Columbia Sportswear Company

Greetings and welcome to the Columbia Sportswear fourth quarter and fiscal year 2019 financial results conference call. At this time, all participants are in 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. It's now my pleasure to introduce your host, Andrew Burns. Please go ahead.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter and full year results in 2020 Outlook. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary explaining our results and the assumptions behind our 2020 Outlook. The CFO commentary is also available on our investor relations website, investor.columbia.com. With me today on the call are Chairman, 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, Executive Vice President and Chief Administrative Officer Peter Bragdon. 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 we 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 with 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 Manchin's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our fourth 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. 2019 was another strong year for Columbia Sportswear with record net sales surpassing the $3 billion mark for the first time in our company's history, as well as record gross margin, operating income, and diluted earnings per share. Broad-based growth was led by the momentum of the Columbia and Sorrell brands and our brand-led consumer-focused strategy. I'd like to thank our global team whose dedication and focus made these outstanding results possible. While we celebrate these financial results, 2019 was also a year of remembrance as we lost our one tough mother, chairman and matriarch, Gert Boyle, whose strength and character guided this company for nearly 50 years. Her mantra, it's perfect, now make it better, guides our culture of relentless improvement and her image and likeness will remain an integral part of our branding. In the fourth quarter, we experienced the challenging retail environment, particularly in outerwear, which resulted in higher levels of promotional activity in our DTC business and higher closeout sales in our wholesale business as we took actions to reduce inventory levels. Globally, many regions also experienced weather that was meaningfully warmer than historical averages, particularly late in the quarter. In this environment, we delivered results generally in line with our guidance, including strong sales growth for the Sorrell brand. Overall in the fourth quarter, we generated 4% net sales growth and operating margin compressed 230 basis points resulting in a 1% decrease in diluted earnings per share compared to non-GAAP fourth quarter 2018 results. Please note discrete tax items resulted in a lower than planned tax rate in the quarter which benefited diluted earnings per share by 9 cents. For the year, we generated 9% net sales growth, expanded operating margins by 10 basis points, and delivered 20% earnings per share growth compared to 2018 non-GAAP results. Both Columbia and Sorrell had excellent years, growing net sales by 9% and 21% respectively. Sales growth was broad-based by channel, with our wholesale business growing 11%, followed by our DTC business, which grew 6% for the year. In 2019, our global DTC business represented 41% of net sales, including our e-commerce business, which represented 11% of net sales. As we enter 2020, we believe the strength of our unique brand portfolio, diversified business model, and ongoing strategic investments position us for long-term profitable growth and market share gains. There is strong demand for the Columbia brand and the focus remains on becoming the number one outdoor brand in the world. Sorel is expected to remain our fastest growing brand as its successful evolution to a year round function first footwear brand continues. For Prana and Mountain Hardware, we will be building on the foundational work we began in 2019 with an eye towards unlocking growth potential in the years ahead. 2020 will also be a year of investment as we incur the full year financial impact of initiatives we began in 2019, many of which continue into 2020. We believe these investments are vital to sustaining our long-term profitable growth trajectory. The timing of financial benefits derived from these investments is not always aligned with sales growth in any given year. And as a result, our 2020 financial outlook who contemplates a modest level of operating margin contraction. With that said, we have a strong track record of delivering improved profitability with over 300 basis points of operating margin expansion over the last five years, and we remain firmly committed to improving operating margin over time. I will provide more details on our 2020 outlook and growth investments later in the call. In recent weeks, the coronavirus outbreak in China has gripped the global community. Our first priority has been to take appropriate measures to ensure the health and safety of our employees and partners in the region. As work continues to contain the spread of the virus, it's having an immediate impact on our business in China, including the effects of store closures and lower store traffic at stores that remain open. We are also seeing an impact in regions and stores outside of China due to lower tourism related to the outbreak. This has resulted in a challenging start to the year which will likely persist until normality returns to the region. At this point, it's too early to forecast the regional and global financial impact on our business, including sourcing, production, and supply chain implications. Given the real-time nature of these developments, The potential financial impact related to this outbreak has not been factored into the 2020 financial outlook that we are providing today. Regionally, U.S. net sales increased 8% in the fourth quarter, driven by high single-digit percent growth in wholesale and mid-single-digit percent growth in DTC, which was driven by new store openings and a high single-digit percent increase in e-commerce. Wholesale growth was primarily driven by higher closeout sales. In DTC, performance was impacted by a challenging holiday sales environment, particularly in outerwear, and difficult comparisons versus exceptional sales performance in the prior year. For the year, U.S. sales grew 12%, led by mid-teens wholesale growth and high single-digit DTC growth, which was comprised of mid-single-digit brick-and-mortar growth and low teens percent increase in e-commerce. In 2020, we expect U.S. net sales to increase high single digit percent, including high single digit percent growth in DTC and mid single digit percent growth in wholesale. Our DTC business remains a viable and profitable growth engine for the company. I'd highlight that from 2017 to 2019, our U.S. DTC net sales have grown nearly 30% and in 2020, we will continue to selectively open new brick and mortar locations and invest in our e-commerce capabilities to fuel continued growth. 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 of the U.S. decreased 1% for the quarter, but were up 5% for the full year. Japan net sales grew low single digit percent in the quarter and were up mid single digit percent for the year. Fourth quarter sales were negatively impacted by the October 1st, 2019 consumption tax rate increase from eight to 10% as well as warmer weather. For the year, we're pleased to see Japan's more than two decades span of annual constant currency growth continue in 2019. Facing uncertainty around consumer spending in light of the consumption tax rate increase, we believe it's prudent to plan 2020 conservatively and are looking for low single-digit percent net sales growth for the year. Despite significant geopolitical and economic turmoil in several LAAP distributor markets, I'm pleased to report our distributor business generated growth in 2019. In our EMEA distributor business, Net sales increased mid-teens percent in the quarter and were up low teens percent for the full year. In our LAP distributor business, net sales decreased mid-teens percent in the quarter and were down low single-digit percent for the full year. In 2020, we expect our EMEA distributor business net sales to increase high single-digit percent and our LAP distributor business to decline high single-digit percent reflecting a challenging political and economic conditions in several markets in Asia and South America. Combined, our diversified global distributor base remains a valuable and profitable growth engine that mitigates risks while extending our global reach. In Canada, net sales decreased 10% in the quarter primarily reflecting a shift in timing of fall 2019 shipments into the third quarter while full year net sales increased 8%. For the year, Canada net sales growth was balanced across our wholesale and DTC businesses. In 2020, we expect Canada net sales to grow at a pace similar to 19, up high single digit percent for the year. Europe direct net sales increased mid single digit percent in the quarter and for the full year. Growth in the quarter was driven by favorable DTC performance as well as higher closeout sales in wholesale. For the year, I'm encouraged that we were able to overcome a challenging retail backdrop and deliver broad-based net sales growth. I recently spent a week in Europe with our European management team and our largest customers and came away confident that demand for the Columbia brand is very strong in this market. We have significant opportunity to grow market share. As we look into 2020, We expect the retail environment to remain challenging and are anticipating mid-single digit percent net sales growth in our Europe direct business for the year. Korea net sales decreased mid-single digit percent in the quarter as warmer weather negatively impacted outdoor sales. For the year, we were able to overcome a soft overall outdoor market and generate relatively flat net sales. We're encouraged that Columbia remains one of the better performing brands Thank you for joining us today. Our new leadership team is focused on building a foundation for sustainable long-term growth by elevating the consumer experience, improving our wholesale distribution, and modernizing consumer-facing technology systems. We believe that Columbia's brand recognition is strong in China and are confident that we can re-accelerate growth over time with the investments we're making. For 2020, we currently expect China net sales to increase low single-digit percent. However, this outlook does not include the potential financial impact of the recent coronavirus outbreak. Turning to gross margin performance, fourth quarter gross margin declined 160 basis points to 50.1%, driven primarily by a higher proportion of lower gross margin closeout product sales in wholesale and unfavorable DTC product margins reflecting increased promotional activity and shifts in product mix. These headwinds were partially offset by Project Connect benefits. For the year, gross margin improved 30 basis points to 49.8% as benefits from Project Connect more than offset a higher proportion of closeout sales and wholesale and unfavorable DTC product margins. Turning to SG&A performance, in the fourth quarter, SG&A expenses grew 6% compared to last year's non-GAAP SG&A expenses, up 70 basis points as a percent of net sales from the prior year. For the full year, SG&A expenses grew 9% compared to last year's non-GAAP SG&A expenses, up 20 basis points as a percent of net sales from the prior year. The biggest drivers of SG&A growth for the year were investments to support our expanding global DTC operations and hire personnel, demand creation, and technology expenses. This was partially offset by a favorable impact from foreign currency rates. As a percent of net sales, demand creation increased to 5.5% of net sales compared to 5.4% last year. Overall, our gross margin and operating expense performance led to an operating margin decline of 230 basis points in the quarter compared to non-GAAP 2018 operating margin. For the year, operating margin expanded 10 basis points to 13% compared to non-GAAP 2018 operating margin of 12.9%. Moving to performance by brand, I'd like to remind you that I will be referencing constant currency growth rates. Looking at the Columbia brand globally, net sales increased 4% in the quarter and 10% for the full year, led by U.S. wholesale business, and was balanced across footwear and apparel. Within sportswear, our PFG line experienced strong sell-through in 2019, and total PFG net sales, including apparel and footwear, surpassed $200 million this year. We were excited to see country singer and brand ambassador Luke Combe wearing his signature black PFG Bahama shirt during his recent Saturday Night Live performance. I'm also proud of the progress we made towards unlocking the Columbia brand's long-term footwear opportunity during the year. The investments we are making in footwear became evident to consumers with the shift product launch in August, which is the first of many new product families to be unveiled in the coming seasons. This new product, along with refreshed classic styles, will be essential to building a much bigger footwear business with existing as well as new wholesale accounts. In the fourth quarter, footwear outperformed the brand overall, driven by top-selling styles including the Ice Maiden, Newton Ridge, and Bugaboo. Columbia's innovations remain a key differentiator in the marketplace. During the quarter, we received several media call-outs and awards. In apparel, Men's Health featured the Whirlybird Interchange Jacket in their 10 Best Ski Jackets for Men article, and Forbes featured the Columbia Women's Heavenly Long Hooded Jacket in their top plus-size coats for this season. In footwear, Business Insider featured the Omni Heat Equipped Bugaboot in their article, The Best Winter Boots for Women, and Self awarded the Shift Outdrive Mid, The Best Shoot for Hiking in their article, the 15 best new workout sneakers of 2019. I'd also like to congratulate a few Columbia-sponsored athletes, Alex Pereira, Sarah Hofland, and Kate Cassie Sharp for their performance at the 2020 X Games. All three athletes earned a spot on the podium in their respective disciplines. Very well done. This season, Columbia's marketing efforts included the Heat Seal campaign, which encompassed a unified marketing message and marketing assets that were leveraged globally. We also implemented key city attack plans in New York and Denver to drive increased brand awareness during the quarter. In 2020, we will continue to focus our marketing efforts on key markets and highlight our innovative product including celebrating OmniHeat's 10-year anniversary. For the Shirell brand, 2019 was an amazing year that reflects the momentum of the brand strategy and positioning as a year-round function-first footwear brand. Net sales increased 14% in the fourth quarter and were up 22% for the full year, driven by robust growth across our U.S. wholesale and e-com businesses. During the quarter, Sorrell's evolution beyond his legacy winter utility business was once again evident as consumers continue to demand more wearable style-focused products. Sorrel continues to see the positive impact coming off the brand's mile-long runway event held in New York City in October as evidenced by an increase in consumer awareness, engagement, and ultimately omni-channel sales. We're proud of this result, but this is just the beginning. In 2020, the Sorrel brand is poised to capitalize on the brand's momentum and to leverage the investments we're making in demand creation. We expect this strategy to drive mid-teens percent net sales growth for the brand in 2020. Turning to Prana, 2019 was a transition year with net sales down 3% as the team optimized distribution and reestablished the brand's premium positioning in the marketplace. In the fourth quarter, net sales decreased 10% reflecting lower wholesale sales partially offset by DTC growth. We were encouraged by robust e-commerce growth late in the quarter as consumers responded positively to Prana's refreshed product and positioning. The brand is focused on elevating the style of its product to differentiate them from their competitive set. They also have launched their new global tagline, Clothing for a Positive Change. This has provided them with a broader and far stronger platform for inspiring social and environmental change. During the quarter, we unveiled the winner of Prana's Dream Job Campaign. After reviewing thousands of entries, we selected one person to receive a $100,000 prize, allowing them a year to chase their dream. Winner Quina Bergen's truly inspiring story stood out as the very definition of creating positive change. We wish her the best as she embarks on her nationwide poetry tour. The dream job promotion has been Prana's most impactful marketing campaign to date and has generated over 60 million impressions. In 2020, the Prana team is focusing on growing brand awareness, solidifying the brand's position at the intersection of style and outdoor, and unlocking product category opportunities. We expect Prana brand net sales in 2020 to grow mid single digit percent with sales growth more weighted towards the second half of the year. We believe Prana's clothing for a positive change message resonates with consumers and we're taking necessary steps to drive sustainable long-term growth. Vermont Hardware, 2019 was a transformational year. We brought revamped product line to market, reignited business with key U.S. wholesale specialty accounts, further strengthened our team and reestablish Mountain Hardware's position in the marketplace. Our refocus strategy has yielded a healthy foundation from which we expect to grow going forward. The success of our fall 2019 product line was evident in strong full price sales growth, which gives us confidence the brand is moving in the right direction. Net sales increased 5% in the fourth quarter and were relatively flat for the full year. In 2020, the Mountain Hardware team is focused on further elevating the brand's position in the U.S., as well as accelerating DTC through e-commerce. We're currently planning brand net sales to be at high single-digit percent in 2020. It'll be an exciting year for the sport of rock climbing as it's introduced into the 2020 Olympics in Japan. We'd like to congratulate Mountain Hardware-sponsored athlete Kyra Conde who has earned the opportunity to compete for Team USA against the best in the world. As climbing enters the global spotlight, we are excited to highlight Mountain Hardware's authentic brand heritage. I'll now quickly review the balance sheet and cash flow. Our balance sheet remains extremely strong with cash balances over $680 million at year end. During 2019, we repurchased 1.2 million shares of common stock for approximately $121 million at an average price of $97.46 per share and paid $65 million in shareholder dividends. Exiting the year, we had $215 million remaining under the current stock repurchase authorization. Total inventory at year end was up 16% year over year to $606 million, primarily reflecting current and future season inventory. This includes increased carryover product, the majority of which has already been sold as a part of our fall 20 preseason wholesale order book. In 2020, we expect to grow inventory at a rate slower than sales growth and modestly improve inventory turnover. I'd now like to review our 2020 financial outlook and provide an update on current areas of investment. Our initial 2020 outlook contemplates 4.5 to 6% net sales growth, including growth from all four brands. We anticipate footwear growth to outpace apparel, driven by Sorrel and the Columbia brands, and we also expect both our wholesale and DTC businesses to grow in 2020. Gross margin is expected to expand up to 30 basis points to 50.1%. We look to maintain the gross margin benefits of Project Connect that we realized in 2019 as well as benefit from a lower mix of wholesale closeout sales and improved product margins, higher DTC sales mix, and lower promotional activity compared to 2019. We expect SG&A to grow faster than net sales resulting in 40 to 50 basis points of SG&A deleverage compared to 2019. The increase in SG&A expenses is expected to be driven by business growth as well as ongoing and incremental investments in our strategic priorities. Combined, we're planning for operating margin to decline 20 to 40 basis points to 12.6 to 12.8% compared to 2019 operating margin of 13%. Based on these assumptions, We expect the Luther earnings per share to be in the range of $475 to $490. In 2020, we anticipate strong free cash flow generating in excess of $250 million, and we remain committed to returning capital to shareholders via share repurchases and dividends, including the 8% dividend increase we announced today. In the first half of 2020, our outlook contemplates low to mid single digit percent net sales growth, a slight decline in gross margin, and SG&A growth faster than net sales, resulting in a diluted earnings per share range of 80 to 90 cents. First half operating profit is anticipated to be entirely weighted to the first quarter with a slight operating loss anticipated in the second quarter. Given the magnitude of the investments we're making and their impact on SG&A growth this year, I'd like to spend some time highlighting key investments and how they're aligned with our strategic priorities. First, to drive brand awareness and sales growth, we remain committed to investing in demand creation. In 2020, we expect to maintain demand creation as a percent of sales at 5.5%, while continuing to involve our mix towards high return opportunities including digital and in-store marketing. We believe investing in demand creation to tell our unique brand stories, grow brand awareness, and create clear paths to purchase for consumers is essential to propelling sales momentum. We're investing to enhance our global omni-channel capabilities and evolving DTC platforms to deliver a better consumer experience. In 2020, investments in our brick-and-mortar stores, including ongoing store refreshments and optimizing the consumer-first or C1 platform. In addition, we're updating in-store consumer-facing technology systems to meet the needs of consumer demands within China's advanced digital ecosystem. In our e-commerce business, we intend to continue rolling out our new mobile platform, Experience First or X1, across the remainder of North America. We're also investing to strengthen our capabilities across the organization. Within merchandising and product teams, we've been investing in personnel to enhance our product engine across our brand portfolio. For the Columbia brand, this includes product initiatives for 2020 and beyond that span footwear, apparel, and accessories. For Sorel, we're experiencing tremendous brand momentum and have added product creation resources to drive further growth in a year-round style-focused product. Across the enterprise, we're making investments to enhance our data and analytics capabilities in support of our brand-led consumer-focused operating model. In 2020, we're continuing to make investments in processes and systems across our supply chain to improve productivity, enhance service levels, and add capacity throughout our distribution and fulfillment networks. We're investing in systems to unlock greater end-to-end inventory visibility and enable more dynamic and automated planning and fulfillment capabilities. We're also increasing network capacity and speed to drive faster store replenishment and fulfillment. I'd also like to highlight that in addition to investing in our business to fuel profitable growth, one of our core values is to do the right thing Not just for our shareholders, but also for consumers, customers, employees, and the communities that we touch. I encourage you to review our most recent corporate responsibility report posted to our website, which highlights our strategy and recent accomplishments that we've made empowering people, sustaining places, and promoting responsible practices. In summary, 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. That concludes my prepared remarks. We welcome your questions. Operator, could you give us a hand with that?