Columbia Sportswear Company

Greetings and welcome to the Columbia Sportswear Second Quarter 2021 Financial Results 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, Andrew. You may begin.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second 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 on our Investor Relations website, investor.columbia.com. With me today on the call are Chairman, President, 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 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 second 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. Hope everyone's well. I'm thrilled to report second quarter financial performance that exceeded our expectations. The robust recovery in our business fueled record setting second quarter and first half net sales, gross margin, operating income, and diluted earnings per share. We eclipsed pre-pandemic first half 2019 financial results, which represented record performance at that time. This marks an important milestone in our recovery. Net sales upside in the second quarter was primarily driven by better than planned performance in our U.S. wholesale and DTC brick and mortar businesses. It's important to highlight that even as consumers return to in-store shopping, our e-commerce business also remains strong. Measuring second quarter 2021 financial performance versus second quarter 2019 results, which were not impacted by the pandemic, is a useful measure of our business recovery trend line. Globally, net sales were 8% above 2019 levels in the second quarter with all four brands surpassing pre-pandemic levels. Second quarter net sales in our U.S. DTC brick and mortar business slightly exceeded 2019 levels and U.S. DTC e-commerce sales increased over 80%. It's clear that our brand portfolio is resonating with consumers and we are well positioned to benefit from current Thank you. Thank you. are responding to the brand's authentic and innovative mountain sports product line. As consumers' interest in sustainability in the outdoors grows, Prana is well positioned at the intersection of these two powerful trends. These record results were achieved despite ongoing pandemic-related disruptions. Industry-wide supply chain disruptions are causing production and delivery delays, as well as shipping cost pressures. ongoing periodic lockdowns and temporary store closures are also impacting DTC and wholesale and brick and mortar store performance in several international markets. Thanks to the tremendous efforts of our dedicated global workforce, we were able to overcome these disruptions to achieve record sales results. I'd add that we also achieved these results with a lower inventory position, exiting the quarter with inventory down 16% year over year. Overall, our spring sell-through has been exceptional. Retail inventory positions are very low, and our fall 21 and spring 22 order books point to continued momentum in the business. Looking at the seasons ahead, I'm confident in our pipeline of innovative products and ability to execute in this dynamic marketplace. Our Fortress balance sheet is intact with cash and short-term investments totaling $821 million with no bank borrowing. Based on second quarter results, we're raising our financial outlook for 2021. Our updated outlook now calls for 25 to 26.5% net sales growth and a diluted earnings per share of $4.30 to $4.55. This outlook includes our current view of the impact from supply chain disruptions, which are impacting Fall 21 production and deliveries. Furthermore, In our revised outlook, we're assuming approximately $40 million of incremental ocean freight costs not contemplated in our prior outlook as we emphasize supply chain continuity and market share gains over costs. Now we'll quickly review our second quarter 2021 financial performance and reference year-over-year comparisons versus second quarter 2020. When reviewing second quarter year-over-year growth rates and margin performance, It's important to remember that the second quarter is our lowest volume sales quarter and small changes can result in large percentage changes. Additionally, second quarter 2020 was significantly disrupted by the pandemic. Many of our DTC and retail partner stores were closed for the majority of the quarter last year. Second quarter net sales increased 79% driven by 89% growth in our wholesale business and 69% growth in our DTC business. Wholesale growth was led by the US and was primarily driven by later timing of Spring 21 shipments compared to Spring 20 and higher Spring 21 sales. While shipments were delayed several weeks on average, order cancellations were minimal. In this inventory constrained environment, retailers remain eager to get product as it arrives. Globally, DTC brick and mortar net sales grew 149% as we lapped prior year temporary store closures. Sales in this channel significantly exceeded our expectations as store traffic levels and sales improved faster than anticipated. Overall, we made great progress in the quarter. Store traffic still remains below pre-pandemic levels. DTC e-commerce net sales grew 5% and represented 16% of the total sales mix. These results were in line with our expectation as we lapped the prior year surge in e-commerce sales. Gross margin expanded 540 basis points to 51.6% of net sales. In addition to decreased inventory reserve provisions relative to elevated levels last year, we benefited from lower DTC promotional activity and favorable wholesale product margins. This was partially offset by unfavorable channel sales mix. Our SG&A expense increased 20%, primarily reflecting the variable component of our expense structure with increased sales volume. This performance resulted in operating income of 35 million or 6.2% of net sales compared to an operating loss of 70 million in the prior year. Deluded earnings per share improved to 61 cents compared to a loss per share of 77 cents in the prior year. Looking at first half financial performance, net sales increased 35% year-over-year and deluded earnings per share increased to $1.44 compared to a loss per share of 76 cents in the first half of 2020. I'll now review second quarter year-over-year net sales growth performance by region and brand. For this review, I'll reference constant currency year-over-year net sales growth rates unless otherwise noted. U.S. net sales increased 107%, reflecting low 140% growth in our wholesale business and mid-80% growth in our DTC business. The robust economic recovery, improving vaccination rates, and strong consumer demand for outdoor products