Columbia Sportswear Company

Greetings. Welcome to Columbia Sportswear First Quarter 2021 Financial Results. At this time, all participants are in 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 from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Andrew Burns. Please go ahead, Andrew.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's First Quarter results. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available in our investor relations website, investor.columbia.com. With me on the call today 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 have 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 than historical information. We do not undertake any duty to update any of the following 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 constant currency net sales. 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 2021 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. I'm pleased to report the pace of fundamental recovery exceeded our expectations in the first quarter, resulting in a return to net sales growth and financial results that were stronger than we anticipated at the time of our last call. Based on first quarter results, favorable early season spring sell-through, Visibility provided by our fall order book and an improvement in business fundamentals, we are increasing our full-year financial outlook. Our fortress balance sheet remains strong with cash and short-term investments totaling $875 million with no bank borrowings at quarter end. It's hard to believe how much difference a year makes. Just over one year ago, we were securing additional liquidity, curtailing factory orders, reducing capital outflows and cutting costs to prepare for an unprecedented global health and economic crisis of unknown duration. As new challenges emerged daily, it was increasingly clear that the tremendous effort and dedication of our global workforce and our disciplined operating approach would be some of the most valuable strengths. Our Fortress Balance Sheet allowed us to sustain our new product innovation pipeline and invest in critical areas of the business including digital capabilities. After the initial demand shock at the height of the global lockdowns in 2020, consumer behavior began to change as markets slowly reopened. Our powerful brand portfolio is well positioned to capitalize on many of the trends that emerged including growing participation in outdoor activities and more broadly, the casualization trend that accelerated as consumers adapted to their at-home work environment. It's hard to predict the future, but I believe many of these new outdoor enthusiasts will continue to share a passion for outdoor activities long after the pandemic is contained. I also suspect that many consumers are in no rush to return to uncomfortable business attire as offices reopen. The pandemic also accelerated the shift to online shopping, which increased our confidence that the investments we are making in digital capabilities such as our e-commerce platform Experience First or X1 are critical to driving sustainable and profitable long-term growth. The strong results and growth outlook we reported today are driven by the culmination of these factors. Looking forward, I believe our dedicated global workforce, Fortress Balance Sheet, ongoing investments in strategic priorities and powerful brand portfolio are contributing to Columbia Sportswear Company emerging from this pandemic in a stronger competitive position. With that said, we remain mindful that the global fight to contain the spread of the virus is not finished. Regional outbreaks are ongoing and vaccine availability remains limited in many markets. Nearly all aspects of our business have been disrupted by the pandemic and we are continuously adapting to new operational challenges. There is no guarantee that these pressures will alleviate and unforeseen challenges may arise. I'm encouraged by the strong start to the year, but we know that now is not the time to become complacent. Looking at first quarter results in more detail, net sales increased 10% year over year or 8% on a constant currency basis. Measuring 2021 financial performance versus 19 results, which were not impacted by the pandemic is a useful measure of our business recovery trend line. Compared to first quarter 2019, net sales were down only 4%, indicating great progress on returning to pre-pandemic sales levels. Globally, our DTC business grew 20% year over year in the first quarter. Our DTC e-commerce business grew 35% and represented 20% of our total net sales mix. Our DTC brick and mortar business grew 10% with continued sequential improvement in fundamentals as well as the benefit of lapping prior year temporary store closures and heightened pandemic related disruptions. Store traffic levels vary by region but remain below pre-pandemic levels. Better than planned wholesale shipments in Asia direct and Europe direct markets were able to offset later timing of spring 21 Inventory Receipts in the U.S., which is experiencing industry-wide supply chain disruptions. Spring 21 deliveries in the U.S. were delayed by approximately three weeks on average during the quarter. To date, we have not experienced any material cancellations and or chargebacks resulting from delays, but this will result in a shorter selling season. Our operations and distribution center teams did an amazing job mitigating these timing disruptions and adapting to heightened health and safety protocols to achieve unit processing levels that were above pre-pandemic levels while supporting e-commerce growth. Footwear net sales grew 35% in the quarter, significantly faster than apparel, accessories, and equipment, which grew at 4%. I'd note that we continue to anticipate the year-over-year growth rate of footwear to be relatively comparable to apparel in 2021. Turning to margins, gross margins expanded 360 basis points to 51.4% of net sales, primarily driven by decreased reserve provisions related to less excess inventory, lower DTC promotional levels, and favorable channel and region sales mix. SG&A expenses decreased 8%, primarily reflecting a reduction in bad debt expense driven by healthier wholesale customer base, partially offset by higher incentive and personnel expenses. This performance resulted in operating profits of $70.5 million, or 11.3% of net sales, compared to an operating loss of $2 million in the first quarter of 2020. diluted earnings per share improved to 84 cents compared to breakeven diluted earnings per share in the prior year. Compared to first quarter 2019 diluted earnings per share of 107, first quarter 2021 diluted earnings per share were down 22%. I will now review year-over-year growth performance by region. U.S. net sales increased 9% in the first quarter reflecting low 20s percent growth in our DTC business, partially offset by low single-digit percent decline in the wholesale business. The combination of favorable late-season winter weather, U.S. stimulus-driven demand, and the ongoing vaccination rollout all contributed to healthy retail backdrop and growing consumer confidence during the quarter. In our DTC business, Stronger than anticipated consumer demand drove low 30% e-commerce growth and improved store performance. We are pleased to see the continued recovery of our DTC brick-and-mortar businesses, but store traffic levels remain depressed, and it will take time to fully recover to pre-pandemic sales volumes. In our wholesale business, net sales were impacted by shipment delays I referenced earlier. In this inventory-constrained environment, we're encouraged to see strong early sell-through velocity and lower promotional activity. From our review of international markets, I'll reference constant currency year-over-year growth rates, which we believe best reflect the underlying business trends. Latin America, Asia Pacific, or LAAP region, first quarter net sales increased 3%. Across Asia, performance varied greatly by market. In China, net sales were up low 60%, 60s percent, primarily driven by the anniversary of heightened pandemic-related disruptions in the prior year, and to a lesser extent, earlier shipment of spring 21 wholesale orders. I'm pleased to announce we have appointed Pierre Leon as our general manager in China. Pierre joined our company in December 2020 and has been serving as our interim general manager since hiring. Pierre has over 20 years of industry experience and has proven to be an exceptional leader. We look forward to Pierre continuing to build a high performance culture and working to unlock China's full potential. We know we have a powerful brand recognition in China and Pierre's immediate areas of focus include elevating our product, marketing, and merchandising capabilities in this important region. Korea net sales were up high 20s percent, primarily driven by the anniversary of heightened pandemic-related disruption in the prior year. We are encouraged by renewed interest in outdoor activities in this region as young consumers have embraced hiking and the outdoors as a safe, socially distanced activity. In Japan, net sales were down low double digit percentage year over year as the country restricted Nonessential activities for much of the quarter as they work to contain the spread of the virus. Given the slow rate of vaccinations in Japan, an ongoing state of emergency, we anticipate the recovery of our Japanese business to be slower than other markets. LAP distributor markets were down low 60% in the first quarter as many regions continue to experience significant economic and health impacts from the pandemic. In addition, many distributors continued to work through carryover inventory from the spring 20 season that was heavily impacted by regional lockdowns. Europe, Middle East, Africa, or EMEA region, first quarter net sales increased 18%. Europe direct net sales were up high single digit percent with wholesale and DTC e-commerce growth more than offsetting brick and mortar declines due to store closures and restrictions during the quarter. EMU distributor net sales doubled compared to the first quarter in 2020, primarily reflecting the timing of spring 2021 shipments that shifted out of fourth quarter 2020 and into first quarter 2021. Canada net sales decreased 3% in the first quarter, primarily reflecting later timing of spring 2021 inventory receipts and wholesale shipments as well as the impact of government mandated temporary store closures and restrictions. Looking at performance by brand, Columbia Brand Net Sales increased 12% in the first quarter. Favorable late season winter weather helped drive DTC sales, allowing our wholesale partners to sell through fall 2020 product and exit the season with clean inventory positions. The combination of these factors fueled a strong finish to the fall 21 booking season, which contributed to the updated full-year sales outlook we provided today. While later timing of shipments impacted spring 21 sell-in, we have been encouraged by early season sell-through rates, which benefited from a healthy retail environment, aided by U.S. stimulus-driven demand, as well as lean inventory positions at retail. In this strong demand environment, I believe the brand is well-positioned heading into the summer sales months. Columbia's innovations received several media call-outs and awards during the quarter. Women's Health highlighted the Facet 15 shoe as the most weatherproof trail sneaker, calling out its outer shell that's capable of standing up to hardcore hikes over any terrain. Runner's World included the Columbia Escape Ascent in their 2021 shoe awards issue. This new addition to Columbia's footwear line features exceptional fit and support and its Adaptrax outsole provides enhanced traction in wet or dry conditions. The magazine notes that Escape Ascent's advanced seamless mesh construction shaves weight without sacrificing stability. Men's Health featured the Men's PMG Bahama Vent as the ideal water shoe with its water-resistant treatment, vent ports, in the midsole and a wet grip outsole. It's great to see PFG footwear gaining recognition. Looking at our season today at spring 21 sell-through, our PFG collection of apparel, footwear, accessories, and equipment is once again a top performing category. Our PFG business surpassed $200 million in 2019 and is on track to have its best year ever in 2021. PFG's heritage is based on an end-use focus of providing solutions to our consumers while they're on the water in the sun. Many of our PFG products feature cooling and protective attributes, including UPF protection, unique venting, and proprietary technologies like OmniFreeze Zero Ice and OmniShade Sun Deflector to enhance their performance. This authenticity as differentiated fishing and water performance brand has allowed us to expand the PFG product line into lifestyle categories which reach a broad consumer base of multiple generations. Over the years, we've expanded the offering from being only apparel at its assumption to the year-round multi-category head-to-toe collection we have today. While sportswear remains PFG's top category, The rapid growth of footwear and accessories speaks to PFG's long-term potential. The phenomenal growth of PFG ball caps highlights consumers' willingness to proudly show their affinity for PFG and is the direct expression of the strength of the brand. Unlocking Columbia's global footwear potential remains an important area of strategic focus for the brand. During the first quarter, we launched our latest footwear collection, This multi-sport shoe feels equally at home in the forest or the city and combines our latest technologies to deliver uncompromised performance on the trail with the style and comfort of a sneaker. In addition to expanding our assortment of modern, athletic-inspired styles like the Trail Storm and the Facet Collection, we continue to refresh and improve traditional hiking styles like the Newton Ridge, which remains one of our best sellers. On the marketing front, we continue to prioritize digital marketing spend to further attract active customers and propel online sales growth. During the first quarter, our marketing activities centered around our Made for Outside campaign. This global campaign is meant to inspire and encourage our consumers to get outside and highlights the Columbia brand's strength providing unparalleled apparel and footwear innovation to help them thrive in any conditions they may face. We also celebrated International Women's Day during the quarter with a week of storytelling highlighting women who pushed the boundaries. We celebrated women who inspire us from the waters of the Atlantic to the peaks of Everest. Whether it's the Ebony Anglers, a group of five black women balancing their professional lives with competitive fishing, Family and Business, or the first Saudi women to summit Mount Everest, their stories inspire us. Just like our fierce founder, Gert Boyle, a tough, no-nonsense leader with a lot of heart. As we look to fall of 21, our marketing efforts will focus on the largest innovation launch in our company's history, OmniHeat Infinity. This new, highly differentiated addition to the OmniHeat family is the next evolution of thermal reflective warmth. It features a new expanded pattern of gold dots that reflect more of your body heat to deliver instant warmth without compromising breathability. Retailers around the world have embraced our latest technology and Fall 21 orders for OmniHeat Infinity have been exceptional. We will be supporting this launch with a global campaign emphasizing digital and social media platforms as well as TV and print advertisements. I look forward to sharing more details in the coming quarters. Turning to our emerging brand portfolio, Sorel net sales increased 20% of the quarter led by DTC e-commerce growth. Strong late season sales of winter products in North America and Europe fueled growth. In addition to consumers embracing the latest spring styles such as the kinetic, Impact Sneakers, and Sport Sandals. Sneakers were once again the fastest-growing category, with sales of sneakers more than doubling year-on-year on Sorrel.com. In wholesale, Sorrel's early spring 21 sell-through velocity is well ahead of last year, and lean inventories are translating into strong full-price selling. It wasn't that long ago that Sorrell's first quarter was anchored in late-season winter product sales. With Sorrell's successful evolution to a year-round brand, first quarter 2021 net sales are approaching 50 million, driven by strength in winter products as well as a powerful consumer-driven rotation to non-winter styles and categories. Prana net sales declined 14% in the quarter, primarily reflecting lower spring 21 orders and the later timing of inventory receipts which impacted wholesale shipments and e-commerce sales. Recent sell-through trends have been encouraging with lower than normal promotional activity. In the first quarter, the men's category was a bright spot. This was led by the popular Zion product line of pants and shorts featuring stretch Zion performance fabric and the recently introduced re-Zion fabric which features recycled nylon and PFC-free durable water repellency. The swim category was another bright spot in the quarter with consumers responding to this season's elevated styles and colors. 100% of Prana's swimwear line has at least one sustainable attribute, highlighting Prana's ongoing commitment to clothing for a positive change. Mountain Hardware net sales decreased 4% in the quarter primarily reflecting lower spring 21 orders. Later timing of inventory receipts and the conversion of its Europe business model from direct to distributor. This was partially offset by strong DTC e-commerce growth reflecting growing consumer interest in the brand. We remain excited about Mountain Hardware's anticipated momentum in fall 21. The order book reflects robust wholesale growth. consumers will be able to find Mountain Hardware products in hundreds of new points of distribution. The brand is hyper-focused on elevating in-store merchandising and signage alongside its digital and social media brand storytelling to maximize sales across all channels. On the product front, Mountain Hardware has a series of new innovations and product introductions that are being well received in the marketplace. This spring, the brand introduced a new lightweight collection of tents and sleeping bags. In the fall, the brand is launching a new ski assortment as well as new next to skin layer called Air Mesh that delivers the perfect balance of warmth and breathability. Before reviewing our full year financial outlook, I'd like to discuss key areas of strategic focus in 2021, including creating highly differentiated product, Investing in demand creation, enhancing digital and supply chain capabilities, and talent. First, we're committed to creating products that inspire active consumers. We know that products are the foundation of our success. Across our brand portfolio, we have an exciting pipeline of new products and technologies and are actively planning the largest innovation launch in our company history. OmniHeat Infinity, as I referenced earlier. We are also committed to investing in demand creation to leverage our compelling brand portfolio and connect with consumers. Given the confidence in our products and brand portfolio, we're increasing our demand creation investments this year. We anticipate demand creation increasing as a percentage of sales to 6% in 2021 compared to 5.7% in 2020 and 5.5% in 2019. In 2021, continuing to enhance digital and supply chain capabilities are key enablers to support growth. On the digital front, we're building on the recent investments of our X1 e-commerce platform with a focus on leveraging consumer data and deploying new capabilities to better segment and target consumer marketing efforts. We are also enhancing our supply chain capabilities to improve inventory management processes and to adapt our supply chain to shifts in our business, including increased penetration of DTC sales through our e-commerce sites and brick and mortar stores. These supply chain investments include improvements toward demand planning and retail store allocation systems and processes. The investments are intended to enable us to better fulfill wholesale and consumer demand as well as optimize fulfillment and productivity of our DTC channels in North America. With our improved financial outlook, we're planning to invest a portion of this upside back into the business to fuel long-term profitable growth. Our updated financial outlook includes incremental investments in demand creation and investments to enhance digital and supply chain capabilities. Lastly, on the talent front, I'd like to highlight the recent hiring of Craig Zannon to serve as Senior Vice President of Emerging Brands. Craig has spent over 20 years in the industry and brings a wealth of experience that will help us accelerate the growth trajectory of Sorrel, Mountain Hardware, and Prana. I look forward to seeing what he can accomplish as we build on the brand-led, consumer-focused strategy that we've been pursuing for the last several years. Greg will be filling the vacancy created by Doug Morris' retirement this summer. Doug has been a crucial part of our senior leadership team and has helped guide our growth strategy. His career at Columbia spanned well over two decades and his business acumen and commitment to excellence will be missed. I'll now review our 2021 financial outlook. This commentary includes forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. Based on first quarter results, favorable early season sell through, Visibility provided by our fall order book and an improvement in business fundamentals were increasing our full-year financial outlook. Our updated 2021 outlook contemplates 21.5 to 23 points, excuse me, 21.5 to 23% year-over-year net sales growth with growth across all four brands. This compares to our prior outlook of 18 to 20% year-over-year growth. From a category perspective, we anticipate the year-over-year growth rate of footwear to be relatively comparable to apparel in 2021. Demand for our footwear continues to improve and outpace production capacity. 2021 footwear growth would be higher absent these capacity constraints and we're working to 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 to 130 basis points and we expect SG&A to grow slower than net sales. Combined, we expect operating margin to be in the range of 11.4 to 12% compared to operating margin of 5.5% This results in a diluted earnings per share outlook of $4.05 to $4.30 compared to our prior range of $3.75 to $4.05. We are forecasting approximately $190 million in free cash flow in 2021 and are acutely focused on managing inventory levels and improving turns. Looking at the first half of the year, we now believe mid to high 20% year-over-year net sales growth is achievable. Please note the second quarter is typically our lowest volume sales quarter, and small changes in the timing of product shipments and expenses can have a material impact on reported results. Historically, second quarter profitability has been challenging given our fixed cost structure, resulting in the company reporting a second quarter earnings loss in most years. Compared to 2019 financial performance, our 2021 financial outlook contemplates us returning to or exceeding record 2019 net sales of $3.04 billion. We are focused on returning to and ultimately exceeding pre-pandemic sales and profitability levels. Our 2021 operating margin outlook of 11.4 to 12% remains below 2019 operating margin of 13%. I note that this margin compression is primarily due to three factors. First, we are purposefully investing in the business to drive long-term profitable growth. One area of strategic focus is investing in demand creation. As a percent of net sales, Demand creation will be 50 basis points higher than it was in 2019. Secondly, we are incurring additional costs associated with operating in a pandemic, including higher supply chain and retail expenses. Lastly, our DTC brick and mortar store traffic remains below pre-pandemic levels, which impacts sales performance and profitability in this channel. We remain committed to driving operating margin expansion over time. In summary, I'm confident in our strategy and encouraged by the fundamental recovery underway. We're 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. 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 remainder of the hour. Operator, could you help us with that?