Columbia Sportswear Company

Greetings and welcome to Columbia Sportswear Company first quarter fiscal year 2019 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations. Thank you. You may begin.

Good afternoon and thanks for joining us to discuss Columbia Sportswear Company's first quarter results in 2019 outlook. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary explaining our results and the assumptions behind our 2019 outlook. The CFO commentary is available on our investor relations website, investor.columbia.com. With me today on the call, our President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Operating Officer, Tom Cusick, Senior Vice President and Chief Financial Officer Jim Swanson, and Executive Vice President and Chief Administrative Officer Peter Bragdon. GERD is not available to join us today, so I will start off by covering the Safe Harbor Reminder. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K in subsequent filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including non-GAAP results for 2018. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our first quarter 2019 earnings release. Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.

Thanks, Andrew. Welcome, everyone, and thanks for joining us this afternoon. Building on the momentum we generated through last year, 2019 is off to a fantastic start. In the first quarter, we generated record sales, gross margin, operating income, net income, and earnings per diluted share that exceeded our expectations. Given this early success and the favorable advanced 2019 fall orders, we have the confidence to increase our full-year revenue and earnings outlook. Overall, we believe our brand-led, consumer-focused strategy is fueling market share gains, and we remain committed to investing in the business to drive sustainable, long-term, profitable growth. In the first quarter, sales increased 8%, or 10%, excluding the effect of exchange rates. Earnings per diluted share increased 39%, compared to non-GAAP first quarter 2018 results. Sales growth was led by the Columbia and Sorrell Brands, and were encouraged to see anticipated Project Connect benefits materialize, helping to fuel a 210 basis point of gross profit margin expansion in the quarter. Regionally, U.S. sales grew 14% in the quarter, driven by mid-teens percent growth in DTC and low double-digit growth in wholesale, reflecting strong execution and brand momentum. favorable winter weather helped our wholesale partners and DTC stores drive end-of-season fall product sales. We've also experienced excellent early sell-through of spring 2019 products. In our DTC business, brick-and-mortar store performance as well as mid-20% e-commerce growth exceeded our expectations. For my review of international markets, I will reference non-GAAP constant currency growth rates which we believe best reflects underlying business trends. Sales outside of the U.S. grew 3% in the quarter led by growth across Japan, Europe direct, Korea, and international distributors while China and Canada sales declined. Japan's mid-teens growth in the quarter reflects the long-running success of the Columbia brand in that market. Japan's growth also benefited from the one-time impact related to a key customer business model change and a favorable shift in the timing of spring 2019 shipments. We expect Japan to grow mid-single-digit percent for the year. Europe Direct generated mid-single-digit percent growth in the quarter with contributions from wholesale, new DTC doors, and e-commerce growth. Europe Direct is positioned to grow mid-single-digit percent for the full year. We are pleased with our performance in the Korean market, generating low double digit percent growth as the business continues to stabilize in a declining outdoor market. We are encouraged that our 2019 guidance for Korea calls for mid single digit percent growth, which would represent our second consecutive year of growth in that market. Our international distributor business was up low double digit percent in the quarter, led by our EMEA distributors. Canada posted a 1% decline in the quarter but remains on track to generate mid single digit percent growth for the full year. China sales declined high single digit percent as we experienced challenges across our wholesale channel that outweighed our DTC growth. To help reinvigorate growth, we're investing in our consumer experience with store fixture upgrades, full store renovations, and enhancements to our digital capabilities. As our new China GM, John So, immerses himself in the business, we look forward to sharing additional updates on our go-forward strategy. While we expect a mid-single-digit percent decline in China net sales for 2019, we continue to believe China represents one of Colombia's largest regional growth opportunities. Turning to margin performance, first quarter gross margin was up 210 basis points to 51.4%. driven by Project Connect benefits, higher full-price product sales mix in our wholesale channels, favorable foreign currency hedge rates, and higher DTC sales mix. SG&A expenses grew 8% compared to last year's non-GAAP SG&A expenses, resulting in SG&A as a percent of sales of 38.5% compared to non-GAAP SG&A as a percent of sales of 38.3% in the prior year. The biggest drivers of SG&A growth were planned investments to support our expanding global DTC operations, higher personnel expenses to support business growth and strategic initiatives, as well as higher demand creation expense. I will now review our performance by brand on a reported basis. Looking at the Columbia brand globally, sales increased 9% in the quarter. This growth was achieved via strong DTC performance and wholesale growth in the U.S. reflecting continued market share gains. On the product front, Columbia's innovative spring 2019 rainwear and Omni Shade Sun Deflector products are receiving accolades. In rainwear, Backpacker Magazine named the Columbia Outdry Extreme Rain Jacket as offering the best protection among all shells tested in their 2019 gear guide. and Gear Patrol named it as one of their most innovative rain shells in their spring roundup. Men's Journal featured Columbia's OutDry Extreme Reversible Jacket in their article, The 7 Best New Rain Jackets to Keep You Dry This Season. The OmniShade Sun Deflector PFG Hybrid Shirt was featured as the lead product in the Saltwater Sportsman's Magazine's 2019 Annual Gear Guide. Bass Angler Magazine featured the Spring 2019 PFG Super Terminal Tackle Shirt in their Spring New Product Showcase issue. During the quarter, we continued to invest in demand creation to amplify these product innovation stories and create deeper connections with consumers. We highlighted several unique digital stories of Columbia athletes putting our products to the test. Recently, we followed China's Liqua and Italy's Katia Fori as they searched for terrain that will prepare them for one of the world's most prestigious trail running competitions, the Columbia sponsored UTMB Trail Run that begins in Chamonix, France and spans three European countries. Collectively, our UTMB sponsorship and content has generated over 160 million impressions since 2015. Last week, We released a new PFG digital story following angler Wesley Locke to Hawaii as she makes her first ever attempt to catch a mahi-mahi offshore on a fly. This multi-generational family story celebrates that fishing is all about the experience and regardless of the catch, there's always something to take home with you. We look forward to sharing more compelling content and product stories like this on our recently launched PFG Instagram channel. PFG remains a unique sub-brand that differentiates Columbia year-round from our traditional outdoor competitors. For spring 2019, our PFG advanced orders significantly outpaced the brand average. Early season PFG sell-through has been exceptional. In the second half of 2019, we're planning to execute key city attack plans in New York City and Denver. We see tremendous opportunity to increase our sales and Brand Awareness in the Northeast, and New York City provides a global stage to highlight our brand. Denver is an ideal location to further amplify our brand presence in an important outdoor-minded market. We look forward to sharing more details about these activations in the coming quarters. Sorrel sales surged 28% in the quarter, reflecting robust growth across both wholesale and DTC distribution channels. Sales growth in the quarter benefited from sales of spring 2019 product, as well as strong sales of fall 2018 fashion styles. Sorel's ability to be a year-round fashion footwear brand is evident in the sales trend of our spring 2019 product line, including the expanded Kinetic sneaker line and the Ella and Joni sandal and wedge collections. Sorel's fashion styles have done exceptionally well in the U.S., and we're starting to see the same momentum build in Canada with the sell-in of fall 2019 product. We remain committed to Sorel becoming recognized as a year-round fashion footwear brand globally. Given the product successes and the tremendous opportunity ahead, we are investing in Sorel demand creation to build on this momentum. At Prada, sales declined 3% in the quarter, reflecting lower wholesale and DTC brick and mortar performance Partially offset by e-commerce growth. From a category perspective, women's pants as well as men's and women's tees and basics performed well in the quarter. We're investing in demand creation to grow brand awareness and continue to see large market opportunity for Prada. Mountain hardware sales declined 11% in the quarter, reflecting lower excess liquidation sales compared to the prior year. We're pleased to see growth in full-price wholesale sales in the quarter. Healthy advanced fall 2019 orders gives us confidence the brand will generate full-year growth. With clean inventory and compelling new product and marketing, we're excited to see what our reinvigorated Mountain Hardware brand can achieve. I'll now quickly review our balance sheet and cash utilization. Total inventory exiting the quarter was up 28% to 521 million. This is in line with the outlook we provided on the last call for elevated inventory growth resulting from earlier receipts of fall 2019 product to improve our manufacturing efficiencies. Based on current timing of receipts and deliveries, we expect inventory growth to peak in the second quarter before moderating by year end. Our balance sheet remains extremely strong with cash balances of over 700 million exiting the first quarter. We continue to have no long-term debt. During the first quarter, the company repurchased approximately 200,000 shares of common stock for $19 million and paid $16 million in shareholder dividends. Exiting the quarter, we had approximately 317 million remaining under the current stock repurchase authorization. Given the substantial investments we're making in our brand-led, consumer-focused organization, I'd like to provide an update on current areas of spending. On the technology front, we continue to move forward with Consumer First, or C1, our new retail platform, and Experience First, or X1, our new mobile experience. While we are continuing to work toward North American implementation of C1 in the second half of 2019, We are now working towards a phased implementation of X1, beginning with Europe Direct in 2019, followed by the launch of North America in 2020. The financial impact of these timeline changes is contemplated in the financial outlook we're providing today. We're also making strategic investments across our supply chain to enable growth, improve productivity, enhance service levels, and add capacity throughout our distribution and fulfillment networks. Before moving to guidance, I'd like to discuss recent changes to our board of directors. First, I'd like to thank Ed George, who will be retiring from the board at the upcoming annual meeting. His support to the company has spanned over five decades, including more than three decades serving on our board. Without the support and counsel Ed provided as the company's banker in the 1970s, Columbia would not exist today. More than anyone, he encouraged and helped us to build, in his words, a fortress balance sheet that has enabled us to prosper through good and bad times. I'd also like to highlight two new additions to our board, Sabrina Simmons and Kevin Manziel. Sabrina, who previously served as the CFO with Gap Incorporated, brings a wealth of global retail experience and insight managing a multi-billion dollar global apparel business that will help inform our strategy during this period of rapid retail change. Kevin, who most recently served as chairman, CEO, and president of Kohl's Corporation, will provide a unique and powerful mix of retail experience and wholesale perspective from his tenure leading and growing one of the largest department store chains in the U.S. Thanks, Ed, and welcome Sabrina and Kevin. I now would like to provide some detail on our upcoming 2019 financial outlook. Based on first quarter performance and the completion of our fall 2019 wholesale order taking process, we now anticipate 6.5 to 8.5% sales growth. Compared to 2018 non-GAAP results, we now expect gross margin to improve by approximately 80 basis points with the largest driver of year-over-year improvement coming from Project Connect benefits. Given our accelerated level of investment in our strategic priorities, we expect SG&A to deleverage, resulting in flat to 20 basis points of contraction in operating margin compared to 2018 non-GAAP results. This equates to operating margin guidance of 12.7 to 12.9%. Together with the benefit of full ownership of our China business, we expect earnings per share of $4.40 to $4.55, up 10% to 13% from 2018 non-GAAP results. For the second quarter, we anticipate mid-single digit percent net sales growth and earnings per share of break-even to a small loss. Please note, the second quarter is our lowest volume sales quarter. The timing of product shipments and expenses can cause reported results to be materially different than our financial outlook. You'll find more details on our Q&A results and 2019 financial outlook in Jim's CFO commentary furnished to the SEC on Form 8K and published on our website. In summary, We believe our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence from which we will continue investing in our strategic priorities to drive brand awareness and sales growth through increased focused demand creation investments. Enhance consumer experience and digital capabilities in all our channels and geographies. expand and improve global direct-to-consumer operations with supporting processes and systems, and invest in our people and optimize our organization across our portfolio of brands. We're making these investments to enable sustainable long-term profitable growth, make us a more efficient company, and drive market share capture across our brand portfolio and geographic regions. We'd be happy to entertain your questions for the balance of the hour. Operator, could you help us with that?