Good afternoon, ladies and gentlemen, and welcome to the Allbirds third quarter 2021 conference call. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session, at which time instructions will follow. Now, I'd like to turn the call over to Kyle Khasigian, Head of Strategic Finance and Investor Relations at Allbirds. You may begin.
Good afternoon, everyone, and thank you for joining us. With me on the call today are Joey Zwillinger and Tim Brown, Allbirds' co-founders and co-CEOs, and Mike Bufano, Allbirds' Chief Financial Officer. Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our Q4 and fiscal year financial outlook, as well as our preliminary outlook for 2022, and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise any statements to reflect changes that occur after this call.
Please refer to our SEC filings as well as our earnings release and Form 8-K filed today for a more detailed description of the risk factors that may affect our results. Also, during this call, we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's earnings release. Now, I'll turn the call over to Joey to begin the formal remarks.
Thanks, Kyle, and thank you all for joining Allbirds' first earnings call. We are thrilled to have this platform to help us further advance our mission and discuss our plans for durable and profitable growth over the coming decades. I'd also like to take a moment to express our gratitude to the Allbirds team, as well as members of the finance community and our investors who helped us shape a successful IPO. We're of course pleased to speak with you on the heels of a strong quarter, one that marked continued re-acceleration of our business as we emerge from the idiosyncrasies of COVID. When Tim and I started this business in 2015, we held the view that climate change was our most formidable and existential crisis, and as a result, believed that consumers would eventually connect their purchase decisions with their values on the environment.
Yet most in the footwear and apparel industries continued to rely on synthetics. Within that tension, we saw opportunity. We didn't wanna make sustainable products for the sake of being good for the planet. We wanted to make incredible products because they are sustainable. We put this purpose at the heart of our business and link it to everything we do, but most notably, our R&D investments and our distribution model. These strategic choices have helped to create important and structural advantages that we believe will allow us to outmaneuver competitors well into the future. When we innovate, we harness some of nature's most abundant and high-quality materials to make products that feel different and perform better than synthetics and leathers that the industry has historically relied on.
We then connect this product engine to a vertical distribution model that allows us to reach consumers effectively while shrinking go-to-market timelines and enabling us to deliver fantastic value and a great shopping experience to consumers, all while preserving our advantage gross margins. Since launching the business in 2016, these strategic choices have enabled a strong and differentiated foundation. We have served over 4 million customers since we sold our first shoe in 2016, and we have maintained a net promoter score greater than 80 in each quarter since Q1 2019. In fact, we logged a global cross-channel NPS of 86 in the first half of 2021. That wonderful customer experience has led to strong repeat engagement, with customer cohorts of a year or more coming back for a second purchase at a rate of 43%.
This repeat purchase rate is notable for both the consistency of the high repeat rate and because it comes from the narrow assortment we have had to date. As we expand our product offering, we're excited by the opportunity to utilize this expanded assortment coupled with our technology and data advantage to grow repeat purchases. We are also energized by how many people have yet to learn about our brand. Our aided brand awareness is low, just 11% in the U.S. as of Q1 2021. With revenues in the trailing twelve months of $260 million, we have a tremendous runway in the global footwear and apparel industries, estimated as of 2020 at $366 billion and $1.5 trillion, respectively.
We are executing this atop a brand platform built around the most important consumer trend of this generation: climate change. Now we simply need to reach more customers. Because of our disciplined approach and product craftsmanship, we have consistently achieved contribution profit in excess of CAC within the initial month of purchase for each annual cohort since inception. Given technology advances over the past decade, our vertical distribution model, coupling a digital heritage with a growing fleet of brick-and-mortar stores, is the right way to do this. We've done this successfully against the backdrop of an industry that has principally relied on wholesale for the past 50+ years.
We opened our first store in 2017, and despite the slowdown of this channel during the pandemic, we now operate a fleet of 35 stores globally, with 23 in the U.S. Each store has strong standalone four-wall economics, but we have come to learn that it is our omni-channel repeat customers who are the most valuable to us. These customers spend 1.5x when compared to digital-only repeat customers, giving us more reason to continue our store expansion. Now zooming out, over these past five years, we haven't cut corners and have been focused on building a strong foundation for the future. While we always envisioned building a global lifestyle brand, we opted to make shoes first. Now that we have gained consumers' trust, we believe they will now embrace our material innovations applied to apparel categories.
We have been almost 100% vertical in our sales model, and we made early investments in our global reach, deploying technology, establishing supply chains, and placing teams on the ground in each of our core international markets. This disciplined approach, coupled with the authenticity of our brand ethos, is how we have built a foundation that we expect to rely upon to grow at a healthy clip for decades to come. Which brings me to our growth algorithm. We're driving the top line primarily through three areas. One, our growing store portfolio, two, international expansion, and three, product innovation, which fuels new customer growth and increases the lifetime value of existing customers. I'll briefly go into each of these. On the first growth pillar, our real estate portfolio is highly productive and is an efficient means with which to acquire customers.
Our stores generate strong returns on invested capital and have attractive payback periods. When we open new stores, it drives increased brand awareness, provides a halo effect on the overall business, and hence, we improve the efficacy of our marketing spend. These impacts, along with lower return rates and more efficient transportation, means that growth in physical retail also drives margin expansion. We have a strong pipeline of new stores ahead, and ultimately, we see white space for hundreds of stores over time. On international expansion, it's important to note that we planted flags early in key markets across Europe and Asia. With that foundation established and relatively low sales penetration in these markets, we have line of sight to attractive growth as a result, particularly in the digital channel.
As is true as we shift the channel mix, as we grow international, we expect to expand gross margins due to our pricing architecture and an efficient logistics network. Underpinning the opportunity to drive growth in our retail and international businesses is an incredible product pipeline led by footwear with a growing and important apparel offering. Our robust R&D engine means that we're continually innovating. In our short history, we've proven that our material and innovation platform creates a powerful flywheel, enabling us to build winning franchises while empowering us to expand into new categories. More on this from Tim shortly. We are ideally positioned to execute against our strategic roadmap because of our amazing Allbirds flock. We are fortunate to have world-class teams who are energized by our mission and the potential ahead. The team's attention is now focused on achieving our medium-term targets.
These include a revenue growth of 20%-30% annually, gross margin of over 60%, and adjusted EBITDA margin in the mid- to high teens, rising to north of 20% over the long term. Simultaneously, we intend to reduce our CO2 emissions by 95% by 2030, helping us to drive towards our company mission while unlocking profitable growth. We're pleased with our year-to-date performance in 2021 and feel great about our positioning as we wrap up the year and look ahead to 2022 and beyond. Different governments have responded to the pandemic with varying techniques, ranging from severe isolation and lockdowns to more permissive approaches. New variants are bound to emerge, and government response will continue to evolve, but we hope and believe that the worst is behind us.
As the world emerges from an environment marked by the most depressed retail traffic we've seen in decades, we believe the macro recovery that's underway will buoy our prospects as we flex our product innovation engine, see recovery in our existing fleet of stores, and unlock our new store pipeline. Briefly on Q3 results, which Mike will walk through in more detail. I'll note that this quarter was headlined by 33% top-line growth year-over-year, reflecting solid execution by our teams and robust global demand for the Allbirds brand. Revenue was strong across channels and geographies, with particular strength in U.S. retail as consumers returned to in-store shopping. We opened four new stores in the U.S. in Q3 and another two in the fourth quarter, bringing us to 35 locations globally, which is where we will end the year.
On the international front, we grew sales by 10% despite a choppier recovery from COVID across some of our core regions outside the U.S. Our team has navigated a difficult supply chain environment well, and we felt well-positioned to capture demand for a holiday season that is shaping up to be quite strong, particularly in the U.S. With that, let me turn it over to Tim to talk to you about product innovation and what lies ahead for the brand.
Thanks, Joey, and hello, everyone. It feels great to be holding our first public earnings call and welcoming our new shareholders. Allbirds started with an initial insight born out of a frustration with over-logoed, overly synthetic products and a conviction that there is a better way. We launched the Wool Runner in March 2016 to prove that comfort, design, and sustainability aren't mutually exclusive, and that fashion shouldn't just feel good, it should also do good. Our blueprint from day one has been to build franchises. We start with one great product and increasingly bring energy and excitement to the mix through colors, materials, and partnerships. The Wool Runner and all of our product franchises since start with a deep understanding of our customer.
We leverage our internal capability in natural and sustainable material R&D to create differentiated product experiences, whether they be the amazing soft and cozy comfort in our wool products or the light and breezy feel from our tree products. Each utilizes a unique minimalist design philosophy that has created a distinct family of products that represent a new language for sustainable design that highlights beautiful natural materials rather than flash and logos, something uniquely Allbirds and recognizable on the street when you see someone wearing our shoes. The combination of our distribution model and our product engine has allowed us to build a real structural advantage in footwear, not only establishing ourselves as a leader in sustainability but also gaining authority for both comfort and performance.
It's exceptionally difficult to surpass the threshold in footwear and achieve scale, but once you do that, the customer trusts you to enter other categories, and we've seen that. Innovators come to us as a partner of choice. Because we've earned credibility with our customers, we're now ideally positioned to be able to connect new apparel offerings to our footwear franchises. Overall, apparel is a small percentage of the business today at just under 10%, but that's intentional. Our approach is to build the business methodically and carefully to increase basket size and help drive repeat purchasing. We saw a great response in the quarter to our product innovation, with strong traction from the Wool Piper Mid, Sugar Rover, and our Perform apparel launch in August, an exciting new collection to complement our performance footwear offering.
We continue to be very excited about our growing community marketing program called the Allgood Collective or AGC. Since the beginning, we've understood that what's good for our community is good for our business, and this strategy puts local ambassadors tied to our growing retail footprint at the center of our product creation process while simultaneously driving brand engagement and awareness. We now have a series of weekly AGC run clubs in operation in Los Angeles, Atlanta, Seattle, San Francisco, London, Tokyo, and Auckland, alongside supporting events showcasing our growing roster of performance products. We have attracted a growing number of local influencers and community leaders who are using the Allbirds store network to host events. The AGC is also an emerging catalyst for new product testing, product launches, and brand content, like our recent trail shoe launch that featured a series of AGC athletes.
Our product partnerships remain a key focus. Product-specific partnerships with Bráulio Amado and our continuing work with adidas and Jeff Staple are examples of our partners bringing incredible energy and amplification to existing franchises and our sustainable thought leadership. In Q4, we were also excited to release a Marshawn Lynch Get Schooled content drop that underlined the potential of sustainability and climate change to be a powerful connector to new audiences. Advertising is also an important way that we amplify all of the great organic reach that our product and brand marketing efforts create for the brand. As we have evolved over the past few years, we have made a concerted effort to diversify our media mix and now feel like we have an effective and healthy balance through our paid marketing funnel.
One important outcome of that effort to diversify our spend is that recent privacy changes and resulting increases in cost of impressions in social media channels have had a limited impact on our business. In the end, we know that people don't buy sustainable products, they buy great products. To us, the very best products are inherently sustainable. We have spent the last five years building a product platform that marries product innovation through natural materials and a purpose-driven brand that meets consumers where they're headed, not where they are. On deck in the next 24-36 months, we have the most exciting product pipeline in the history of the company.
We can look forward to multiple new lifestyle and performance product launches and new material platforms as we see the benefit of historical investments in team and R&D and momentum from our increasing prominence in the footwear and apparel category as a leading partner for a global network of sustainable material innovators. Now, over to Mike to discuss Q3 financials and our full year outlook.
Thanks, Tim, and hello, everyone. I'll start by echoing the sentiment you heard from Joey and Tim about starting our life as a public company. We're thrilled to be here. We appreciate your interest in Allbirds, and we're looking forward to spending more time with our analysts and shareholders going forward. I'll also echo what Joey said earlier. We're pleased to report strong Q3 results across the P&L, highlighted by revenue growth of 33% above our medium-term annual target of 20%-30%, continued gross margin expansion of 120 basis points, and continued leverage in the marketing line of the P&L. I'll take a few minutes to walk you through the P&L and explain the drivers of our Q3 performance. Net revenue increased 33% year-over-year to $63 million.
As Joey and Tim mentioned, this growth was primarily driven by strong U.S. performance and from new product introductions. Breaking down our net revenue growth a bit further, orders were the main driver of the 33% increase. In addition, we saw a strong 13% increase in average order value. Looking at net revenue by geography, our net revenue in the U.S. increased by 42%, reflecting strength in both physical retail and digital. We continue to see a notable uptick in the retail channel as consumers continue to return to stores. Net revenue in our international markets grew by 10%.
In some regions, particularly in China, Japan, and New Zealand, our momentum was slowed somewhat by the COVID resurgence. Finally, to close out our commentary on Q3 2021 net revenue growth, I'd like to point out that the two-year increase in net revenue was 40% when comparing to Q3 2019. I share this because we believe it's a helpful data point for investors as we begin to lap COVID. Turning to gross profit, we delivered Q3 gross margins of 54.1%. That's an improvement of 120 basis points from Q3 2020. This improvement reflects our ability to make steady progress towards our medium-term target of 60% or greater gross margin. The biggest drivers of gross margin expansion in Q3 were improvements in product COGS and a favorable year-over-year mix of higher gross margin products, including our newly launched performance apparel.
Those positives were partially offset by higher warehouse costs and pressure on logistics costs more broadly. I'll pause here for just a second and state the obvious. We are mindful of the macro headwinds around supply chain and logistics costs, especially with the latest COVID variant news. Of course, this is a fluid situation, and like everyone in the industry, we're monitoring closely as we have been since the pandemic started. In that context, looking at gross margin for the balance of 2021, I will share that we are experiencing higher than normal holiday season outbound shipping surcharges in the current quarter. However, even with some headwinds, we still expect to achieve full year gross margin year-over-year improvement of approximately 150-200 basis points in 2021. That translates to an expected full year 2021 gross margin of 52.9%-53.4%.
As we march towards 60%+ gross margins, we are focused on the annual gross margin progress we've been making and believe we will continue to make. Indeed, we are proud of the progress we have made since 2018, when our gross margin was 46.9%. At the midpoint, we would end 2021 at an improvement of over 600 basis points from 2018 to 2021. Moving down the P&L below gross margin, Q3 2021 SG&A totaled $33 million and increased by 64% year-over-year. Let me unpack SG&A a bit for you. First, it's important to note that SG&A includes the operating cost of our stores, such as labor and occupancy, as well as pre-opening expenses. Indeed, in Q3 2021, the increase in store expenses was the biggest driver of the increase in our total SG&A.
Compared to Q3 2020, we had 11 more stores in Q3 2021, an increase in the number of stores of over 50%. In Q3 2021 alone, we expanded our store portfolio by four new stores in Manhattan on the Upper West Side, in L.A. in Century City, in the Bay Area in Palo Alto, and our first store in Atlanta. One last note on store expenses is that we had approximately $300,000 of pre-opening costs in Q3 2021. Closing out SG&A, another significant driver over the year of the year-over-year increase was approximately $2 million of incremental costs we incurred in preparing to be a public company. We expect to see another $3 million of public company costs in Q4 2021, bringing the full year 2021 total to an estimated $5 million.
Looking now at marketing spend, we achieved more than 500 basis points of leverage relative to Q3 2020 as our teams focused on scaling marketing efficiency while maintaining strong sales growth. Bringing all that together, adjusted EBITDA in the third quarter of 2021 was negative $6.3 million compared to negative $3.8 million in the third quarter of 2020. When you factor out the $2 million of public company costs in the quarter, adjusted EBITDA decreased by only about half a million dollars year-over-year. I'll finish up my commentary on our Q3 financials with a quick look at the balance sheet and cash flow. We ended the quarter with $65 million of cash and cash equivalents and $40 million of availability under our revolving credit facility.
Capital expenditures in the quarter totaled $6.2 million, primarily driven by new store openings. As you can see on the balance sheet, the big mover this quarter was inventory, which totaled $99 million, up 55% from Q3 last year. Given the macro supply chain and logistics environment, we felt it was prudent to take advantage of our strong balance sheet and increase our inventory positions. We were well inventoried in Q3 and continue to be so in Q4 and into the first half of 2022. I think this is a good place to touch on supply chain broadly before moving on to guidance. From a production perspective, it's important to note that Vietnam accounts for only about 50% of our manufacturing, with more of our production in the North than the South. Thus far, we have not experienced any government-mandated manufacturing shutdowns in Vietnam.
Through careful planning, secondary sourcing, and regional diversification, our teams have deftly navigated a challenging environment, positioning us to meet demand throughout the holiday season and over the coming quarters. Huge kudos to our supply chain team. I'll wrap up my remarks by sharing our outlook going forward. For full year 2021, we expect net revenue to be between $270 million and $272 million, which equates to an increase of 23%-24% versus full year 2020. On a two-year basis, that's a 39%-40% increase when compared to full year 2019. Looking at the bottom line, we expect full year 2021 adjusted EBITDA of -$15 million to -$17 million, including an estimated $5 million of public company costs.
Backing out the public company costs, full year 2021 adjusted EBITDA would be negative $10 million-negative $12 million. On an apples-to-apples basis, that would be an improvement of 22%-35% when compared to full year 2020's adjusted EBITDA of negative $15.4 million. Looking around the corner to 2022, we'll be providing detailed guidance on our Q4 earnings call in February 2022. As a reminder, our seasonality skews towards Q4 and the gifting season. On an ongoing basis, we plan to provide detailed annual guidance on the Q4 call each year. That being said, with this call occurring off cycle due to the IPO, we did wanna share with investors and analysts our preliminary thoughts on the top line next year.
In short, we feel we have great momentum in our business, and we are confident that in 2022, we can grow net revenue at the high end of our medium-term target of 20%-30%. Our preliminary 2022 net revenue expectation is approximately $350 million, which would represent a 60% two-year growth rate, a significant acceleration over the two-year growth rate in 2021. In closing, I'd just like to share that we continue to feel confident about how the business is positioned and our ability to capitalize on the opportunities ahead of us. Through careful investments, we have built a solid infrastructure across people, supply chain, and technology that we believe positions us to profitably grow the business and create shareholder value. With that, I'll turn the call back to the operator to start Q&A.
Ladies and gentlemen if you have questions at this time please press star then one on your touch tone telephone. If your question has been answered and would like to remove yourself on the que, please press the pound key. Our first question comes from the line of Lorraine Hutchinson from Bank of America. Your question please.
Thank you. Good afternoon. You spoke about the strength in the quarter driven by physical retail. Can you talk a little bit about the performance of the digital channel and how you expect this to play out over holiday and then into 2022?
Yeah. Hey, Lorraine, thanks. Yeah, the recovery in the U.S. has been particularly strong in retail, as we noted. Digital also has been strong. As we kind of noted in the remarks, the way that these interoperate is where the power is, and we are seeing that in play, and we're seeing some really good pickup on digital, and we see that continuing through into the early parts of Q4 here, including this past weekend, very optimistic. That's both with existing customers and new customer acquisitions. We feel quite good about how that's performing.
Thank you.
Thank you. Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your question please.
Okay, great. Thank you so much. I'm wondering, look, considering everything that's going on in supply chain and looking at your inventory levels, do you think it's perhaps even prudent to carry more inventory through the year next year, for example, just to sort of guard against some of the things that we're seeing in supply chain? I'm just interested to hear your inventory management philosophy. And any more specific color or comments you could provide about the performance apparel launch and consumer reception here in the quarter would be helpful. Thank you so much.
Good to hear your voice. I'll start on the inventory and supply chain piece, and I'll turn it over to Tim on the performance apparel piece. Look, it's certainly something we'll continue to monitor really closely and consider about how much inventory to hold through 2022. Again, our supply chain team, we think, has done a fabulous job helping us navigate through a lot of these, like, recent challenges. I'd say if we were going to, we would probably really lean into our core products, core colors, core sizes, the stuff that we know there's a nice long tail on and long life on. But certainly something we're gonna monitor pretty closely. You know, now after the transaction, we obviously have a really strong balance sheet.
We're in a great place to be able to use that to our advantage to continue to meet demand and grow the business.
Hi, Kimberly. We're thrilled with how the performance apparel launch has been received. It's another big step for us into the performance space. We're still only a year and a half into that journey. We have a couple of products. We launched the Dasher a year and a half ago. It's gone really, really well. We've added the trail shoe, which, you know, in my opinion is, I think possibly the best product we've ever made, the most technically advanced. Then to be able to further our strategy of connecting these footwear franchises to our apparel offering, you know, I think you see that in the performance apparel. You know, again, it's still footwear first. That's still the focus of the majority of our innovation efforts, but
We saw an ability in the performance apparel to leverage the material innovation, import it into apparel, and do something that quite frankly, the rest of the category is not doing in natural materials. We see the product as really differentiated. Again, you know, we'll end the year with apparel as something like 10% of the business. We're gonna build that very methodically and slowly with a strategy to increase repeat purchase rates, increase basket size, and do that sort of step-by-step. We're really pleased by our initial launch there and how it's been received.
Great color. Thank you.
Thank you. Our next question comes from the line of Matthew Boss from JP Morgan. Your question please.
Great. Thanks, and congrats on your first quarter out of the gate.
Thanks, Matt.
On the top line, Joey, could you speak to your product pipeline, maybe what you're most excited about looking forward? Mike, near term, you delivered 40% growth in the third quarter relative to 2019. Guidance at the midpoint, I think embeds this moderation to 34% in the fourth quarter. Maybe could you just speak to business trends that you're seeing into holiday relative to some of the assumptions that are embedded in your near-term guide?
You wanna start with that one?
Why don't you start using certain product, and I'll talk about it too.
Sure. Hey, Matthew. The product pipeline, you know, I think you've heard us share previously that Tim mentioned it already today. It is the next two years is the most exciting aspect of the product pipeline that we've ever created as a company. The innovations that we're doing on the material side, they just take a long time. As we're working those through the innovation cycle, we can't yet put that into the front part of our kinda go-to-market product development cycle. Well, now a lot of those innovations are coming through, and we can now use those and harvest that and turn them into fantastic products.
As Tim mentioned, with a big focus on footwear and then also coupling that with great material innovation that we think translates into apparel. You know, how we do that, so we think about the use occasions significantly. We really try to balance lifestyle and performance and have a nice offering that balance across those types of uses. I would also say that the cadence is something that's come into sharper focus for us.
What we've seen throughout this year and particularly in the past in Q3, but also in the early parts of Q4, when we have a great product cadence, and this doesn't need to be a brand-new innovation, this can be small things like, you know, the Fluff Collection that we introduced recently, that speaks to the brand really well, and it's a great cozy comfort right for the moment. When we can do things like that, even if they're small, it engages our customer base so significantly, and it just drives really attractive engagement and lift into our existing customer LTV. We see a lot of that in the future. I think we've grown a lot of discipline in our go-to-market.
You know, we've also, as you can see from what we've done in this past quarter, we've really buffered some lead times to make sure that we can deliver through what is a challenging supply chain environment. It's not just the innovation and design side, it's also just the execution side and making sure we're getting these to customers at the right time and the right place, which is always the trick in our business.
Great. Thanks, Joey. To answer the question then on the two-year, Matt, I mean, look, in a business our size, I think there's always gonna be a little bit of noise kind of when you look at that two-year. We feel like it lands roughly within the range. You know, I actually step back, and I look at it for the full year of 2020, the two-year will be 39%-40%. We feel really good about that growth, especially with a lot of the COVID volatility, especially the stuff we mentioned international. Then for me, at that approximately $350 million for 2022, we feel really good about the acceleration over the course of full year 2022 on the two-year.
All just to say, you know, we've given that 20%-30% medium-term revenue target range on an annual basis. We're really focused on hitting that, you know, year-over-year and really delivering the medium- and long-term growth. And we look at the quarter, certainly wanna try to deliver consistently, but we're really focused on that annual piece.
Great. Best of luck.
Thank you. Our next question comes from the line of Mark Altschwager from Baird. Your question please.
Good afternoon, and congrats on your first report here. Mike, I was hoping you could give us a bit more color on how you're thinking about gross margin for Q4. I think the annual guide you gave does imply a fairly wide range for Q4 specifically. Maybe just talk about the factors that might drive you towards the upper end there versus the lower end based on what you're seeing today. Similar question, just as we think about 2022, I think some of the freight pressures may be intensifying a bit in the early part of the year, but just any update there and the various levers that you're using to offset. Thank you.
Yeah, thanks. Thanks for the question, Mark. Yeah, on Q4 gross margin, look, I think, you know, the reality is it's our highest volume quarter of the year. You know, folks have looked at the seasonality of the business as we shared, you know, in the roadshow and as we share in the S1. I think the range may not be quite as wide, you know, if you look at it on a full year basis, 'cause Q4 does have the bulk of the volume in there. The factors at play are some of the stuff that I mentioned on the call. We're certainly feeling warehousing pressure. We're feeling some outbound shipping pressures. I think there's a host of factors that are kinda moving along there.
On your point about what we can, you know, do to offset it, we actually already took one step.
In Q3 where we took a modest price increase on our core items, so from $95 to $98, that was very well received from a customer perspective. We didn't really see any drop off in demand when we did that. That's one step we took to kind of mitigate some of these costs. That obviously will carry over into 2022 as well for us. We're not gonna get specifically right now into 2022 growth margin guidance and the factors. I mean, you're right, it's a pretty volatile environment. We're monitoring it really closely, but we'll keep updating analysts and investors when we get into that detailed guidance in Q4 on the Q4 call, I should say, when appropriate.
That's very helpful. Thank you, and best of luck.
Thanks, Mark.
Thank you. Our next question comes from the line of Bob Drbul from Guggenheim Securities. Your question please.
Hey, just a quick question for me, is essentially on the pricing we just mentioned, Mike. I think the Trail Runner are sort of at the higher end of your pricing spectrum. I think Tim called it out a little bit in terms of his excitement around it. Can you just talk about the success at these higher price points that you're seeing? The second question is can you talk a little bit more about like the new store openings that you've done and how they've opened versus your plan and what you're seeing there? Thanks.
Yeah. I think these are both good Joey questions, Bob, so I'm gonna turn it over to him to answer them.
Yeah, sure. Thanks,.
Bob. We have historically seen that when we introduce products with a technical edge to it, customers' willingness to pay goes up significantly. We've seen this before on a materials basis. We've also seen it when we weatherproof products. Our Mizzle line is part of the Wool Runner franchise, and we add a weatherized treatment to it for wintertime, and it's a fantastic producer for us, particularly in the colder weather months. People wanna pay more for it. That's one aspect. The Dasher was another proof point for us, and the Trail further extends it. You know, we're really pleased with the response.
That's with technical performance. We've also seen that, as Mike just mentioned, when we moved from 95 to 98 on some of our core products, there was really no perceivable volume impact. We know we can continue to do this. I would just say, you know, back to the previous question, we have a lot of exciting newness coming in the next two years and more so than you'd kind of consider for a mature company. Meaning that a larger percentage of the sales that we'll contribute for the next couple years is gonna come from products that don't exist today, that we don't sell today.
As we do that, we have an opportunity to really cement our premium brand and premium price position with consumers, and we expect this to go really well based on what we've seen so far. New stores versus plans that said this year? Yeah. How the new stores have been performing so far. Yeah. Really positive. I think we've obviously recalibrated expectations. We're in this kinda what we would call the kinda messy middle zone of COVID, where we're neither in the shelter in place nor are we completely emerged from COVID. We've recalibrated just to take a conservative approach when we underwrite our stores in these new leases.
What's happening is we're getting really attractive lease terms, given that we're looked at as a tenant that is a traffic driver to multi-property owners. We're getting great terms, and we're still underwriting conservatively for sales calls on these leases, and we're outperforming them significantly. That's really encouraging. I say that in particular because some of the news on physical retail traffic is that it's still not coming back in the way that people have hoped. As travel bans lifted and people at the border for the U.S. in particular opened up in the early part of November, we kind of expected to see a bunch of traffic recover, particularly the key metro areas, and we really haven't seen that as much.
Despite all that, the stores are performing fantastically, and we're really encouraged with it. That was a big driver of some of the growth you're seeing in this past quarter, and you'd expect it to continue into Q4.
Thank you.
Thank you. Our next question comes from the line of Erinn Murphy from Piper Sandler. Your question please.
Great. Thank you. Good afternoon. Can you hear me okay?
Yeah, we can. Hi, Erinn.
Great. Hey, nice to hear from you all. Just two questions for me. The trends both in international in Q3, some of Asia was a little bit weaker, but talk about Europe. Into the fourth quarter, are you seeing any change in trend with the new variant, particularly in the European market? If I can ask one follow-up to Bob, any price increases planned in your 2022 preliminary guide of $350 million? Thanks so much.
Erinn, we definitely heard the second question. I think I picked up on the first question. Let me attempt just to say it back to you to make sure I followed it. I think you're asking, you know, the trend we saw international Q3 into Q4, are we seeing any impact from the, you know, the latest COVID variant? Was that the first question?
You got it. I apologize for my receptivity. Yes.
No worries. No worries at all. You know, look, the short answer is we felt, like I said on the call, a little bit of choppiness in international because of COVID in Q3. I'd say we haven't noted anything right now in the business, you know, in the last, like, week or two, different than what we were kinda feeling in Q3. I think overall we feel pretty good about the momentum, especially when you look at the two-year stacks on the international side of the business. So we're not overly concerned right now, but clearly we're monitoring it very closely. Joey said, you know, when you're talking about we're in this middle point of COVID, that's certainly true kind of in the U.S. and it's even a little bit different in other parts of the world.
So if there's material updates to give there, we'll obviously kind of follow up and let you know, you know, as we get into the end of the quarter and into the beginning of next year. The second question is easier to answer, which is, you know, is there any additional price increase built into the $350 million, you know, estimated 2022 net revenue? The short answer is no, you know, no move above the 98. Some of what Joey was talking about the new product launches, you know, and how we've been able to take more price on these more technical products, some of that will continue into 2022 with some of the new product launches, and you'll see that come as we launch the items.
That's factored in now into how we're thinking about the overall revenue growth for next year.
Great. Thank you so much.
Thanks, Erinn.
Thank you. Our next question comes from the line of Edward Yruma from KeyBanc Markets. Your question please.
Hey, guys. Thanks very much for taking the question and congrats on the IPO. I have two quick ones for me. I guess first, some other shoemakers are complaining that they're gonna miss some of the key running selling season because their core products are getting delayed that would normally drop in January and February. I guess, are you seeing some of those delays, and does that factor in the guidance? Then second, it seems like you guys did a great job clearing out some of the deadstock shoes you had during the Black Friday, Cyber Monday sales. I guess any sense on how clean inventory is and kinda how those promotions went? Thank you.
Yeah. Thanks, Ed. Appreciate the questions. The good news on your first question is we just don't see any issues with the product drop cadence. You know, we've had some foresight early on this year to really buffer all lead times. That is why we noted a big increase in inventory in Q3. That's not just for Q4 inventory, that's also for stuff happening in H1 2022. We feel like we're in a fantastic situation, and everything that we have planned for the roadmap for the first half of next year and frankly into the second, we feel really good about and a very strong position. No issues to report on there, and no complaints.
We feel good there. On the second question, I'll take the opportunity, you know, just to talk about this past weekend. We obviously don't have everything in quite yet, given the recency of it. It was a really good holiday shopping season for us in this first part in Black Friday, Cyber Monday. You know, we've always had a very premium brand attitude around pricing. We also, because of the vertical retail model that we have in terms of distribution, we control how we show up. There's no leakage in price, and so we really have the opportunity to show up in a premium way at every time we do something.
We know as we grow and we expand the assortment, we really need to have an escape valve for our designers to take risks and to innovate and really push the boundaries because our product is what's gonna win in the long run. We want our team and our product team to take risks, and we wanna give them an outlet to if there's anything slow-moving, that we can sell it to consumers and do that in an attractive model that's also mindful of margin. You know, previously, we started to build the muscle with an outlet store in the Bay Area. That's one aspect of how we reach a different set of consumers with that.
In this case, we were really surgically looking at inventory and looking at slow-moving inventory where we have odds and ends on sizes and whatnot, and we put those on the digital offering for Cyber Monday. The response from consumers with relatively shallow discounts was quite exceptional. We're really encouraged at how we're kind of honing this muscle as we go forward, which will be something that's important as we start to take risks and broaden the assortment.
Thank you.
Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Your question please.
Hi, good afternoon. First I have to let you know my son is happy you brought back Smallbirds, so thank you for that.
Yes.
Yeah.
One of our best customers. That's good to hear.
Exactly. I loaded up. I guess a question on marketing. You know, you got a lot of leverage in the quarter on marketing. I mean, how are you thinking about leaning into marketing, you know, during the holiday season? Is that something where we should see meaningful leverage again? Then secondarily, on the performance apparel launch, I know you've had it for like three minutes, but are you finding that to be a good kind of customer acquisition tool, bringing new customers into the brand? Or is that really at this point, kind of further monetizing and getting more share of closet of your current customer base?
I think we'll do a three-person weave to answer these. I'll start on one comment on the marketing, then turn it to Joey to talk about the holiday peak. Then I'll share a little bit about the consumer behavior that we started to see and how it shows up in the numbers on the performance apparel. They wanna talk a little bit more about, you know, the target customer there. On the first part on the marketing leverage, just remember, part of what's driving that as a percent of sales and what we saw in Q3 and will continue into Q4 is the fact that we have more stores on a year-over-year basis. We have, you know, 10 more stores in Q3 this year than we did Q3 last year. Right now.
The four more stores we've opened in Q4 thus far. We'll end this year with 35 stores. We ended 2020 with 22 stores. Pretty significant increase in number of stores, great vehicle for acquiring new customers with no, you know, like, marketing dollars kind of going against this. That's sort of the macro, I'd say, on the leverage we're seeing with marketing as a percent of sales. There is a second part of that question that I'll let Joey answer that was about specifically like how are we thinking about the marketing spend, you know, maybe more on the digital side, Joey, into Q4.
Yeah. I'd say broader than digital to get to Mike, I would just point to one of the comments that Tim made earlier in the call. You know, we've taken a really methodical approach to diversifying the media mix, and we're trying to balance the right portion of SEM with the right portion of the funnel. Meaning are we generating awareness, are we generating consideration or purchase, or are we focused on re-engagement? We really try to balance particularly that upper edge of the funnel and diversify the spend. We continue to see great value out of varying channels within the media mix.
Part of the reason we're able to do that and also understand what's happening within our media mix and as that relates to output from a sales perspective is because of the data orientation of the company. You know, we take every dollar that we spend, and we analyze that in multiple different ways. Because we have every transaction happening between the consumer and our company, we are able to do a fairly sophisticated multi-touch attribution model, and that really helps us inform where to spend the dollars. That ranges from offline spend like TV on a linear broadcast basis, all the way down to the really highly trackable bottom of funnel things on search and social. I think we're in a really good place.
We feel like that leverage is gonna continue, and we're gonna have a really effective return on ad spend throughout the rest of this year, and we hope that continues.
Great. Thanks, Joey. I'll just kind of touch one piece really briefly on the performance apparel and then turn it over to Tim to answer that part, Sharon. I mentioned on the call that we saw a 13% increase in average order value in Q3. Part of what drove that was apparel broadly, not just performance apparel. We are seeing larger order sizes now as people you know, whether we relaunch some stuff on shirts or the performance apparel itself. That's one of the ways it's showing up in the metrics that we saw in the quarter. Certainly that type of behavior, while apparel is still a small percent of the mix overall, that type of behavior is part of what we've considered when we think about 2022 guidance.
Tim, maybe you wanna talk a little more broadly about the consumer and what we're seeing there.
Sure. I mean, I think in really simple terms, I think when you make a pair of shoes, people trust you to make the apparel that goes with it. Connecting our performance footwear offering to our performance apparel is at the core of the strategy. We're also able to leverage material platforms that in some cases have taken a long time to create in wool and tree and then offer them up in apparel products that we think are very differentiated. Again, one of the founding principles of the whole brand, quite frankly, is that we're in the early stages of a transformational shift in the category from synthetics, cheap synthetics and plastics derived from oil to natural materials.
Allbirds, you know, is founded on the idea that we can do this well, differently and better than the competition. The performance apparel was just the start of really understanding how to do that in apparel. We'll continue to focus on footwear. But we see, you know, apparel as another asset in our journey to kind of fully realize Allbirds as a lifestyle brand.
Okay, great. Thank you.
Thank you. Our next question comes from the line of John Kernan from Cowen. Your question please.
Excellent. Thanks for taking my question, guys, and congrats on the IPO and the strong quarter out of gates. Just on the confidence in the high end of the revenue targets, those medium-term targets, 20%-30% next year, it's great to hear. Any detail on how we should think about channel mix, geography and even at a category level on getting to that 30% type growth next year?
Yeah. I'd say the stuff that you've seen drive the north of 30% the last couple of quarters, those are the types of things that will continue, you know, into 2022, right? When we think about the biggest drivers, we know the retail recovery in the U.S., both within existing stores and opening new stores, that's a huge driver of it. The white space we see internationally and the ability, you know, most of those markets, as you know, John, don't even have a clean non-COVID year. We see a lot of opportunity kind of within those markets. It's a lot of the stuff the guys have both been talking about when it comes to new product launches and our ability to acquire new customers and grow LTV with those. Those really are the big drivers of what we expect to see.
For us, what gives us real confidence in it is we know that stuff is working really well right now. We hope, you know. We believe it'll continue to work as we kinda go into next year. Just remember that $350 million is in the high end. It's a preliminary number. We'll give a little bit more color and a little more info on that once we get through Q4 here, which again, is our peak season. We're happy to talk a little bit more with you about it on the Q4 call in February.
Got it. My follow-up is just maybe on the medium-term margin targets, the adjusted EBITDA margin reaching mid- to high-teens. Like, what's the biggest driver of gross margin expansion as we go forward?
Yeah. The biggest drivers of the gross margin expansion, there's really three things that are gonna get us there over the medium term. The first is our biggest sources of growth, like I just referenced. Physical retail and international, those are also both gross margin accretive. That's a big factor. About half of the improvement we expect to see over time is gonna come from that. The second piece that's gonna come is we just assume over the course of the medium term, which again we're defining as five years here, we think what we're gonna see is some sort of normalization of logistics costs. Not saying we'll go all the way back to 2019 or pre-COVID levels, but we don't think we'll be at the exceptionally elevated levels we are today.
We'll get the normalization there. Then the last piece of it is we're gonna get it through some of the stuff we talked about on the call, right? Launching new products that come at a higher gross margin that really warrant that higher price and have the great technical features, you know, that customers are looking for, and then getting it, you know, sort of the old-fashioned way. I mean, if you think about it, that's another 25-50 basis points from that third category, and we've proven the track record to be able to do that over the last, you know, few years. Like I said on the call, we'll have seen over 600 basis points if we hit the midpoint of that, 2021 gross margin guidance.
Awesome. That's helpful. Thank you, and best of luck as we round out the holiday.
Thanks, John.
Thank you. Our next question comes from the line of Dana Telsey from Telsey Advisory. Your question please.
Good afternoon, everyone, and so nice to see the progress. As you talked a little about in the gross margin portion about decrease in product costs, can you expand on that a little bit and what are you seeing there? How long do you see that lasting? With physical retail, what do you think is the appropriate size of the store as you grow your product assortment, and how do you think of the cadence of store openings going into next year? Thank you.
Yeah. I'll start on the first one, and then Joey can take the physical retail one. On the gross margin, you know, again, a lot of it really is just coming as we get bigger, as we have more size, as we have more scale. I think that's a big part of it. We're obviously like, you know, engineering the products and continue to improve them. That's really what the story is there. Honestly, things like scale and this continuous improvement, those will only grow, and we'll have more power with that as we go forward. It's definitely one of the contributors. It's kind of that. It's part of that third bucket that I was just walking John through, Dana, of the improvements in the gross margin over time.
Joey, do you wanna talk a little more on physical retail?
On retail, yeah, physical retail. We, I mentioned earlier, we're in the fortunate situation of just being viewed as a great traffic driver for multi-property landlords. What we've done as a result of that is really work to take the right size and learn throughout this past 18 months about how we do the retail layout between footwear and apparel, and how we create a service model that's really exceptional for our customers. We have found a really nice space where we can have great fitting rooms and fit all the service layout into, you know, a box that's around 2,500 sq ft. That's kind of the go forward.
You may see flagships that are bigger, you know, 4,000+, and you may see smaller markets with slightly smaller stores, of course. You can think generally in that 2,500, maybe up to 3,000 sq ft, as the right size. In terms of pacing, we'll give numbers annually on that. We expect to give everyone here a figure for 2022 when we reach the call in February. I would say just at a high level, we're gonna do more than we did this year. This year we did 13 new openings. We'll do more next year. We're trying to be thoughtful about maintaining what we think is just an exceptional customer experience.
Our retail stores in the U.S., but really broadly across the fleet is over a 90 in NPS, and that reflects this fantastic customer experience. The way that we keep that is with great people. We treated our people fantastically during COVID, and our employer brand has improved significantly as a result of that. The word of mouth does spread, and we're a very attractive company to come work for in retail. What we've seen is it's the human capital that drives that fantastic experience, and we need great assistant store leaders to get promoted up to store leaders. That human capital consideration is something that we work on pretty hard. That's probably the most significant limiting factor. It's not whether we can get the right deals.
There's plenty of deals out there for us to do on the real estate side. It's about picking the right ones, being smart about the markets that we go into, and then being opportunistic on the specific deals that we pick up based on what becomes available and making sure we have the human capital to support it. That's kind of the high level on how we think about it. Again, we'll give more when we get into the next year. One thing maybe just to remind you, not you specifically, Dana, but everyone. The model that we're working on and the reason why we think this is so powerful is that when we go into these markets, it's the store halo that creates something so powerful.
I mentioned it in my earlier remarks, but it's important enough to mention again. When we get in there, the marketing efficiency improves. We often find that customers come in for the first time. They have lower return rates because they get to try it on in the store and make sure it fits right there. They often go home, and 'cause that experience is so good, they buy a second time on digital. Those omni-channel repeat customers are spending one and a half times what our digital-only repeat customers are. You can see what happens when you translate NPS into and great product experience, what that turns into in terms of repeat engagement.
I would just say that's in a nutshell. I hope everyone walks away understanding from our earlier remarks. We still think we have, you know, roughly around 10%-11% aided awareness in the U.S., and the NPS is exceptionally high. When people come and meet the product, meet the company, they love us, and we just need to meet more people. That's the journey that we're on. I think that's why the future's so bright, why we're really optimistic about 2022 and beyond.
All right. Operator, we're out of time. I know Joey has a closing comment. I just wanna cover one very quick thing while we're all still on the call just for a second. Kyle and I have gotten a couple questions even while he's been on the call about the share count that is in the earnings release. Just to be clear, remember, this is our share count as of 9/30, the end of Q3, which is the pre-IPO share count. We're happy to answer any model questions or cleanup questions from analysts or investors kind of tied to that, but we did get a couple questions kind of offline about that, so I thought I'd just kind of say that on the call just so everyone's on the same page, looking at that the same way. All right.
That's the last of my boring finance stuff. Joey, why don't you take us home and close out our first earnings call?
Sure thing, Mike. Well, thanks, everyone. As we've mentioned, we're thrilled to be on this stage and to grow alongside you all, our investors, analysts, and other stakeholders. We couldn't be happier with this foundation we've built in the last five years. We just wanted to take this opportunity to close with a note of congrats to the Allbirds team that created the business. Just a big kudos and take this stage to thank everyone. Thank you all. We look forward to speaking with you next quarter.
Thank you. Ladies and gentlemen, for your participation in today's conference, this does conclude the program. You may now disconnect. Good day.