Columbia Sportswear Company

Greetings. Welcome to the Columbia Sportswear third 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 third 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 and General Counsel Peter Bragging. 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 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 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. Third quarter results reflect a continuation of the trends we've experienced throughout 2023. Our international direct markets continue to outperform the U.S. Within our DTC business, brick-and-mortar stores are performing better than the e-commerce channels. Economic and geopolitical uncertainty remains top of mind for consumers and retailers. Overall, we will generate 3% net sales growth in the third quarter. Canada, Europe Direct, and China all delivered high teens percent or better year-over-year growth. In the U.S., retailers continue to take a cautious approach to managing inventory levels and placing orders. Consumer demand for soft goods, including apparel, Footwear remains weak. I'm pleased to report the inventory exiting the quarter was down 16% year over year. Throughout the year, we've been executing our inventory reduction plan. The combination of lower inventory buys, shipment of full 23 orders, and increased excess inventory sales in our outlet stores has yielded substantial progress towards our goal. We've done this while generating healthy gross margins, which is a testament to the evergreen nature of our products. We have a clear path to achieving our goal of reducing year-end inventory by over $200 million compared to this year. As we head into our peak sales period, I'm excited about the brand activations in place for this holiday season. For Columbia, OmniHeat Infinity continues to be one of the fastest growing parts of our business and is prominently featured in our marketing campaigns this season. In addition to our innovative warming technologies, the Columbia brand is executing several collabs, including the recently launched 100th anniversary Disney collection inspired by Disney's vintage arc. In the coming days, we will launch our latest Star Wars collection featuring Luke Skywalker's iconic flight suit reimagined as a fully equipped ski collection. To promote the launch, we will be leveraging Columbia brand ambassador Bubba Wallace as well as a top Jedi master. You'll be able to find the content on our social media channels. To celebrate the 50th anniversary of the iconic Caribou boot, Sorrel recently opened 20 shop and shops at Nordstrom's featuring key fall styles and unique 3D Sorrel polar bears created by local artists in each market. Sorrel also recently opened a bold new Brooklyn pop-up store featuring exclusive styles and interactive brand experiences. This fall, Mountain Hardware launched its Seek Wilder Paths campaign, which reflects a comprehensive brand refresh. MountainHardware.com has been redesigned and enhanced to bring the brand's unique identity to life. To celebrate the brand's 30th anniversary, Mountain Hardware released the Heritage Collection, celebrating its most iconic styles. Mountain Hardware also released a highly sought-after collab with the iconic streetwear brand, Stussy. As you can see, we have a great lineup of brand and marketing activations planned to engage consumers and drive sales this season. We now await the arrival of cold weather. The last several weeks have been unseasonably warm, resulting in a slower start to the fall selling season. Based on third quarter performance and a more cautious forecast for the remainder of the year, We are lowering our net sales outlook. Despite this net sales reduction, our diluted earnings per share range is moving slightly higher, reflecting a relatively unchanged margin outlook and a lower effective tax rate. I'll provide more details on our 2023 financial outlook and initial 2024 commentary later in the call. I'll now review our third quarter financial performance. Net sales of $986 million, were up 3% year over year. Net sales growth was balanced across our direct-to-consumer and wholesale businesses. Within wholesale, the approximate impact of timing shifts resulted in a $30 million benefit to net sales when compared to the third quarter of last year. This was relatively in line with our expectations heading into the quarter. Those margin expanded 70 basis points as lower inbound freight costs and favorable channel mix more than offset our inventory reductions across both wholesale and DTC. SG&A expenses increased 10%, primarily driven by expense growth across our DTC business, demand creation investments, and supply chain. Included earnings per share decreased 6% to $1.70. I'll now review third quarter year-over-year net sales growth by region. For this review, I'll reference constant currency growth rates. U.S. net sales increased 5%. U.S. wholesale increased mid-single-digit percent, driven in large part by on-time Fall 23 shipments relative to late deliveries last year. U.S. DTC net sales increased low single-digit percent. Brick and mortar was up mid-single-digit percent, driven by the contribution from new stores open over the last year, as well as incremental sales from temporary outlet stores. The U.S. e-commerce net sales were down high single-digit percent. The online environment remains competitive and promotional. Latin America, Asia Pacific region, or LAAP, net sales increased 4%. China net sales increased mid-20%, reflecting strong consumer demand across all channels. Our team in China has done an excellent job of driving engagement with consumers in new ways that are authentic to Columbia. During the quarter, we introduced new fall styles to our popular Transit product line, our premium China-specific product collection. The Transit line was prominently featured in our latest brand campaign in China, which included a new brand ambassador and in-person and online brand experiences. In October, we built an entire Columbia brand nature exploration experience at Shanghai's Grand Gateway Mall. The installation featured four specific sectors, beach, cloud, glacier, and jungle. Within each of these microclimates, consumers were able to learn about Columbia's warmth, try cool and protected innovations, and experience them in action. Our digital team brought the outdoors to consumers digitally by launching a Columbia brand virtual reality homepage on Tmall. This immersive outdoor visual experience drove great traffic and consumer brand engagement on the site. I believe the investments we've made in China to elevate talent drive operational improvements or yielding results. China is expected to be one of our fastest-growing markets this year, and we're well-positioned looking into the future. Japan net sales increased low teens percent, aided by earlier shipments of Fall 23 orders and DTC growth. This fall, our team in Japan has connected with consumers to reinforce our heritage through hype collections and events. They're also driving energy through locally relevant partnerships, like the recently launched CoLab with Tokyo-based clothing brand Beams. Inspired by one of PFG's first products, the iconic multi-pocketed fishing vest, the collection fuses technical fishing aesthetics with beam style. The launch has garnered promising pre-order results and is generating extensive media coverage. The RIA net sales declined low 30%, as we continue to reset the business for long-term growth in challenging market conditions. As we outlined on the last call, management is focused on several multi-year initiatives across talent, distribution, marketing, and product. This process includes closing unprofitable doors and non-brand enhancing wholesale accounts as we work to elevate distribution. We believe these efforts will drive a deeper connection with consumers and fuel sustainable growth. LIAP distributor markets were down mid-teens percent, reflecting on-time fall 23 orders, which shifted the timing of sales into the second quarter. Europe, Middle East, and Africa, or EMEA, net sales decreased 21%. Europe direct net sales increased mid-20%, benefiting from earlier shipment of fall 23 product and robust PPC growth. Direct-to-consumer performance was driven by the addition of seven new brick-and-mortar doors over the past year, as well as strong e-commerce performance. As part of our strategy to elevate the Columbia brand experience at retail, we've opened 10 new shop-and-shops with Fingersport in France and Germany this year. These enhanced in-store displays secure space for the brand at an important strategic retail partner while elevating the assortment presentation. Europe Direct has been one of the top-performing markets throughout 2023. Despite the positive momentum we're seeing, we anticipate external headwinds will be more impactful to growth in the orders ahead. Our EVA distributor business declined high 80%, reflecting the anniversary of shipments to Russia, as well as a greater portion of fall 23 orders shipping in the second quarter. Canada net sales were up 38%, driven by earlier shipment of Fall 23 orders, as well as strong DTC brick-and-mortar performance. Looking at performance by brand, Columbia brand net sales increased 4% per quarter, including the benefit of earlier Fall 23 shipments. This fall, Columbia's lead innovation story is OmniHeat Infinity, which remains one of the fastest-growing parts of our business. We're building on last year's momentum with an expanded assortment, including a new innovative double-wall elite construction. Double-wall elite provides enhanced performance with two layers of OmniHeat affinity, which helps block wind and traps warmth. We're also expanding the assortment of OmniHeat Helix, our disruptive poly-fleece technology. Our fall marketing campaign is highlighting these differentiated innovations and continue to establish Columbia as the leader in keeping people informed. The campaign features support across paid media, PR, social, and e-commerce, including spots on Thursday Night Football and the first ever NFL Black Friday game. On the partnership front, we helped Disney celebrate their 100th anniversary with a new special edition collection featuring Columbia gear inspired by vintage Disney artwork. Sell-through of this collection has been outstanding, with key styles quickly selling out. In the coming days, we'll launch our latest Star Wars collection, which I believe will be our most exciting yet. Columbia and Lucasfilm's creative teams work closely together to reimagine Luke Skywalker's iconic flight suit as a fully equipped ski collection. The styles incorporate our proprietary technologies so you can withstand the elements in this galaxy or one far, far away. To promote the collection, we're leveraging our sponsorship of NASCAR Team 2311 and driver Bubba Wallace. Bubba has had a career year in 23, advancing to the round of 12 in the playoffs and generating significant coverage for the Columbia brand. Fans of Bubba, NASCAR and Star Wars will be particularly interested to tune into the NASCAR Cup Series Championship on November the 5th. In preparation for the race, Bubba enlisted the help of a top Jedi master who will make a surprise appearance in advance of the race. In footwear, we launched the faceted 75 Alpha this fall. This modern waterproof hiker with trail running DNA received a Men's Health 2023 Sneaker Award, along with a PFG Pro Sports Shoe. Footwear remains the largest category opportunity for the Columbia brand, and I'm excited about the product pipeline we have heading into next year. Before moving to our emerging brands portfolio, I'd like to welcome Woody Blackford back to the Columbia brand team as our Chief Product Officer. Woody previously spent almost 14 years at Columbia. Woody spearheaded teams that brought to market some of Columbia's most innovative products and technologies. He invented OmniHeat Reflective in 2010, which has been the foundation for billions in sales across the OmniHeat collection. I believe his comprehensive understanding of Columbia and our consumers, as well as his passion for product creation, can help accelerate Columbia's growth around the globe. Welcome back, Woody. Thank you. Fitting to our emerging brand, Sorrel brand net sales increased 9%, primarily driven by earlier fall 23 shipments and higher wholesale closeout sales. This fall, the Sorrel team is engaging with consumers and bringing products to life in new ways. The brand recently opened 20 shopping shops at Nordstrom to celebrate 50 years of the iconic Caribou boot and the launch of new Caribou X collection. Early season sell-through at these shop-and-shops has been very encouraging. Sorrell's new pop-up shop in Brooklyn includes an augmented reality experience where consumers can stand in front of a special mirror and see how they bunk in Sorrell's unique styles. The brand also collaborated with singer Chloe Bailey on an exclusive Caribou X that was only available for purchase at the pop-up. Mountain Hardware net sales decreased 9%, driven by fall 23 wholesale shipments, partially offset by DTC third. This fall, Mountain Hardware is celebrating its 30th anniversary. As part of the celebration, Mountain Hardware launched its Seek Wilder Paths campaign, which reflects a comprehensive brand refresh. MountainHardware.com has been redesigned and enhanced to bring the brand's unique identity, purpose, and tone of voice to life. Mountain Hardware also released a heritage collection celebrating its most iconic styles, including the Exposure Parka, Windstopper Tech Jacket, and Sub-Zero Down Jacket. These products pay homage to the brand's early style, updated with today's fit and fabric technology. Mountain Hardware's collab with iconic streetwear brand Scusi featured several co-branded products, including jackets, trousers, and beanies, as well as sleeping bags. The collection quickly sold out and meaningfully boosted traffic to Mount Hardwood's website. Prana net sales decreased 18% in the quarter. The Prana team remains focused on repositioning the brand for growth in future seasons. Our new brand president, Tricia Humelon, is quickly assessing Prana's opportunities and charting a path to unlock the greatest growth potential. 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 these statements. For the fourth quarter, we expect sales to decline 5% to 10%, reflecting the wholesale sales shift into the third quarter compared to last year, partially offset by modest BTC growth. Our fourth quarter net sales outlook incorporates a slow start to the fall selling season we have experienced and a more cautious view on sales trends for the balance of the year. We're forecasting fourth quarter diluted earnings per share to be in the range of $1.93 to $2.18. For the full year, we now expect net sales growth to be in the range of 1.5% to 2%. Inclusive of a lower tax rate assumption, we forecast polluted earnings per share to be in the range of $4.45 to $4.70. We anticipate strong operating cash flow of approximately $500 million in 2023 as our inventory levels normalize. While it's early in our 2024 planning process, I'd like to provide some commentary on how we're thinking about the year ahead. I'm excited about the product pipeline and growth initiatives we have planned to fuel demand in 2024. For spring 24, we launched OmniMax, our latest performance innovation in footwear. This new platform provides versatile cushioning, enhanced stability, and increased traction for hikers, trail runners, and entrepreneurs. In apparel, we continue to build out an industry-leading portfolio of cooling and sun protection technologies. This spring, we'll introduce OmniShade broad-spectrum airflow, offering exceptionally breathable sun protection with OmniWIC evaporation for fast drying next to skin comfort. We will continue to invest in OmniFreeze Zero Ice, our industry-leading cooling and moisture management technology. The sweat-activated cooling technology is featured in a number of styles and activity categories, helping to keep our consumers outdoor longer for all their pursuits. In our quest to find better ways to help humans enjoy the outdoors, we look to nature to discover new innovations. For fall 24, we're launching an exciting new warming technology, OmniHeat Arctic. This new biomimicry insulation system is inspired by how polar bears keep warm in extreme conditions. OmniHeat Arctic starts with a translucent outer layer that lets solar energy in. Heat is then transmitted to an insulation layer close to the body for maximum warmth, mimicking the polar bear's warmth protection system. The result is lightweight, high-efficient warmth boosted by solar power. We're also investing in key franchises like PFG, which pioneered the fishing apparel category and remains the leader today. Through product enhancements, marketing investments, and reaching new consumers, we're focusing on expanding our leading market share in the phishing category. To drive e-commerce growth and enhance the consumer experience, we're investing in capabilities to enrich content, increase personalization, and optimize our membership program. We can make these types of investments during turbulent periods because of the strength of our diversified global business model and fortress balance sheet. We can invest in long-term growth opportunities at a time when financially constrained competitors cannot do so. Even with all the exciting product and growth initiatives planned for 24, we know there will be challenges, particularly in the first half of the year. Retailers continue to take a cautious approach to managing inventory levels and placing orders. Fears of slowing consumer demand as well as the persistence of higher interest rates create lingering economic uncertainty. The effect of these headwinds is most pronounced in the U.S., and we're starting to see similar conditions emerge in our Europe direct markets and Canada. Geopolitical unrest is adding to this uncertainty. As previously communicated, we're phasing out products designed with PFAS chemicals across our global product line in 2024. Our intent is to stop manufacturing any apparel or footwear with PFAS prior to our fall 24 season. In the U.S., we anticipate some retailers will choose to destock PFAS styles in the first half of the year before loading in the new styles designed with PFAS free chemistry fall 24. This transition is expected to impact the flow of our wholesale business and how we and others manage through existing inventory. We also expect our footwear business to remain challenged through the first half of 2024. After our footwear category trends remain soft, its inventories remain high. Our spring 24 order book reflects the culmination of these challenges. As a result, we expect our global wholesale business to be down by a low double-digit percent the first half of the year. We expect this wholesale decline will be partially offset by continued growth in our global DTC businesses, resulting in total first-half net sales declining a mid-single-digit percent. For the full year, we believe generating net sales growth is achievable as retail inventory levels normalize and retailers seek to restock products designed with PFAS-free category. In this environment, Our objective is to modestly improve full-year operating margin to 24. We plan to provide more detail on the 24 outlook when we announce fourth quarter results next February. Overall, I'm confident in our team, our strategies, and our ability to achieve the significant long-term 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, omni-channel, and global, and empower talent that is driven by our core values. That concludes my prepared remarks. Welcome your questions for the remainder of the hour. Operator, if you can 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. Once again, that's star 1 if you have a question.

or a comment. The first question comes from Bob Drebel with Guggenheim.

Bob, please proceed.

Thank you. Good afternoon, Tim, guys. I guess, Tim, two questions that I have for you. I think the first one is, when you think about the next few months of this, the holiday season and sort of what's upon us, Can you just, like, with the order book where it is, you know, your sell-ins where it is, can you elaborate a bit in terms of how you see inventories at wholesale, I mean, at retail, your wholesale partners? And then I guess the second piece of this is when you think about your DTC business sort of, you know, in the fourth quarter but also sort of in the 24th, just how you're approaching it, you know, given a lot of the headwinds that are out there and sort of some of the uncertainty. Thanks.

Yeah. Thanks, Bob. Well, you know, as you know, this year has been really about inventory management for the company, but that's been the focus for us. And, uh, so we're prepared to have a great fourth quarter. Um, as usual with Columbia, it's going to be a weather story. So we're expecting weather to be normal. And, um, Frankly, that's a global norm. So we've got places in the world where it will likely be colder than normal and some places where it may be warmer. But I would expect that we've planned a business for basically an average year. Our partners, our retail partners, are well set up. We delivered earlier this year than we did last year. So our expectations are that we're going to have a solid sell-through products for 2023. As it relates to 24, we've basically been operating a business that we grew nicely with local talent or talent that's been in with the company for quite some time. We've added a professional to help us run the business in a better way, David Thies, who we talked about last quarter. And our expectations are that as we continue to improve the way we operate DTC stores for the balance of 23 and into 24, we're going to see some quite outstanding results. Frankly, we're doing quite well with the existing fleet.

We know we can only improve.

And, Tim, as you think about the early spring order book, just any more color in terms of, you know, is – you know, pricing or, you know, anything in terms of, is it all just sort of macro? Do you think that's impacting, you know, what you've seen from your wholesale partners at this point?

Yeah. Well, I think, you know, there's, there's some for larger operations, more pan American operations. There are concerns that they want to manage their inventory levels that can, that contain PFAS out of their business inventories. And we, we want to do the same thing. So, There's a certain cautiousness there. And the expectations, I think, are going to be quite good for the rest of the year. Our expectations are that as we continue to roll out these innovations and excel on these marketing activities that we talked about earlier today, that we're going to have a solid year.

Hey, Bob, and I might add, you know, a couple of the factors that are contributing to that order book being down. Certainly the outdoor footwear trend that we've seen this year in our business has been a little bit soft in the footwear category. That's holding back the order book. Tim touched on the PFAS transition. That's having an impact. And then to a degree, you know, particularly with smaller customers that may have more liquidity constraints, given the environment that we're operating in, that that part of our business has been more impacted than when we look at certain of our larger strategic accounts.

Great. Thank you very much.

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

Yes, thanks so much for taking my questions. I guess I wanted to ask, I think you mentioned at the end of your remarks, you know, you saw some signs of headwinds emerging and Europe Direct and Canada. I just wanted to, you know, maybe you could provide more details into that. And then, you know, talking about the PFA impact on the wholesale order book, is there any way you can, you know, explain a little bit more, like, which regions should be more impacted? Maybe as I think about, like, maybe some regions have retailers who are farther along in that, you know, road into transitioning out of PFA. So that would be very helpful to understand as well. Thank you.

Certainly. Well, we're seeing, as it relates to Europe and Canada, we're seeing similar constraints that Jim mentioned on the capital, the lower capitalized retailers that we have in those two markets. And again, the geopolitical disruption, including the war in Ukraine, specifically as it relates to Europe, are having an impact. As it relates to PFAS, there's really only two geographies in the world that will have a prohibition beginning in 2025 on PFAS. So it's possible to navigate these and sell product where the products are prohibited. But large multi-state USA operations that want to have a common inventory across their entire fleet Those are the areas where they're being quite cautious on building inventories.

And then just to double back, Maurizio, as it relates to Europe and Canada, I'd also note when you look at our third quarter results, consumer demand within our direct-to-consumer businesses in each of those geographies is still plus 20% in local currency terms. So from a consumer demand standpoint, still very healthy in most, if not all, or close to all of our international regions. where we're beginning to see some of that softness is looking out into the order book and just given the overall conservative nature of how retailers are placing orders at this stage.

That's super helpful. And I guess just very quickly, when you talk about the, you know, the, in your presentation about the number of stores, just want to make sure, does that number include the temporary stores that you're opening and also how long, are these temporary stores will be operational. Just, I guess, I mean, the purpose of it is to get rid of excess inventory. So, I just want to make sure, like, you know, how should we think about those stores once, now that it seems that they're in a good place.

Yeah, the temporary stores are not reflected in the store counts that we provided. And we haven't provided those for a variety of reasons. These come in all different forms and shapes and sizes. and so they're really not comparable to looking at the existing store plates. That's why the store count's not included. We've begun to extend certain of those leases through much of next year, knowing that, you know, we still have work to do in terms of getting our inventory cleaned up, as much progress as we anticipate making by the end of this year. There's still continued efforts next year, coupled with, I think – The point around some of the PFAS inventory, certainly to the degree we have remaining unsold PFAS inventory, we would look to move that through our outlets in a profitable manner, similar to what we're doing this year.

I thought very quickly, what are the two regions that you mentioned regarding the PFAS? Maybe I didn't hear it, but I just want to make sure I got those two. What were those two regions?

New York and California.

Oh, okay.

Just those two states. Those are the only two states that require PFAS-free chemicals, and the effective date of that regulation is January 1 of 25. So we have between now and then to work through the transition. We're well down the tracks on this. We're beginning with our fall 24 season, which we've commercialized and we're going to market on. That product no longer – we've designed it so that it no longer – as PFAS chemicals intentionally put into that product. And so we'll be working through next year as retailers destock any on-hand inventories they have and then restock into the new merchandise. That's going to create some of the challenges when you think about first half, second half from a growth rate standpoint, because part of that first half order book is soft as retailers begin to contemplate what they need in inventory and be able to sell down those PFAS styles. And then our expectation is that they'll eventually begin to restock into that as our fall merchandise becomes available in the market. And to some degree, while this is specific to California and New York, we are making these conversions for our global product line. And so to some extent, while this is specific to New York and California, it does have a carryover impact into other geographies as they need to work through the same transition with all of their retailers.

Got it.

Thank you so much.

Okay, the next question comes from Lauren Veselescu with BNP Paribus. Please proceed.

Oh, good afternoon. Thank you very much for taking my question. I wanted to ask, sorry, I'm going to be the next person to ask about PFAS, but I think Jim, you've been pretty clear about PFAS. You guys called it out at your investor day. I think you talked about it. It's in your 10Q. You guys have been ahead of this, but what do you think are the implications? I know you can't speak to other companies, but what do you think the implications are for the industry? Where do you think you are in terms of phasing this out relative to the overall industry? Is this applicable – to just outerwear, or does it just go all the way down to either the YKK zippers, and this is more of a broad industry factor to consider?

Well, yeah. So this is Tim. So just to be clear, PFAS has been around in thousands and thousands of products, all the way from food containers to medical devices which are implanted in the human body. So this is not just limited to outerwear. This is endemic across all sorts of stuff, including furniture and anti-stain paints, as you mentioned in the zipper thing. So these products are endemic and across all sorts of different products. I think we're well ahead. In fact, I know we're well ahead of many competitors especially those who are smaller. So if we think about the size of our business and the amount of opportunity we have and capacity to accept additional expenses as it relates to understanding the chemistry, applying the chemistry to our products, et cetera, and then managing where these products go after January 1, 2025 so that we don't We don't run afoul of these issues. We're well ahead. There are other smaller companies who are quite far behind and even some larger ones. So I think we're managing our business to the best we can, and I think we've got it well organized, and I'm proud of what the team's done to manage this process.

Okay. Very helpful, Tim. And then I might have missed this just because we're all juggling a bunch of earnings calls, but did you guys talk a little about your spring order, the reflection of it, the challenges? Maybe can you just put a finer point on that? How do we think about that as we think about 1H? Is that reflective of U.S. wholesale challenges, or are you also seeing that reflective of of AMEA as well or other regions?

Yeah, we commented on the losses. Given the spring 24 order book that we've now fully taken, we anticipate our wholesale business globally be down a low double-digit percent. Within that, as you think about it from a geographic standpoint, knowing that the U.S. is where we've seen most of the softness, and then you have some of the discreet activity that we're talking about on the conversion of PFAS, the U.S. wholesale business will decline at a faster rate than the overall global rate. To a lesser degree, are we seeing that in the case of our European business? And then our Asia businesses are actually still quite well performing. Those index a little bit more to C2C channels. Taking that outlook for our wholesale business being down low to double-digit, and when we combine that with the expectation that our D2C business continues to grow in the first half of next year, we believe that from an overall standpoint, through the first half of the year, our business is likely to be down a mid-single-digit percent. We're still very early in our 2024 planning processes, so we've not gone any further than that in terms of what that might mean from an operating income perspective. at least some pressure knowing that there's going to be the top lines to be down to the first half of the year. And of course, it's too early for us right now to comment on the full year.

Okay, so that's helpful. And then maybe, yeah, to your point, it's super early, but maybe you could just talk about just the degree of flexibility around the P&L. What can you do in terms of pulling back? I think, you know, you've got a 5% marketing spend. Anything that you would be willing to just, are there no sacred cows kind of approach to hold the profitability as we transition through this PFAS transition?

Yeah, Ron, I think I'd just like to make the comment that the company's been historically known as an incredibly conservatively run and very focused, efficient company. And I think you can expect that that will continue and that there are lots of levers for the company to use to manage our SG&A spend. And we'll be using every one of them to maximize the return for our investors.

And not the least of which, Laurent, as you'll recall, one of the areas that's impacted our P&L in a meaningful way this year is the elevated inventory and how that's added to our SG&A in terms of carrying costs that impacted our gross margin as well. That is easily the top area that we're focused on, getting those inventories back down, getting our labor productivity within our operations at a more efficient level, because we know that that can drive meaningful improvement in the operating structures of business going into next year.

Okay, very helpful. Thank you. Thank you both, and best of luck for this holiday season.

The next question comes from John Kernan with TD Cowen. John, please proceed.

Hi, this is Alex Douglas on for John. Thank you for taking our question. I actually just had a quick follow-up on something you said in response to the last question. As it relates to kind of the flow of those elevated inventory costs and what you might get back over the next couple of quarters, How should we think about the magnitude and the timing of that? Any additional color you could provide there would be extremely helpful.

Yeah, it's going to be difficult to provide specific guidance in terms of how we think about that in FY24. What I would indicate is last quarter we indicated that the impact of the elevated inventory on our operating profits here in 23 has had about a 200 basis point impact on our operating profits. And that's a combination of SG&A with the likes of outside storage, labor costs, and then, of course, the gross margin with the mix of excess product and SMU product that we do specifically for our outlets. And so there's a – you know, looking out to 2024, there is 200 basis points of improvement over time. To what extent we're able to capture all of that is dependent upon continuing to make progress on inventory. I wouldn't think that we're going to get all of that – And then certainly there's so many other variables at play when we think about 24 from a profitability standpoint, you know, between revenue, other investments, and other factors impacting the business. I don't want to get into, you know, magnitude and flow of what that could potentially look like.

Okay. That's very helpful. Thank you.

Okay. The next question comes from Jim Duffy. With Stifel, Jim, please proceed.

Oh, thank you. Hello, guys. A lot of questions have been asked already. I wanted to ask just about the trend that you're seeing in your outlet stores. And I'm curious how the stores are performing given the mix has shifted towards clearance inventory versus made-for product. So if you could comment on traffic and conversion in the stores, what you've seen thus far, that would be great. Thanks.

We still see nice growth coming out of our outlet channel. You know, it's difficult to comment on the traffic side of things in particular, only from the perspective of to the degree we've opened up. And in many cases, we've opened up temporary stores in locations where we have existing outlets. So there is some cannibalization and we're only keeping traffic on the existing store fleet. So it's tough for me to answer that question because we know that there's some puts and takes across that. But On the whole, we're still seeing in the quarter, we've seen nice growth in that brick-and-mortar business. I'd say that it's decelerated from an overarching standpoint when you look at Q1 to Q2 to Q3, but still driving nice growth in that part of our business.

Very helpful. Thanks, Jim.

Next question comes from Abby Zvejniks with Piper Sandler. Abby, please proceed. Please proceed.

Great, thanks so much for taking my question. I understand that inventory is expected to be down over $200 million at the end of the year, but it seems like with the order book down low double digits for the first half, the goal will likely be to reduce inventory more. So what of that will be reducing inventory receipts, which I know you commented that you did, versus how long will the impact of increased promotions way on gross margin. Thank you.

Well, you know, we're still well on track to get that $200 million reduction in inventory exiting the year. Our primary focus there has been that that should be less of a factor as it relates to the timing of spring 24 inventory receipts in production. You know, as we begin to lap spring 23 when we made progress with regard to the lead times within our supply chain. As we look forward, our supply chain is now caught up. So year on year, that really shouldn't be the factor. This is really much more a function of continuing to work through the inventory that we're carrying over from prior seasons in our fall 23 inventory and leveraging our outlets to profitably work through that inventory here in the fourth quarter. And we've been really pleased with the margins that we've seen as we've sold through that excess inventory in our outlets through the third quarter and into the fourth quarter here.

Okay, got it. Thank you.

Okay, the next question comes from Alex Perry with Bank of America. Alex, please proceed.

Hi, thanks for taking my questions here. I guess just first, what are your current expectations for holiday? Do you sort of expect both you and the industry to lean heavier into promos during this holiday, given what you're seeing from a consumer behavior standpoint? I guess, how do you think the overall promotional environment will play out? Thanks.

Yeah, I think we can expect to be sort of an average promotional year this year. Just to reiterate, Columbia's very weather sensitive company in terms of our product offering, which is heavily weighted to outerwear and winter footwear. So that'll be an important catalyst for growth and high margins as it relates to our company. And then you have to remember that Columbia is a global company, so we can't just look at at the weather in North America. It's going to be important everywhere. So our expectations are there's going to be an average weather year somewhere in the world and hopefully across the world.

Perfect. And then I just wanted to ask a similar question for sort of the puts and takes for 4Q gross margins. And then, you know, Jim, any sort of help on how we should start to frame, you know, calendar 24 gross margins? I know that You know, freight's been a big benefit as we exited this year, you know, offset by some heavier promos given the elevated inventory. Just any, you know, color on sort of how we should be framing at least gross margins as we move through next year. Thanks.

Yeah, let me speak to the fourth quarter first. So our gross margins were up 70 basis points in the third quarter. We would expect our gross margins to be up. Slightly better than that in the fourth quarter, and it's essentially the same drivers that are going to underlie that. We know that we're going to continue to have or expect to have the freight benefits. Those freight benefits the last couple quarters have been north of 300 basis points. We should see that same or similar benefit here in the fourth quarter. Channel mix will be positive for us as we've got more of those wholesale shipments that we got out in the third quarter, so the business will be a bit more heavily weighted. to our D to C business. So combined, that's a pretty strong tailwind in the gross margin going into the fourth quarter. The offset to that would be an increase in our promotional cadence, promotions and markdowns, by and large reflecting moving through that excess inventory through our outlets. So we feel good about the margin plan that we put forward. Our margin in the third quarter came through a little bit stronger than how we planned it coming into the quarter. So we think we're well set there. Looking out to next year, I think the factors I'd be thinking about without getting into specifics, this inbound freight benefit that we've been seeing this year, that'll carry through at least the first quarter of next year. That's probably about the time that that would transition and be comparable for the balance of the year. The costing environment. has generally been favorable as we've finalized our product costing for spring 24 and fall 24. And with the neutral to favorable costing environment, we've by and large held pricing for a product line next year. So that should be net neutral to net positive. And then, of course, we'll have some benefit. This is going to be the more difficult part of it to measure, but as we get inventories back down into more normalized levels and a better balance on the full price to close out or clearance activity, that should provide a margin benefit. So now the challenge with that is going to be we need the top line as well to offset some of those margin pressures.

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

Once again, if you have a question or a comment, please indicate so by pressing star one. The next question comes from Jonathan Komp with RW Baird. Please proceed.

Yeah, good afternoon. Thank you. I just want to follow up just to clarify on the PFAS topic. Did I miss or maybe could you quantify the impact that you're talking about? Is that across sort of all product lines and all seasons? And then are you willing to sort of talk about the impact from destocking that you're embedding in the first half.

Yeah, we're having a difficult time with the audio, but I think you're asking about PFAS. Is that correct?

Yeah, hopefully you can hear me. I was asking if it's really applicable to all product lines, and then are you able to quantify the drag that you're building into the first half commentary?

Yeah, so the PFAS, as I said earlier in the call, is endemic across thousands of products, and so ours are no exception. Many of our products contain PFAS, and as we're building newer products and getting out of those, they're changing, and we don't intend to have any PFAS products that we're manufacturing after fall 24. So that's where we're headed. We've got a clear plan to sell our products The remainder of our PFAS inventory, almost all of it has been sold. And so we're expecting that the final liquidation will have minimal impact on the business in the future.

And then, John, as it relates to the first pass, it's exceptionally difficult to quantify the impact of what we're talking about from a PFAS transition perspective. There's so many other variables that are impacting the business. We couldn't even really estimate what that could look like. It's meaningful enough that, you know, as we took in our order book, it was a common conversation that we'd had with our sales team, with certain customers, particularly in the U.S., but to some degree that's touching on earlier globally as well because this is a change in our global product line.

Okay, that's helpful. Thank you. And one follow-up just on Sorel. If you could talk a little bit more about what's contributing to the lower end growth outlook for this year? And as we think longer term, I know a year ago at Investor Day, you highlighted Sorrell's having the opportunity to grow 20% or higher year in and year out and having a billion-dollar revenue opportunity. So can you just maybe frame up how we should be thinking about low single-digit growth this year for Sorrell in terms of the broader opportunity and how you still see it?

Yeah.

We are still very bullish on the Surrell brand and the opportunities there is clear. I would say that the opportunity for us to continue to grow it into a year-round brand has been slightly more challenging than we thought. And so it's still dependent heavily on winter product where it has an incredible reputation. Our plan is to continue to focus on expanding the a seasonal nature of the products to take advantage of the incredible brand that Solilo has. We're also going to be expanding gender to get more men's product and children's product in the offering. But right now, today, it's still a very famous winter.

That's very helpful. Thank you. Thanks, Tom.

Okay, we have no further questions in queue. I would like to turn the floor back to management for any closing remarks.

Well, we thank you for listening to us today, and we'll talk to you soon in February when we have results from our fourth quarter. Thank you.

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