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.