Columbia Sportswear Company

Greetings. Welcome to the Columbia Sportswear first quarter 2023 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 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, Chief Administrative Officer, and General Counsel Peter Bracken. 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 the financial tables included in our earnings release and the appendix of our CFO commentary and financial review. Following our prepared remarks... We will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour. Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon, everyone. First quarter results highlight the importance and value of our diversified global business model and strong balance sheet. Overall, we were able to generate healthy net sales growth of 8% year over year and up 10% in constant currency. I'm pleased to report that earlier receipt of spring 23 inventories drove improved wholesale on-time delivery rates and a return to pre-pandemic service levels. For the last three years, supply chain constraints have impacted our ability to drive sales growth. As we look to maximize sales in this uncertain economic environment, it's great to have those product lead time delays behind us. Looking at first quarter results, Consumer demand in many areas of our business remains strong. International markets were resilient, growing 17% on a reported basis and 25% on constant currency basis. In the U.S., outlet stores generated healthy growth as consumers seek out value and promotions in the marketplace. Apparel category performance was also a bright spot as sales trends benefited from better availability of Spring 23 product. In other areas of the business, consumer demand signals were more challenging. Columbia.com had a softer start to the quarter, but performance improved in February and March as we increased promotional levels to spur demand. In the U.S., footwear market headwinds impacted both Columbia and Sorrel performance. Pockets of elevated footwear channel inventory, unfavorable weather for spring product, and overall retail cautiousness presented headwinds. Additionally, key categories such as hike and trail have softened following growth over the last several years. We remain confident in our footwear strategy and our ability to unlock our long-term growth potential in this category. As I mentioned on the last call, reducing our inventory and aligning it with demand is a top priority. Inventory exiting the quarter was up 34% year over year, driven by elevated carryover inventory, earlier receipt of current season inventory, and to a lesser extent, increased older season inventory. We anticipate incurring higher SG&A expenses tied to our elevated inventory levels. These expenses will persist until inventories normalize towards the end of the year. We're executing our plan to manage down inventory levels while focusing on profitability. We have a clear path to reducing year-end inventory by over $200 million compared to last year. For the full year, we are reiterating the net sales and gross margin outlook we provided in February. While there are puts and takes across our diverse business, our forecast for overall demand and promotional activity have not meaningfully changed. We are lowering the high end of our EPS range to account for higher SG&A expenses, which I'll discuss in more detail later in the call. In times when there are high levels of economic uncertainty, our strong financial position is a strategic advantage. We exited the first quarter with over $460 million in cash and short-term investments, as well as no bank borrowings. I believe our diversified business model, financial strength, and operating discipline will enable us to navigate near-term challenges and emerge in a stronger position. I'll now review our first quarter 2023 financial performance. Net sales of $821 million were up 8% year over year and up 10% on constant currency basis. Gross margin contracted 100 basis points and was roughly in line with our outlook. As expected, the biggest driver of contraction was higher promotional activity in the marketplace as we lapped an exceptionally low promotional environment in the prior year. This was partially offset by lower inbound freight costs. SG&A expenses increased 16% and were 42.3% of net sales compared to 39.3% in the prior year. SG&A expense growth primarily reflected elevated supply chain costs, higher DTC expenses to support growth, and investments to support our strategies. During the quarter, We incurred higher than expected warehousing and fulfillment expenses, largely resulted from elevated inventory levels. Deluded earnings per share decreased 28% to 74 cents. I'll now review first quarter year-over-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 of the U.S. were unfavorably impacted by foreign exchange rates. U.S. net sales increased 3%. U.S. wholesale increased mid-single-digit percent and benefited from earlier shipment of Spring 23 orders relative to last year. The Columbia brand's spring selling season performance has been encouraging, with apparel sell-through trending above last year. USDTC net sales increased low single-digit percent. Brick and mortar was up high single-digit percent with healthy outlet store performance driven by strong traffic trends as well as contributions from new stores opened last year. U.S. e-commerce net sales were down high single-digit percent, primarily due to a slow start of the quarter for Columbia.com. Turning to our international business, Latin America, Asia Pacific region, or LAAP, net sales increased 22%. China net sales increased mid-20%. Over the last several years, we laid the groundwork to enhance store productivity and reaccelerate growth in China. We invested in talent, localized product, and go-to-market activities to strengthen our capabilities in this important market. I believe we are starting to see the benefits of our efforts. The easing of COVID-19 restrictions resulted in a surge of consumer demand, which was sustained throughout the quarter. For spring 23, we successfully launched a new China-specific product collection designed for Chinese consumers. The new collection, named Transit, is attracting new, younger consumers to the brand. Initial sell-through performance has been exceptional. We're encouraged by the first quarter performance and anticipate China to be one of our fastest growing markets in 2023. Japan net sales increased high teens percent. Net sales growth was driven by improved demand as we lapped prior year COVID-19 impacts. Net sales growth was also aided by earlier shipment of spring 23 orders. Following two years of pandemic restrictions, we are encouraged to see DTC traffic recovering and international tourism starting to return to Japan. Korea net sales declined high teens percent. Our new leadership team in Korea is in a multi-year process of rebuilding the business to further elevate the brand and drive productivity across all channels. We're in the early phases of this effort. We know that there's a significant market share opportunity for Colombia in the future, and despite a slow start of the year, we still see a path to full-year growth in Korea. Across our Asia Direct markets, Columbia is connecting with consumers in an authentic way through the buildup of hike communities, including the Hike Society in China and Korea and the Hiking School in Japan. These grassroots clubs celebrate the outdoors through hiking events and experiences. As we share our passions for the outdoors, were building deeper connections with consumers and inspiring the next generation of outdoor enthusiasts. LIAP distributor markets were up over 100%. This growth reflects the strength of the Columbia brand and our distributor partnerships in these markets, as well as favorable timing of shipments. Europe, Middle East, Africa region, or EMEA, net sales increased 20%. Europe direct net sales grew high 20% benefiting from strong demand across all channels and earlier shipment of Spring 23 product. Despite relatively warm and dry weather in the quarter, Columbia brand strength and better product availability fueled healthy sell-through. Columbia was recently announced as the first exclusive partner of Mega Marsh, a series of hiking events that take place across Europe. The series had over 35,000 participants in 2022 and is scheduled to host 23 events this year. We expect this partnership with one of the largest hiking communities in Europe to help drive continued momentum in the important hike category. Our EMEA distributor business was down low teens percent. The decline in sales reflects the lack of sales to Russia partially offset by growth in other EMEA distributor markets. Canada net sales were up 43%, driven by strong demand across all channels and earlier shipment of Spring 23 product. In Canada, we're continuing to grow our dedicated in-store footprint with strategic retail accounts. This includes a number of enhanced in-store displays and shop and shops set to open in 2023. These efforts strengthen our retail partnerships and further highlight our unique product offering across both footwear and apparel. Looking at performance by brand, Columbia brand net sales increased 12% during the quarter. Growth was led by apparel, partially offset by softness in footwear. We remain focused on unlocking the long-term growth in the footwear category and continue to make strategic investments in the business. In the first quarter, we launched our Be the Goat footwear campaign, featuring the new Facet 75 hiking shoe. This is our latest addition to the Facet collection and is designed to provide hikers exceptional traction on difficult terrain. The integrated global campaign spans social media, e-commerce, print, and in-store displays. The FACET 75 was featured in several outdoor publications, including articles from Gear Patrol and Gear Junkie on the best new gear for 23. Charles Melton from the television series Riverdale led a group of influencers who will be seen wearing it on social media in the next few months. With the Peak Freak campaign last fall and now the FACET 75 this spring, we're establishing a cadence of high-impact footwear launches. Shifting to PFG, we launched our Protect What You Love campaign. This marketing investment in our iconic PFG product line is designed to deepen its authentic position in fishing. Protect What You Love is about conservation as well as protecting your skin with our sun protection technologies. PFG also partnered with Captains for Clean Water to raise awareness about the challenges that the Florida Everglades and fisheries are confronting. The campaign features our distinctive product innovation and highlights Columbia's passion for the pursuit of fishing. The cast of characters in our campaign ranges from Wesley Locke, one of our fishing athletes, to the Dude Perfect team, who partners with Bubba Wallace to have a fishing competition in Miami. Bubba Wallace also nearly won in a PFG wrapped car at the Talladega Speedway last weekend. In another feature story, New York Mets first baseman Pete Alonzo speaks about growing up fishing and the importance of great gear in baseball and fishing and what the sport means to him. PFG products have recently been featured in several fishing and boating enthusiast publications, including Marlin Magazine, Boating Magazine, and Fish Alaska. These articles highlight styles such as the Skiff Guy Jacket, and the Super Terminal Vented Hoodie. We also invested heavily in digital media, highlighting both our apparel and footwear. Through our marketing, PR, and grassroots community engagements, we're creating deep consumer connections and building affinity for the Columbia PFG brand. In our latest collaboration with New York-based boutique KIF, We harnessed the power of PFG with an assortment of fishing apparel, footwear, and accessories that blend functionality with style. Several top styles sold out almost immediately, attesting to our ability to build brand and product heat with a younger audience. On the innovation front, we launched OmniShade Broad Spectrum. This product utilizes engineered combinations of fiber, yarn, and fabric structures to block a wider range of harmful UVA and UVB rays. Columbia is the first brand to label clothing as having broad spectrum protection. Overall, the Columbia brand has had an encouraging start to the year. The Columbia brand's exceptional value proposition and innovative product offering are well positioned to meet the needs of consumers in this economic environment. Finally, I would like to welcome David Thies as Columbia Brand's new Senior Vice President of North America DTC. David has an accomplished background in retail and merchandising, and we look forward to utilizing his expertise to help the Columbia Brand expand and evolve our DTC operations. Shifting to our emerging brands, Sorrel Brand net sales decreased 3%. Net sales were down primarily due to the tough footwear environment. The first quarter is a small transitional quarter for Sorrel, consisting of late winter and early spring product sales. The late receipt of fall 22 product resulted in some fall product missing the peak selling window. To clear through this late arriving fall inventory, the brand increased promotional activity on Sorrel.com during the quarter. Additionally, unfavorable cool and wet weather contributed to a late start in the spring selling season. I'd note that spring season sell-through has improved in recent weeks with the arrival of warmer spring weather. The sandal category has led this resurgence, fueled by new sports styles like the Connecticut Impact Collection. Near-term sales trends are below our long-term growth ambitions for Sorrel. We remain confident in the brand and its potential to become the next global footwear force. Mountain Hardware net sales increased 18%, driven in large part by earlier shipment of Spring 23 orders. Following Mountain Hardware's product-driven resurgence, the team is now working to bring the brand's identity to life. This includes enhancing Mountain Hardware's digital presence and launching a more robust organic social media strategy. Prana net sales decreased 1% in the quarter. The sales decline was driven by the wholesale business, partially offset by DTC growth. To celebrate Prana's 30th anniversary, the design team pulled some of the brand's original styles from the archive and refreshed them to create a new Prana Originals collection. The product has performed well and yielded strong social engagement. The Climb, the HBO Max reality series sponsored by Prana, concluded in late January. This marketing investment piqued awareness with current and new customers. We will continue to partner with legendary climbers Chris Sharma and Megan Martin to reinforce Piranha's connection to climb. Senior Vice President of Emerging Brands Craig Zannon has taken over as Interim President of the Piranha brand. We're conducting a search for a new leader. The Piranha team is focused on repositioning the brand to energize growth. We'll now discuss our 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 are reiterating our 3 to 6 percent net sales growth outlook. While there are various trends across our regions, channels, and categories, our forecast for overall demand has not meaningfully changed. We are reiterating our gross margin outlook for expansion of 60 basis points to approximately 50%. Marketplace promotional activity continues to normalize in line with our expectations compared to exceptionally low promotions in the prior year. We expect SG&A expenses to grow faster than net sales growth. Our outlook for SG&A expense growth has increased since our last call, reflecting incremental warehousing and fulfillment costs associated with elevated inventory levels, as well as transitional costs associated with third-party logistics. We have and continue to implement cost containment actions, but realizing savings from these actions will take time. we expect operating margin to be in the range of 11.6 to 11.8%. Operating margin performance will not be linear year to year, and we remain fully committed to improving operating margins over time. This operating performance leads to a diluted earnings per share range of $5.15 to $5.40. We anticipate strong operating cash flow of at least $600 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 consumers, amplify marketplace excellence that is digitally led, omnichannel, and global, and empower talent that is driven by our core values. That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, could you help us with that?

Absolutely. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

The first question is from Bob Durbel with Guggenheim Securities. Please proceed.

Good afternoon.

Tim, I have two questions, really. The first one is, when you look at, you know, the outlook for the remainder of the year, have you seen any changes in your order book? You know, I know you kept your top line the same, but, you know, when you look at the performance, you know, in North America or in Europe, have there been any material changes from, you know, what you had seen, you know, a quarter ago? And then the second question is, you know, can you elaborate a bit more in terms of, you know, what's happening in the footwear category? I think you talked about hike and trail and just how big, you know, what's the percentage of that in your business? And just, you know, what do you think it'll take to, you know, get that business to either you know, slow down in terms of some of the declines or actually improve maybe in the back half of the year. Thanks.

Yeah, Bob. So no, no significant changes. In fact, no changes really of any consequence on the order book. Uh, as you know, we, we take orders every day and cancels every day. So, uh, but our order book is, is as we, as we expected it, uh, you know, several quarters ago. And, um, And we're excited about the ability to perform on the order book in a much better and more timely manner than we had certainly last year. Last year was such an unusual period where we had an enormous order book and then the logistics issues really didn't allow us to fulfill it. And the final result, frankly, was the inventory levels we're seeing today. So we're confident in that. and our ability to perform there. As it relates to footwear, hike and trail over the total is the company's largest category of footwear. But in the back half, it will certainly be a challenge from a size perspective by our winter footwear business, which is actually the biggest part of the last part of the year. So we're very focused on creating great products which are highly differentiated and democratic in terms of their pricing and promotion. I still am confident that the company can provide innovative, differentiated products to have our business grow at the proper levels.

Great. Thank you very much.

The next question comes from Laurent Vasilescu with BNP Paribus.

Please proceed. Good afternoon. Thank you very much for taking my questions.

I wanted to ask about CIRREL, the guide. Originally, I think last quarter, 90 days ago, it was for low double-digit growth, and now I think it's guided for high single-digit growth in the CFO commentary. Just curious to know what you're seeing there. Was there a pickup in cancellations? And piggybacking off of Bob's question, I think fall order book was originally anticipated to be up mid-single digits overall for the company. Is that still the case?

Yeah. The Surreal brand was impacted much like the Columbia brand in terms of a large order book last year and poor fulfillment on our part last year due to logistics issues. When we talk about the spring quarter and the quarter just completed, it was impacted with promotional activity from the winter merchandise that we carried over, as well as weather impact on spring products. So as the quarter has concluded and we've seen activity in the latter part of the quarter and the early part of Q2, we're seeing that the The sandal category is now getting traction and improving. So, you know, we're very bullish on the brand, and we expect that that will get us up to clearly to where we guided at our investor day, that this will be a fast-growing brand for the company.

And, Laurent, there's been no meaningful changes in the fall 23 order book. We're still planning that part of the business up for sale. percentage for the season.

Okay. Very, very helpful. And then, Jim, maybe a question for you on your CFO deck. Last quarter, I think for the first half commentary, you were expecting, you know, one-age gross margin to expand in the late months and below the full year. I didn't see that commentary in this CFO commentary. So, just curious, Maybe for the audience, if you can kind of give us some guardrails on how we should think about 2Q gross margins. And if they are below, maybe can you walk us through the moving pieces to get to the full year guide?

Yeah, from an overarching standpoint, we're still planning our gross margins to be up in the second quarter. They'll be up north of 100 basis points, Laurent. With the revision we've made in our outlook, we've indicated that we'll come in at the lower end of our first half outlook. And if you do the math on that, that'll imply our Q2 operating income essentially being breakeven. And so if you look at gross margin being up just over 100 basis points, you can do the rest of the solve on that. But we're still anticipating the inbound freight cost benefits that we previously indicated in As Tim touched on, as it relates to what we're seeing from a promotional standpoint, the market's really been aligned to what our plan has been to date.

Okay, very, very helpful. And then just one last question on the Russia business. Can you just, again, maybe remind the audience the magnitude of the impact? It's just the timing as we think about modeling EMEA for the year by quarter.

Yeah, so on the full year in terms of what we fulfilled to Russia, it was around $50 million, and that was fulfilling orders that had been taken prior to the invasion. And then specific to the first quarter, it's a mid-single-digit millions of dollars that we shipped to Russia. I think it was in the $5 million range.

Okay, and then so most of it came into – remind me, I think it was in 3Q22, right, when you fulfilled it? 3Q22.

That's exactly right. There was essentially nothing in the second quarter, and then it would have been predominantly third quarter that you would have seen those shipments.

Okay. Okay. Very helpful. Thank you very much, Jim, for that, so we can model it correctly. Thank you.

Next question comes from Mitch Kometz with Seaport Research. Please proceed.

Yeah. Thanks for taking my questions. First question on supply or on the SG&A. So, you know, the SG&A rate has gone up. Sounds like that's primarily supply chain. I guess I'm wondering, you know, what's changed? Why are those incremental costs now higher than, you know, three months ago? Is that because it's taking longer to work through the inventory than you expected? And then maybe kind of a follow-up to that. Like when I eyeball the slide deck, it looks like maybe supply chain is up around 20 million. Like, what are you thinking for the year now on those year-over-year incremental supply chain expenses?

Yeah, I'm going to ask Jim to talk to you about the balance of the year, but what we saw in the first quarter was an impact of inventories on the efficiency of our logistics operations, just the sheer magnitude of the inventory that was during that period. So we expect that as we reduce our inventories, and as we mentioned, we expect about a $600 million cash flow positive from this year in order to get us, as the inventory levels are reduced, that our efficiencies will also increase along the way.

Yeah, Mitch, and just to reiterate the point there, The increase in our SG&A on the quarter, that's not a function of inventory, haven't been greater than what we had planned. Inventory is really where we thought it would be. It's just the degree of productivity. I think, frankly, we probably planned the business too aggressively with regard to how well we'd be able to manage down the labor within our distribution center. So that came as a bit of a surprise, and we've incurred some transition costs related to our third-party logistics. When you look at the change in our full-year outlook, which is in the mid-teens, millions of dollars, the operating income line, essentially the entirety of that is associated with, you know, what we've seen in the first quarters relates to the incremental warehousing and fulfillment costs.

Okay. Are these costs that essentially, you know, go away next year when you have You know, when you're expecting the inventory to be down a couple hundred million?

That would certainly be our expectation. You know, as we get the DCs back down into normal capacity levels and a better mix of what's running through our own distribution centers and what's in third-party logistics, plus there are certain transition costs that would be one time in nature that will accumulate during the year. So I would expect that provides us a bit more of a tailwind as we get out to 2024.

Okay, and then just to follow up, Tim, on the footwear piece, the hike and trail, the challenges there, is this kind of a post-COVID hangover where the pendulum is kind of overcorrecting away from these categories? And if so, when might that normalize, do you think?

I think it's going to be a combination. Yeah, and I would say, yes, it's a combination of high demand during the COVID period for hiking footwear and then – really an ability for us to provide new fresh merchandise this year. So I would think that over time, when we have a larger component of our footwear being along the lines of our facet collection, which is a fast hike, sneaker-ish type product, that you're going to be seeing a re-acceleration of the footwear, especially in hike So that's the expectation and we're working hard towards that.

All right. Okay. Thanks.

Good luck. Up next, we have John Kernan with TD Cowan. John, please proceed.

Excellent. Thanks for taking my question, guys. So just on Sorrel, obviously, you know, the targets you laid out the investor day, 20% plus growth. It did have tough multi-year comparisons this quarter. I'm just,

curious how you're planning the business the rest of the year and you know how do we think about the return to growth well the brand is you know an incredibly strong performer inside our emerging brand portfolio and we would expect that as we continue to gain traction in that business with timely deliveries of product and the high quality standards that we have in styling and design will again produce great sales results. That's our focus, and that's the plan.

And, John, as it relates to how we're envisioning growth for the balance of the year, in the CFO commentary, we indicate that Sorrel's planned up a high single-digit percent from what had been a low double-digit percent. And I would say that's pretty consistent across the quarters with the exception of third delivery of the expectation of earlier delivery and shipment of fall products. So I think, you know, we look at Q1 as being a little bit of an aberration, as Tim touched on, in terms of it being a transition seasonal quarter for us and looking forward to the balance of the year.

Got it. How should we think about inventory dollars as we start to cycle some of the bigger increases from last year? And then within that, how do we think about the recovery of break costs within gross margins?

Yeah, as it relates to inventory for the balance of the year, there are some comments in the CFO commentary that we've provided in our first half outlook. We contemplate inventory continuing to grow at the end of Q2, albeit it'll begin to normalize from a growth standpoint. So we were plus 30%, just over 30% here in Q1. We'll see that come down into the low 20s in Q2. And then our expectation is as we begin to move into the fall winter season, leveraging that carryover inventory, utilizing that excess inventory through our outlets, that we would see a sequential drop in our inventory in the back half of the year. And we're still targeting and feel like we've got a clear path to our inventory being down north of $200 million. And we're stretching to be far better than that as we exit the year. And then as it relates to the degree, as we move through that excess inventory, we've got that plan into our margin in terms of still really thinking about this from a normalized discounting perspective and any changes that might have in our obsolescence or inventory reserves is also factored into the outlook that we're providing here today.

Then maybe one follow-up. Obviously, nice to see the revenue guidance reiteration. Just how do you think your wholesale partners are positioned for the back half of the year? I think March and April were tough on a lot of people. Weather, obviously, not agreeable. How do you think people are prepared for the macro as we go into the back half?

Yeah, I think in general, our order book is built on a conservative outlook from our retailers. So no one is expecting great things from the back half of 2020. So I think that's how we've built the book and our expectations are that we'll, based obviously on our inventory levels, that we have something to fill their shelves with in addition to what they've already bought.

Got it. Thank you.

Okay. The next question is from Jim Duffy with Stifel. Jim, please proceed.

Oh, thank you. Good afternoon, guys. Just a couple of questions for me. I wanted to start on the DTC trends. I'm curious, is the positive comp you're seeing, they're supported by better in stocks or are you seeing good traffic and transactions as well? Yeah, Jim.

Well, as you know, we consider ourselves to be a wholesale company, so we don't typically talk about the metrics in our own DTC stores. That having been said, The traffic was quite strong in the stores this quarter. And we think that's reflective of a number of issues, including consumers at this time looking for greater value. And we have a strong outlet fleet. But pricing has remained strong. And I think we're positioned correctly. And as we said, we were going to be liquidating our carryover inventory primarily through our own outlet stores for the fall.

Yeah, I'd say a modest benefit as it relates to the better stock levels. I think this is much more a function of traffic that Tim's describing and an increase in tourism in certain of our international markets.

Good to hear. I'm also hoping you guys can speak to U.S. channel inventory dynamics. Is the footwear situation that you referenced unique to U.S.? ? footwear in those categories, or are you seeing channel apparel inventories elevated as well, and what do you see as kind of the timeline for path to resolution of that?

Yeah, I think in general our category of merchandise has been more challenged than others in the footwear area.

Got it. But how about apparel, Tim? Is the apparel channel inventory situation in a fairly healthy state, or are there imbalances there as well that you're contending with that are influencing the marketplace?

Yeah, again, our retailers took a quite conservative approach to spring orders. But frankly, we've seen improved sell-throughs versus last year, and it would indicate that the merchandise categories that were strong in PFG, sportswear, rainwear are all performing well, and I think in that area we've got good tailwinds.

Okay, great. And then last one, Jim, I wanted to ask on the cash flow from operation guidance, maybe I missed this earlier, but it looks like a bump of $100 million. What's behind the lift?

I think more so than anything, we're a bit conservative when we put that together previously, Jim, and as we've taken a harder look at, and we've got more definitive view into the inventory purchases that we've made for the fall season and looking at our overall working capital, it just gives us increased confidence that we're going to end up in that north of $600 million range from an operating cash flow perspective.

Great. I'll leave it at that. Thank you, guys. Thanks.

Okay. The next question comes from Abby Zvezdniks with Piper Sandler. Abby, please proceed.

Great. Thanks so much for taking my question. Just on the earlier delivery of shipments in 1Q, are there any geographies or brands where we should expect that to create difficult 2Q growth rates? And then on the Sorrel brand, just with the U.S. wholesale order books being conservative, like you just talked about, I guess what's driving the better Sorrel results in the second half? Thanks.

Yeah, again, as it relates to the earlier deliveries, I think our Our business will be quite strong at our retail partners during especially the balance of the year. Our biggest seasonal sales period for the Columbia brand certainly is Father's Day. That's where our PFG performance really shines. And I think our retailers are well stocked there and certainly in better shape than they were last year. So our expectations are for a good second quarter sell through. with our retailers. As it relates to Sorel, as focused as we've been on changing it from a winter brand to a more year-round brand, it's still heavily impacted by sales of winter footwear. So our expectations are that the back half of the year for Sorel will be a tailwind as it relates to winter footwear requests.

Yeah, maybe just to add to Tim's comments, From an overall perspective, when you look at second quarter, we do anticipate second quarter being a slower growth quarter on the whole relative to first quarter. So it'll be up a low single to mid single digit, kind of in that zone. And the difference between the two quarters is effectively going to be the timing shifts on the wholesale business. And by geography, where you'd expect to see the most of that would be in the U.S., Canada, and our European direct businesses, where we received inventory and were able to get it out to our customers sooner, so you'd see the adverse effect of that coming out of the second quarter. And you'll see that same trend phenomena occur in the latter part of the year as well, where it will be heavy Q3 growth and lighter Q4 growth.

Got it. Super helpful. Thank you.

Okay, the next question is from Jonathan Kump with Baird. Please proceed.

Yeah, good afternoon. Thank you. Can I just ask a broader question, thinking about the shape of the earnings outlook for the year? First half, it looks like it'll be down quite a bit year over year, near seasonally low period. And then second half looks like embedding fairly healthy double-digit earnings growth for the second half combined. So could you just Maybe walk through the pieces to sort of get comfortable with that outlook.

Yeah, there's two to three drivers on that, John, that I would call out. First, keep in mind that we're lapping the prana impairment charge that we took in the fourth quarter last year at $35.6 million. So if you set that piece aside, the other two major factors that are going to be in here is, one, we anticipate gross margin being healthier in the latter part of the year. That being as we see the full benefit of the lower inbound freight costs being a larger benefit to the gross margin, coupled with the fact that from a retail promotional standpoint, the comps year over year will be a little bit easier in the latter part of the year. And then the second point I would make here is that as you think about SG&A, we come into the year with a heavier rate of growth from SG&A perspective. You're seeing that in Q1. As we work ourselves into the back half of the year, again, we'll be lapping some of the investments we made last year plus some of the cost containment actions that we've taken. So when you look at the combination of those three things, that's why you'd see a bit more of inflection with second half earnings growing faster than first half. And we're perfectly confident in the plan we've put together around that with all the visibility that we have here today.

Yeah, that's really helpful. And then just maybe a follow-up, Jim, just the thought on bringing down the high end of the earnings guidance for the year, but not changing the low end. Was there some maybe conservatism at the low end coming in, or are you including some optionality, places you could pull back if needed? Just any thoughts there? Thank you.

It's really just more function of the discrete nature of the change in the outlook. And so when you look at first quarter and where you know, where the SG&A came in higher than we had expected, you know, because it's kind of a discrete event. You know, we felt that the high end required an adjustment. We didn't foresee as strong of a need on the low end of things.

Okay, makes sense. Thanks again.

Okay, up next we have Paul Loez with Citigroup. Please proceed.

Hey, thanks. It's Tracy Cogan filling in for Paul. My first question is on Columbia Footwear specifically, and I'm wondering what you're expecting for sales growth this year now compared to your prior expectations. And then what are you looking at for margins in that footwear business? And then secondly, I was hoping you could talk a little bit more about that China-specific product that you mentioned. I'm wondering how much of the assortment that represents and right now, what you think it might eventually be, and then what's the price point like there compared to the rest of the assortment? Thanks.

As it relates to the Columbia footwear side of things, from an overarching standpoint, we still see the Columbia brand growing at a high single-digit rate of growth. Did I have that right, Andrew, or is it mid-single? I think it's more mid-single. Sorry. and that footwear is slightly going to outpace still where we are from an apparel standpoint. And as we look at the order book that we've taken for the fall-winter season, you know, that would contemplate that higher rate of growth in terms of the orders that we've taken for our customers. And then I might pass it over to Tim as it relates to China and the transit collection.

Yeah, I just want to make one more comment on footwear for Columbia. Most importantly, an impactful part of our business is winter footwear. And due to the logistics issues we had last year, this will be really an improvement, vast improvement, frankly, on delivery timeliness on the winter footwear. So our expectations are quite high there for a very successful season. The transit collection was born in China and designed by our China merchandising team based in Shanghai. The product itself was commercialized and manufactured by the global team, which is based here in Portland. So we had great costs on it, a lot of very good gross margins, and proves to us that we need to be synchronizing our investments in product to include local influence merchandise. So I think what we've learned is that the more we link our global teams together and use design and creative folks that are based in market, the better we're going to be doing.

Great. Thank you.

Okay, the next question is from Mauricio Serna with UBS. Please proceed.

Hi, good afternoon. Thanks for taking my question. I want to ask about the gross margin cadence. You know, just thinking about second quarter, you provided an outlook, but if I think about third versus fourth, where should we expect the, you know, higher gross margin expansion? And I guess from the SG&A perspective, I understand fourth quarter, SG&A dollar will probably be down or probably the quarter with the least growth. But if I think about the other two quarters, how should we think about that, the growth in 2Q and 3Q?

Thanks. So, growth margin, as I commented earlier, we do plan that to be up greater than 100 basis points in Q2. And sequentially, as you look at third, fourth quarter, they're both going to be relatively equivalent in terms of the growth margin. expansion and slightly above where we plan to be for the second quarter. So it should be relatively consistent with the understanding that, you know, the ocean freight, the inbound freight cost benefits will be flowing through each of those three quarters is radically similar. That makes sense. And then as it pertains to SG&A growth, I think we still have SG&A growth planned through each of the three quarters, albeit that rate of increase or rate of growth in SG&A will come down, particularly towards the end of the year, and more in line with where we've got the full-year plan from a top-line perspective.

Got it. Just to confirm, so that implies that fourth quarter SG&A dollars will be up despite, you know, including the prana impairment from last year?

No, because the prana impairment charge, we did not include that as SG&A expenses.

Okay, got it, got it. Got it. And then just one follow-up, maybe. If you could speak about the, you know, in the USDTC business, a little bit more color on the sales growth trends inter-quarter, just trying to understand, like, how the sales evolve, like, across each quarter. You see a deceleration, acceleration. Any additional commentary would be very helpful. Thanks.

Well, we certainly don't want to get into the monthly cadence of it, aside from the prepared remarks that we've made. You know, on the whole, what I would describe is that, you know, the D2C brick-and-mortar business was healthy really throughout the quarter. You know, we saw nice traffic in that part of the business in the U.S. and internationally. And then, as Tim noted, I think the prepared remarks, the e-commerce business was a bit slower in the early part of the quarter, and then with some incremental changes promotions that we've made, we began to see demand surge a bit there. And I would keep in mind, you know, we're lapping first quarter of last year in which consumer demand was still, you know, quite robust coming off of some of the stimulus from the year prior and a quite cold, favorable weather as well. So, you know, lapping against that still be able to put up the growth rates. We still remain pleased with the overall performance of the business and that brick and mortar is more than offsetting some on the e-commerce side of the house.

Yeah, thanks. Thank you very much.

The next question is from Alex Perry with Bank of America. Please proceed.

Hi, thanks for taking my questions. Just first, what's embedded in the guidance in terms of promotional environment from here? Is the assumption that it sort of moderates in terms of year-over-year pressure? And how do you sort of square that away with your comments on sort of the consumer seeking out value with the really strong traffic you've seen in the outlet business? And then just on the D2C versus wholesale outlook, I guess when you look at your D2C business, What are you sort of expecting in terms of D2C.com versus D2C brick and mortar? Is the thought that for the remainder of the year, given what you're seeing in your outlet business, that D2C brick and mortar continues to sort of outpace D2C.com? Thanks.

Yeah, I would say that the promotional activity we expect to be on par to previous, call it pre-pandemic levels. So we expect impact there, offset partially by what we would see in terms of savings of freight. So I think that we've guided appropriately on our gross profit margin for the balance of the year. As it relates to DTC, DOTCOM versus Crip and Mortar, it seems like consumers, at least in the first portion of the year, wanted to get out and shop. So... We did that in a greater way, certainly, in our operation than the city at home in ordering online. And it's our expectation that that will likely continue, that we have, you know, a stronger performance from DTC, but we also expect our .com business to rebound and be strong as well in the balance of the year. So we really haven't, again, given great granularity on the two things. but it certainly appears that consumers like getting out and shopping.

Yeah, that's right. And, Alex, there is a subtle change in our revenue outlook where basically previously we'd indicated that our dot-com business would grow faster than our brick-and-mortar business, and that's reversed in the outlook we've provided here today where we do see the consumer shifting a bit more to physical in-store shopping versus dot-com, but they – they more or less offset each other.

Perfect. That's really helpful. And then I guess just my second question, on the cost containment actions, when do those start to flow through the P&L? Is that towards the end of this year or more next year? And what exactly is sort of in there? Thank you.

It would be more second half, you know, and it's much more a function of slowing rate of – investment slowing the rate of headcount additions, those types of costs, I wouldn't necessarily describe it as a full-blown cost reduction plan, but really just seeking to moderate our level of SG&A to bring it back down more in line with where we are from a sales perspective. And then, of course, to the point made earlier, to the extent there's some incremental costs were incurring as it relates to the supply chain and distribution, you know, we would expect that, you know, if we lap those, that should provide us a bit of a favorable comp to be more efficient in the out year.

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

We have no further questions in queue. We have reached the end of the question and answer session, and I will now turn the call over to management for closing remarks.

Well, thank you for listening in. We're excited about the potential for the future, and we have great opportunities ahead of the company.

We look forward to talking to you in about 90 days' time.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.