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?

Absolutely. Thank you. Ladies and gentlemen, the floor is open for questions. If you have any questions or comments, please indicate so by pressing star 1 on your touchtone phone. Pressing star two will remove you from the queue should your question be answered. And lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Once again, that's star one if you have a question or comment. Okay, the first question is coming from Bob Jabal with Guggenheim. Your line is live.

Hey, Bob. Tim, you talked about the order books improving since the last time we talked. Can you elaborate a little bit more on that? And I think just in terms of how you see the inventory flow, your inventories that you have on hand, but where you see retail inventories are, if you could give us a little more color on that, that would be helpful.

Certainly. We take the bulk of our orders for seasons well in advance. So as an example, fall 22 we took the bulk of the orders and call it October November December and to a certain extent January but we take orders beyond that period clear into them you know during the during the season itself so we have a visibility to the order book all the way through and it's it was quite strong and strengthened all the way through the order taking cycle so we feel very comfortable where we are with the book and We also know that based on the amount of inventory we were able to deliver for fall 21 and the late winter weather in early 22, that we're going to have a very receptive group of retail partners and consumers looking for winter merchandise.

And Bob, geographically, that growth in the order book, I'd say there's a high concentration of growth that's focused in North America, where we've been stronger, as well as in our European direct business. Got it.

Okay. And I guess just in the inventory that you have on hand, can you just tell us, with the increase in the order book, how are you approaching your DTC, your outlet stores, a little bit more on the inventory as you think about the rest of the year?

Yeah, we're buying... you know, what our customers want from us, what our wholesale customers want from us, and we're buying merchandise also for the stores. But we have the ability to put that merchandise, if it was required, into the outlet stores later in the season. So, you know, we have a number of levers we can pull in the event that we've got inventory backup for whatever reason. Got it.

Thank you very much.

Thanks, Bob. Okay, up next we have Jim Duffy with Stifel. Jim, your line's live.

Thanks. Hi, guys. I wanted to start with a question on the footwear business. First off, congratulations on the Sorrel momentum. Can you speak to the gender mix within Sorrel and how that's changing? Is it one gender or the other that's really driving the momentum? And then the strong footwear outlook for the year, is that led by Sorrel or is it balanced and Columbia's participating as well? And then lastly, I guess, what's the impediment to securing more capacity? Is it simply that the larger brands are getting the priority as capacity comes online? Certainly.

Well, let me tell you that it's led quite evenly across the two brands, but Shirell is by far the fastest growing, and it is primarily a women's product. I'll have the numbers wrong, but the scale is about right. This is probably in the neighborhood of 70%, 75% women's product in Sorrel. And especially in the first quarter, we had the benefit of some winter merchandise, but it's really the sneakers and the wedges that are leading for Sorrel what's happening here. So we're very excited about that brand and the possibilities for it. Columbia's product line has been led with the Newton Ridge, which is a hiking style, one that's been very popular throughout the pandemic and before. It's one of our mainstays, and it's a terrific style and done very, very well for the company across the board. And then as it relates to enough inventory, we're concerned specifically in the – in the wedges for Shirell, there are specialty factories that need to build that merchandise. So it's more narrow for the company than would say the opportunities for the sneaker business, which is, which are factories are much more, there are more factories able to make that kind of product. But we're building relationships and strengthening our relationships with our Asian partners on footwear production. And we expect that in 23 we'll have as much as we want, which is frankly more than today.

Yeah, Jim, and just one other comment. As it relates to our full-year outlook for footwear, you know, it's a mid-20% growth, and it's relatively balanced across both Columbia footwear and Sorrel. In the prior quarter when we reported, I think we indicated that Sorrel would be up in the – at or near the 30%. That's come down a little bit, and that's mostly – or that's entirely – supply side effects with the anticipation of some of our fall 22 production being a little bit late relative to the market. If it happens to get in a little bit earlier, certainly what we're seeing from a consumer demand standpoint, and you see it in the first quarter where demand's quite strong, but balanced growth between the two brands.

Thank you, guys. Operator. Apologies for that.

The next question is coming from Lauren. Your line is live.

Oh, good afternoon. Thank you very much for taking my question. Um, I wanted to ask about China. Um, China's a mid single digit percentage of your overall sales. What are you baking into, um, the two to guide of mid singles for China? and maybe for overall for the year in your revised guide. And then I would love to hear if you're seeing, I know China's an important hub for supply chain, if you're seeing any disruptions or are you seeing that the factories remain open with the strict COVID policies in China?

Certainly. Well, we all know that there's been quite an amount of closures of almost everything in certain sections of China, and so we're not immune from that. Our headquarters are in Shanghai, and our distribution center is in Shanghai, so we've been hampered there certainly of late by the zero tolerance policy. We expect that China still will be a very important marketplace for the company, and we're treating it as such. Although the current opportunities that we expect to happen in that market are baked into the guidance we've given you today. As it relates to the supply chain, we have a very small amount of finished goods merchandise that enters the U.S. from China. But China is still a significant provider of componentry and raw materials for the company. to be used in construction and other markets around the world. So we have some visibility on the supply side for our factories, and what we've given you today would indicate where we expect the final deliveries of merchandise to be.

Yeah, and then, Laurent, does it relate specifically to Q2? That's the one quarter where I would anticipate China being the most impacted. As you look at the first quarter on a constant currency basis, we were flat. We had a really solid January, February. So we were really encouraged by consumer demand early in the year. But as the quarantines and lockdowns began to take effect, that had a pretty detrimental impact on parts of our business and in different geographies. So we've taken the Q2 down quite significantly. And then obviously there's a fair amount of uncertainty and we've baked in that into our outlook as well as best as we can.

Okay, very helpful. And then with 2Q, you're guiding revenues mid-singles, gross margins down 200. So on a year-over-year basis, it looks like gross profit will be equal to last year. And then last year, 2Q, you did about 61 cents of EPS. So I'm just trying to understand how to square away why you would have minimum EPS contribution to Q. Is there something like one-time expense that you're baking into the SG&A or just outsized profitability from China? Just trying to figure that out to understand the 1H EPS guide.

I think, Laurent, it's effectively, you know, when you look at our Q2 outlook at plus 5% on the top line, this is really a function of the top line. in changing our outlook relative to what we previously provided, because we previously indicated that the first half would be up high teen to low 20 and pretty balanced between the first and second quarter. And with us having removed sales to our Russian distributor from our outlook, coupled with what we just spoke of related to the downward revisions to our China business, those are fundamentally the two most significant changes we've made to our outlook. Aside from that, in the first half, we've actually increased sales our outlook from a gross margin standpoint, as we've seen slightly lesser effect from ocean freight relative to what we previously estimated and continued strong full price environment in which we're not as promotional. So I think it's really a function of that top line and fixed operating costs of the business that create that break-even point that you see in the second quarter.

Very helpful. Thank you, Jim. And looking forward to the investor day in September.

You bet. Thank you. The next question is coming from Jonathan Kompf with RW Baird. Your line is live.

Yeah, thank you. Maybe more of a near-term question when you look at the U.S. or your Europe direct business. Any insight to what you're seeing from consumer behaviors more recently? And then when we think to the back half and the higher sales growth rate relative to Q2, could you maybe just bridge some of the pieces to think about to the higher overall revenue growth rate?

Yeah, go ahead.

Yeah, it relates specifically to the U.S.-Europe from a direct-to-consumer standpoint more recently. We saw solid demand throughout the first quarter. As we began to lap certain of the economic stimulus, certainly you'd expect that growth would be a little bit more subdued, and it was for us, but we didn't go backwards. It was relatively on par with the elevated levels we achieved last year, which we're incredibly pleased by that. Europe, likewise, very strong demand throughout the quarter in the DSC business. And then, as we've planned it for the balance of the year, and as we've previously discussed, we've moderated some of that growth that's factored in to the outlook that we've provided and how we've thought about that in the back half of the year.

Yeah, and I just might comment that the growth in the outdoor business during the pandemic very significant, and we expect that that's going to continue to grow. People will spend more time outdoors, as well as the casualization of the workplace. So I know we're out here in the hinterland in the West, but there's not many neckties in our building.

Yeah, there's a lot fewer here as well. But maybe as a follow-up question for the investor day, since it'll be your first I know you've signaled the pathway to a billion dollars or more of sales for Sorrel, but are you planning to sort of lay out longer-term financial targets for the whole business? And when we think of the Columbia brand, can you share kind of the main drivers that you see directionally for some of the growth drivers after 2022? Yeah, certainly.

It will be much more expansive when we get to the investors day, but we will have presentations from all of the brands during that period. And they'll be focused primarily on the products that we're providing and how we expect our products to evolve and go forward with the consumer. We're also going to talk about, specifically as it relates to the Columbia brand, the increased demand creation spend and focus that we're going to be talking about. So, you know, we've talked for every quarter really about the increased investment and demand creation and we'll be able to show you our plans as it relates to that. We believe that we've got the right product and the right investment in infrastructure to provide a very large growth for the company. We just need to supercharge the brand awareness on all brands, but specifically on the Columbia brand.

And then, John, I think to your question on long-term, certainly we'd look to include in that investor day you know, our point of view in how we're driving growth across each of the brands and what that equates to from an overall growth and earnings algorithm perspective.

Great. Looking forward to that. Thanks again.

Thank you. All right. Up next, we have John Kernan with Cowan. Your line's live.

Good afternoon. This is Krista Zuber on for John. I just wanted to circle back first on the SG&A and then I have one follow-up. So the prior guidance, if I understand it, was for first half SG&A to grow at a slightly slower pace than sales, and obviously today it's been revised to somewhat faster than sales growth. Could you just give us a sense of what, for the second half, I guess, of 22, is it potentially possible then to have some leverage in order to get to the full year guide, which is, I guess, modest leverage for the full year.

Yeah, we do have modest SG&A leverage planned for the full year. There's a slight increase in our SG&A outlook for the year, and that's going to be mostly related to inflationary pressure. And within inflationary pressure, that's impacting many facets of our business, not the least of which is wage pressure, and we've made wage adjustments in the business, and certainly you're seeing that as it relates to ocean freight, and we've also seen increases in oil prices that are equating to fuel surcharges. Much of that's up in our gross margin, but it's effectively the inflationary pressure that's impacting that SG&A line.

Okay, great. Thanks. And then just on the pricing actions, I think I recall that for the first half you were looking for, at least for spring 22, was sort of a mid single digit pricing increase. And then planning sort of high single to low double for fall 22. I guess, any sort of pushback or what's the reception been so far? And do you anticipate further increases into 2023 as you start to build orders initially for spring 2023? Thank you.

Yeah, well, we don't, obviously we don't have any any consumer reaction to fall 22 yet, but the reaction from our dealers, which we take as a plebiscite for the consumer, was quite good, and that's reflected in the strength of our order book. For spring 22, the modest increases have not yet been impactful, and so our expectation is that consumers are expecting inflation across the product categories that they buy, and they've been responsive so far.

Okay, up next we have Mitch Kometz with Seaport Global. Your line is live.

Yeah, thanks for taking my questions. Got a couple. First off on gross margins, so you guys obviously raised your outlook for the first half, and Jim, I think you mentioned that was largely due to ocean freight and full price becoming better than previously expected. I haven't been able to do the math on the back half yet as to what's implied, but any changes to your gross margin on gross The back half and any thoughts on how you view full price selling promotions, ocean freight, things like that in terms of the back half versus maybe what you were thinking off the last quarter?

I think the changes in the back half are going to be pretty modest. Most of what we changed in the gross margin outlook is going to be in the first part of the year due to the two factors I talked about in terms of the ocean freight and the less promotional effect. And as we look out at the the balance of the year here. We're normalizing the effective promotions and building in a bit promotions as we lap those. We also, in the last month or so here, finalized our ocean freight contract, so that gives us some confidence in expectation of not only securing allocation directly with the seam ship lines, which is a bit inverted relative to the freight forwarders that we had to book through last year, so it should be more efficient for us, And then with regard to the rate in those negotiations, you know, we've been, over the course of the last several months, our ocean freight rate's been four times what you would consider kind of normal or prior levels. And with the negotiations, we'll be in much better shape. You know, we certainly won't be back down to pre-inflationary rate increases, but much further below where we are today. So that'll be an offset. as a gross margin tailwind, particularly as we get out into the fourth quarter. And that's essentially the way we looked at it when we last gave an outlook in February.

I think your prior thinking on pricing for fall was that the increases would offset the costs with ocean freight being one of them. I assume the pricing hasn't changed. So are you now thinking that you more than offset those costs, or are you now seeing maybe more inflationary pressures on kind of wages around materials that are maybe offsetting any benefits from ocean freight versus kind of your prior thoughts.

Mitch, we're seeing, as you know, we're seeing increases across the board in the SG&A functions as well as the cost of labor, et cetera.

Yeah, if we're just isolating strictly on the product input costs, excluding freight, we've, covered those increase those we've more than covered those increases with with price and so with freight coming down in the latter part of the year with our new ocean contracts that will provide a bit of a tailwind so we would anticipate that third quarter continues to be a bit of a margin headwind overall but by the time we get to the fourth quarter knowing that that ocean freight's playing a little bit more in our favor that our fourth quarter gross margins are actually better year on year than last year okay and then just a quick question on sorel

Tim, you highlighted, obviously, you led with it with your brand discussion. You talked about it being a billion-dollar opportunity. You highlighted wedges and sneakers. Is there any way you can say, you know, what the split is these days between kind of spring-summer versus fall-holiday in terms of the mix and what that opportunity might be over time?

Well, yeah, I certainly – the winter product that Surreal is so famous for, and it's historically been the exclusive product that they've they've made is so expensive that we can't offset completely with spring with the pricing on those sneakers. But the opportunity globally really to increase the revenue on Sorrel is going to be led by the sneaker and the more fashion styles. So today I'd have to, I'd have to get back to you with a, with a more accurate split, but certainly the future will be much higher women's component and much higher sneaker and fashion footwear.

Okay. Thanks, guys.

Good luck. The next question is coming from Camilo Lyon with BTIG. Your line is live.

Hi. This is Mackenzie Boydston on for Camilo. Thanks for taking our questions. My first question is just on supply chain. I know you just talked about ocean freight costs kind of alleviating the back half, but in terms of actual delays you're seeing at the ports, can you kind of talk about where that kind of stands today? Has it improved? Has it worsened since relative to last quarter?

There's been modest improvement, but it's still, you know, far and away, overall logistics lead times are far greater than they were relative to, you know, where we were just over a year ago. And the way we've thought about that as we look out at the balance of the year, it's really keeping it relatively stable with maybe some modest improvement, which is part of the reason why when we think about our outlook for the year and the order book that we've taken from our wholesale customers and the revenue forecast we put out there, we have adjusted that in part just due to certain of the uncertainty and risk associated with the supply chain than just overall economic environment.

Perfect, thanks. And then in terms of, I think I saw in the CFO presentation, $20 million of incremental education investments that you're making. Can you just kind of talk about in detail kind of what those would be? I think there'll be some digital, but just any color there would be helpful.

Yeah, there's a handful of investments that are included in that $20 million. And it's going to be comprised of the combination of digital incremental demand creation as we bring our demand creation up to 6%. And then we've got some retail stores, branded stores that we're opening in the year that are also contributing to that. From a digital perspective, I would say that digital is kind of far-reaching across the company. But predominantly, we want to make sure that we're focused on the product, on the marketing, on the consumer. So amongst the tools and capabilities is digital. capturing an improved level of information around the consumer and being able to have data and analytic capabilities to be able to feed that back into our product engineer marketing team. So that's an example of one of many digital-based investments that we're focused on.

Great. Thanks so much.

Up next, we have Mauricio Cerna with UBS. Your line is live.

Great. Thanks for taking my question. I wanted to ask, I don't know if you have talked about or given a figure about the revenue impact from supply chain constraints and specifically in the U.S. wholesale business. And also, I wanted to ask about the gross margin outlook. In the CFO commentary, it mentions that one of the factors that would drive the decline or the contraction in gross margin is unfavorable unfavorable regional mix shift. So I'm trying to understand where would that be coming from, you know, because from what I can recall also, it says that the U.S. and Canada are the markets that will likely outperform in terms of sales growth. Thank you.

Yeah, I think on the region and mix or region and channel mix side of your question, part of that is due to the fact that our wholesale business is growing at a faster rate than our direct consumer business. on the year. And that's implied in the outlook. And that's a little bit lower of a gross margin. So that's going to be part of the channel component of that. And then as you think about the region, I think as we look at our region mix, our highest gross margin region is going to be in the Latin America, Asia Pacific region. And that's just given the higher concentration of retail-based businesses there relative to North America and Europe. And with North America and Europe growing at a faster rate, again, that's going to create a little bit of a a little bit of a mix shift. And then on the front part of that question, as it relates to the supply chain, Mauricio, can you ask that one more time? I kind of missed the context of it.

Yes, if you gave out any figures, what was the revenue impact from supply chains in the U.S.?

Yeah, nothing specific. And to the degree there are timing shifts, these are shifts of SPRING DELIVERIES THAT ARE COMING IN QUITE A BIT LATER THAN LAST YEAR, KNOWING THAT WE'VE BEEN IMPACTED BY LATER OR LONGER LOGISTICS TIMEFRAMES COUPLED WITH THE VIETNAMESE FACTORY CLOSURES LAST YEAR. SO WE'VE GOT REVENUE SHIFTING EFFECTIVELY OUT OF Q1 AND INTO Q2. YOU KNOW, WE PREVIOUSLY PROVIDED AN INDICATION THAT OUR SPRING ORDER BOOK WAS UP AT OR NEAR THE 30% LEVEL, AND YOU CAN SEE WE DELIVERED 20-PLUS PERCENT IN THE QUARTER. You know, that gives you a little bit of an indication of some of the shift. And then part of the reason why is you look at our second quarter outlook, it's plus five. You're not necessarily see that catch up. And that's in part because we've reduced the Q2 outlook for the combination of the Russia business and backing those sales out, coupled with the reduction in our China business.

Got it. Understood. And sorry, just one quick last thought. follow-up on on china uh you know does is your guidance i mean just trying to understand the guidance implies that you know at some point in three queues in q3 things uh normalized or like what is the time frame that uh that the company is considering in its in its guidance well we're certainly looking at the second quarter as being the the most challenged and and that due in part because we've got uh our wholesale dealers

Many of them have not been able to operate either, so we're not likely to ship the bulk or the remaining of our wholesale order book. As we get out into the third and fourth quarter, there's a lot of uncertainty. We certainly contemplate a recovery in that market, but not necessarily where we planned it coming into the year.

Got it. Thank you, and congratulations on the results.

Okay. Up next, we have Alex Perry with Bank of America.

Your line is live. Hi, thanks for taking my question. So I just wanted to ask a little bit on, you know, to give some more color on the phasing of the sales guidance. So the first quarter came in, you know, well above, but QQ comes down quite a bit. And then it seems like the back half comes up a bit. The QQ guide, is that all Russia and China? Is there something else sort of embedded in there? And then What are the assumptions in the rebound in the back half?

So as it relates to Q2, the takedown, it's almost entirely related to those two factors between Russia and China. To a lesser degree, there might be some timing shifts as we begin receiving and shipping our fall season in that June time frame, but that would be much smaller. And then, Alex, as it relates to the back half of the year, We do anticipate that our fall deliveries or fall inventory receipts and shipments are much earlier than they were last year, albeit not back to what we would consider normal levels. But with that in mind, that would skew revenue growth pretty heavily to the third quarter, still growing in the fourth quarter. And that's really going to be the acceleration of growth, if you will, in the back half of the year. A lot of that's just going to be driven by the strength of the overall wholesale order book or D2C businesses growing at a more modest rate in the back half of the year.

I also might point out that Q2 is our lowest quarter of the year from a revenue standpoint, so any slight changes in the mix will be impactful.

Great. And then could you just give us a little more color on maybe how the DTC business has trended in the quarter? I think you may have called out some moderation and growth in March. Was that mostly sort of stimulus comp? And then what is sort of embedded in the 2Q guidance in terms of DTC? Are you sort of assuming that that sort of trend rate, the moderation you saw in March sort of continues or what's sort of embedded in terms of DTC, I guess, both for the second quarter and for the balance of the year?

Yeah. Well, as you know, we consider ourselves to be a wholesale company, so we don't provide many of the matrix details that a retailer would provide. But we're seeing solid numbers out of our own DTC business, and it's impacted as well by the the delivery issues that we've been talking about during the call. So the expectation is that the business will continue to grow. And when we present our merchandise in our own stores the way we'd like to have it presented everywhere, we see great results.

Yeah, and Alex, maybe just a little bit more color. I mean, January and February were exceptional months, you know, aided, I think, in part by cold weather and months of pickings. speaking specifically to USD to C. And then March, you know, as we began to lap the stimulus, you know, business did not contract, you know, so we held our own. So we were quite encouraged by that, knowing the increase in volume during that stretch. And then just in the last two weeks as we began to get further away from when those stimulus checks are written and out to the public, you know, we've seen business be quite healthy and strong. And I think that's a testament to more recently getting our spring product out to retail and on the floor for the consumer.

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

Thanks. Once again, if there are any remaining questions, please press star 1 on your touchtone phone. Up next, we have Paul Leves with Citigroup. Your line is live.

Hey, thanks, guys. Can you just quantify what the size of the Russia business was in the second quarter of last year, and is that business typically greater in 2Q versus the quarters in the back half, and any quantification you can provide there? And then also, I think you mentioned in your presentation there were some year-over-year unfavorable changes to bad debt, and I'm just curious if you can talk a little bit more about what drove that. Thanks.

Yeah, as it relates to Russia, you know, we'll get down into quarterly breakdown of that. You know, there was an indication that Tim provided in the prepared remarks that, you know, it equates to 2% impact on our full year outlook for a full year basis. I would say that the second quarter is typically the most significant shipping quarter into the Russian distributor because that's when we ship the bulk of our fall product. So it'll have a disproportionate impact, which you see that in the outlook that we're providing. And then as it relates to the unfavorable comparisons on bad debt, that's going to largely relate to the fact that in 2020, we booked up reserves for bad debts in light of the risks from the credit environment in the midst of the pandemic. In 21, we released some of those reserves because things didn't pan out as bad as we thought they would. So we're just lapping against more difficult comps having released reserves last year and more of kind of a normalized environment, if you will, this year.

And where are your current reserves relative to like a pre-pandemic sort of level?

They're on par with where we were from a pre-pandemic perspective, and that'll be in our Maybe I think it's in the release document. If you go back into the balance sheet there, you'll see it's on par with where we were back in 2019. Got it. Great. Thanks, and good luck, guys. Thank you.

If there are any final questions, please press star 1 on your touchtone phone. Okay, we have no further questions in queue. I'd like to turn the floor back to management for closing remarks.

Well, thank you all for listening in. We're very anxious to show you the products and plans for the future of the business in September right here in Portland, so we hope you can all make it. Thank you for your attention.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.