Columbia Sportswear Company

Greetings and welcome to Columbia Sportswear third quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow today's 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. Vice President of Investor Relations and Strategic Planning. Thank you. You may begin.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's third 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, 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 and we do not undertake any duty to update any of the forward looking statements after the date of this conference call to conform to 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 more 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 third quarter 2021 earnings release and the appendix of our CFO commentary and financial review. 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, everyone. I hope everyone is well and vaccinated. Our third quarter results reflect the unique operating environment in which we find ourselves, characterized by high consumer demand for our products and an unprecedented supply chain disruption. During the quarter, delayed inventory receipts impacted U.S. wholesale shipments and resulted in a net sales shortfall compared to our internal plan. I'd emphasize that our net sales shortfall was not a function of consumer demand, which remains robust. Early fall 2021 sell-through at our North American wholesale customers' stores, as well as our own DTC business, has been very encouraging. The retail environment is healthy with low promotional activity contributing to higher than planned gross margin. When combined with lower than planned SG&A spend, we were able to exceed our operating income forecast. Our fortress balance sheet is intact with cash and short-term investments of over 600 million and no bank borrowing. We had several brand highlights during the quarter. Columbia introduced OmniHeat Infinity, The largest innovation launch in our company's history. This next evolution of the thermal reflective warmth further strengthens our portfolio of differentiated innovations while providing exceptional warmth and value to customers. Sorel's bold collection of sneakers, sandals, and wedges drove meaningful growth on Sorel.com with e-commerce sales more than doubling compared to third quarter 2019 pre-pandemic levels. Mountain Hardware's energized Fall 21 product line fueled outstanding growth, including expanded distribution at new retail doors and Prana delivered healthy growth led by broad-based recovery in its wholesale business. As we enter the important holiday sales season, we're acutely focused on navigating supply chain disruptions and maximizing sales potential. Our revised net sales outlook reflects the reality that we will not be able to entirely offset this headwind. Given our improved outlook for gross margin and updated operating expense assumptions, we're raising our diluted earnings per share outlook to $4.55 to $4.80. As we finish the year and look forward to 2022, I'm excited about our innovative product pipeline and the momentum we see across the brand portfolio. Based on this strength, we believe we can achieve mid-teens or better net sales growth in 2022 on top of the low 20% growth we anticipate in 21. I will discuss our initial 2022 commentary in more detail later in the call. Now I'll quickly review our third quarter 21 financial performance and reference year-over-year comparisons versus third quarter 2020. Third quarter net sales increased 15% reflecting DTC growth as well as higher fall 21 wholesale shipments as we anniversary prior year pandemic disruptions. By channel, net sales growth was driven by 25% growth in our DTC business and 10% growth in our wholesale business. Within the DTC business, brick and mortar, net sales grew 36% in line with our expectations. Store traffic levels improved significantly compared to third quarter 2020, but remained below pre-pandemic levels. DTC e-commerce net sales grew 6% and represented 11% of the total sales mix. We are encouraged to see sales in this channel remain substantially above 2019 levels as consumers return to in-store shopping. Gross margin expanded 180 basis points to 50.7% of net sales and SG&A expenses grew 7% year-over-year. The combination of gross margin expansion and operating leverage resulted in 440 basis points of operating margin improvement compared to third quarter 2020. Diluted earnings per share increased 62% to $1.52. I will now review third quarter year-over-year net sales growth performance by region and brand. For this review, I will reference constant currency net sales growth rates unless otherwise noted. U.S. net sales increased 15%, reflecting mid-30% DTC growth and low single-digit percent wholesale growth. U.S. wholesale shipments were below our internal plan and would have been higher absent supply chain disruptions. We're encouraged by our early fall 21 sell-throughs, which is up year over year despite lower retail inventory levels. The growth in our USDTC brick-and-mortar business reflects year-over-year improvements in store traffic levels as well as lower promotional activity that resulted in higher average order values. Our USDTC e-commerce business also benefited from significantly less promotional activity compared to the prior year. Turning to international sales performance. During the third quarter, sales trends continue to be influenced by each region's COVID-19 restrictions, vaccination rates, and consumers' willingness to shop in-store. Canada and Europe experienced post-lockdown recoveries, while other regions, such as China and Japan, were impacted by government-mandated COVID-19 restrictions during the quarter. Latin America, Asia Pacific region, or LAAP, third quarter net sales increased 10%. In China, net sales were up mid-teens percent, primarily reflecting higher fall 21 wholesale shipments, partially offset by lower DTC sales. In the quarter, DTC performance was impacted by lower store traffic, resulting from COVID-19 related government restrictions, as well as isolated flooding and power outages across several provinces. We remain focused on driving growth and enhancing the consumer experience in this important market. For fall 21, we're investing in demand creation including a digital first full funnel marketing campaign highlighting OmniHeat Infinity. Korea net sales increased mid teens percent, primarily reflecting higher fall 21 wholesale shipments and to a lesser extent DTC growth. In Japan, net sales decreased low single digit percent as demand was impacted by the state of emergency declaration that was in place from mid July through quarter end. Year to date, there have been over 200 days with some level of state of emergency restrictions in place in Japan compared to approximately 50 days in 2020. LIAP distributor markets were up low 20% driven by higher fall 21 wholesale order shipments. Europe, Middle East, Africa region or EMEA third quarter net sales increased 9% driven by low double digit growth in our Europe direct business and mid single digit growth in our EMEA distributor business. Growth was driven by higher Fall 21 wholesale order shipments as well as improved DTC performance in our Europe Direct business as lockdown restrictions eased. Canada net sales increased 18% in the third quarter, primarily driven by higher Fall 21 wholesale shipments and improving DTC performance as this market reopened. Looking at performance by brand, Columbia brand net sales increased 15% in the third quarter as DTC brick and mortar growth was constrained by supply chain disruptions that impacted wholesale net sales performance. Across all channels, sell-through of Columbia's Fall 21 product line has been encouraging. Top performing categories include fleece, sportswear, and rainwear with continued strength in PFG products. In October, we officially kicked off our global marketing campaign to support the launch of OmniHeat Infinity, our new highly differentiated addition to the OmniHeat family. This full funnel campaign spans in-store, traditional, and digital social outlets and will be engaging customers around the world throughout the season. In fact, later this winter, OmniHeat Infinity will enter new territory as the first Columbia product to reach the moon. Stay tuned for more details on that front. Our OmniHeat Infinity launch has been covered extensively by media outlets, including Men's Journal, Gear Patrol, Good Housekeeping, Women's Health, and Outside Magazine, among others. Combined media coverage of the launch has surpassed 340 million impressions and counting. OmniHeat Infinity was also featured on the Late Show as host James Corden, and his staff went head-to-head with our newest brand ambassadors from the USA Curling team. In September, we announced a multi-year sponsorship with USA Curling. Columbia will be working closely with the USA Curling National Team Program, including the men's, women's, junior, and wheelchair teams. Curling is one of the most watched sports during the Winter Olympics. The Columbia uniforms and our logo will be prominently displayed as the U.S. team defends its gold medal over multiple weeks of competition. I can't think of a better way to showcase our brand than a global sport that takes place completely on ice. In addition to the OmniHeat Infinity launch, we had several unique brand stories to highlight across our digital platforms during the quarter. We featured brand ambassador Bubba Wallace and renowned National Geographic photographer Babak Tafreshi as they captured the brilliant Utah desert night sky. Together they journeyed to Utah's remote Gooseberry Mesa to take Bubba's passion for outdoor photography to the next level while relying on their Columbia gear to keep them warm. Earlier this month, We also got a chance to celebrate Bubba's historic First Cup Series win at Talladega Super Speedway. Congratulations, Bubba! We also featured country musician and Columbia Ambassador Luke Combs as he found adventure on the wide open spaces of Montana with his wife and friends. Led by a Columbia Sportswear adventure crew, they explored some of Big Sky Country's hidden gems during a series of fishing, trap shooting, and quad riding excursions. On the product partnership front, we're continuing our successful collaboration with Disney and Lucasfilm with another Star Wars collection for Fall 21. This new special edition collection is inspired by the galaxy's most notorious bounty hunter, Boba Fett, and will launch ahead of his highly anticipated new Disney Plus series this December. Before discussing our emerging brands, I'd like to update you on some recent Columbia brand management changes. We're pleased to announce that responsibility for global direct market sales will be managed by Tim Sheeran in the newly created position of Senior Vice President, Global Wholesale. Tim will leverage his extensive international experience as he oversees Asia Direct, Canada, Europe Direct, and our U.S. wholesale businesses. We are also taking this opportunity to further align our Columbia brand offense with our U.S. DTC leadership, now reporting directly to Columbia brand president, Joe Boyle. Turning to our emerging brand portfolio, exceptional consumer demand for Sorrel was evident in the third quarter. Sorrel.com net sales increased over 30% versus third quarter 2020, and we're up over 100% compared to third quarter 2019. This growth was led by sneakers, sandal, and wedge category performance, as well as popular winter-style products like the Out and About. During the quarter, Sorel launched a multi-channel marketing campaign to introduce the new Brex Boot and Heel collection, which is driving new customer traffic to Sorel.com and quickly becoming a favorite among influencers and celebrities. The continued success of these new categories and styles validate Sorel's evolution to become a year-round function-first fashion footwear brand. Overall, Sorel brand net sales decreased 5% as DTC e-commerce growth was more than offset by lower fall 21 wholesale shipments, resulting from supply chain disruptions. Prada net sales increased 19% in the quarter, led by broad-based wholesale growth. I'm encouraged to see Prada's account base including national accounts, smaller independent retailers, and new points of distribution embraced the France Fall 21 product line. Prana's latest outerwear collection, which features many sustainable features, is off to a promising start to the season. Female consumers are showing strong interest in the down collection, including the premium priced S-List series. Prana will be emphasizing outerwear, which is an important growth category for the brand in its new marketing campaign launching in early November. During the third quarter, we announced Monica Miro was appointed Prana brand president. She brings extensive experience in leadership roles, building inspirational omnichannel brands. I'm confident that her growth mindset, strategic discipline, and people-first approach will strengthen the Prana brand. Mountain Hardware net sales increased 47% in the quarter. Growth was led by higher fall 21 wholesale shipments that reflect the team's tremendous efforts to enhance the product line and extend the brand's reach into new retailers. The new in-store displays at important wholesale accounts look amazing. I hope you get a chance to see the Mountain Hardware display at some of the newly opened public land stores. When reviewing the presentation of Mountain Hardware's innovative product, You start to get a sense for the tremendous potential of this authentic premium mountain sports brand. During the quarter, Mountain Hardware's innovation received awards and media call-outs. Outside Magazine recently gave the Powabunga Ski Pack a Gear of the Year award in its recent 2022 Buyer's Guide. Gear Junkie featured the Super DS Stretchdown Jacket in a recent article on the best puffy jackets of all time. During the quarter, we announced Troy Sycott was appointed the new Mountain Hardware brand president. Troy has served as vice president of sales for the past three years and has been co-leading the brand on an interim basis. This well-deserved internal promotion facilitates a smooth transition and allows the team to focus on accelerating growth during this pivotal time in the brand's history. He is an energetic leader that will serve Mountain Hardware well. I'll now discuss our 2021 financial outlook and preliminary 2022 commentary. This outlook and commentary includes forward-looking statements. Please see our CFO commentary and financial review presentations for additional details and disclosures related to these statements. Our updated 2021 outlook contemplates a 21.5 to 23% year-over-year net sales growth. Compared to pre-pandemic 2019 results, our updated 2021 outlook contemplates flat to 1% net sales growth. Looking at the balance of the year, our updated guidance reflects the supply chain disruptions that have intensified in recent months. Inbound shipping times, port congestion, and other logistic delays have elongated in transit time from factory to inventory receipt. Additionally, factory closures in southern Vietnam have added additional pressures to an already stressed global supply chain. While Vietnam factories began to reopen October, the factory downtime has impacted the availability of Fall 21 products and timing of Spring 22 production. To date, order cancellations resulting from delayed receipts and deliveries have been minimal. In this high-demand inflationary environment, We remain confident in our ability to profitably sell in transit inventory in current or future seasons. I'd also note that the job market remains very tight and staffing challenges across our retail stores and distribution centers present further risk to realizing net sales during the peak holiday sales season. Based on year-to-date results and the healthy full-price selling environment, We are raising our gross margin guidance. For the full year, we now expect gross margin to expand by 190 to 210 basis points. We expect SG&A to grow slower than net sales. Demand creation is expected to increase as a percent of sales to 6% in 21 compared to 5.7% in 20. Combined, we expect operating margin to be in the range of 12.6 to 13.2%. Diluted rates per share is expected to be in the range of $4.55 to $4.80 compared to our prior range of $4.30 to $4.55. While significant uncertainty persists and we have not completed our 2022 planning process, I'd like to share some initial thoughts on how we are approaching the year. This commentary incorporates our current view of the supply chain disruptions, constraints, and expenses, but could materially change as conditions evolve. Our Spring 22 wholesale sales forecast continued to improve since the last update and now reflects over 30% growth compared to Spring 21 sales levels. Based on momentum we see across the business, We believe mid-teens or better net sales growth for the full year is attainable. Looking at gross margin performance, we expect higher product and freight costs as well as the likelihood of a more normalized promotional environment will create gross margin pressure in 2022. We do not expect planned price increases will fully offset these inflationary headwinds. We are also planning to make investments across the business, including demand creation, retail store expansion, supply chain and digital capabilities that will add to our overall spending levels. On the digital front, we're accelerating our digital and analytics capabilities to leverage consumer data, enhance the consumer experience across our platforms, and drive efficiencies across the organization. We're also investing in supply chain capabilities to expand distribution capacity, improve inventory management, and adapt to shifts in our sales mix. With these factors in mind, we're currently planning our 2022 operating margin to be similar to the range provided in our 2021 financial outlook. It's important to reiterate that we are maintaining this level of operating performance despite significant cost pressures and growth investments across the business. In summary, I'm confident we have the right strategy in place to drive sustainable and profitable long-term growth, and we're 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. Operator, could you please help us get questions for the remainder of the hour?