Columbia Sportswear Company

Welcome to the Columbia Sportswear 4th Quarter 2021 Financial Results Conference Call. At this time, all participants are in a 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. Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Burns, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon, and thank you 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 and financial review presentation explaining our results. This document is also available on 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 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 call 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 fourth 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. I hope everyone is well. As I look at our record fourth quarter and full year 2021 results, it's clear our strategy is excelling. This extraordinary financial performance demonstrates that our brand portfolio is resonating with consumers, and we are well positioned to benefit from consumer and outdoor trends. While I'm excited about our results, I'm even more optimistic about our ability to realize the tangible growth opportunities that we have ahead of us. Fourth quarter results exceeded the financial outlook that we provided in October. We saw positive momentum across our business throughout the quarter, overpowering any regional weather trends that occurred. I'd like to thank our worldwide employees. Their tremendous hard work and perseverance enabled the company to navigate operational challenges and achieve this record financial performance. During the quarter, net sales upside versus plan was primarily driven by our DTC brick and mortar and e-commerce businesses. Even as consumers returned to in-store shopping this holiday season, our e-commerce sales continued to grow rapidly. In our wholesale business, fall 21 sell-through rates have been exceptional. Despite our best efforts to deliver product to our retail partners, wholesale sales were constrained by supply chain disruptions. Our retail partners are well positioned to exit the season with clean inventory positions. Orders for our spring and fall 22 product line have been phenomenal as retailers strive to meet demand for our products. Gross margin performance in the quarter was better than planned as high demand and lean inventory in the marketplace resulted in a highly favorable full-price selling environment. The combination of net sales growth, gross margin expansion, and SG&A leverage fueled an 18.7% operating margin in the quarter. This was the highest fourth quarter operating margin performance since 2004. We exited the year with cash and short-term investments of $895 million. and no bank borrowings. Our profitable growth trajectory and fortress balance sheet have given our board of directors the confidence to approve a 15% increase to our quarterly cash dividend. For the year, we generated 25% net sales growth, expanded operating margin by 890 basis points, and delivered 229% earnings per share growth compared to 2020. Mountain Hardware was our fastest growing brand in 2021, with full net year sales increasing 33%, followed by Columbia, which increased 28%. Growth was broad-based by channel, with our DTC business growing 33% and wholesale growing 18% for the year. In 2021, our global DTC business represented 47% of net sales, including our e-commerce business, which represented 18% of total net sales. We achieved an important milestone with full-year 2021 net sales and diluted earnings per share coming in 3% and 10% above 2019 levels, respectively. As we begin 2022, consumer demand for our products is incredibly strong. The Columbia brand's differentiated innovation, value proposition, and outdoor heritage uniquely position the company to unlock its vision to be the number one outdoor brand in the world. Columbia's successful OmniHeat Infinity launch is a clear example of the brand's ability to deliver compelling product to consumers globally. Across our emerging brand portfolio, we see phenomenal growth potential with Sorel leading the charge. Sorel is anticipated to be our fastest-growing brand in 2022, reflecting robust demand for this unstoppable, function-first fashion footwear brand. Mountain Hardware's resurgence is underway, with product innovation and distribution expansion fueling continued growth in 2022. At Prana, we expect continued growth as new leadership sharpens the brand's focus on the opportunities ahead. Exceptional wholesale sell-through rates in 2021 and lean retail inventory levels exiting the year are fueling robust spring and fall 2022 wholesale orders. Combined with our expectation for continued DTC growth, our 2022 net sales outlook calls for 16% to 18% growth. Our top priority in 2022 is navigating this dynamic environment to maximize near-term sales while continuing to invest back into the business to drive long-term profitable growth. I'll provide more details regarding our 2022 financial outlook later in the call. Now I'll quickly review our fourth quarter 2021 financial performance and reference year over year comparisons versus fourth quarter 2020, unless otherwise noted. Fourth quarter net sales increased 23%, primarily driven by higher consumer demand for our products as we anniversary prior year pandemic disruptions. Our DTC business increased 33% and wholesale increased 13%. Within our DTC business, Brick and mortar increased 39% and e-commerce increased 25%. Compared to pre-pandemic fourth quarter 2019 results, our DTC brick and mortar business increased 8% and DTC e-commerce increased 76%. Even though supply chain disruptions constrain growth in wholesale, fall 21 sell-through exceeded our expectations. Our retail partners are well-positioned to exit the season with minimal carryover inventory. Gross margin expanded 160 basis points to 52.2%. Combined with SG&A leverage, our operating margin expanded 520 basis points compared to fourth quarter 2020. Diluted earnings per share increased 66% to $2.39. I'll now review fourth quarter and full year net sales growth by region and brand. For this review, I'll reference constant currency net sales growth rates unless otherwise noted. U.S. net sales increased 27% in the fourth quarter and 28% for the full year. In the quarter, U.S. DTC net sales increased low 40% and wholesale increased low double-digit percent. Our U.S. DTC brick-and-mortar business generated positive same-store sales growth compared to fourth quarter 2019 levels. This notes the first positive same-source sales performance over 2019 since the pandemic began. In order to support our retail partners during the peak Black Friday, Cyber Monday sales period, we made the decision to constrain U.S. e-commerce marketing to slow online demand and prioritize wholesale shipments. Had we not prioritized wholesale shipments during this period, our e-commerce sales would have been even higher. Overall, U.S. wholesale shipments performed largely in line with the outlook provided on the last call, as supply chain constraints limited upside potential during the quarter. Turning to international markets, during the fourth quarter, most regions experienced favorable recovery trends. With that said, government efforts to contain the virus impacted store traffic and consumer demand in China and in Japan. Latin America, Asia Pacific region, or LAP, fourth quarter and full year net sales increased 8%. China grew mid-teens percent in the quarter, primarily reflecting higher fall 21 wholesale shipments and to a lesser extent DTC growth. Lower store traffic resulting from COVID-19 related government restrictions and unseasonably warm weather tempered DTC brick and mortar performance in the quarter. We remain focused on driving growth and enhancing the consumer experience in this important market. For the year, China grew low 20%. Korea grew low teens percent in the quarter as favorable winter weather contributed to healthy DTC growth and solid demand for outerwear and hiking products. For the year, Korea grew low double-digit percent. We recently appointed Tony Bae, As general manager of Korea, he brings over 20 years of experience building consumer connections, leading marketplace management, and driving commercial growth strategies. I look forward to Tony's leadership as we capitalize on Korea's revitalized outdoor industry growth. Japan was down slightly in the quarter. Consumer demand modestly recovered following the most recent state of emergency declaration that was in place through the end of September. For the year, Japan grew low single-digit percent. LAAP distributor markets were up low 20%, driven by higher fall 21 wholesale order shipments compared to elevated fall 20 cancellations in the prior year. For the year, LAAP distributor markets were down mid-teens percent as distributors worked through carryover inventory positions. Europe, Middle East, Africa region, or EMEA, Fourth quarter net sales increased 33%, driven by robust growth in both the Europe Direct and our EMEA distributor business. For the year, EMEA increased 25%. Europe Direct grew low 30% in the quarter, fueled by strong recovery in consumer demand across our DTC and wholesale businesses. For the year, Europe Direct grew low 20%. Our EMEA distributor business was up high 30% in the quarter and the full year. Fourth quarter growth was driven by later shipments of higher fall 21 wholesale orders and higher spring 22 orders. Canada net sales increased 14% in the fourth quarter, primarily driven by improved DTC performance and higher fall 21 wholesale shipments. For the year, Canada net sales increased 18%. All right, looking at performance by brand. Columbia brand net sales increased 28% in the fourth quarter and 27% for the full year. During the quarter, growth was broad-based across outerwear, sportswear, and to a lesser extent, footwear. We successfully executed our largest product innovation launch in the company's history, OmniHeat Infinity. The launch featured a global multi-channel marketing campaign that included traditional, social, and digital media outlets. You may have seen our OmniHeat Infinity commercials during NFL games broadcast on Fox and the NFL Network. OmniHeat Infinity has been covered extensively by U.S. media outlets with over 50 earned placements and combined media coverage surpassing 700 million impressions. As we mentioned on the last call, OmniHeat Infinity will be the first Columbia product to reach the surface of the moon. Columbia partnered with Intuitive Machines to be part of their Nova Sea Lunar Lander. The launch is scheduled for later this year. On the product partnership front, we saw a successful launch of our Star Wars Boba Fett collection in December. Inspired by the most notorious bounty hunter in the galaxy and infused with Columbia DNA, this collaboration created significant buzz for our brand. The launch helped drive the highest sales volume hour in Columbia.com history. Since our partnership with Disney and Lucasfilm began, Star Wars collections have generated close to 3 billion earned media impressions. This week, the USA Curling team is sweeping the ice in style, wearing Columbia as the official uniform jersey. We worked closely with all members of the team to customize jerseys, jackets, pants, and accessories. Technology elements include both our OmniWick for accelerated moisture evaporation and OmniHeat Infinity to stay warm in between matches. Best of luck to the entire USA Curling team. I'm pleased to announce that the Columbia brand made Forbes Halo 100 list. The inaugural list was put together using consumer feedback on over 2,000 brands to measure the impact these companies are creating for customers. Columbia debuted at number 25 on the list and was ranked number one in terms of perceptions of brand values and trust. We attribute this success to Columbia's approachability across a broad demographic of consumers. Our focus on durability and innovation clearly resonates with consumers of all backgrounds. Turning to our emerging brand portfolio, Sorrell Brand's net sales increased 9% in the quarter and for the full year. In the quarter, net sales growth was led by strong performance of the winter-style categories. In addition to Sorrell's DTC e-commerce focus, the brand is fostering strategic retail partnerships to elevate the brand at wholesale. During the quarter, Zappos.com launched a first-of-its-kind pop-up sneaker shop with Sorrell as the exclusive partner. We noted an immediate uptick in sales in the first week. On the marketing front, Sorrell recently wrapped up Season 4 of its popular podcast, The Step, which features unstoppable women. The podcast has been ranked within the top 20 entrepreneurial podcasts on Apple and has reached over 12 million people. Sorel's successful evolution to a year-round, function-first fashion footwear brand is evident in the breadth of popular non-insulated styles. To put this in perspective, in 2021, only 15% of Sorel's North America sales were in the insulated winter utility boots that used to define the brand. 85% of sales were in the non-insulated boots, wedges, heels, sneakers, and sandals. The brand's success in the hyper-competitive multi-billion dollar sneaker category speaks to Sorel's brand heat and trend-setting designs. I encourage you to check out Sorel's first-ever TV commercial on YouTube. The ad spotlights the Spring 22 kinetic line and features an all-female cast and female-led production crew. Titled Keep Moving, the commercial shows the spirit of the Sorrel brand. This has been an amazing transformation for a brand that we paid less than $10 million for over 20 years ago. Today, we see a clear path for Sorrel to be a billion-dollar brand. With this goal in mind, we're investing in demand creation, and product to fuel growth in 2022 and beyond. We anticipate Sorrel's growth rate to accelerate in 2022 as our factory partners scale capacity. For the year, we anticipate Sorrel's net sales growth to approach 30%. Prana net sales decreased 7% in the quarter, but we're up 8% for the full year. Lower debt sales reflect the impact of delayed fall 21 receipts and a soft DTC e-commerce business. We are encouraged by fall 21 sell-through rates with our wholesale partners. During the quarter, Prana had strong sales with its popular Stretch Zion product platform as the brand transitions to its new high-performance, sustainable ReZion fabric. In 2022, we expect continued focus and growth in all channels as new leadership sharpens the brand's focus. Mountain Hardware net sales increased 30% in the quarter and 33% for the year. I'd like to congratulate the Mountain Hardware team. The brand's success in 2021 is not just about the growth rate, it's about the quality of that growth that's most encouraging. The success of new products and distribution expansion with strategic retail partners fueled high-quality growth and the strongest gross margin performance in over a decade. In the quarter, net sales growth was led by strong Fall 21 wholesale performance in addition to healthy DTC gains. By category, strong sell-through was broad-based across snow sports, sportswear, and the popular stretch-down collections. The brand added over 350 new points of distribution this season with strong sell-through performance noted at top retailers. In 2022, we expect continued Mountain Hardware net sales growth. Management is keenly focused on solidifying the brand's identity, growing brand awareness, and building on the successes of 21. We are also investing in talent to further strengthen the brand team and scale the business. I'll now discuss our 2022 financial outlook. 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 2022 outlook contemplates 16% to 18% year-over-year net sales growth. I'd note that wholesale orders for our 2022 product line support even stronger growth, and we are purchasing inventory to meet this higher demand. We are calibrating the forecast we are giving you today to reflect ongoing supply chain bottlenecks which are anticipated to continue. To the extent we can mitigate these supply chain constraints, we see potential upside to our financial outlook. We expect net sales growth to be broad-based across our brands, regions, and channels, with Sorrel anticipated to be the fastest-growing brand in the portfolio. From a category perspective, we expect the year-over-year growth rate of footwear to outpace apparel. We worked with our factory partners to successfully expand footwear capacity in 2022 across both the Sorrel and the Columbia footwear businesses. Even with this additional footwear capacity, we will not be able to fulfill all the demand in the marketplace during the year. We are continuing to work with our factory partners to further expand capacity for 2023 and beyond. Our 2022 net sales outlook includes the benefit of pricing additions we've taken to mitigate inflationary pressure. Price increases varied by market and product category. In the U.S., on average, we increased pricing by a mid-single-digit percent for our spring 22 product line and a high single to low double-digit percent for our fall 22 product line. In this inflationary environment, pricing power is critical to profitable growth. Gross margin is expected to contract approximately 160 basis points to approximately 50%. The decline in gross margin performance compared to 21 reflects continued elevated freight costs, the potential for more normalized promotion and trade terms, across our DTC and wholesale businesses, a higher proportion of wholesale sales, which generally carry lower margin than DTC, partially offset by price increases we've taken to mitigate the impact of higher product input costs. Our 2022 gross margin outlook of 50% represents the second highest gross margin performance in our company's history, just behind our record 2021 performance. We expect SG&A expenses to grow at a slightly slower rate than net sales, inclusive of strategic investments we're making to drive long-term profitable growth. On the technology front, we're investing in our digital and analytics capabilities to leverage consumer data, enhance the consumer experience across our platforms, and drive efficiencies across the organization. We're investing to enhance our supply chain capabilities to expand distribution capacity improve inventory management, and adapt to shifts in our sales mix. Demand creation investments are expected to increase as a percent of sales to 6% compared to 5.9% in 2021. We're also investing to grow our DTC store fleet. In North America, our current plans call for opening approximately 15 new stores. Our store growth plans include opening several branded stores with an updated format that we're testing. These stores are an authentic Columbia brand brick and mortar experience, showcasing a wider range of product, including premium and entry point product. Compared to the Columbia flagship stores that we closed in 2020, these smaller format stores are in non-high street locations with lower rents and better economics. We expect operating margin to be in the range of 13 to 13.5% compared to 14.4% in 2021. I'd note that the high end of our 2022 range is 50 basis points above our 2019 operating margin of 13%. This improvement is net of an incremental 50 basis point investment in demand creation, higher freight expenses, and inflationary pressures. We remain committed to expanding operating margin over time, but year-to-year fluctuations are not always linear. We have a strong track record of improving profitability over the last decade. This operating performance results in diluted earnings per share outlook of $5.50 to $5.80. With the tremendous momentum we see across our business, I believe it's important for the investment community to have an opportunity to dive deeper into the brand strategies and products that were fueling this growth. We are currently planning to host our first ever analyst day at our campus here in Portland this fall. I look forward to sharing the date and the details as we finalize our plans. In summary, I'm confident we have the right strategy to unlock the significant growth opportunities we see across the business and we are 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 our prepared remarks. We welcome your questions for the remainder of the hour.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Bob Durable with Guggenheim Securities. Please proceed with your question.

Hi. Good evening. Hey, Bob. I have two questions, Tim. The first one is, I don't know if you could take it or Jim would take it, but as you think about the guidance in the full year 22 expectations at this point. Can you talk a little bit about the order book? You know, what really, what transpired for the spring period? I don't know if you could give us any of the rates, but you know, really what you're seeing, how booked you are for fall on the wholesale side. And I guess just when you think about in your guidance, if you could maybe just help us understand the DTC assumptions, you know, either in your stores for the full year or, or even the digital success that you've had lapping that, that would be helpful.

Certainly. Well, as it relates to the order book, the order book has grown significantly and substantially over the last period. So it gives us a lot of confidence in terms of the guidance that we gave you today for the full year. Now, we assume that there will be continued pressure on logistics and potentially closures of factories, et cetera, during the year. So our anticipated revenues are lower than what we're buying inventory for. So we expect that there's an opportunity across all the brands and geographies that we can exceed the guidance today that we gave you. But that's based on our confidence in the order book, which we have in hand. As it relates to the DTC business, also very strong. And remembering that we're dealing with lower traffic rates in almost every place that we do business. The traffic occasionally, as in the case of Japan, has been mandated closed nearly half of last year. So we're dealing with traffic numbers that are down, but the brick-and-mortar business has been – robust and quite solid, and I think it's a testament to the brand and also the outdoor experience that people in many cases are trying for the first time. Our digital business was also quite good, and the investments that we're making in that area of the business are going to be quite large over the next 12 months and probably beyond. to give ourselves the opportunity to become a better supplier in that area. And always with the background that we consider ourselves really to be a wholesale supplier, and so we expect our business will be good with our wholesale partners as well.

Got it. And, Tim, just a follow-up question. So I think the BW collection launched, I don't know if it was yesterday or recently. I was just wondering if you had any sort of,

comments on on how that started and are we expecting an lc collection for luke combs anytime soon actually uh well let me answer the first question about bubba who's been a terrific ambassador for the brand uh he's a true outdoors person and i think our affiliation with him and the affiliation and affinity that our pfg customer have with with nascar has been just spectacular so uh we expect that's going to continue and we'll have more of these capsule collections, uh, for both Bubba in the future. And also, uh, we're going to be launching a Luke Combs, uh, hunting collection, uh, beginning with, uh, sometime later in this fall. Uh, and with the expectations there is that that's going to also be a significant interest to, um, to fans of Luke's, uh, and, and, uh, it's been exciting stuff. I've seen several of the samples. It looks really cool.

Well, congratulations and best of luck.

Thanks.

Our next question comes from the line of Lawrence Vasilescu with BNP Paribas Exane. Please proceed with your question.

Oh, good afternoon. Thank you very much for taking my question. Congratulations on a really strong finish to the year. Um, I'd love to ask about, um, uh, the first half guidance with regards to high teens to low 20% growth. I think, remind me, but I think you guys talked about spring 22 wholesale to be up over 30%. Is that still the case as we think about the top line? And then how do we square away with that with regards to DTC component for the first half?

So yeah, Laurent, your recollection is correct. We talked in October about our order book for the spring season for wholesale business being plus 30% as we saw orders continue to come in and improve. As Tim touched on, given the supply chain disruptions and delays, we've softened our forecast a bit given the challenges from a supply chain perspective. And when you take that combined with the growth that we anticipate from a direct-to-consumer perspective, that's what gets you to that high teen, low 20. I think if you were to imply growth in there, you're going to get growth for the D2C business in the low double-digit range. It'll be a bit better than that as we've adjusted that wholesale business for some of the supply chain disruptions.

Okay, very helpful. And then I think on your slide 18 or 19, you're calling for gross margin to be down 300 bits in the first half. I'd love to know, Jim, if you could possibly parse out, is that all due to supply chain constraints, incremental freight, and how do we think about that 1H EPS range that you're calling for 90 cents to $1.10? Are you assuming that Can we go back to the historical rate where 2Q is a lost quarter and then all the EPS would be driven in the first quarter?

Let me touch on the gross margin contraction first for a moment. You'll recall ocean freight surcharges. We began to see those increase at a pretty significant rate dated back to the mid part of 2021. And so as we continue to see those elevated costs in the first part of this year. We've not seen those abate all that much. We're going up against, obviously, a difficult comp. And so of that 300 basis points of gross margin contraction in the first half, our ocean freight impact alone will be north of that. It'll be 350-ish in that order of magnitude. So there's some other puts and takes in our overall gross margin. And as it pertains to the outlook between Q1 and Q2, I don't think we've provided a lot of detail on that other than to say that we believe we'll be modestly profitable in the second quarter.

Okay, very helpful. And last question here on innovation. Great to hear about Infinity. You had Black Dot. You had Xero last year. Tim, should we brace ourselves for more technology coming forward?

Yeah, we've launched a new technology as it relates to heating that's applicable to lighter weight knits and fleece. We're calling it Helix. It's quite dramatic in terms of its appearance on the exterior of the garments, and we're pretty excited about that because it really opens up more technology to probably one of our largest product categories, which is fleece and lightweight knit. So it's going to be exciting. It's well-received, and we're looking forward to having it be part of the showcase when we talk about the brand, all the brands and the innovation we have loaded into the products during our September Investor Day.

Great. Looking forward to that.

Thank you. Our next question comes from the line of Mitch Kumitz with Seaport Global. Please proceed with your question.

All right, yes, thanks for taking my questions. Yeah, I wanted to follow up on Bob's question earlier about the order books, because you guys have referenced spring not only again today, but on the last call. And I would imagine you're pretty far into getting your fall orders. Could you give us any numbers behind that? I mean, is that order back up, you know, double digits? Is that a fair assumption?

Yeah, I mean, Jim might be giving you more specifics, but again, the order book was incredibly strong, and we received it much earlier globally than we have in the past.

So it's just a testament to the brand's strengths and customers realizing that they'll need to give us their orders earlier in order to help us all avoid the issues we've had in the past with logistics.

Yeah, and it's just to add a little more color to that. As Tim touched on, orders came in substantially earlier than they ordinarily do. We're effectively 100% booked for the fall season. And that was in part due to the fact that with longer lead times from a logistic standpoint, we were getting our purchase orders in sooner to compensate for a portion for those facts. And then as it relates to the overall growth in that order book, it's well above that we see today.

Okay. And given the strength of that order book, the fact that you guys raised prices, you know, I think you said high single digits to low double digits in the U.S., it doesn't sound from those numbers that there was a whole lot of pushback to that?

Well, you know, nobody likes price increases, and I wouldn't say people were thrilled with it, but, you know, we got a much larger order book than we had, and so we We assume that the pricing power that the brands have will carry that, will carry those additional charges. And, no, it looks like it's going to be a terrific year, you know, barring any particular unknown more COVID problems or logistical issues, which appear that in many respects they're moderating, certainly later in the year.

And then, Tim, lastly, you mentioned that you expect Sorel to be your fastest-growing brand this year, approaching 30% year-over-year. Again, I assume that is reflected in the order books as well. And do you expect more of that growth on a percentage basis to come in the first half, just given the reception that you're getting to the spring-summer product in that brand?

Well, I think there'll still be very nice growth in the back half of the year. But it's been incredible, the response to the Sorel brand, And it's really rotation away from being a purely winter brand to being a brand that's year-round, which will be a big part of its future growth. And, you know, there's a number of things about the footwear business. Unfortunately, right now, the constraint on availability of product is hurting us. But the footwear business in general looks to be very important to the company's future. And Sorel will lead the way there with its highly differentiated product designs.

Okay, great. Thanks, and good luck. Thanks, Mitch.

Our next question comes from the line of Mauricio Serna with UBS. Please proceed with your question.

Great. Thanks for taking my question, and congratulations on the results. I wanted to ask about if you could speak a little bit more about the outdoor category and tailwinds that you see, you know, for 2022? I mean, how much, like, growth, underlying growth of the category are you seeing? And then maybe if you could talk a little bit more, I mean, you talked about the price increase that you're taking in the first half and second half. I mean, how does that reflect the anticipated cost inflation that you're seeing along your businesses? Thank you.

Certainly.

Well, you know, we talk about the outdoor business and the importance of that, especially it's the offer of safety for families that want to go outside and have a place where they can be comfortable outdoors without a mask, perhaps. But what we're really seeing is an acceleration of the already begun casualization of the workplace casualization of how people are living their lives. And I think the fact that the outdoor apparel industry has been a real beneficiary of that is really supercharged when people actually use the products outdoors. So we would expect that that's going to continue to be a tailwind for the company, for all the brands, not just the Columbia brand.

And then as it relates to the latter part of that question, regarding the price increases and the inflationary pressure, as I noted earlier, as you see in our outlook, our first half gross margin being down 300 basis points, we were able to offset through pricing increases at that mid-single digit level the effects of cost increases in our input costs. So when you think of raw materials and labor, but we weren't able to at we hadn't yet had visibility to the increases in these ocean freight surcharges. And then as we got to the fall season, we had better visibility both to the product input costs as well as that ocean freight, and we've priced accordingly in order to offset those pressures for the season.

Got it. And then just if I could have like one follow-up on the operating margin outlook. Assuming next year things get better and maybe the cost – you know, the cost environment improves, could we assume that the company recovers those 160 basis points and that's implied like even operating margins in the long run being closer to 15%?

There's a lot of dependencies in that equation, you know, particularly as it relates to ocean freight and those types of costs. We've done a lot of work over the course of the past few months as we look at renewing our ocean freight contracts. We expect some degree of normalization in the latter part of 22. Frankly, though, as we look out further into 23 and beyond, you know, we do believe that certain of the product costs, inflationary pressures that we've seen, that they're transitory in nature. You know, you'd see that in the case of certain of the commodity and raw materials. Those fluctuate from time to time and that they're at elevated levels currently. and as ocean freight goes down or normalizes more over time, we've taken advantage of the strength of our brands, the pricing power that we have, and that should, as those events occur, that should put us in a stronger place from an overall gross margin and operating margin perspective.

Thank you very much.

Thank you. Our next question comes from the line of Paul Lejouis with Citigroup. Please proceed with your question.

Thanks. It's Tracy Cogan filling in for Paul. I had two questions. The first was I was wondering how your retail business trended by month and whether you saw any improvement in traffic, in the tourist traffic at your factory outlet locations after the borders opened in November. And then secondly, I think you guys talked about opening some new smaller concept branded stores. this year after closing a few in 21. And I was wondering if you could give us a sense of the new store economics of these stores versus the existing fleet and then longer term with this new store format in mind, you know, what your ultimate fleet size might be. Thanks.

Certainly. Well, as a relation to the traffic in the tourist stores, those still have not come back to pre-pandemic levels. In fact, they're quite anemic. I mean, it's a real testament to the power of the brands that our DTC business contributed so mightily to the fourth quarter results. But traffic is still lagging in those markets where we typically would have international tourists present. As it relates to the new format, these are stores which we're taking the learnings from our existing cadre of branded stores where we've enhanced the mix, the merchandise mix, to include not only our premium products, but also some of our opening price point items, which had not been present in the kind of depth that they had been previously. And again, as we said, we're really a wholesale company, so we don't really release the details of the metrics that a normal retailer would. So um, we can talk to you about the, the general, uh, trends in those businesses, but we don't release all the, all the metrics.

And then Tracy, your question regarding, um, overall trends on the quarter, uh, by month are, well, we found the DTC business across both stores and e-commerce was strong growth really across all three months. There wasn't, uh, It wasn't front-weighted per se. We saw that strong revenue all the way through the month of December.

Got it. Thanks very much.

Thank you. Our next question comes from the line of Jim Duffy with Stiefel. Please proceed with your question.

Oh, thanks. Good afternoon. Great quarter, guys. I wanted to Ask about the North America business. It seemed to decouple from any weather-related influence, and that's not historically been the pattern. I'm curious how you explain that. Is there meaningful change in the merchandise assortment that would explain that, or is it really just consumer behavioral differences?

Well, I think there were a number of things at play. Obviously, there was so much media coverage of the shortages that consumers were generally prepared to come earlier to the stores. And then the company's largest launch of any innovation was our OmniHeat Infinity launch, which kicked off in early October. And I think those two things converged to give us really a great environment. And then, you know, it doesn't hurt when in late December and January you have all these cleanup storms that just drive consumers who need the product into the stores to, to get it. So I think it was a, you know, a terrific result. And, um, but it was at least as much about the new products that we're offering as it was almost anything else.

Understood. Thank you. And then I also wanted to talk about the promotional backdrop fairly benign in the fourth quarter. Um, just your thoughts in the context of the order book and, uh, views to consumer spending patterns, what the glide path might look like towards a more normalized promotional environment. Any thoughts there? Maybe you can speak to how that's contemplated in the guidance for 2022. Certainly.

Well, it's clearly present in the gross margin guidance we've given you that the expectations are that there will be more normalized activity throughout the year We're hopeful, obviously, that we've been too cautious there, but that's what our view shows us, is that there'll be more activity than there certainly was this year.

Yeah, and I might add something to this as well, Jim, and that's, as we say, here in the month of January, consumer trends, the full price-selling environment we've been in has continued, so we're continuing to see good healthy margins in the DTC space with not much in the way of promo and markdowns. This would typically be the time of year where you'd see those a bit deeper. And as Tim touched on, we've planned some degree of normalization through the balance of the year. With that said, you know, we're not contemplating that our margins and our promotional levels go back to where they were two years ago. So we're still planning for better overall margins, but coming off of some of the peaks and the highs that we've seen as strong as the full price selling environment's been over the last several months.

Great. Thank you for your thoughts. Thanks.

Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.

Hi. Thanks for taking my question, and congrats on a really strong quarter. Just first, I was just wondering... I was just wondering if there was any way to sort of quantify sort of how much the supply chain disruptions limited upside in the quarter. And would you characterize that as more of a four Q one Q shift? And then I think in the prepared remarks, you made a statement that wholesale orders for 2022 supported even stronger growth versus maybe what you've guided to. So it seems like maybe you left some 2022 orders on the table. Is there, you know, a possibility to meet some of that, you know, extra demand?

Well, as it relates to the first part of that question, Alex, in terms of quantifying, you know, what Q4 could have been, that's difficult to do. You know, we were a bit light in our shipments from a wholesale standpoint relative to the outlook coming into the quarter. On a global basis, though, we're talking a single-digit millions of dollars, a bit higher in the case of the U.S., just given port congestion and challenges from a supply chain perspective. You know, perhaps a different way of looking at it as well is if you go back, date it back to our outlook at the midpoint of the year and where we finished. You know, there's about a $100 million delta between where we were in July and where we finished the year. And effectively, that's a lot of the It's not been cancellations because we've not seen cancellations. Order demand from our wholesale customers has been very high. So a lot of that's orders that have shifted out into Q1. Some of those will result in cancellations. And with the favorable weather that we've had, certainly it provides some upside to us given the environment we're operating in. And then Alex, I missed the second part of that question.

Yeah, I think maybe in Tim's prepared remarks, he said, you know, wholesale orders for 2022 support even stronger growth, which sort of implied that maybe there are some orders, you know, left on the table. Was that the right way of characterizing that, or is there a possibility you can meet that unfulfilled demand? I'd characterize it a little bit.

Yeah, it characterizes a little bit differently in that we're buying inventory to support that higher order book and to fulfill those orders. Now, given the constraints that we're seeing in the supply chain, the delays, we've softened our outlook a little bit to contemplate, and we've seen some of that experience during the last several months that we're factoring that into our guidance. In terms of being able to quantify that, it's really difficult to do. We did provide a projection on our operating cash flow, which you'll note it's down pretty significantly year on year compared 21 to 22. That's my CFO commentary, and a lot of that is going to be reflective of inventory growth in contemplation of both the growth of the business and the expectation that eventually we see some normalization of the supply chain, and we've produced some of our spring 23 production and see some of that inventory come into the year as well.

That's incredibly helpful. And then just a follow-up question, how are you just thinking, you know, higher level about the health of the U.S. consumer in 2022 as you lap, you know, stimulus benefits and expanded unemployment benefits?

Well, I think that there's significant pricing power within the brands that we have. And, you know, in periods of... economic turmoil, which if the stimulus does not continue and there are other impacts, it'll be slightly disruptive. But we've done very well in periods of tough economic times. It's really a testament to the brands, all of them, to the strengths of our brands and our ability to manage in a thoughtful way based on the balance sheet we have, which we can put to use at this time.

Perfect. That's really helpful. Best of luck going forward.

Thanks, Alex. Thank you.

Our next question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.

Thank you. This is Mackenzie Boydston on for Camilo. My first question is about China. So you posted low 20% growth this quarter. Definitely impressive given some of the macro challenges there. But would just love to hear you talk about your strategy how you're kind of thinking about China going into this year.

Yeah, you know, we've been very open about the fact that we've underperformed in China. It's a huge market. We've been clear that it's the largest single geographic area for the company in terms of opportunity. It's great to see a turnaround in that market. We think we have the beginnings of a great growth there. We have a new management team in place, as I think we've told you, and we have a high degree of confidence that we've got the right approach there to get ourselves in a better position.

The brand is very, the Columbia brand, which is really the only one that we have in that market, is very strong. It's been there for a long time, and it's now, as our team in China likes to say, it's reawakening the brand So we would expect that you'll see continued strong growth there, especially based on the investments we've made in the digital arena, both in people and processes.

Great, thank you. And then my second question is just about footwear. So I know you mentioned in your prepared remarks about not being able to fully meet the demand for footwear this year. Could you just talk about the state of your manufacturing operations and footwear today, and when would you expect to see that start to normalize?

Certainly.

Well, you know, I personally have been talking about the promise of footwear since we went public in 1998, and we're now beginning to see just how important that can be. With both the Columbia product and the Sorrel product, just the demand is literally outstripping our ability to supply it. So we will have growth in footwear, obviously in revenue and in supply in 22, which is going to be quite higher than it was in 21, but it's still not enough to cover all the demand that we see out there for the product. And that demand is really quite strong in every market that we operate. So we believe that we are in a position where we will be able to cover the full demand for the company's footwear products in 23, but it's taken us some time to get ourselves in that position.

Perfect. Thank you.

Best of luck.

Thanks.

Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Tim Boyle for closing remarks.

Well, thank you very much for listening in. We're really proud of the way our employees and the teams concluded this year. If you would have told us at the beginning of the year that we'd be in this position, we would likely not have believed you. But we really want to make sure that you understand as much as possible about the business and, importantly, the products that we make across all of our brands So we're looking forward to welcoming you here in September to show you the full breadth of our product offering and the products that we make. So thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.