Columbia Sportswear Company

Good afternoon, ladies and gentlemen, and welcome to Columbia Sportswear First Quarter 2022 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Andrew. Sir, the floor is yours.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's First Quarter Results. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available 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. 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 point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our first quarter 22 earnings release and the appendix of our CFR 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 that 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. Before reviewing our financial performance, I'd like to take a moment to focus on the Russian government's tragic and unjustified invasion of Ukraine. Our hearts go out to the people of Ukraine and those impacted by this humanitarian crisis. Since the invasion, we have made it a priority to work with multiple aid organizations to deliver products and other support to refugees from Ukraine, as well as displaced persons within Ukraine. We have also matched all employee donations to nonprofits delivering humanitarian aid. Columbia Sportswear does not have any direct operations in Russia and has operated in that market through a contract with a third-party international distributor on an advance order basis. During the first quarter, we paused taking any new orders from this distributor. Turning to our financial performance in the quarter, 2022 is off to a great start. First quarter net sales increased 22% year over year and diluted earnings per share increased 23%. Our strong financial performance demonstrates that our brands are resonating with consumers and our strategies are excelling. I'd like to thank our worldwide employees. Their diligent work and perseverance has enabled the company to navigate operational challenges and achieve another quarter of record net sales performance. Business momentum was broad-based with growth across all brands, channels, and geographies. Sorrel and Columbia led the charge, growing 37% and 22% respectively. Sorrel's compelling new sneaker styles and a resurgence in the wedge category contributed to phenomenal demand and brand heat. Columbia's success is rooted in the brand's differentiated innovation value proposition, and authentic outdoor heritage. During the quarter, Columbia continued its long history of innovation with several new product technologies, including the ODX mesh fabric in outerwear and Techlite plush cushioning in footwear. For the purpose of our revised financial outlook, we have removed any future sales to our Russia-based distributor. Despite removing these sales, we are reiterating our net sales forecast. Since our last call, our fall 22 order book has strengthened in many other global markets. Based on our encouraging start to 22 and lower share count, we are increasing our full year earnings and diluted earnings per share outlook. We remain focused on unlocking the tremendous growth opportunities we see across our brand portfolio while mitigating the impact of inflationary pressures and supply chain constraints. We are also investing back into the business to drive favorable long-term results. I'll provide more detail regarding our updated outlook later in the call. The confidence we have in our business is reflected in our elevated share repurchase activity. During the quarter, we repurchased 217 million of common stock, representing a 4% reduction in shares outstanding since December 31st. At the April board meeting, Our board approved a $500 million increase to our share repurchase authorization. Even with this elevated share repurchase activity, our Fortress balance sheet remains intact. We exited the quarter with cash and short-term investments of $610 million and no bank borrowing. Now I'll quickly review our first quarter 22 financial performance in more detail. Our first quarter net sales were generally in line with our internal plan. When combined with strong gross margin performance and lower than planned SG&A expenses, diluted earnings per share exceeded our expectations. First quarter net sales growth was broad-based. Both our DTC and wholesale businesses increased 22%. Within our DTC business, brick and mortar increased 22%, and e-commerce increased 21%. Gross margin contracted 170 basis points, with the largest driver being higher freight expenses. Gross margin performance was ahead of our internal plan, primarily driven by a favorable full-price selling environment. SG&A leverage was able to partly offset gross margin pressure, resulting in only a 30 basis point decline in operating margin compared to first quarter 21. Diluted earnings per share increased 23% to $1.03. I will now review first quarter 22 financial performance and reference year-over-year comparisons versus the first quarter of 21, unless otherwise noted. U.S. net sales increased 23%, with our DTC and wholesale businesses both increasing low 20%. Favorable weather early in the quarter fueled strong late season cold weather product sales. As the quarter progressed, the combination of lean spring 22 inventories at retail and the anniversary of prior year government stimulus resulted in sales growth moderating in March. Our USDTC business comped positively across all channels. Traffic levels in our brick and mortar stores continued to improve as consumers returned to in-store shopping. We achieved an important milestone in the first quarter with our U.S. outlet store traffic returning to pre-pandemic levels. U.S. wholesale growth reflects higher shipments of our robust Spring 22 order book. Sales growth would have been even higher had it not been for later receipts and shipments of Spring 22 product. Overall, these delays were largely in line with our expectations. It's too early in the season to get a good read on Spring 22 sell-through at our retail partners, as many are still processing our shipments. With that said, we've been pleased with our recent DTC sell-through. We anticipate being well-positioned with merchandise to meet consumer demand during the important spring holidays and summer sales months. For my review of international markets, I'll reference constant currency net sales growth rates. During the first quarter, most regions continued to see favorable recovery trends. Latin America, Asia Pacific region, or LAAP, net sales increased 14%. China was flat in the quarter as favorable cold weather sales were offset by the impact of recent mandatory quarantines related to the continued COVID-19 outbreak in that region. While the recent surge in virus cases creates near-term uncertainty, Long-term, we remain focused on driving growth and enhancing the consumer experience in this important market. Japan increased mid-teens percent, reflecting favorable weather this year and the lapping of state of emergency declarations, which hindered sales in the prior year. Korea grew high teens percent, reflecting favorable weather and strong outward performance. LAP distributor markets were up mid-60%, driven by shipment of higher spring 22 orders. Europe, Middle East, Africa region, or EMEA, net sales increased 42%. This was driven by robust growth in both the Europe Direct and EMEA distributor business. Europe Direct grew high 30%, fueled by a strong recovery in consumer demand across our wholesale and DTC businesses. Our performance in Europe Direct markets has been encouraging, and we've seen minimal impact from the Russia-Ukraine conflict in these markets to date. Our EMEA distributor business was up low 60%, driven by shipments of higher Spring 22 orders. The bulk of our Spring 22 shipments to our Russia-based distributor occurred in fourth quarter 21. A small portion of these Spring 22 shipments occurred in the first quarter 22 prior to the onset of the conflict. Canada net sales increased 27%, with broad-based growth across DTC and wholesale. Growth was led by our DTC brick-and-mortar business, which benefited from the anniversary of prior year temporary store closures. Looking at performance by brand, I thought I'd break from tradition and start with Sorrel this quarter, given its outstanding performance. Net sales increased 37%, despite supply challenges driven by strong wholesale and DTC performance. In addition to favorable cold weather product sales, we continue to see year-round styles gain traction. The Connecticut Impact lace sneaker was the number one style in terms of units sold on sorel.com, highlighting the brand's growing presence in the multi-billion dollar sneaker category. As consumers return to in-person social activities, Sorel has seen a tremendous resurgence in their wedge category, led by the Out and About collection. Sorel recently partnered with LA-based Alfred Coffee to create a limited edition collection. Both Sorel and Alfred keep people moving forward, and this collab was designed to keep for those people on the go. The collection is inspired by Alfred's two most popular beverage, their world-famous iced vanilla latte and iced matcha latte. We see a clear path for Sorrel to be a billion-dollar brand, and we are investing in demand creation and product to fuel that growth. Turning to the Columbia brand, net sales increased 22% in the first quarter. Growth was broad-based across outerwear, footwear, and sportswear. On the innovation front, Our Spring 22 product line includes the launch of several new differentiated technologies and products. We introduced OutDry Extreme Mesh Fabric, which features next to skin comfort, ultimate breathability, superior waterproofness, and no added PFCs. In footwear, we launched Techlite Plush, our pinnacle cushioning experience. This responsive, extra-light foam provides long-lasting cushioning, while an elevated midsole design improves heel-to-toe transition and maximizes comfort over uneven terrain. We've also combined two of our top warm-weather technologies in the new PFG Terminal Deflector Ice Hoodie. It utilizes OmniShade Sun Deflector to deflect sunlight and OmniFree Zero Ice to cool and wick moisture away from the body. Applied to our new lightweight fabric, these two technologies deliver game-changing sun protection and cooling performance. On the product partnership front, Columbia partnered with Kith, a New York-based boutique, to launch an exciting spring collection in select U.S. and international markets. The collection featured iconic Columbia products and technologies, interpreted through the Kith design lens. The collaboration honored our outdoor heritage while engaging a younger audience. Several of the top styles sold out online within an hour, attesting to the equity of the Columbia brand in that space. Columbia celebrated International Women's Day by highlighting women who inspire us, from the employees in our Women's Leadership Initiative to our founder, Tough Mother, Gert Boyle. Kurt's fierce spirit, no-nonsense humor, and high standards still guide us to this day. Columbia continued our partnership with nonprofit Girl Trek, which aims to unite black women by creating opportunities for them to walk together. In February, Columbia-sponsored athlete Bubba Wallace kicked off the NASCAR season with a second-place finish at the Daytona 500. At the event, Columbia hosted an interactive booth showcasing Bubba's number 23 car wrapped in an OmniHeat Infinity paint scheme, as well as our recently released Bubba Wallace collection. Bubba collaborated with our product team to select fabrics, colorways, and design details to create a distinct collection inspired by his lifestyle and race team. The booth also featured a life-size replica of Intuitive Machines' Lunar Lander, which utilizes OmniHeat Infinity technology. The Lunar Lander will carry that technology and Columbia branding to the moon in the coming months. Columbia will be the primary sponsor on Bubba's car in three races this year. At the recent Bristol Motor Speedway's Dirt Race, Bubba's car featured a retro-inspired theme capturing the essence of iconic Columbia styles with neon colors and bold color blocking. Congrats Bubba on the strong start to the season. We would also like to applaud another of our Columbia ambassadors, Luke Combs, who recently won country artist of the year at the I Heart Music Awards. Luke and his wife are avid outdoors people, and we're excited to partner with him on an upcoming hunting collection. I'd like to congratulate Columbia sponsored athlete, Cassie Sharp, who won silver in the women's half-pipe competition at the winter Olympics. This is an especially incredible achievement as Cassie spent most of the last year recovering from an injury. Our sponsorship of the USA curling team is off to a tremendous start. The Columbia uniforms and our logo were prominent throughout several weeks of Olympic competition. and the events captured the attention of new and avid curling fans alike. I would also like to announce the hiring of Pri Shumate as the Chief Marketing Officer for the Columbia brand. Pri has extensive background in driving demand creation in multiple consumer categories, and we're excited to have her leading the marketing efforts of the largest brand in our portfolio. Shifting back to our emerging brands, Prana net sales increased 4%. Sales growth in the quarter was constrained by late receipt of spring 22 inventory. Recently, Prana and Sorrel teamed up for an apparel and footwear collab. This new collection includes sneaker and sandal styles that feature the iconic design and comfort that Sorrel is known for, and an elevated active apparel collection with Prana's sustainability ethos. David Wiltshire- mountain hardware net sales increased 5% in the quarter sales growth was constrained by late receipt of spring 22 inventory, resulting in some shipments moving into the second quarter. David Wiltshire- As a result, we anticipate mountain hardware second quarter net sales growth to exceed first quarter performance. David Wiltshire- For spring 22 mountain hardware introduced the new core air shell collection. This ultralight, ultrapackable stretch layer keeps wind and water out, while its super breathable fabrics provide a near weightless feel. I'll now discuss our updated 2022 financial outlook. This outlook and commentary includes forward-looking statements. Please see our Form 8K and CFL Commentary and Financial Review presentation for additional details and disclosures related to these statements. The operating environment remains dynamic with significant growth opportunities as well as ongoing supply chain and inflationary pressures. We are reiterating our 16 to 18% year-over-year net sales growth outlook. We have removed any future sales to our Russian-based distributor from our outlook. This equates to about a 2% headwind to full-year consolidated net sales. We were able to offset this headwind, given that our Fall 2022 order book has strengthened in many other global markets since our last call. As we noted, when we gave our initial 2022 financial outlook, we have calibrated the forecast we are giving you today to reflect ongoing supply chain bottlenecks as well as economic and market uncertainties. To the extent we can mitigate these supply chain constraints or market conditions allow, we see potential upside to our financial outlook. Gross margin is expected to contract approximately 130 basis points to approximately 50.3 percent. We expect SG&A expenses to grow at slightly slower rate than net sales inclusive of strategic investments we're making to drive long-term profitable growth. We expect operating margin to be in the range of 13.2% to 13.6% compared to 14.4% in 2021. Based on our year-to-date share repurchases, we now expect our diluted share count for the year to be 63.6 million shares. This results in a diluted earnings per share outlook of $5.70 to $6, up 20 cents from our prior outlook. For the second quarter, we anticipate mid-single-digit net sales growth and near break-even earnings. This lower level of sales growth reflects the removal of Fall 22 shipments to our Russia-based distributor, as well as the impact of the rise of COVID-19 cases in China. Quarantines and closures across several regions in China have reduced near-term consumer demand in that market. As we highlighted in our last call, we will be hosting an investor day at our campus here in Portland this fall. The date has been set for September 22nd. We look forward to showcasing the brand, the strategies, and exciting products that are fueling our growth. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. And we're investing in our strategic priorities that will drive brand awareness and sales growth through increased focused demand creation investments. Enhance consumer experience and digital capabilities in all our channels and geographies. expand and improve global direct-to-consumer operations with supporting processes and systems, and invest in our people and optimize our organization across our portfolio of brands. That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, could you help us with that?