Columbia Sportswear Company

Good afternoon, ladies and gentlemen, and welcome to the Columbia Sportswear Second 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 Burns. Sir, the floor is yours.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second 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, Chief Executive Officer Tim Boyle, Executive Vice President and Chief Financial Officer Jim Swanson, and Executive Vice President and Chief Administrative Officer Peter Bragg. 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. 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 update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to 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 earnings release and the appendix of our CFO commentary and financial review. Following 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.

Hey, thanks, Andrew, and good afternoon, everyone. I hope everybody is well. As I review our first half 2022 financial performance and the current environment, I'm confident that our strategies are working. and we have tremendous long-term growth opportunities ahead. In the first half, sorrel net sales surged 33%. Columbia drew 12%, Mountain Hardware grew 11%, and Prada grew 3%. These results reflect the strength of our combined brand portfolio. The Columbia brand's differentiated innovation, value proposition, and outdoor heritage uniquely position the brand to capitalize on the popularity of outdoor activities. Sorel continues to outperform the marketplace, led by the brand's bold new summer and year-round styles. Mountain Hardware's product-driven resurgence is underway, with innovation fueling continued growth. Rana's leadership continues to sharpen the brand's focus on the opportunities ahead. Globally, trends vary greatly by region. Canada, Europe Direct, Japan, and Korea all had excellent first-half performance. These markets continue to realize a healthy pandemic recovery curve with strong consumer demand. In other regions, our business was impacted by external headwinds. In China, the impact of recent zero COVID policies restrictions resulted in a sharp net sales decline. As anticipated, our EMEA distributor business also declined substantially, reflecting the impact of the ongoing Russia-Ukraine conflict. In the U.S., we generated strong first-half net sales growth despite later receipts and deliveries of Spring 22 product, which constrained inventory availability and sell-through. The U.S. market also faced difficult comparisons as we anniversary government stimulus, which boosted consumer demand last year. We remain focused on unlocking the growth opportunities we see across all regions as we navigate these market-specific challenges and supply chain constraints. As we look forward, I believe it's prudent to take a more conservative approach to our financial outlook for the balance of the year. As the second quarter progressed, it became increasingly clear that the operating environment is evolving. In the U.S., inflationary pressures, rising interest rates, and recession fears are weighing on consumer and retailer sentiment. Our updated outlook contemplates higher order cancellation risk and more conservative DTC assumptions. It also assumes a more promotional environment as the marketplace seeks to rationalize inventory levels. We have navigated numerous economic cycles in our company's 84-year history. I'm confident that our differentiated brand portfolio, operating discipline, and strong financial position will enable us to effectively manage this cycle. We're monitoring retail trends and our order book against this uncertain backdrop. I'm confident in the quality of our inventory, which includes a high proportion of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. We also have a fleet of outlet stores, which enables us to sell remaining high-quality inventory profitably. As the demand environment shifts, we're focused on restraining expense growth to manage profitability. I'm excited to launch our innovative product into the marketplace as we head into the important fall season. Outerwear and winter merchandise inventories are very lean at retail after an exceptional sell-through last season. We have a robust fall 22 order book to deliver against, and retailers are keen to get initial floor sets in place ahead of weather-driven consumer demand. I'll provide more detail regarding our updated outlook later in the call. From our review of second quarter 2022 financial performance, I'll reference year-over-year comparisons versus second quarter 2021, unless otherwise noted. When reviewing second quarter year-over-year growth rates and margin performance, it's important to remember that the second quarter is our lowest volume sales quarter and small variances can result in large year-over-year changes in profitability that may not be indicative of the underlying business trends. Overall, our second quarter results were mixed. Net sales growth of 2% reflects robust growth in many markets, tempered by essentially no Russia-based distributor shipments, zero COVID restrictions in China, and foreign currency exchange headwinds. Net sales were below our outlook, primarily reflecting shortfalls in the U.S. and China. Despite this shortfall, we were able to slightly exceed our operating income forecast. By channel, wholesale net sales decreased 1%, including the impact of substantially lower Russia-based distributor net sales. Excluding distributor markets, global wholesale increased low teens percent, reflecting shipments of our robust Spring 2022 order book Our DTC business grew 5% year-over-year in the second quarter, driven by 11% brick-and-mortar DTC sales, partially offset by a 5% decrease in DTC e-commerce net sales. Brick-and-mortar growth exceeded e-commerce growth in the quarter in part due to consumers' increased desire to shop in-store. E-commerce sales declined in the quarter due to lower Prana and China e-commerce sales. Gross margin contracted 240 basis points, with the largest driver of contraction being higher inbound freight expenses. Gross margin performance was roughly in line with our forecast, and the overall promotional environment remained favorable during the quarter. SG&A expenses increased 7% and represent 48.7% of net sales, compared to 46.2% of net sales in the second quarter of 21. The increase in SG&A expenses reflect broad-based growth across the enterprise to support sales growth as well as technology and supply chain capabilities. Personnel expense growth was driven by incremental headcount as well as wage increases. This performance resulted in a 1.5% operating margin and diluted earnings per share of $0.11. I will now review net sales performance by region. for international markets, offers constant currency growth rates. Please note that strength of the U.S. dollar resulted in a 10-point translation headwind to international direct markets and a 2-point headwind to consolidated net sales. U.S. net sales increased 9%, with wholesale increasing low teens percent and DTC increasing low single-digit percent. U.S. wholesale growth reflects shipments of our robust spring 22 order book. Early season sell-through of spring merchandise was impacted by later shipments of inventory stemming from Vietnam factory closures in 21 and logistic delays. As the spring season progressed, mounting inflationary pressures and economic uncertainty appeared a temper demand in the marketplace. Retailer on-hand inventories increased year over year as we anniversary prior year inventory shortages. With higher marketplace inventories and a rapidly changing economic environment, retailers are rationalizing their inventory needs. Despite these pressures, retail product margins, retailer product margin remained healthy in the second quarter. Low single-digit USDTC growth reflected higher brick-and-mortar net sales, partially offset by a modest decline in e-commerce net sales. Our DTC business remained generally healthy across both channels in April and May before softening in June. Latin America, Asia Pacific region, or LAP, net sales increased 2%. China was down high 40% in the quarter as the market faced strict restrictions due to its zero COVID policy. Our China headquarters and distribution center are located in Shanghai, which was locked down for several weeks. In addition to store closures, we were unable to fulfill e-commerce orders for a lengthy period of time. Shanghai began reopening in June, several weeks later than we initially expected. Retail traffic trends are still recovering. On a positive note, the 618 online sales event was a success with double-digit year-over-year growth. Japan increased mid-30%, driven by strong consumer demand and the lapping of state of emergency declarations, which hindered sales in the prior year. Korea grew high teens percent, led by strong DTC performance. Improving retail operating efficiency is contributing to our success in Korea. The team continues to focus on enhanced in-store marketing and heightened SKU productivity. The pandemic has reinvigorated consumer interest in outdoor activities in Korea. During the quarter, Colombia participated in the Go Outdoor Camp Festival. Thousands of attendees celebrated camping and outdoor life and toured Colombia's high-energy installation. LAP distributor markets were up low double digits percent, driven by shipment of higher fall 22 orders. Europe, Middle East, Africa region, or EMEA, net sales decreased 30%. This decline was driven by substantially lower sales to our Russia-based distributor, partially offset by strength in our Europe Direct business. Europe Direct grew low 30%, fueled by Columbia brand momentum and a recovery in consumer demand. We experienced strong performance in brick and mortar across both DTC and wholesale channels. Robust growth with strategic partners in the sporting goods channel was notable. Our EMEA distributor business was down low 70%. Candidate net sales increased 74%, with high growth across wholesale and DTC as we anniversary prior year pandemic-related disruptions. Looking at performance by brands, Sorel was our fastest growing brand in the quarter. Net sales increased 24% despite supply chain challenges driven by strong wholesale and DTC performance. By category, growth was driven by year round and summer categories, including sneakers, wedges, and sandals. Sorel's potential to become a billion dollar footwear brand is evident, and we're investing in demand creation and product design to fuel that growth. Turning to the Columbia brand, net sales were flat in the second quarter. Strong growth in many markets was tempered by essentially no Russia-based distributor business, zero COVID restrictions in China, and foreign currency exchange headwinds. On the product partnership front, we're continuing our successful collaboration with Disney and Lucasfilm with another Star Wars offering. For this collection, which will be released in the coming days, we've combined the iconic PFG Tamiami shirt with elements of classic Star Wars comics. The shirt's print features legendary Star Wars characters Chewbacca, R2-D2, and Han Solo. Columbia recently collaborated with Mad Happy to launch a new Summer 22 Outdoors collection. Mad Happy is a global lifestyle brand on a mission to make the world a more optimistic place. The collection brings awareness to the connection between spending time outdoors and improving our mental health. The line features a variety of styles and silhouettes that incorporate Columbia's innovative outdoor technology. During the quarter, a number of Columbia products have been featured in consumer and industry publications. In apparel, Columbia's innovative sun protection technology was featured in Gear Patrol and Outdoor Gear Lab articles highlighting the Terminal Deflector Zero hoodie, the Silver Ridge long-sleeve shirt, and the PFG Title T hoodie. Columbia's Backbolt Fleece made Outside Magazine's list of best fleeces of 2022. In footwear, both Travel and Leisure and Outdoor Gear Lab featured the Newton Ridge hiking boots in their list of best hiking boots for women. Earlier this month, Columbia-sponsored athlete Bubba Wallace unveiled a bright new look to his number 23 car for the NASCAR Cup Series race at Road America. The car featured the PFG fish flag scheme with dozens of fish forming the red stripes of the American flag down the side of the car. The PFG fish flag is our top-selling baseball cap with millions of units sold such as slots. The ball caps are one of our fastest growing products. We believe this speaks to the consumer's brand affinity for Columbia, combined with a product that celebrates the love of country and outdoors. We will continue to bring products to market that celebrate places and build emotional connections with consumers. As we look forward to this fall, the Columbia brand's top global priority from a product and marketing standpoint is continuing to build momentum around OmniHeat Infinity. We will be running a worldwide integrated marketing campaign featuring OmniHeat Infinity as the gold standard in warmth, focused on how the technology works and why it matters for consumers. As you know, poly-fleece is one of the largest outdoor product categories. We believe the introduction of OmniHeat Helix this fall will bring disruptive innovation to this largely undifferentiated category. OmniHeat Helix is the first of its kind patented visible technology. It utilizes highly efficient insulation cells to maximize warmth and provide breathability. Shifting back to our emerging brands, Prana net sales increased 3%. Sales growth in the quarter was constrained by late restraint of spring 22 inventory. The Prada team is working to reposition the brand in the marketplace in the coming seasons. Mountain Hardware net sales increased 18%. The brand had several product highlights in the quarter. For spring 22, Mountain Hardware introduced the new Core AirShell Collection. This ultra-light, ultra-packable stretch layer quickly became Mountain Hardware's top-performing shell. The New York Times Wirecutter product review website concluded that Mountain Hardware's Mineral King Tent is the best two-person car camping tent. The tent features an ultralight suspension system and was described as one of the easiest tents in the market to set up. Before moving to our financial performance, excuse me, before moving to our financial outlook, I'd like to note the recent appointment of Christiana Smith-Shee to our Board of Directors. Christiana is currently the principal at Lovejoy Advisors, where she helps brands digitally transform their business. She also serves on the board of two other publicly traded companies. I look forward to leveraging her insight to help us grow our company. I'll now discuss our updated 22 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures relating to these statements. Based on the current environment and growing economic uncertainty, we believe it's prudent to take a more conservative approach to our financial outlook for the balance of the year. Supply chain challenges remain elevated and are anticipated to continue throughout the rest of the year. We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners. West Coast port labor contract negotiations could further complicate inbound freight logistics. We have diversified our port exposure and expect less than 40% of our second half inventory will go through West Coast ports covered by the ILWU labor contract. Our updated outlook contemplates higher order cancellations and a more conservative DTC assumption, as well as a more promotional environment as the marketplace seeks to rationalize inventory levels. We have also taken a more conservative outlook in China for the balance of the year as COVID restrictions are impacting the market. Following the invasion of Ukraine, we paused taking any new orders from our Russia-based distributor, for Russia, Ukraine, and Belarus. As we disclosed last quarter, the company had pre-existing contractual obligations for Fall 22 orders taken before the invasion. Given the uncertainty surrounding these Fall 22 orders, we previously removed any of those sales from our financial outlook. Our updated financial outlook now includes a portion of this distributor's contracted Fall 22 orders being realized in the second half of the year. Foreign currency exchange headwinds are now expected to unfavorably impact full-year net sales growth by 3 percent and diluted earnings per share by 15 to 20 cents. Based on these and other factors, we now forecast net sales to grow 10 to 12 percent year over year. Gross margin is expected to contract between 180 and 210 basis points. SG&A expenses are forecast to grow roughly in line with net sales. We expect operating margin to be in the range of 12.1% to 12.8% compared to 14.4% in 2021. This results in a diluted earnings per share outlook of $5 to $5.40. Based on our year-to-date share repurchases, we now estimate our diluted share count for the year to be 63 million shares. For the third quarter, we anticipate net sales growth of approximately 20%. This high level of sales growth is primarily driven by the sell-in of our Fall 22 order book and modest DTC growth. As we highlighted on our last call, we'll be hosting an investor day at our campus here in Portland on September 22nd. We look forward to showcasing the brand strategies and exciting products that are fueling our growth. Invitations for this event will be sent out in the coming days. Before my closing remarks, I'd like to highlight the fact that we recently released our 2021 Environmental, Social, and Governance Report, which is available on our website. I'd encourage you to review the report, which outlines the progress and accomplishments that we made empowering people, sustaining places, and promoting responsible practices. In summary, I'm confident we have the right strategies in place to navigate this dynamic environment and unlock the significant growth opportunities we see across the business. We're investing in our strategic priorities to drive brand awareness and sales growth through increased focused demand creation investments, enhance consumer experience and digital capabilities in all of our channels and geographies. expand and improve global direct-to-consumer operations with supporting processes and systems and invest in our people and optimize our organization across our portfolio of brands. That concludes my prepared remarks. We welcome your questions. Operator, could you help us with that?