Columbia Sportswear Company

Greetings and welcome to the Columbia Sportswear Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 is now my pleasure to introduce your host, Andrew Burns. Thank you, Mr. Burns. You may begin.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter results. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary explaining our results. The CFO commentary is also available on our investor relations website, investor.columbia.com. With me on the call today here are Chairman, President, and Chief Executive Officer Tim Boyle, Executive Vice President and Chief Financial Officer Jim Swanson, and Executive Vice President and Chief Administrative Officer Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations or beliefs about the future. These statements are expressed in good faith and are believed to be a reasonable basis. However, each forward-looking statement 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 SEC filings. We caution that forward-looking statements are inherently less reliable and historical information. 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 changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information on the 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 fourth quarter 2020 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, and good afternoon. I hope everyone is well and your families are all safe and healthy. I'm pleased to report above-plan fourth quarter results with broad-based outperformance across our brand portfolio and regions. These results are particularly impressive with the backdrop of a global pandemic and demonstrate the dedication and commitment of our global workforce of employees who overcame enormous pandemic-related disruptions. While consolidated net sales and earnings remained below prior year levels, trends sequentially improved compared to third quarter, and we remain poised for continued recovery in 2021. 2020 was an unprecedented year of adversity by almost any measure. Our team's swift cost containment and capital preservation actions, along with disciplined working capital management, enabled free cash flow of nearly $250 million and cash and short-term investments of over $790 million and no borrowings exiting the year. Our profitable growth trajectory and fortress balance sheet have given our board of directors the confidence to approve a quarterly cash dividend, increase our stock repurchase authorization, and return to our pre-pandemic capital allocation strategy. Fourth quarter net sales declined 4% and diluted earnings per share declined 14% year over year, primarily reflecting the ongoing negative effects of the COVID-19 pandemic, partially offset by the benefit of later timing of fall 2020 shipments that we referenced in our third quarter earnings release. Promotional pricing activity in the quarter was less than expected, resulting in gross margin expansion of 50 basis points compared to fourth quarter in 2019. I'd note that fourth quarter 2020 operating income includes 18.1 million in retail impairments and store closure charges and 17.5 million in Prada trademark impairment. Wholesale net sales declined 5% in the fourth quarter driven by earlier actions to curtail purchases of fall 2020 inventory in conjunction with wholesale customer order cancellations and lower consumer demand resulting from the pandemic. This was partially offset by later timing of fall 2020 shipments. I'm encouraged by the strong fall 2020 sell-through rates and our wholesale partners are well positioned to exit the season with clean inventory positions. DTC net sales declined 3%, driven by lower brick and mortar sales, partially offset by strong e-commerce growth. In the fourth quarter, our e-commerce net sales increased 41% and represented 23% of the total net sales mix. As a reminder, we went live on our new mobile-first e-commerce platform, X1, in North America for the Columbia, Sorrel, and Mountain Hardware brands during the third quarter. I'm pleased to report the X1 platforms performed exceptionally well during the peak season and contributed to improved site performance and conversion. For the full year, net sales declined 18% and earnings per share declined 66% year over year, primarily reflecting the negative effects of the COVID-19 pandemic. A bright spot for the year was our DTC e-commerce net sales, which grew 39% year over year, and represented 19% of the total net sales mix. If you include our partners wholesale online businesses along with our own e-commerce sites, we estimate online sales were over 30% of our global net sales mix in 2020. Investing in supporting this growth across both our e-commerce sites and wholesale partner sites is a top priority for us. We know that when the Columbia brand is democratically offered across our broad distribution, consumers choose our innovative products. As we begin 2021, we're encouraged by the building momentum across our brand portfolio, which is reflected in the continued robust growth of our e-commerce channel, as well as a meaningful recovery in wholesale orders for the spring and fall 2021 seasons. That being said, we're also facing several operational headwinds and unknowns resulting from the ongoing pandemic. There is tremendous uncertainty regarding the timing and effectiveness of global efforts to contain the spread of COVID-19. We are also facing industry-wide supply chain and logistics capacity constraints that are resulting in later receipts and customer deliveries of spring 2021 production. Additionally, brick and mortar traffic trends remain depressed, with stores in destination locations and tourist-dependent markets remaining some of the hardest hit. We anticipate traffic in these markets to remain depressed until international tourism resumes. Before detailing our strategy to mitigate these challenges and grow our business in 2021 and beyond, I'd like to quickly review our fourth quarter and 2020 financial performance. Sales trends during the fourth quarter remain highly correlated to each market's management of the pandemic and consumers' willingness to shop in store. In the U.S., fourth quarter net sales decreased 6%. This performance reflects a mid-single-digit percent decline in both wholesale and DTC net sales. Stronger-than-anticipated consumer demand helped fuel strong wholesale reorders despite a warm start to winter that reduced early-season outerwear sell-through. As colder weather arrived in December, outerwear sell-through accelerated and retailers are well positioned to exit the season with clean inventory positions. Recovery curves across our broad distribution vary greatly with sporting goods and online retailers leading the recovery in wholesale. In DTC, stronger than anticipated consumer demand drove high 30% e-commerce growth and improved store performance. We are pleased to see the brick and mortar net sales decline moderate compared to the third quarter but this channel remains under pressure. Limited tourism, government mandated restrictions and growing consumer preference to shop online are all contributing to depressed store traffic levels. From our review of international markets, I will reference constant currency year over year growth rates, which we believe best reflects the underlying business trends. In our Latin America, Asian Pacific or LAAP region, Fourth quarter net sales decreased 8%. In Asia, store traffic and sales trends continued to improve during the quarter with some weeks returning to positive year-over-year growth. Looking at net sales growth in our direct markets, Japan grew low single-digit percent, Korea declined low single-digit percent, and China was down high single-digit percent. This marks a meaningful improvement in trend compared to the third quarter and the region is positioned to return to growth in 2021. We know we have powerful brand recognition in China and that this market represents one of our largest geographic growth opportunities. With that said, recent trends show that we are underperforming. To unlock China's full potential over the long term, we're committed to supporting and investing in this region. Last quarter, we announced that Franco Fogliato is leading the company's focus on the global omnichannel experience, including oversight of Columbia brand sales in China. Frankel will be working to support and build strong commercial channel teams in China that will drive global brand messaging while optimizing local product and marketing. We've also made a regional leadership change in China, and a search is underway for a new general manager. LAAP distributor net sales decreased low 50%, primarily reflecting lower spring 2021 orders, as many distributors worked through carryover inventory from the spring 2020 season that was heavily impacted by regional lockdowns. In our Europe, Middle East, Africa, or EMEA region, fourth quarter net sales decreased 18%. Europe direct net sales grew low single digit percent, driven by wholesale and e-commerce growth, partially offset by a decline in DTC brick and mortar sales, primarily resulting from lockdown restrictions. EMEA distributor net sales decreased high 50%, reflecting challenging conditions in several markets and later timing of spring 2021 shipments that have shifted into the first quarter of 2021. As a reminder, distributor shipments are factory direct meaning we don't control the timing of shipments or related revenue recognition for this part of the business. It's also important to note that a large volume of shipments typically occurs around year end resulting in significant quarterly timing shifts year to year. Canada net sales increased 37% in the fourth quarter benefiting from the later timing of fall 2020 shipments and to a lesser extent robust e-commerce sales. Shifting to fourth quarter margin and profit performance, gross margin expanded 50 basis points year over year to 50.6% of net sales, primarily driven by favorable channel mix, lower promotional pricing activity, and favorable foreign currency hedge rates. This was partially offset by higher freight costs. SG&A expenses were essentially flat compared to the fourth quarter of 2019. During the fourth quarter of 2020, we realized approximately $30 million in SG&A savings from cost containment actions and lower variable expenses. For the full year, we achieved our 2020 cost containment goal of more than $100 million of SG&A expense savings in comparison to last year before non-recurring expenses and charges. This performance resulted in an operating margin of 13.5% of net sales down 100 basis points from the prior year. Diluted earnings per share decreased 14% year-over-year to $1.44. Moving to performance by brand. Columbia brand net sales decreased 7% in the quarter due to earlier actions to curtail inventory purchases in conjunction with order cancellations. Retailers had significantly less inventory on hand entering the season. Consumer demand ultimately exceeded our expectations, resulting in strong wholesale reorders and sell-through rates. While a warm start to winter in the U.S. reduced early season outerwear sell-through, trends improved in December as colder weather arrived. Globally, I would characterize weather for the fall 2020 season as within the band of normal to favorable for most of our key markets. By category, consumers' interest in poly-fleece styles was quite strong as consumers shopped with their at-home routines in mind. Popular insulated styles like Women's Heavenly and Subtle Mountain Jackets were top sellers. In footwear, classic styles like the Newt Ridge and Winter Boot lines, including the Fairbanks, Bugaboot, Ice Maiden, and Minx were top performers. Overall, strong season-to-date sell-through rates and cold weather in early 2021 are helping retailers exit the season with clean inventory positions. This creates a favorable backdrop for the fall 2021 order book and season. In December, we launched our fifth annual Star Wars collection. This year's collection, based on the hit Disney series The Mandalorian, was our most extensive-to-date with several styles for adults and children. The launch generated a phenomenal response from our consumers with many styles selling out in the first hour. Our efforts to promote the collection earned dozens of online and broadcast placements, creating over 300 million impressions across media and social channels. Columbia's innovations received several media call-outs and awards during the quarter. Tomomiya's new OmniHeat Black Dot technology was highlighted by several outlets, including Gear Junkie, Forbes, Women's Wear Daily, US Weekly, and was honored by Popular Mechanics as one of the 100 greatest innovations of 2020. Outerwear styles from our ski collection, including the Peak Pursuit, Women's Alpine Crux, and Autumn Park Down Jacket were highlighted by several outlets, including Ski Magazine, Men's Health, and Outside Magazine. In footwear, Outside featured the Facet 45 Outdry in the Epic Gifts for Ocean Addicts in their Holiday Gift Guide. Gear Patrol featured the Hyper Boreal OmniHeat Boot in their article on the Best Boots for Winter Adventures. During the fourth quarter, we continued to prioritize digital marketing spend, including mid-funnel investments to further attract active customers and propel online sales growth. We took a digital-first approach to creative assets and leveraged this content across digital and social media platforms around the world. For the year, Columbia's DTC e-commerce business grew 39% and represented 15% of the brand's total net sales mix. On the marketing front, we featured social media outflowers to tell differentiated brand and product stories throughout the quarter. In addition to our OmniHeat 10th anniversary and Warm Smarter campaigns, we had several more targeted marketing events highlighting our new facet footwork collection, our popular PFG line, and winter ski assortment. In 2021, I look forward to strengthening Columbia's ties with Bubba Wallace as he embarks on his first season with his new team, 2311, whose principal owners include Michael Jordan and three-time Daytona 500 winner Denny Hamlin. In addition to creating brand heat at key races, we will be sharing a new project with National Geographic Creative Works this fall, highlighting Bubba's outdoor pursuits. Turning to our emerging brand portfolio, it was quite encouraging to see all three brands return to growth in the fourth quarter. with signs that momentum is building into 2021. Sorrel net sales increased 5% in the quarter led by e-commerce growth that reflected strong underlying brand momentum and consumer demand. Sorrel was our strongest performing brand in 2020 with net sales down only 7% despite the challenges presented by the pandemic. For the year, Sorrel's DTC e-commerce business grew 44% and represented 31% of the brand's total net sales mix. In 2020, as the pandemic took hold, consumer brand affinity for Sorel remained high and demand shifted towards versatile collections such as kinetic sneakers, Ella sandals and classic slippers. For the full year, sneaker category net sales led by the kinetic collection grew nearly 200% year on year on Sorrell's North America e-commerce sites. Successes in these new categories validate Sorrell's evolution beyond its legacy winter utility business to become a year-round function-first fashion footwear brand. Prana was our strongest performing brand in the fourth quarter with net sales up 11%. Top selling categories for the quarter included fleece, fitness apparel, and flannels, as consumers shop for their at-home routines. Growth in the quarter and throughout the year was led by e-commerce. For the full year, Prana's DTC e-commerce business grew 37% and represented 47% of the brand's total net sales mix. This growth included record new customer acquisitions. It's clear that Prana's commitment to being an industry leader in sustainability and its mission to create clothing for positive change is driving new consumers to the brand. As we begin 2021, I believe Prana is uniquely positioned at the intersection of four growing consumer trends, rising participation in outdoor activities, conscious consumerism, sustainability and growing demand for yoga and active apparel. This spring, Kronos continue to strengthen its commitment to sustainability with the introduction of ReZion. This next generation of the brand's best-selling stretched Zion fabric delivers the same elevated performance, refined style, and versatility of its predecessor with the sustainability benefits of recycled nylon and PFC-free durable water repellency. Mountain Hardware net sales increased 7% in the fourth quarter, led by e-commerce growth. For the full year, Mountain Hardware's DTC e-commerce business grew 31% and represented 25% of the brand's total net sales mix. The investments we've made in recent years into Mountain Hardware's re-energized product line and modernized messaging and look are clearly sparking consumer and retail interest. Looking at the fall 2021 order book, Strong growth at key wholesale accounts as well as meaningful new distribution demonstrates retailers are embracing the brand's direction. In 2021, the Mountain Hardware team is focusing on driving U.S. wholesale growth and sustaining e-commerce momentum. Unlocking the brand's full potential in these two important domestic businesses is the first step to realizing the brand vision of becoming the most desired mountain sports brand in the world. I'd now like to review our key areas of focus for 2021 and our financial outlook before opening up the call for questions. It's clear the pandemic has changed consumer shopping behavior, and we believe many of these shifts, including a greater consumer preference for online shopping, will remain intact long after COVID-19 is contained. All aspects of our business operations are being impacted, and our distribution channels around the world are evolving. This is creating both disruptions and opportunities. As the consumer marketplace evolves, we are adapting our business model to capture demand and unlock our brand's portfolio's full potential. As we plan 2021, there are a few key areas of focus I'd like to highlight. First, we're committed to creating products that inspire active consumers. We know that products are the foundation of our success. For the Columbia brand, We know that when we provide consumers innovative products that keep them warm, dry, cool, and protected at an exceptional value, we win their loyalty and business. We achieve this with our differentiated technologies, many of which are developed in-house and exclusive to our brands. As the pandemics took hold, we did not back down on our investments in product design and innovation, and I'm excited about the robust pipeline of innovative products that we have for many seasons to come. Looking to 2021, we're launching several new exciting innovations. This spring, we're launching our newest and most advanced cooling technology to date, OmniFreeze Zero Ice. This touch-activated cooling fabric takes on the heat before you start sweating, while an improved sweat-activated pattern enhances moisture management and evaporative cooling. This fall, we're launching OmniHeat Infinity. We expect this to be the largest innovation launch in our company's history, and early retailer feedback and orders have been incredibly encouraging. This new addition to our OmniHeat family provides significant more heat reflection and dramatically different visual appearance to the consumer. With our product focus, footwear is a top priority across both the Columbia and Sorel brands. I've always said that footwear should be the company's largest category, and we've been investing to realize this potential. We have elevated our footwear design and merchandising capabilities, resulting in encouraging results across both Columbia and Sorel in recent years. This momentum remains evident in our spring and fall 2021 order book. were also committed to investing in demand creation to leverage our compelling brand portfolio and to connect with consumers. Given the confidence in our brand portfolio, we anticipate demand creation increasing as a percent of sales to 6% in 2021, compared to 5.7% in 2020 and 5.5% in 2019. This represents the highest level of demand creation investment as a percent of sales in our history as a public company. Within our demand creation spending, we are prioritizing digital marketing and social media investments to amplify our brand messaging and create clear paths to purchase. In 2021, continuing to build digital expertise is a priority. Prior to the pandemic, we were already investing to enhance our digital capabilities with the X1 initiative, Our 2020 e-commerce growth has only increased our confidence that the investments we're making in digital capabilities are critical to driving sustainable and profitable long-term growth. We are also recalibrating our DTC brick-and-mortar strategy to reflect the current retail environment. In 2020, we closed 1,300 performing stores in the U.S. and one in Europe. These were primarily full-price branded stores. In 2021, we plan to selectively resume opening stores where market conditions and favorable lease terms create an attractive return profile. We currently anticipate opening approximately eight stores in the US, primarily consisting of outlet stores. The number of stores may increase as we finalize ongoing lease negotiations and evaluate the best opportunities. We are also committed to investing in talent across the organization. We recently announced Skip Potter is joining the company as our Chief Digital Information Officer. In this newly created role, Skip will be responsible for leading Columbia's global technology organization where he will play a pivotal role in evolving our digital footprint and omni-channel and supply chain capabilities across the enterprise. On a related note, We were thrilled to recently welcome John Culver to our Board of Directors. John has been instrumental in driving international growth at Starbucks for almost 20 years. We are excited for him to bring that knowledge and expertise to our Board of Directors as we continue to focus on unlocking our international omnichannel growth opportunities. Mr. Culver also brings a deep understanding of the consumer and consumer trends, including digital transformation. which we hope to leverage during his service on the board. Turning to 2021 financial outlook. This commentary includes forward-looking statements. Please see our CFO commentary for additional details and disclosures related to these statements. Our initial 2021 outlook contemplates 18 to 20% net sales growth to approximately $3 billion with growth across all four brands. This net sales outlook is based on spring and fall 2021 orders that indicate a return to growth in our wholesale business with notable strength in the fall 2021 order book. Other items contemplated in this outlook included continued DTC e-commerce growth and a return to growth in DTC brick and mortar sales. The recovery in brick and mortar sales factors in the benefit of lapping prior year store closures as well as gradual fundamental improvement over the course of the year. From a category perspective, we anticipate the year-over-year growth rate of footwear to be relatively similar to apparel in 2021. We're working to overcome challenges with our footwear manufacturing partners capacity and capture as much of the anticipated demand as we can across both the Sorrel and Columbia footwear businesses. Gross margin is expected to expand approximately 110 basis points to 50% and we expect SG&A to grow slower than net sales. Combined, we expect operating margin to be in the range of 10.8 to 11.5% compared to the operating margin of 5.5% in 2020. This results in an initial diluted earnings per share outlook of $3.75 to $4.05. We are forecasting approximately $240 million in free cash flow in 2021, and we are acutely focused on managing inventory levels and improving terms. Capital expenditures are expected to be between $60 and $80 million. Looking at the first half of the year, we believe high teens percent to low 20% year-over-year net sales growth in the first half of 2021 is achievable. Looking at the later timing of spring 2021 receipts and deliveries, we expect net sales growth to be heavily weighted into the second quarter. Industry-wide constraints on ocean transportation, including vessel and container shortages, are resulting in later selling season when compared to 2020. Our supply chain and logistics teams are working diligently to mitigate disruptions. As I referenced earlier in the call, Based on the strength of our balance sheet and confidence in our long-term growth and earnings recovery, the Board of Directors has approved the company's quarterly dividend at its pre-pandemic level of 26 cents per share. They have also approved an incremental $400 million share repurchase authorization, which is in addition to the $82 million remainder under our existing share repurchase authorization. We have also reinstated our historical approach to capital allocation. In this framework, our top priority for cash is continue to invest in our business to enable long-term profitable growth. Our second priority is to return at least 40% of annual free cash flow to shareholders in the form of dividends and share repurchases with an aspiration to increase our dividend over time. Other uses of cash include opportunistic mergers and acquisitions. In summary, I'm confident in the strategy that we outlined today and encouraged by the fundamental recovery underway. We are committed to driving sustainable and profitable long-term growth and investing in our strategic priorities to drive global brand awareness and sales growth through increased focused demand creation investments. will 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 for the hour. Operator, could you help us with that?