Columbia Sportswear Company

Greetings and welcome to Columbia Sportswear Company's second quarter fiscal year 2019 financial results. 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 a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Burns, Director of Investor Relations. Thank you, Mr. Burns. You may now begin.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second 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 2009 outlook. The CFO commentary is also available on our investor relations website, investor.columbia.com. With me today on the call are President and Chief Executive Officer Tim Boyle, Executive Vice President and Chief Operating Officer Tom Kusek, Senior Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief Administrative Officer, Peter Bragdon. GERT 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 in material from what is projected. Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K and 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 in financial tables included in our second 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 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. 2019 is shaping up to be an excellent year for Columbia Sportswear Company with record second quarter and first half financial performance. Based on strong first half results, current business momentum, and one-time tax benefits, we are raising the low end of our net sales outlook and raising our operating margin and earnings per share outlook for the full year. Overall, our brand-led consumer-focused strategy is delivering profitable growth, market share gains, and enabling continued investments in our strategic priorities. In the second quarter, net sales increased 9%, driven by strong spring 2019 sales performance, and to a lesser extent, early shipments of advanced fall 2019 orders and increased closeout sales. Excluding the effect of exchange rates, net sales increased 11%, with double-digit growth realized for Columbia, Sorrell, and Mountain Hardware brands. Project Connect financial benefits continued in the second quarter, helping to drive 70 basis points of gross margin expansion. Diluted earnings per share more than doubled to $0.34. It's also important to note that diluted earnings per share includes $0.11 of one-time tax benefits primarily related to the passage of the Swiss tax reform package. Because the second quarter is our lowest volume sales quarter, I'm going to focus my remarks on our first half results as they more accurately reflect underlying business trends. For the first half, net sales increased 8% or 10% excluding the effect of exchange rates. Diluted earnings per shares of $1.41 increased 83% compared to 2018 GAAP first half results and increased 52% compared to 2018 non-GAAP first half results. Regionally, U.S. net sales increased 13% comprised of mid-teens percent growth in wholesale and low double-digit percent growth in DTC driven by brick-and-mortar store performance and a low 20% increase in e-commerce. Consumers responded well to our innovative Spring 2019 assortment, led by the Columbia and Sorrell brands in the U.S. wholesale and e-commerce channels. For my review of international markets and brand performance, I will reference constant currency growth rates, which we believe best reflect the underlying business trends. Net sales outside the U.S. grew 6% in the first half, with the EMEA, LAAP, and Canada regions all reporting net sales growth. Looking more closely at growth trends in our international markets, our international distributor business was up high single-digit percent with growth from the EMEA distributors partially offset by a modest decline in our LAAP distributor business. Japan's high single-digit percent growth in the first half reflects the Columbia brand's strong market position with healthy growth noted across both Hosea and DTC Channels. Europe Direct was up mid-single-digit percent, driven by DTC and wholesale growth. Given economic pressures, the retail environment is challenging in several of our largest European markets, resulting in growth rates below what we've seen in recent years. That said, given our relatively low market share today, we continue to see tremendous long-term growth opportunities in Europe. Korea was up mid single-digit percent in the first half as our business continues to stabilize despite a declining Korean outdoor market. China was up low single-digit percent in the first half. After a decline in the first quarter, net sales returned to growth in the second quarter, driven by our decision to work down excess inventory. In 2019, new general manager John So is focused on resetting the marketplace by optimizing distribution, and investing in our consumer experience. The Columbia brand has a strong market position in China, and we believe new management and the investments we are making will reinvigorate growth in this market, which remains one of our largest geographic growth opportunities. In Canada, after a difficult first quarter, the arrival of warmer weather in the second quarter helped boost spring 2019 product sell-through resulting in mid-single-digit percent growth for the first half of the year. Turning to margin performance for the first half, gross margin was up 150 basis points to 50%, largely reflecting Project Connect benefits, including our design to value, assortment optimization, and manufacturing efficiency initiatives. SG&A expenses grew 9% compared to last year's non-GAAP SG&A expenses resulting in SG&A as a percent of sales of 41.7% compared to non-GAAP SG&A as a percent of sales of 41.6% in the prior year. The biggest drivers of SG&A growth were planned investments to support our expanding global DTC operations, higher personnel and project-related expenses, and increased demand creation spending. Looking at the Columbia brand globally, sales increased 11% in the first half led by our USDTC and wholesale businesses. We believe this growth is indicative of market share gains. Our spring 2019 sell-through has been quite positive across all categories as consumers responded to our innovative product lines. Once again, PFG was a top performer and is quickly approaching annualized sales of more than $200 million. We are committed to investing in PFG to unlock its full potential. In 2019, We've released several PFG digital stories as well as launched a new dedicated PFG Instagram channel. In June, country singer and brand ambassador Luke Combs was invited to be the newest member of the Grand Ole Opry. Luke received this prestigious honor wearing his signature black PFG Bahama shirt. Congratulations, Luke. It's well deserved. On the product front, Columbia received several media call outs and awards during the quarter. In rainwear, the Evolution Valley Jacket was included in Forbes Roundup of the best raincoats for stylish and productive men, and Digital Trends featured the OutDry Extreme Eco Jacket in their article on sustainable outdoor gear for Earth Day. OmniShade Sun Deflector products, including the PFG Tidal Deflector and Terminal Deflector, were featured in articles on sun protective clothing from Outside Magazine, Gear Patrol, and Yahoo Lifestyle. In footwear, Runners World featured a strong review of our new lightweight trail running shoe, the Alpine FTG. Our newest collaboration with Opening Ceremony, which continues to resonate with younger consumers, was covered by several media outlets including Esquire, Bustle, Complex, Hypebeast and Nylon. We're excited to launch a new footwear platform innovation next month. called Shift, which targets younger adults who are not willing to compromise city-inspired style and athletic comfort for outdoor function. Shift provides them with a modern aesthetic, athletic comfort, and is engineered with Columbia's technologies for uncompromising performance on the trail. We'll be launching this product August 9th with a select number of retail partners around the world, including some very limited production styles with influential retailers. We will support this launch with a coordinated marketing campaign including launch events, influencers, digital, in-store, and out-of-home advertisements. This is just the first of many new Columbia Footwear product introductions that you'll see in the coming years as we realize the brand's full potential in this important category. As part of Columbia's mission to unlock the outdoors for everyone, We recently announced a new campaign and donations to support the National Park Foundation's Open Outdoors for Kids initiative, which helps today's youth trade screen time for green time. This collection of t-shirts features nine limited edition designs with images from our national parks. We also continue to support the UK National Park System as their official outfitter of park rangers and staff. During the quarter, we continue to enhance our consumer experience globally by investing in Columbia's in-store presence with key retail partners. This season, we've added additional shopping shops and fixtures at top sporting goods retailers, which resulted in improved sell-through performance of targeted categories at those doors. In the second half of 2019, we will be executing key city attack plans in New York City and Denver. Evidenced by the success of our Houston and Chicago key city attack plans last year, this strategy has proven to be a valuable tool to boost brand awareness and drive increased sell-through across our wholesale partners, Columbia Stores and Columbia.com. We look forward to sharing updates on these important activations in the coming quarters. Sorel net sales increased an impressive 31% in the first half of the year, led by growth in U.S. wholesale and DTC. Spring 2019 product was well received with strong performance noted across our Ella sandals, Joni collection, and Kinetic sneakers. Looking to the second half of the year, we're positioned to capitalize on this momentum during the higher volume fall and winter seasons. In recent calls, we've highlighted that we are investing in Sorrel demand creation in 2019 and I look forward to sharing some of the exciting marketing and product stories that will be unveiled this fall on our next conference call. Prana net sales declined 1% in the first half. In order to maintain the brand's premium position and raise brand awareness, we reduced promotional activity and made changes to marketing and catalog programs. While this impacted near-term sales growth, the Prana team is hyper-focused on the product assortment and market position in order to drive long-term growth. Mountain Hardware sales declined 1% in the first half, but we're encouraged to see full price sales up year-over-year during this time period. In the second quarter, Mountain Hardware reported year-over-year growth for the first time since 2017 and is poised for continued growth in the second half of the year. I congratulate the Mountain Hardware team for its tremendous work in building a foundation for long-term growth and in reinvigorating I'll now quickly review our balance sheet and cash flow. Total inventory exit in the year was up 33% to $756 million, primarily reflecting earlier receipts of fall 2019 product to improve manufacturing efficiencies and to a lesser extent to support our business growth. Our inventory is in line with our expectations and consistent with the commentary we provided on the last call. We remain confident in the quality and aging of our inventory position and expect inventory growth to moderate in the second half of the year with projected mid-teens percent year-over-year inventory growth at the end of the third quarter. We continue to view our diversified supplier base as a competitive strength and looking at our spring 20 assortment and beyond, the product source in China is expected to represent a low double-digit percent of total imported value into the U.S. If the U.S. seeks to impose additional tariffs on China products, the potential impact would be primarily felt in 2020 and beyond. Our balance sheet remains extremely strong, with cash balances of over $500 million exiting the second quarter. We continue to have no long-term debt. During the first half, the company repurchased over 1 million shares of common stock for approximately $100 million, at an average price of 97.22 cents per share and paid 33 million in shareholder dividends. Exiting the quarter, we had 236 million remaining under the current stock repurchase authorization. Before reviewing our 2019's financial outlook, I'd like to provide an update on current areas of investment. On the technology front, we have begun implementation of our new retail platform, Consumer First or C1 in North America. Currently, we're in the pilot phase of this implementation with a limited number of stores and plan to roll out C1 across the North America store fleet in the second half of this year. During the quarter, we also implemented our new mobile platform, Experience First or X1, in our Europe Direct and Prana e-commerce businesses. We're pleased with the performance of these systems to date. We still expect the remainder of the X1 North America implementation to occur in 2020. We are also continuing to make strategic investments across our supply chain to enable growth, improve productivity, enhance service levels, and add capacity throughout our distribution and fulfillment networks. I'd now like to provide some detail on our updated 2019 financial outlook. Based on first half performance, we now anticipate 7% to 8.5% full year net sales growth. Compared to 2018 results, we continue to expect gross margin to improve by approximately 80 basis points with the largest driver of year-over-year improvement coming from Project Connect benefits. We expect operating margin to be between 12.9% and 13% compared to 2018 non-GAAP operating margin of 12.9%. Our full-year financial outlook now contemplates a full-year tax rate of approximately 20% due to one-time tax benefits and a reduced share count. Together with the benefit of full ownership of our China business, we expect diluted earnings per share of $4.65 to $4.75, up 16% to 18% from 2018 non-GAAP results. Our capital expenditures outlook has also increased to $145 million, reflecting the opportunistic purchase of property close to our corporate headquarters, as well as larger technology investments. For the third quarter, we anticipate low double-digit percent net sales growth and mid-to-high single-digit earnings per share growth compared to 2018 non-GAAP third quarter diluted earnings per share of $1.41. Please note that our third quarter earnings release and conference call will be on Wednesday, October 30th. In summary, our record for first half performance is evidence that our brand-led, consumer-focused strategy is working. 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 global brand awareness and sales growth through increased focused demand creation investments, enhance consumer experience and digital capabilities in all of 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. You can find more detail on our Q2 results and our 2019 financial outlook in Jim's CFO commentary available on our website. That concludes my prepared remarks. We're welcome to answer your questions for the remainder of the hour.