Columbia Sportswear Company

Greetings. Welcome to Columbia Sportswear fourth quarter 2022 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. You may begin.

Good afternoon, and thanks 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 CFL 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 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 for 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 appendix for CFO commentary and financial review. Following our prepared remarks, we will list 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 call the call over to Tim.

Thanks, Andrew, and good afternoon, everyone. I'm incredibly proud of the financial performance and accomplishments that our global workforce delivered in 2022. For the year, net sales grew 11% to a record 3.5 billion. On a constant currency basis, net sales increased 14%. I'd like to thank our dedicated employees whose tremendous efforts enabled these results. We achieved these results while navigating numerous supply chain challenges. We know there's a strong demand for our products and our recent financial performance could have even been higher absent the product delivery delays we experienced. Columbia and Sorrell led the charge with both brands generating record net sales and double-digit constant currency growth in 2022. Geographically, we have broad-based momentum. Our largest market, the US, grew 12%. On a constant currency basis, International growth highlights include Europe Direct surging 31% on the year and Canada growing 19%. By channel, our growth in 2022 is relatively balanced with both our wholesale and DTC business generating double-digit constant currency growth. Our global DTC e-commerce business grew 10% constant currency and represented 18% of total net sales. I believe these results are proof that our strategies are working. Looking at the current environment, the threat of a recession is weighing on the market. In these times, our strong financial position is a strategic advantage. We exited the year with over $400 million in cash and no bank borrowings. We're entering 2023 in a position of strength with positive momentum in many markets around the world. The Columbia brand's iconic innovation, value proposition, and democratic product offering are enabling us to capitalize on the popularity of outdoor activities. Differentiated innovations like OmniHeat Infinity and the recently introduced OmniHeat Helix are separating Columbia from the competition and fueling its growth trajectory. Sorrell's function-first fashion footwear is resonating with consumers. We believe Sorrel is on its way to $1 billion in sales and becoming the next global footwear force. Our products have earned us a loyal base of consumers, and we're making focused demand creation investments to create even deeper consumer connections and unlock growth. We have amazing strategic wholesale partners and a powerful direct-to-consumer business that's helping us create the marketplace of the future. As we begin the year, one of our top priorities is to reduce our inventory position and align it with demand. I'm confident in our ability to perform this task effectively and profitably over the course of the year. Our business model, strong financial position, and strategies are well suited to manage this process. Our product offering includes a large percentage of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. Given our strong balance sheet, we can be patient as to when and where we sell our product. We expect to continue utilizing our fleet of outlet stores to profitably liquidate remaining excess inventories. Columbia Sportswear is positioned to deliver another year of profitable growth in 2023. The top end of our financial outlook contemplates 6% net sales growth and a 12.2% operating margin. I will provide more details on the key drivers and assumptions influencing this outlook later in the call. I will now review our fourth quarter 2022 financial performance. Net sales grew 4% or 8% on constant currency basis. This was within the financial outlook we provided in October and reflects strong execution in a challenging environment. Gross margin contracted 180 basis points and was roughly in line with our outlook. The largest driver of contraction was higher promotional activity in the marketplace as we lapped an exceptionally low promotional environment in the prior year. SG&A expenses increased 5% and represented 34.6% of net sales compared to 34% in the prior year. we incurred $35.6 million in non-cash Prana impairment charges during the quarter, which impacted diluted earnings per share by 43 cents. Diluted earnings per share decreased 15% to $2.02. I will 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 to illustrate underlying growth in each market. All regions outside the U.S. were unfavorably impacted by foreign exchange rates. U.S. net sales increased 2% in the fourth quarter and 12% for the year. In the quarter, we generated high single-digit percent DTC growth, balanced across our brick and mortar and e-commerce businesses. U.S. wholesale net sales decreased mid-single-digit percent, Wholesale performance in the quarter was unfavorably impacted by a greater portion of all 22 orders shipping in the third quarter this year relative to last year. Looking at the third and fourth quarters combined, second-half U.S. wholesale net sales increased high single-digit percent, reflecting healthy retailer demand for our products. With that said, we note supply chain disruptions and resulting delivery delays tempered our Fall 22 performance. We were unable to maximize early-season full-price sales, and we experienced higher order cancellations resulting from the late receipt of inventories. As we move into Spring 23, our on-time delivery percentage has greatly improved and is approaching pre-pandemic service levels. U.S. Fall 22 retail sell-through trends were generally positive. With the season almost complete, Sell-through is tracking roughly in line with fall 21, which was exceptionally strong. Turning toward international business, Latin America, Asia Pacific region, or LAAP, net sales increased 11% in the quarter and 13% for the full year. China was up mid-single-digit percent for the quarter, led by strong DTC.com performance. For the year, China declined mid-single-digit percent primarily reflecting the impact of government efforts to contain COVID-19 outbreaks. I'd like to thank our team in China who overcame numerous supply chain and COVID-related challenges. I'm encouraged by the emerging momentum I see in this market as we start 2023. I believe the investments in talent and operational improvements we've made over the last several years position us to accelerate the business as China reopens. We know we have powerful brand recognition in China, and that this market represents one of our largest geographic growth opportunities. Japan increased high single-digit percent in the quarter and high teens percent for the full year. For the quarter, net sales growth was led by DTC as traffic recovered and consumers embraced Columbia's products. Korea grew low single-digit percent in the quarter and high single-digit percent for the full year. There is sustained interest in outdoor products and activities in that market, and we are positioned for continued growth in 2023. Our new leadership in Korea is focused on managing the marketplace to optimize our DTC store fleet and retail partners' distribution to further elevate the brand and drive productivity across all channels. LAAP distributor markets were up low 80% for the quarter and high 70% for the full year. Growth in the quarter reflects higher fall 22 and spring 23 orders, as well as favorable timing of shipments. With robust growth in 2022, Our LAP distributor business has returned to pre-pandemic sales levels. Europe, Middle East, Africa region, or EMEA, net sales increased 32% for the quarter and 26% of the year. Europe direct grew low 30% in the quarter and for the full year, including strong demand across all channels. I'm extremely proud of our team and the progress they've made growing our business in Europe while improving profitability. If you'll remember in 2015, Europe Direct represented just over 100 million euros in annual net sales and generated an operating loss. In 2022, we surpassed 300 million euros, and its profitability is accretive to our consolidated operating margin. Our products, marketing, and marketplace strategies are yielding powerful results. Europe Direct is expected to be one of our fastest-growing markets in 2023. Our EMEA distributor business was up high 30% in the quarter and up low teens percent for the full year. Growth in the quarter was driven by favorable timing of fall 22 and spring 23 shipments compared to last year. As we previously noted, we paused taking any new advanced orders for the Russian market early last year. Our outlook for our EMEA distribution business does not include sales to Russia, but contemplates healthy growth in other distributor markets, which will help offset a portion of these lost sales. Canada net sales were up 23% in the quarter and 19% for the full year. In the quarter, growth was led by wholesale, which benefited from favorable timing of all 22 shipments compared to last year. We're well-positioned for continued growth in Canada. Columbia and Sorrel have high brand awareness and excellent market positions. In fact, Columbia has been voted the number one trusted sportswear brand for seven years in a row in the University of Victoria Brand Index. Looking at performance by brand, Columbia brand net sales increased 13% in the fourth quarter and 16% for the full year. During the quarter, growth was relatively balanced across apparel and footwear. Following last year's launch of OmniHeat Infinity, we were able to build on the momentum this season, launching an expanded collection for Fall 22. Our worldwide marketing campaign focused on how the technology works and why it matters. One campaign featured a partnership with Eagles star quarterback Jalen Hurts, Jalen's timely content was also featured in a number of NFL broadcast spots. Good luck in the Super Bowl, Jalen. We also utilized micro to macro influencers like YouTube sensation Dude Perfect in the campaign. The Dude Perfect team visited the Columbia store at the American Dream Mall, tested out the OmniHeat Infinity jackets on the slopes, and the content was featured on the Jimmy Kimmel Show. The OmniHeat Infinity technology received numerous accolades during the quarter. Several styles, including the Platinum Peak and Ballistic Ridge Jackets, were featured in this season's best-of lists from Outside Magazine, Gear Patrol, and Ski Magazine. We successfully introduced OmniHeat Helix, our new disruptive poly-fleece visible technology. Helix was a small targeted launch in our DTC business for Fall 22, and we're excited to build on this unique technology in the seasons ahead. On the product collaboration front, we saw the successful launch of our newest Star Wars collection inspired by the Clone Wars animated series. Our latest collaboration includes references to Obi-Wan Kenobi, Anakin Skywalker, among others. The collection incorporates OmniHeat Infinity thermal reflective technology to help fans overcome the harsh winter elements wherever in the galaxy they are. Shifting to our emerging brands, Sorel brand net sales decreased 9% in the quarter and increased 11% for the full year. In the quarter, Net sales were unfavorably impacted by a greater portion of Fall 2022 orders shipping in the third quarter, as well as higher order cancellations. Early season sell-through was challenged given delivery delays. As product availability improved, consumer demand for the brand was evident on Sorrel.com, which generated robust growth in December. Those categories, including sneakers and sandals, were top performers in the quarter. Sorrel's consumer base is passionate about the brand. The Sorrel team remains laser focused on bringing a relentless flow of compelling products to its unstoppable consumer. In 2023, the brand has exciting product partnerships and shop and shops planned with key retail partners. We expect Sorrel to be our fastest growing brand in 2023, while supply chain constraints held back growth in 22, we are confident that Sorrel can grow even faster in the years ahead. Chroma net sales decreased 6% in the quarter, but were up 1% for the full year. Sales declines in the quarter were driven by softness in the wholesale business, which was impacted by late product deliveries, partially offset by DTC growth. Decline, the HBO Max reality series sponsored by Chroma, debuted in January. Hosted by Jason Momoa and Prana Ambassadors Chris Sharma and Megan Martin, the series features climbers taking on various challenges as they compete for a $100,000 prize and a Prana sponsorship. We believe this series is a unique opportunity to raise awareness around Prana as we reestablish the brand's roots in key activities like climbing. The Prana team remains focused on repositioning the brand in the marketplace to energize growth. Mountain Hardware net sales decreased 9% in the quarter, but increased 5% for the year. Similar to our other emerging brands, net sales were impacted by late product deliveries, which drove higher order cancellations. I will now discuss our initial 2023 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentations for additional details and disclosures related to those statements. We remain focused on achieving the long-term growth algorithm we laid out at our investor day in September. As we noted, growth will never be perfectly linear, and we are not immune to near-term macro headwinds. Our 2023 outlook contemplates 3% to 6% net sales growth, The positive momentum we've experienced in 22 is expected to be tempered by consumer spending headwinds and retailer caution as they manage their inventory positions. While our initial 2023 outlook is below the three-year growth figure we outlined at the investor day, our confidence in our long-term growth opportunity has not wavered. Since our IPO in 1998, we've generated a 9% net sales growth figure and look to improve this into the future. We anticipate gross margin expansion of 60 basis points to approximately 50%. We expect SG&A expenses to grow faster than net sales growth. While others are cash constrained and limiting their investment spend, we're using our strong financial position and profitability to strengthen our competitive position. we will continue to invest in our strategic priorities to support long-term profitable growth. On the digital front, we're investing in consumer data and analytics that will ultimately fuel membership enhancements and build stronger connections with our consumers. More broadly, we're investing in digital capabilities across the business to be more agile and adaptive. When it comes to supply chain capabilities, We're investing in people, processes, and systems to improve supply and demand planning, drive inventory efficiency, and support growth. This outlook contemplates maintaining our demand creation spend as a percent of sales at 5.9%, consistent with 2022. We may adjust this level of spend depending on market conditions. We expect operating margin to be in the range of 11.6 to 12.2%. Operating margin performance will not always be linear year to year, and we remain firmly committed to improving operating margin over time. This operating performance leads to a diluted earnings per share range of $5.15 to $5.55. We anticipate strong operating cash flow of at least $500 million in 2023 as our inventory levels normalize. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. We're investing in our strategic priorities to accelerate profitable growth, create iconic products that are differentiated, functional, and innovative, drive brand engagement with increased focused demand creation investments, enhance consumer experiences by investing in capabilities to delight and retain customers, amplify marketplace excellence that is digitally led, omnichannel, and global, and to empower talent that is driven by our core values. That concludes my prepared remarks. We'll welcome any questions. Operator, could you help us with that, please?