Columbia Sportswear Company

Good afternoon, everyone, and welcome to Columbia Sportswear's second quarter 2024 financial results. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Andrew Burns. Sir, the floor is yours.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second quarter results. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available on our investor relations website, investor.columbia.com. With me today on the call are Chairman, President, Chief Executive Officer Tim Boyle, Executive Vice President and Chief Financial Officer Jim Swanson, and Executive Vice President and Chief Administrative Officer and General Counsel Peter Braggins. 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 FCC 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 the 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 in 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 second quarter results were generally in line with guidance. We're working to maximize sales in a challenging U.S. marketplace. characterized by slow consumer demand and cautious retailers. Outside the US, we're experiencing strong demand for our products in most international markets, including China and our Europe direct business. Through the first half of the year, we've made meaningful progress on our top line priorities. Inventory exit in the quarter was down 29% year over year, reflecting substantial progress in our inventory reduction efforts. The profit improvement program is on track to deliver between $75 and $90 million in cost savings this year. We're reducing expenses associated with carrying excess inventory and driving cost reductions in focused areas of the business. We have generated strong operating cash flow of over $100 million through the first half of the year, enabling meaningful return of capital to shareholders. We're on track to generate over $350 million in operating cash flow this year. With much of the cost containment and inventory reduction actions well underway, our focus is on returning to growth. For Columbia, we're building strategy to bring new consumers into the brand through enhancing our product line and marketing. Our efforts to stabilize Sorrel and lay the foundation for its next phase of growth are in motion. Krana's turnaround efforts have begun with signs that the brand is on a path to return to growth in the seasons ahead. Mountain Hardware is benefiting from its recent brand refresh and is on track to deliver growth this year. Our Fortress balance sheet remains a competitive advantage and enables us to take a thoughtful approach to unlocking the long-term growth and profit improvement opportunities we see across the business. We exited the quarter with cash and short-term investments of over $710 million and no debt. As we begin the second half of the year, our fall 24 order book supports sequential improvement in wholesale sales with the potential for overall sales to return to growth by the fourth quarter. Given our year-to-date performance and our current trends that we see across the business, we are reiterating our four-year net sales and diluted earnings per share guidance. Overall, 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 our second quarter financial performance. I'd like to remind everyone that the second quarter is our lowest volume sales quarter. Small shifts in the timing of shipments and expenses can have a material impact on reported results. Net sales of 570 million decreased 8% year-over-year and were within our guidance range. Gross margin contracted 270 basis points, slightly below plan, as we made efforts to spur demand and reduce inventory in the U.S. SG&A expenses decreased 3%, primarily reflecting lower supply chain expenses SG&A was below plan in the quarter, resulting in our operating loss coming in slightly better than the guidance range. Our second quarter loss per share of 20 cents compares to diluted earnings per share of 14 cents in the second quarter of 2023. Looking at net sales by geography, U.S. net sales decreased 15%, primarily driven by a high 20% decrease in U.S. wholesales. The combination of lower spring 24 shipments and ongoing retailer cautiousness impacted results. While wholesale sell-through is trending down mid-single-digit percent, in part due to lower shipments, Columbia brand channel inventories are well below prior seasons. We're well positioned to exit the season with lean channel inventories. USDTC net sales decreased low single-digit percent. Brick and mortar was up mid-single-digit percent, driven by the contribution from temporary clearance locations and new permanent stores opened over the last year. U.S. e-commerce net sales were down high teens percent. A challenging e-commerce environment for traditional outdoor brands, coupled with efforts to de-emphasize promotions on Columbia.com, weighed on performance. As we have said on path calls, our goal is to establish Columbia.com as the best expression of the brand. ensuring that visitors to the site see our latest products and innovations with enriched brand storytelling. For my review of second quarter year-over-year net sales growth in international geographies, I will reference constant currency rates to illustrate underlying trends in each market. Latin America Asia-Pacific region, or LAAP, net sales increased 13%. China net sales increased mid-teens percent, led by robust e-commerce growth. Highlights in the quarter include a successful 618 event and continued growth with TikTok, which remains one of our fastest-growing platforms. While e-commerce performance is leading, we are seeing strong performance in wholesale and DTC brick and mortar. Overall, the China marketplace is healthy, which is translating to increased store productivity, lower discounting, and leaner inventory levels. Our success in this competitive market is fueled by localized product and marketing investments rooted in our brand's deep heritage and innovation. Our brand activations in the quarter highlight the team's focus on cultural relevance and consumer connections. Our summer hike brand campaign featured a video with popular outdoor enthusiasts that garnered millions of views and even more impressions on social sites. We validated PFG's global appeal with a successful TikTok campaign in cooperation with a top phishing influencer on the platform. We have several more marketing activations planned for the balance of this year in this important market. We continue to anticipate that China will be one of our fastest growing markets in 2024. Japan net sales increased high single digit percent. the continued increase in international tourism more than offset softer domestic spending. This summer, we activated several marketing campaigns throughout the season, including hike, travel, rainwear, and fishing activations. Beginning this month, we'll be sponsoring a short-form TV program called Life in the Outdoors, highlighting Columbia innovations and our connection to the outdoors. This program will air throughout the fall season, reaching millions of consumers across the greater Tokyo area. Korea net sales declined low teens percent. LAP distributor markets were up high 30%, primarily reflecting earlier shipments of increased fall 24 orders. Europe, Middle East, and Africa region, or EMEA, net sales increased 3%. Europe direct net sales increased low double-digit percent, led by a robust DTC growth. I recently had the opportunity to visit Europe and meet with several leaders of our largest customers. It's clear that we have a tremendous opportunity to build bigger businesses with these strategic partners. Our teams in Europe are doing an exceptional job creating Columbia brand visibility and relevance in the marketplace. This summer, our brand efforts focused on generating momentum in the hike category through a variety of marketing efforts and grassroots events. From our Get Hiked marketing campaign to the Columbia Hike Society and an exclusive partnership with Megamarsh, we are strengthening Columbia's presence in this important geography. Our Europe Direct business remains on track to be one of our fastest-growing markets this year. Our EMEA distributor business decreased low single-digit percent. Canada net sales decreased 4% as lower wholesale sales were partially offset by DTC growth. Columbia remains well positioned in Canada with high brand awareness and consumer trust. Looking at performance by brand, Columbia brand net sales decreased 5%, primarily reflecting a challenging U.S. marketplace, partially offset by healthy trends in many international markets. At the end of June, we launched our revamped U.S. Columbia Greater Rewards Loyalty Program with several exciting new features aimed at enhancing consumer benefits and engagement. Members now enjoy new rewards, personalized offers tailored to their preferences, and the ability to earn points on purchases. Spending over $300 annually earns members our newly launched Titanium status, which includes additional perks like early access to exclusive events and products. Columbia Grader Rewards Program members already represent the majority of USDTC sales, with over 5 million active users who have made a purchase in the last year. These valuable Columbia customers typically spend more and purchase more frequently than non-members. With new and enhanced features, as well as our continued expansion of benefits, I believe we will be able to further increase the impact of this important program over time. On the innovation front, Columbia Brand's cooling technologies and sun protection products are key differentiators. This spring, we introduced our latest cooling technology, OmniShade Broad Spectrum Airflow, which provides lightweight, breathable UV protection. During the quarter, several publications highlighted our unique cooling technologies including Forbes' list of best sun shirts and Sport Fishing's best Father's Day gifts for fishermen. Several Columbia products were also highlighted in an ABC News article on the best sun protective clothing to keep your skin safe. This spring, we also launched our new OmniMax footwear system, which combines versatile cushioning, enhanced stability, and increased traction. OmniMax is featured in several key footwear styles and has been recognized by several top media outlets and reviewers. Women's Health Magazine awarded the shoe as a best new sneaker of 24, and Outdoor Life named our Columbia PFG castback as the best boat shoe in its annual fishing footwear reviews. OmniMax will be an important component of our footwear growth strategy in the season ahead. As we look forward to fall, We're building on the success of OmniHeat Infinity with more styles and a global marketing campaign. We're expanding the OmniHeat family of warming technologies with the addition of 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 a polar bear's warmth protection system. The result is lightweight, highly efficient warmth boosted by solar power. Shifting to our emerging grants, mountain hardware net sales increased 2% as DTC growth was partially offset by lower wholesale net sales. During the quarter, mountain hardware activated its sun Be Sunwise marketing campaign, which highlights key sun protective products and their benefits. By partnering with online sports community Strava and leveraging content from athletes, influencers, and media outlets, Mountain Hardware was able to increase visibility and bring new consumers into the field. Looking at the second half of the year, Mountain Hardware has several brand and product activations, validating its position as the premier outdoor apparel and equipment brand. These include expanding the iconic Ghost Whisperer collection and reigniting their snow sports offering. I'm also excited for the next month when USA climbing team member and mountain hardware athlete, Jesse Gruper, will be competing for gold in Paris. Good luck, Jesse. Chrononet sales decreased 21% in the quarter with declines across wholesale and DTC. I'm confident that Prana's new leadership team has strengthened the brand's talent, product, and marketing strategies. While it's not evident in second quarter results, Prana's revitalization is apparent in future season orders, which suggest a return to growth. Sorrel brand net sales decreased 44%, with challenging demand for spring 24 products across wholesale and DTC. As a reminder, the second quarter is Sorrell's lowest volume quarter, typically representing about 10% of full-year net sales. New leadership is focused on stabilizing business trends while revitalizing the brand to drive long-term sustainable growth. This evolution will take time, but I remain confident in Sorrell's future. I'll now discuss 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 across the global marketplace, there are many external risks and uncertainties. Outdoor industry and U.S. consumer headwinds, geopolitical conflicts, supply chain disruptions, and upcoming elections in many of our major markets. These factors, among others, have the potential to impact consumer demand and our operations. We continue to monitor disruptions in the Red Sea. At this time, delays appear manageable, and the vast majority of our product line is expected to be delivered on time and in full. We have also seen a spike in spot pricing for ocean freight in recent months. We utilize contracted pricing for the bulk of our ocean freight, which minimizes our exposure to spot pricing. With that said, we have noted an increase in peak season surcharges, and our guidance incorporates our best estimate of the impact of these supply chain risks for the balance of the year. We are reiterating our net sales outlook of a 2% to 4% decline. While there are modest changes across our portfolio, our overall sales expectations have not meaningful changed. Gross margin is now expected to expand 40 to 60 basis points to 50 to 50.2%. This is below our prior guidance, reflecting efforts to spur demand and opportunistically work down inventory levels. SG&A is expected to be between 42 to 43% in net sales, leading to an operating margin of 7.7 to 8.4%. We are reiterating our diluted earnings per share outlook of 365 to 405. We continue to expect strong operating cash flows of at least $350 million in the year. While it's too early to comment on 2025 growth prospects, I'd like to share that early indications from our Spring 25 Wholesale Order Book suggest a return to growth in our wholesale business in the first half of 2025. Looking beyond Spring 25, we're encouraged with the sharpened strategic focus and growth plans for each of our brands. For Columbia, we're focused on bringing younger active consumers into the brand through an enhanced product line that further emphasizes innovation, performance, and style. We also see the opportunity to elevate the brand's presentation across channels. We know that when we target the right consumers with our innovative products, we win in the marketplace. 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's digitally led, omnichannel, and global, and empower talent that's driven by one of our core values. That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, can you help us with that?