Birkenstock Holding (NYSE:BIRK) held its third-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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Summary
Birkenstock Holding plc reported strong Q3 results with a 15% revenue growth in constant currency, reaching the high end of their annual target.
The company raised its fiscal 2026 guidance for revenue growth to 15% and adjusted EBITDA to at least 710 million euros.
EMEA growth accelerated to 15%, with a strong performance in both online and retail direct-to-consumer (DTC) channels.
The APAC region achieved 23% growth, with China showing over 50% growth, confirming the brand's premium positioning.
Birkenstock continued its retail expansion, with new store openings in multiple regions, contributing to a 50% increase in owned retail revenue.
Product innovation, especially in closed-toe and sandal categories, drove growth, with new collections and collaborations enhancing brand appeal.
The company is confident in its brand strength, focusing on expanding its market share and enhancing shareholder returns through strategic initiatives like share buybacks.
Despite FX and tariff pressures, adjusted EBITDA margin improved by 60 basis points year over year on a like-for-like basis.
Management highlighted the successful refinancing of senior notes at lower rates, which will reduce future finance costs.
Full Transcript
OPERATOR
At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. The company has allocated 45 minutes to this conference call and will take as many questions as time allows. I would like to remind everyone that this conference call is being recorded. I will now turn the call over to Megan Kulik, Director of Investor Relations.
Megan Kulik, Director of Investor Relations
Hello and thank you everyone for joining us today. On the call are Oliver Reichert, Director of Birkenstock Holding plc and Chief Executive Officer of the Birkenstock Group, and Daveet Socrolo, Chief Financial Officer of the Birkenstock Group. Today we are reporting the financial results for our fiscal third quarter ended June 30, 2026. You may find the press release and a supplemental presentation connected to today's discussion on our investor relations website at birkenstock-holding.com.
Results have also been filed on Form 6-K with the SEC. We would like to remind you that some of the information provided during this call is forward-looking and accordingly is subject to the safe harbor provisions of federal securities laws. These statements are subject to various risks, uncertainties and assumptions which could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as in our filings with the SEC, which can be found on our website at birkenstock-holding.com.
We undertake no obligation to revise or update any forward-looking statements or information except as required by law. We will reference certain non-IFRS financial information. We use non-IFRS measures as we believe they represent the operational performance and underlying results of our business more accurately. The presentation of this non-IFRS information is not intended to be considered by itself or as a substitute for the financial information prepared and presented in accordance with IFRS.
Reconciliations of non-IFRS measures to IFRS measures can be found in this morning's press release and in our SEC filings. Now I'll turn the call over to Oliver.
Oliver Reichert, Chief Executive Officer
Good morning, everybody. We performed exceptionally well in Q3 and once again demonstrated the strength of our brand. Given this continued momentum, for fiscal 2026 we raised our guidance for revenue growth to 15% in constant currency and adjusted EBITDA of at least 710 million euros. We delivered another strong quarter. Our revenue grew 15% in constant currency at the high end of our annual target of 13% to 15%. EMEA growth accelerated to 15%. DTC growth accelerated to 16% in constant currency.
Adjusted EBITDA margin on a like-for-like basis improved 60 basis points year over year. We achieved this despite an increase in costs, especially freight rates due to the conflicts in the Middle East. We returned capital to shareholders by repurchasing €230 million in shares. We also refinanced and upsized our senior notes at a 75 basis points lower rate. We continue to grow in our white spaces. APAC continued its high-quality and DTC-led growth, especially in China.
We accelerated the pace of retail expansion. We are on track to meet our target of approximately 140 doors by the end of fiscal '26. Importantly, owned retail revenue grew 50% in constant currency. Same-store sales were up high single digits. We saw a strong acceleration in linear digital growth, capturing more demand in our own e-comm channel. Closed-toe penetration was up 500 basis points, consistent with recent trends and in line with our goal to expand usage occasions for our footbed.
Product mix contributed over half of the growth in ASP. We saw double-digit growth across all of our regions. Our Americas business was up 14% in constant currency. Youth retailers and sporting goods stores continue to lead B2B growth, with sellout at key partners in these channels up above 20% year over year. Within the Americas B2C business, we saw very strong retail growth as we continue to open new stores to capture more in-person shopping demand in our own doors.
We opened four new stores in the U.S., bringing the total to 21. Growth in EMEA was 15% in the largest, most important quarter for EMEA. We saw accelerating consumer demand, especially in our DTC business both online and in-store, with strong full-price realization of 93%. We opened four stores during the quarter, bringing the total in EMEA to 50. APAC grew 23% in constant currency. Excluding Australia, APAC growth was close to 30%. Australia's growth in the quarter was impacted by a shift in quarterly cadence as a result of the distributor acquisition.
We are very confident in our APAC target for the full year. Importantly, we had over 50% growth in China, the country with the highest ASP, a testament to our high-quality premium brand positioning in the region. Within the APAC segment, we opened five new owned stores, bringing the total to 53. On the product side, we continue to innovate and drive newness in both closed-toe and sandals. This innovation is most visible with our premium 1774 collection.
We introduced new raffia, canvas and premium leather executions in Naples, Boston, Arizona and Gizeh. We also collaborated most recently with Song for the Mute, Other Arrow and Repetto. A very successful launch targeting the female-led and growing popularity of ballet flats. This global movement also resulted in a very strong demand for the Mary Jane style. Fanta Clarita, one of the newest mainline silhouette launches. This once again demonstrates our ability to create a trend within our brand.
While demand for the Boston remained very strong, other clog executions also performed exceptionally well. For example, the Naples grew by more than four times the units sold year over year. We also saw very strong growth in shoes led by UTI a late ADMOC toe, which more than doubled in units sold year over year. Overall, non-Boston closed-toe executions were up more than 50%. About half of our top 20 silhouettes are closed-toe, including three that were introduced within the past three years.
In our sandal business, we saw the strongest growth from our newest seasonal executions such as flowers, rivets, buckles, prints and textiles. Growth was especially strong in our Mayari, Madrid and Siena silhouettes. We highlight this newness most prominently within our DTC business, driving growth in our own channels. We remain super confident in the strength of our brand. We are purpose-driven and see strong global demand for the footbed. We target a diverse range of consumers across geography, gender, age and income.
Our total addressable market is only limited by the global population. This gives us flexibility to drive growth regardless of global or regional macro conditions. We manage our distribution with discipline to maintain scarcity, properly segment the market, manage channel growth and protect for price realization. Now I will pass the call over to Ivica to go through the quarterly results in more detail.
Ivica, Chief Financial Officer
Thanks Oliver. I'm happy to share with you details of Birkenstock Holding's performance for the third quarter of fiscal 2026, which exceeded our expectations. We generated third-quarter revenues of 720 million euros, growth of 13% on a reported basis. Growth in constant currency was 15% at the high end of our 13 to 15% expectation. The depreciation in the US dollar, Canadian dollar and Asian currencies like the Indian rupee and the Japanese yen compared to the third quarter of 2025 caused a 180 basis points headwind to revenue growth in the quarter.
For reference, in the third quarter of 2026 the average EUR/US dollar rate was 1.16, up from 1.13 in Q3 of fiscal 2025. We saw strong growth across all segments in the quarter. The Americas segment was up 14% in constant currency, continuing the trend we saw in the first half of the year and reflecting the consistent strength in our most developed market. EMEA was up 15% in both reported and constant currency, a strong acceleration from Q2 driven by particularly strong D2C in Europe in both online and retail.
We continue to see some localized impact in the Middle East related to the conflicts in the Gulf region, particularly in the UAE, which is highly dependent on tourism and expat demand. This has been offset by strong domestic demand in markets such as Saudi Arabia. Overall, the Q3 performance was better than anticipated. APAC was up 23% in constant currency. APAC quarterly growth rates are skewed due to the changed revenue pattern from the Australia business prior to the acquisition.
Revenues were recognized when we delivered to the distributor before the peak season. We are now realizing revenues in line with the local market dynamics and seasonality. The Australian spring/summer months are September to February and D2C and B2B sell-out peaks in these months, which aligns with our Q1 and Q4, which differs from the revenue realization pattern pre-transaction. Therefore, Q3 Australia growth was lower versus last year, which as one of our top markets in the region had an impact on the APAC growth rate.
Excluding the impact from Australia timing shifts, our APAC growth was close to 30%. We continue to expect APAC to grow at twice the pace of the other segments for the full year. By channel, for the year, B2B was up 15% in constant currency, consistent with the trends of the last few quarters. On the back of continued strong demand at our key partners, D2C accelerated strongly to 16% in constant currency, up 400 basis points from 12% growth in Q2 and outpaced B2B in the quarter.
Our digital growth accelerated very nicely compared to the first half of the year. Many of the actions we are taking to drive improved conversion are beginning to show results. This includes improved content, enhanced user experience including simplified checkout options and expanded loyalty and member benefits. Retail was up 50% as we continue to see very strong performance from our new and existing doors. We added 13 new owned stores, bringing our total to 124.
Same-store sales growth was up high single digit. Adjusted gross profit margin for the third quarter was 59.2%, down 130 basis points year over year, mainly driven by 60 basis points of pressure from FX and 70 basis points of pressure from incremental US tariffs. Adjusted gross profit margin excluding these effects was up 10 basis points year over year. While we continue to benefit from better capacity absorption which contributed 50 basis points to adjusted gross profit margin, product mix caused a 40 basis points drag on margin.
The ongoing shift to closed-toe silhouettes comes with a slight margin drag due to the manufacturing complexity and higher consumption of production minutes. However, the shift is very beneficial for us as it yields higher ASP and higher gross profit per pair. Selling and distribution expenses were 186 million in the third quarter representing 25.9% of revenue. This was up 30 basis points from the prior year primarily due to accelerated retail expansion and some higher logistics cost as a result of the conflicts in the Middle East.
General and administrative expenses were 33 million or 4.5% of revenue, down 40 basis points year over year due to lower IT expenses and fixed cost leverage. Adjusted EBITDA in the third quarter of 242 million was up 11% year over year. The flow-through of FX effects reduced adjusted EBITDA by 8 million. Excluding this FX impact, EBITDA was up 15%. Adjusted EBITDA margin of 33.7% was down 70 basis points year over year due to 130 basis points of pressure from FX and tariffs.
Excluding these impacts, adjusted EBITDA margin would have been up 60 basis points. This improvement is despite the increase in freight and logistics cost. Adjusted net profit was 134 million in the third quarter, up 15% year over year. Adjusted EPS for Q3 was €0.74, up 19% from €0.62 a year ago. The debt refinancing triggered an 11.7 million expense from the accelerated amortization of the transaction cost and the derecognition of the embedded derivative of the original senior notes.
The ASR triggered a 10.6 million expense from fair value changes due to price movements during the term of the ASR. These one-time non-cash expenses were recognized in finance cost and were excluded from adjusted net profit. We generated $247 million in operating cash during the quarter compared to $261 million due to higher income tax payments totaling 77 million. We ended the quarter with cash and cash equivalents of 694 million after the share repurchase of 230 million and the refinancing and upsizing of our long-term senior notes.
As a reminder, in June we repaid 428.5 million of five and a quarter senior notes due 2029 and issued 900 million new senior notes due 2033 at four and a half. The remaining excess cash added to the balance sheet gives us flexibility to further enhance shareholder value with an additional 500 million share repurchase or the refinancing of other existing debt, subject to market conditions. Our inventory-to-sales ratio was 37% in the quarter, up from 33% a quarter ago.
The increase from last year is largely driven by the increase in capitalized tariffs and FX effects. Our DSO for the quarter were a healthy 45 days, up slightly from 43 a year ago. During the quarter we spent 26 million in capex, adding to our production capacity in Aruca, Wurlitz and Pasavag, beginning the build-out of Wittichenau and continuing our investments in retail and IT. We also paid the second tranche of the purchase price for Birkenstock Australia of 9 million.
Our net leverage was 1.8 times as of June 30, 2026, up from 1.5 times at September 30, 2025, reflecting the cash outflows from the ASR. Excluding the ASR, net leverage would have been approximately 1.4 times. Turning to our outlook for the fourth quarter and fiscal 2026, in the fourth quarter we expect revenue growth in constant currency within our annual guidance range of 13 to 15%. We expect FX to be relatively neutral in Q4, resulting in similar growth rate on a reported and constant currency basis.
On margins for Q4 we expect FX to be neutral. On tariffs, given the recently announced agreement with the European Union and the implementation of Section 301 tariffs, we now expect a blended tariff rate for Q4 of just over 15%, below what we have experienced under the Section 122 tariffs. As a result, tariffs should also be relatively neutral year over year in Q4. For the full year, we now expect revenue growth of 15% at the high end of our guidance range of 13 to 15% for the full year.
We continue to expect adjusted gross margin of 57 to 57.5% and adjusted EBITDA margin of 30.2 to 30.5% inclusive of approximately 200 basis points of pressure from FX and US tariffs combined. Adjusted EBITDA is now expected to be at least 710 million euros. For the fiscal year our expected tax rate is 30 to 31%, up from our prior forecast of 26 to 28%, due to the non tax-deductible expenses largely associated with the ASR and debt issuance, including the tax impact of the accelerated share repurchase as well as the refinancing and upsizing of our senior notes.
Adjusted EPS is expected to be €1.90 to €2.05 in line with our prior forecast. This includes approximately 15 to €0.20 of pressure from FX. This does not include the impact of any additional share repurchase beyond the ASR completed end of June. CapEx should be in the range of 110 to 130 million euros. We have a net leverage target for the end of fiscal 2026 of approximately 1.6 to 1.7 times, up from our previous forecast of 1.3 to 1.4 times after the impact of the ASR, but excluding any additional share repurchases.
With that, I'll turn it back to Oliver to close.
Oliver Reichert, Chief Executive Officer
Thanks Ivica. We are super happy increasing our revenue growth target to 15% in constant currency and adjusted EBITDA to at least 710 million euro. Our third quarter results once again prove that demand for our beloved brand remains strong even in times of inflationary pressure on consumer wallets. We remain an accessible and desired brand. We are excited about the opportunities in the fast growing and underpenetrated APAC market, in expanding our own retail fleet, and in the newness and innovation within our brand.
As we look toward the final quarter of our fiscal 2026 and beyond, we plan to continue to grow our share and expand our following within our new younger talent group, building lifetime connections with our consumers across regions and channels. Drive innovation and create newness in both our closed toe and in our sandal business. Actively steer product between geographies and channels to optimize margins, maintain scarcity and protect brand equity.
Continue to use our strong balance sheet and capital allocation decision to drive shareholder returns. Our organic growth generates substantial cash flow. Over the past two years our operating cash flow totaled 774 million euros. Our first priority remains to invest in the business. Of this 774 million, 189 million was invested in capex. Given our currently undervalued shares, we will look for opportunities to continue our buybacks. We will now take your questions.
OPERATOR
We will now begin the question and answer session. Please limit yourself to one question. If you would like to ask a question, please press Star one to raise your hand. To withdraw your question, press Star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q and A roster. Your first question comes from the line of Matthew Boss with JP Morgan.
Your line is open. Please go ahead.
Matthew Boss, Analyst at JPMorgan
Thanks and congrats on a nice quarter. So Oliver, nice recovery in direct to consumer growth. This quarter came in above B2B for the first time in two years. Can you speak to drivers of the improvement at direct to consumer and what you're seeing in B2B relative to D2C? And then relative to the raised top line guide for the year, could you talk to trends in the fourth quarter and do you think there's potential upside to your 15% top line forecast for the year?
Oliver Reichert, Chief Executive Officer
Hey Matt, thank you for your question. I'm maybe a bit hard to understand because I'm dialing in from Trope. I'm heavy selling shoes here as you can imagine. It's quite hot. Hopefully you can hear me loud and clear. So to come back to your question, we delivered strong growth across both channels. Of course B2C outpaced B2B, supported by the investments we are making in both own retail and in our digital business. Both channels are and will remain important drivers for our business. The DTC performance was driven by owned retail, where our expanded footprint and faster store opening pace delivered 50% growth. Same-store sales were also strong, up high single digits, which reflects the continued demand for our brand across our existing store fleet.
We also saw accelerating online growth — newness on the product side, greater personalization, and stronger storytelling — making the digital experience more compelling and driving conversion. This was most impactful in Europe, where we saw a clear step up in online performance with 93% full-price realization, even as the broader market became more promotional, as you know. So we're focused on growing the business where we can and create the most value.
That means continuing to invest in B2C while maintaining a strong, disciplined B2B business. Our wholesale partners are an important part of our growth strategy. They give us efficient access to new customers, particularly younger consumers, while helping us maintain high-quality distribution across our markets. Our 15% constant-currency revenue growth guidance reflects the strength we are seeing today across channels and markets. And last part of your question, we feel very confident about the momentum in the business, and our long-term revenue growth target is 13 to 15.
Thank you.
Rick Koehler, Analyst
Best of luck.
OPERATOR
Thank you. Your next question comes from the line of Laurent Fasulescu from BNP Paribas. Your line is open. Please go ahead.
Laurent Fasulescu, Analyst at BNP Paribas
Good morning Oliver and team. I wanted to ask about EMEA. EMEA growth accelerated nicely versus Q2. Did you see any impact from the conflict in the Middle East? Could you provide additional color on key drivers behind the acceleration in growth? And to what extent did favorable weather conditions contribute to the growth relative to the underlying trends in the business? And curious, are you seeing any continuation of these trends into 4Q within EMEA?
Thank you so much.
Ivica, Chief Financial Officer
Hey Laurent, thank you for your question. It's Ivica. So indeed we did continue to see an impact from the conflict in the Middle East, although certainly it was less pronounced than in Q2. Basically, at the onset of the conflicts back then, we were able to mitigate much of the pressure through adjustments in the delivery routes and strength in other parts of the region. For instance, if you think of Saudi Arabia, very resilient market and less dependent on tourism and expats.
So in general, Q4 is a larger quarter in the Middle East, so we expect slightly more of an impact, also due to the resumption of hostilities in the region itself. That said, we expect the total second-half impact to be below the 10 to 12 million we originally estimated. We now see this totaling high-single-digit millions. Overall, the growth acceleration was largely driven by D2C demand. As Oliver already mentioned, demand proved very resilient across the region and we saw nice growth in both retail and online.
We're also seeing the benefits of the investments and actions we've taken to drive traffic and improve conversion. This is also something we spoke about in January at our Capital Markets Day. And this includes enhanced upper-funnel online marketing, stronger content, and optimization of the on-site experience. And this is all contributing positively. So on the weather, definitely warmer. Temperatures are generally favorable to our business. However, we were already seeing improved trends ahead of that, and those trends have continued into the first weeks of our fiscal Q4.
And finally, to note, there was bad weather in some of our other markets in Q3 as well.
OPERATOR
Your next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open. Please go ahead.
Lorraine Hutchinson, Analyst at Bank of America
Thank you. Good morning. So pricing over inflation was not a contributor to gross margin this quarter as it has been for the past few. Were you more promotional? And how should we think about your ability to pass inflation through with pricing when customers are a little more price sensitive? Are you seeing any signs of consumer pushback on pricing, particularly in early back to school?
Ivica, Chief Financial Officer
Hey Lorraine, it's Ivica. So all pricing decisions are made with the goal of passing through inflation and protecting gross margins, something that we do very consistently. There can be timing differences from when we take pricing and when the inflation works its way through the inventory and flows through the COGS. And please keep in mind year to date, the pricing-over-inflation benefit to gross margin is 30 basis points. On promotion, at an overall industry level, we see indeed a higher markdown activity as retailers compete for a more constrained consumer wallet.
In this context, we continue to deliver a superior full-price realization and gross margin. This basically underlines the strength of our brand and our markdown discipline, which remains unchanged. We are and will selectively discount, as we always have. Any active markdown we do is to effectively manage our seasonal excess stock as our business continues to grow. So as you know, 75 to 80% of our business is core products and evergreen styles. Our markdown assortment is centered very much around prior-season merchandise, seasonal colorways, and broken size runs.
And the beauty of our brand is we serve a broad range of price points from $50 to $1,500 and remain accessible when consumers are tightening up their spending. For those consumers who are more price sensitive, we offer executions in Birko-Flor, EVA, or textile, for example. And importantly, any action we have taken are not negatively impacting our margin. As you can see from our results, gross margin was even up 10 basis points on a like-for-like basis.
And finally on back to school, we continue to be a must-have brand for the school year and we continue to see very strong youth-driven demand in the US.
OPERATOR
Your next question comes from the line of Christina Katai, an Equity Research analyst. Your line is open. Please go ahead.
Christina Katai, Analyst
Hi, thank you for taking the question and congrats on a good quarter. You provided helpful color that the shift toward closed toe has created I think a roughly 40 basis point pressure on gross margin. Can you help us quantify that further? What is the difference in gross margin between closed toe and open toe? Then secondly maybe if you could provide more color on the components of growth this quarter just across ASPs and volume. Thank you.
Ivica, Chief Financial Officer
Hi Christina, thank you for your question. And first on the margin impact. So as you know we don't disclose specific margin on a product level, but the complexity of higher-ASP, non-Boston, closed-toe shoes and boots executions require more labor input and consume more production minutes. So this quarter we saw an over 500 basis points increase in our closed-toe share, and this is driven by over 50% growth in the non-Boston silhouettes, with Naples units up more than four times and Uji more than doubling year over year in Q3.
That impacted the gross margin. These are great, highly profitable products which are helping us to attract new consumers and broaden the usage occasions for the footbed, and they generate a higher ASP and profit dollars per pair, although a slightly lower but still very strong margin. And we use contract manufacturers in Portugal for some of this production. So insourcing parts of this production now that demand is scaling is a future margin opportunity for us, definitely.
And then on the second part of your question on ASP versus volume, it was very much in line with our 1/3/2 target and reflects the continued buildout of all production capacity across the network, which is progressing according to plan.
OPERATOR
Your next question comes from the line of Michael Benetti with Evercore ISI. Your line is open. Please go ahead.
Carson (for Michael Benetti), Analyst at Evercore ISI
Hey guys, it's Carson. I'm here for Michael. Thanks for taking our question here. Sorry to get into the nitty gritty of the model, but can you walk us through the tax rate? It's coming in above the original guidance of 27 to 28%. Is this 30 to 31% the new baseline for taxes? And then I would have expected more upside to EPS for the year given the strong EBITDA outlook and share repurchase. Why aren't we seeing the flow through to EPS and then related to that, what's the normalized finance cost on a quarterly basis with the new debt issued? And then should we expect to see less volatility in total finance costs going forward?
Ivica, Chief Financial Officer
Thanks. Hi Carsten, thank you for your question. The first one on tax. No, we do not believe that 30 to 31 is the new baseline going forward. We expect a recurring tax rate in the high 20s this year. It is elevated due to the non-deductible, non-recurring, non-cash finance expenses associated with the refinancing that we have completed over the course of Q3, the ASR, and the mark-to-market valuations in the embedded derivative. Expenses on EPS this year will be impacted by this higher effective tax rate.
With a normalized tax rate, adjusted EPS growth would have been 23% in the third quarter. For the full year, the impact is about €0.08 per share. To your last part of your question on the finance cost, this quarter finance costs were impacted by, again, one-time, non-cash expenses related to the refinancing of 11.7 million and the ASR of 10.6 million, so we do not expect to incur these expenses going forward. What will result, however, in a recurring way and recurring change is the issuance of the new 900 million senior notes and the repayment of the original close to 430 million notes.
This will increase interest expense within finance cost by approximately 4.5 million per quarter, and finance costs should normalize at around 25 million per quarter. Overall, we expect volatility to decrease due to lower fluctuations in the embedded derivative resulting from the longer time to optional redemption of the new senior notes.
OPERATOR
Your next question comes from the line of Simon Siegel with Guggenheim Securities. Your line is open. Please go ahead.
Simon Siegel, Analyst at Guggenheim Securities
Thanks. Hey everyone, hope you're having a nice summer and nice job. Avitha, can you just speak to the spread between inventory and sales? How are you thinking about the composition of your inventory now? Maybe how's the change in units versus Euros and how are you thinking about the go forward inventory levels? And then just to clarify on the Australia timing shift, did sales shift earlier into 2Q or later into 4Q and is that change now behind us?
Just curious how to think about the underlying comment you made or the underlying trends comment you made and the go forward expectations. Thanks guys.
Ivica, Chief Financial Officer
Hey Simeon, it's Ivica again. Thank you for your question. The first part on the inventory. So as you are well aware, over 70% of our finished goods inventory is already contracted. Most of this inventory is core, basically evergreen products which don't go out of style, and definitely allowing us for better pre-production and production balancing, and definitely also helps our planning. More than half of the increase in our stock-to-sales ratio is attributable to FX and capitalized tariffs, and this is something that we've spoken about already in our earnings call in Q2.
The other half is largely attributable to the consolidation of the Australia business and the timing of revenue recognition and sell-through of the inventory there. We're now running an onshore business and are more bound to the cadence of selling in the region itself.
OPERATOR
Your next question comes from the line of Adrian Duverger with Goldman Sachs. Your line is open. Please go ahead.
Adrian Duverger, Analyst at Goldman Sachs
Hey, good morning. Good afternoon Oliver, Ivic and Megan. Thank you very much for taking my question. Could you please comment a bit more on the performance in the U.S.? More specifically, how is the order book performing? Could you please comment maybe on the sell-in versus sell-out at your wholesale partners? I think you commented already that you have seen very good growth from these youth, department stores, and sporting goods. And also, following up on the prior question, are you confident that there is no buildup of inventory anywhere in the wholesale channel, and is there anything you are seeing in terms of wholesale appetite for your products?
I guess as well in terms of consumer feedback, that would be super helpful. Thank you very much.
Ivica, Chief Financial Officer
Thank you very much, Adrian, it's Ivica again. So on your question with regards to U.S. B2B, and indeed as Oliver said earlier in this call, we continue to see strong youth-led demand, and basically this is the cohort that is highly growing and effectively being new to the brand. So this is what we call the footbed newbies. Sell-through across these channels in Q3 was up by 20% plus year over year. So a continued strength we've observed for the last couple of quarters and very similar to what you have seen already before with regards to back to school.
As mentioned, we are one of the must-have brands. We are continuing to see this youth-driven growth. And with regards, coming back again to the markdown activity, there is no change to our approach, and if we would be marking down, you would immediately see it in our gross margin. But you don't see it. It's just the opposite: you see an increase on a like-for-like basis, and this is what we will continue to build on.
OPERATOR
Your next question comes from the line of Ed Obin with Morgan Stanley. Your line is open. Please go ahead.
Ed Obin, Analyst at Morgan Stanley
Yeah, good afternoon. So just a question on China actually. Obviously your exposure to China is small. I think it was about 2% last year. But you mentioned on the call that you're growing about 50% year over year. Could you just update us on your plan to continue to grow in that market, just on production capacity, because Oliver mentioned your sustained capex investment. I think on my estimates you're going to be selling about 42 million pairs this year.
When will you start to be thinking about building new factories, or with the existing capacity what could be potentially the number of pairs you could be producing every year? Thank you.
Ivica, Chief Financial Officer
Hi Eduard, it's Ivica. So the first part of your question on China: the business there was up 50% in the quarter and was our largest market in APAC in Q3, and it's very much a premium market for us. It's high-quality, retail-led growth with the highest ASP globally. We'll continue to follow the roadmap we outlined for the market at our capital markets day in January. This includes raising brand awareness through new stores, both company-owned and partner doors, local activation, and brand-building events.
Events do play a key role in increasing the brand awareness throughout the region, and this will be built up further. So the second part of your question with regards to build-out of capacity, especially with regards to production. We are on track to deliver 10% unit growth as we've said at our capital markets day, and the build-out of the entire manufacturing network, especially with regards to Wittichenau, but also Arouca in Portugal and Görlitz, is progressing according to plan, and we are well on track to deliver the target unit growth.
OPERATOR
Your next question comes from the line of Mark Altschbager with Baird. Your line is open. Please go ahead.
Mark Altschbager, Analyst at Baird
Great. Thank you for taking my question. Wanted to hit on capital allocation. You have another, I believe, $500 million of liquidity for buybacks. How do you anticipate executing the additional buyback program going forward? This last one was ASR, obviously. How are you thinking about that versus a regular ongoing buyback program? And relatedly, net leverage 1.8 times today, guiding to 1.6, 1.7 by year end. Do you have a target leverage ratio, or what is the leverage level you're going to run in order to complete the buyback program?
Thank you.
Ivica, Chief Financial Officer
Hi Mark, thank you for your question. It's Ivica again, and you are right: we have a significant cash balance from which we can execute additional buybacks, and we plan to do so. We will be responsive to capital market activity and make the decision how and when to utilize that cash based on a number of factors, including potential liquidity events for our largest shareholder, the timing naturally of which we do not control. Ideally, we would be utilizing the cash as we did the $200 million last year and buy shares as part of a larger transaction so we do not further reduce our public float, which is, as you know, already very low.
That said, as we did this year with our most recent ASR, we don't have to wait for a bigger transaction and will buy back from the public float if our board decides that it's in the best interest of our shareholders. With regards to leverage, we do not have a specific leverage target set. We will keep our options open to allocate capital however it is in the best interest of our shareholders.
OPERATOR
Your next question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Please go ahead. Anna, you may need to unmute your device locally. For now, we will move on to Dana Telsey from Telsey Advisory Group. Your line is open. Please go ahead.
Dana Telsey, Analyst at Telsey Advisory Group
Hi. Congratulations on the nice results, Oliver. As you think about the closed-toe penetration, which was up so nicely in the quarter, which typically is a summer quarter that's usually more sandals-heavy, what was the growth in the sandals category? And, going forward, how do you think about product innovation and newness, whether in sandals or closed toe, and pricing? Thank you.
Oliver Reichert, Chief Executive Officer
Hey Dana, it's Oliver again. Thank you for your question. As you know, our sandals business remains very strong, up high single digits in constant currency year over year. Sandals were particularly strong in our own DTC channel, driven by newness. There's no one else with the footbed and its benefits, so this is a category we own. It's not just Arizona, which is still growing and benefiting from newness. The Mayari, the Madrid, and the Siena silhouettes performed particularly well this summer.
The success of our closed-toe business, especially clogs, has created true four-season demand, reducing the seasonal dependence on sandals. This is not just the Boston. It includes the Napoli, the Zurich, Amsterdam, and others, all of which are doing very well and building on our momentum in clogs. We are constantly driving newness and innovation in both open toe and closed toe, growing our global fan base. We create new trends from within our brand to build and expand our archive and extend usage occasions.
I mentioned two good examples of this in my opening comments, like the Santa Clarita and the Repetto collaboration to capture the increasing global demand for ballerinas. This will be—don't forget this—this will be the trend for the next three to five years. The ballerinas for ladies.
OPERATOR
And with that we have reached the end of the Q&A session. This concludes today's call. Thank you so much for attending. You may now disconnect.
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