Columbia Sportswear Company

Greetings. Welcome to the Columbia Sportswear first quarter 2024 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 and Chief Administrative Officer and General Counsel Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations, or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation 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. I'm pleased to report that 2024 has started out broadly in line with our expectations. We are reiterating our full-year net sales outlook while modestly raising our diluted earnings per share range. In this challenging environment, we continue to take a disciplined approach to expense management, and our commercial teams are working to maximize sales across all channels. Our Fortress balance sheet enables us to take a thoughtful approach to unlocking the long-term growth and profit improvement opportunities we see across the business. During the quarter, we made meaningful progress on our top priorities. Our inventory reduction plan has yielded substantial benefits. Inventory was down 37% year-over-year exiting the quarter. I'm proud of our team's efforts to navigate the supply chain challenges of the last several years while generating healthy gross margins. We are now shifting our focus towards longer-term supply chain goals, including improving inventory terms and enhancing the speed and efficiency of our operations. Growth is vital for our success. We are implementing strategies across the portfolio to accelerate the business. For Columbia, we're focused on bringing younger active consumers into the brand through a reinvigorated product line that further emphasizes innovation, performance, and style. On the marketing front, we're targeting a more balanced, full funnel approach to drive consideration from new customers. We are also focused on elevating our product assortment and enhancing our in-store retail presentations across all channels. We have several proof points across the globe that this strategy is successful. We've driven meaningful growth in recent years in China and several markets across our Europe direct and distributor businesses. We know that when we target the right consumers with our innovative products, We win in the marketplace. In our emerging brands, we have new leaders at Sorrel and Prana formulating the brand and product strategies to fuel their next phase of growth. Mountain Hardware has strong momentum from its recent brand refresh, and the team is thinking bigger as they map out paths to meaningfully scale the business. Turning to our profit improvement program, we're on track to deliver between 125% and $150 million in savings by 2026, including $75 to $90 million in cost savings this year. We are eliminating expenses associated with carrying excess inventory and driving cost efficiencies throughout our supply chain. We've also begun realizing indirect spend savings. During the quarter, we completed a reduction in force It's never easy to lose valued members of our team who have contributed to our company during their tenure. Our teams handle this process with respect and thoughtfulness, consistent with our core values. We remain confident that our Fortress balance sheet, differentiated brand portfolio, and strategies position us to reaccelerate growth and capture market share over time. I will now review first quarter financial results. Net sales decreased 6% year-over-year to $770 million. This exceeded the high end of our guidance range, primarily driven by earlier timing of spring wholesale shipments. Direct-to-consumer net sales increased 3%, led by brick-and-mortar growth. E-commerce sales declined as we anniversary last year's promotional activity. Our wholesale business declined 14% year-over-year, primarily reflecting lower spring 24 orders. Gross margin expanded 190 basis points, as lower inbound freight costs and favorable channel mix more than offset promotional activity. SG&A expenses were essentially flat, as higher DTC expenses were offset by lower supply chain and variable demand creation spending. Deliverance per share decreased 4% to 71 cents. I'll now review first quarter year-over-year net sales growth by region. For this review, I'll reference constant currency growth rates. Overall, North America remains our most challenging market. We are facing several headwinds in this market, including consumers continue to grapple with inflationary pressures, which is impacting soft goods demand. Traditional outdoor category trends are weak, particularly in footwear, And retailers are taking a cautious approach in placing future season orders. Outside of Growth America, we have stronger trends in several markets, including China, Japan, and our Europe Correct businesses. In the U.S., net sales decreased 8%, driven by mid-teens percent decrease in wholesale sales, resulting from lower spring 24 orders. U.S. DTC net sales were down slightly. Across all channels, we experienced strength in January, fueled by favorable winter weather, followed by softer trends in February and March. USDTC e-commerce net sales were down 0.15%. Sorrel.com was particularly hard hit in the first quarter, and the overall e-commerce environment remains challenging. Since late last year, we have been proactively managing promotional activity on Columbia.com to help establish the site as the best expression of the brand. We know that our site is already an important destination for our younger, active consumers. We want to ensure that when they visit Columbia.com, they see our latest products and innovations with enriched brand storytelling. USDTC brick and mortar sales increased high single-digit percent, driven by the contribution from temporary clearance locations New stores opened over the last year and, to a lesser extent, improved store productivity. In 2023, we used our fleet of outlet stores and temporary clearance locations to profitably liquidate excess inventory. This year, we will continue to leverage these stores to manage inventory levels, including PFAS inventory, and to drive sales as consumers seek out value in the marketplace. Latin America, Asia Pacific region, or LAAP, net sales increased 7%. China net sales increased high 20%, led by exceptional e-commerce performance across our platform partners. In fact, the team was proud to receive special recognition from TikTok this quarter as one of the fastest growing outdoor brands on the platform. The spring 24 transit line, a premium China-specific collection, is outpacing last year's sell-through and clearly resonating with younger Chinese consumers. We expect China to continue being one of the fastest-growing parts of our business in 2024. Japan net sales increased low double-digit percent. Sales benefit from increasing foreign tourist activity, which is helping to offset softer domestic consumer spending. Korea net sales declined mid-single-digit percent. LAP distributor markets decreased high 20s percent, reflecting a greater portion of spring 24 orders shipping in the fourth quarter of last year compared to the first quarter. Excluding the impact of shipment timing, LAP distributor sales were relatively flat. Europe, Middle East, and Africa region, or EMEA, net sales decreased 6 percent. Europe direct net sales were essentially flat as healthy DTC growth offset the impact of lower spring 24 wholesale orders. The Columbia brand continues to perform well in the marketplace, measured by healthy DTC and wholesale sell-through, despite economic and geopolitical pressures. This quarter, we extended our popular Hike Society program into France following its successful launch in the UK last year. As a reminder, we have Columbia Hike Society programs across several European and Asia direct markets. This series of events allows young hikers to meet like-minded people, to explore the outdoors, and learn about the Columbia brand's technologies. To further strengthen Columbia's presence in the important hike category, we're continuing our exclusive partnership with Mega Marsh. This year, it includes a series of 23 hiking events, that take place across Germany, Austria, and Switzerland, with each event typically fielding over 1,000 participants. Our EVA distributor business declined low 40%, reflecting a greater portion of spring 24 orders shipping in the fourth quarter of last year compared to the first quarter. Excluding the impact of shipment timing, EVA distributor sales were down only slightly, despite several markets being impacted by geopolitical conflicts. Canada net sales declined 11 percent because lower spring 24 wholesale orders were partially offset by modest BTC growth. Similar to the U.S., Canadian consumers are seeking out value in the marketplace, which is driving healthy performance at our outlet stores. Looking at performance by brand, Columbia brand net sales decreased 6 percent, reflecting lower spring orders partially offset by DTC brick and mortar growth. The delivery of our spring shipments is well underway, and we're excited for consumers to gain access to our newest product innovations. Our industry-leading cooling and sun protection innovations, like OmniFreeze and OmniShade Sun Deflector, differentiate Columbia from the competition. This spring, we launched OmniShade Broad Spectrum Airflow, offering exceptionally breathable sun protection with OmniWick Evaporation for fast drying next to skin comfort. We're also focused on re-energizing PFG with new products like the PFG Uncharted Collection. This new assortment features a younger, more active fit, tech-packed performance, and new fabric versions. In footwear, we launched the OmniMax system, which combines versatile cushioning, enhanced stability, and increased traction. OmniMax is available in a variety of hiking, trail running, and fishing styles. In our DTC stores, we supported the launch with in-store and window displays, helping to drive encouraging sell-throughs of higher price point OmniMax styles like the Konos. I'm encouraged by the consumer response to several of the new footwear and apparel offerings that I referenced. These are early indications that the Columbia brand strategies to attract new consumers and drive long-term growth are on the right path. We look to build on these successes in the coming seasons and years as we expand our consumer base. In February, Columbia's innovative spirit was on full display as our OmniHeat Infinity technology helped protect Intuitive Machines' lunar lander on its historic mission to the moon. Columbia Sportswear is a proud scientific partner of Intuitive Machines. Our thermal reflective technology helped protect the Nova Sea lunar lander from the extreme temperatures of outer space. This partnership brings Columbia's technology full circle. We're sending a product to the moon that was inspired by NASA space blankets. The mission was featured in hundreds of media outlets, creating billions of impressions worldwide. We are proud to share that we've signed on to Intuitive Machines' next mission scheduled for later this year. In April, we partnered with Academy Sports and Outdoors to host a special Bubba Wallace meet and greet in Dallas ahead of the NASCAR race at Texas Boater Speedway. Both Columbia PFG and Academy have a long history with NASCAR, and this event created a unique opportunity to further connect Bubba's energetic fan base with our brand. The week was capped off with other driving academy and PHE-wrapped car on its way to a seventh-place finish. As we have mentioned before, the wholesale channel remains a top priority for the Columbia brand, and we're excited to leverage our ambassadors to create brand heat with our key strategic partners. This spring, we launched our latest collaboration with New York-based boutique Kiff, featuring apparel, accessories, and footwear designed for outdoor camping. The collection blends functionality with style while appealing to a younger audience. Shifting to our emerging brands, as a reminder, our emerging brand portfolio sales mix is predominantly in North America, which is our most challenged market. The headlines we outlined earlier on the call are evident in our emerging brands' performance. Sorel brand net sales decreased 24%, with challenging trends across DTC and wholesale. With new leadership now in place, the Sorrell team is focused on revitalizing the brand, building a compelling product range, and driving long-term sustainable growth. I remain confident in the future of the Sorrell brand. Mountain Hardware is building on the momentum from its recent brand refresh. In the quarter, net sales increased 17% reflecting earlier timing of spring shipments and BTC growth. The product line and brand positioning are on track, and the team is focused on accelerating growth. Chrono net sales decreased 4% with a decline in wholesale partially offset by modest BTC growth. The product team remains focused on building brand awareness, refining the product assortment, and unlocking the brand's growth potential. We're encouraged by Fall 24 orders and the potential to return to growth in the second half of the year. I'll now review our 2024 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. Looking to Fall 24, our teams are continuously working to minimize any shipment delay resulting from disruptions in the Red Sea. At this time, delays appear manageable. The vast majority of our product line is expected to be delivered on time and in full. We are reiterating our net sales outlook of a 2% to 4% decline. While there are modest changes across our portfolio, our overall net sales expectations has not meaningfully changed. Gross margin is now expected to expand approximately 80 to 120 basis points to 50.4 to 50.8 percent. We are expecting modestly higher clearance and liquidation activity as consumers seek value, and we will continue to opportunistically work down inventory levels and maximize sales. SG&A is expected to be 43 to 43.4 percent of net sales, leading to an operating margin of 7.7% to 8.5%. Our diluted earnings per share outlook has increased modestly to $3.65 to $4.05, driven by higher interest income, licensing income, and a lower share price. We expect strong output in cash flows of at least $350 million in the year. 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 are 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's 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?