Columbia Sportswear Company

Greetings. Welcome to Columbia Sportswear's third 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, VP of Investor Relations and Strategic Planning at Columbia Sportswear. 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, Chief Administrative Officer, and General Counsel Peter Braggin. 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 in financial tables included in our earnings release and the appendix of our CFO commentary and financial review. Following our prepared remarks, we'll 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. Overall, third quarter financial results reflect a continuation of the trends we've experienced all year. The North American outdoor marketplace remains challenged, and we are working to maximize sales in a soft consumer demand environment. Outside of North America, we continue to experience positive momentum in most direct and distributor businesses, led by our China and Europe direct business. Third quarter net sales declined 5% year over year and came in at the low end of our guidance range. Despite this, we were able to exceed our diluted earnings per share guidance range through a better than planned gross margin and disciplined expense management. Our financial position remains strong. We exited the quarter with cash and short-term investments of over $370 million and no debt. We are on track to generate over $300 million in in operating cash flow this year. In addition to investing in our business to drive long-term profitable growth, we are returning free cash flow to shareholders via dividends and share repurchases. Through the first three quarters of the year, our share repurchases totaled $231 million. Highlighting our continued commitment to our capital allocation strategy, the Board of Directors has approved a new $600 million buyback authorization. As we enter our peak sales season, there's no shortage of uncertainty. We await the arrival of colder weather in many regions of the world. With this in mind, we are taking a more cautious net sales outlook for the remainder of the year. Despite the top-line pressure, we are slightly raising the bottom end of our diluted earnings per share guidance. Before reviewing our results and outlook in more detail, I'd like to discuss Columbia's new growth strategy named Accelerate. In recent months, the Columbia brand initiated Accelerate, a growth strategy intended to elevate the brand and attract younger and more active consumers. Over the past 86 years, we've built an extraordinary company and one of the largest outdoor brands in the world. Our top strategic priority is to accelerate profitable growth, and I know our company is capable of growing rapidly. The accelerate growth strategy is centered around several consumer-centric shifts and enhanced ways of working. First, we have strengthened our consumer segmentation framework to clearly define the growth opportunities ahead of us. We will continue to serve our existing consumers with accessible outdoor essentials while also focusing on bringing new, younger, active consumers into the brand. We know that this consumer segment is the largest and fastest growing part of the outdoor market. We already successfully serve this consumer outside the U.S., where we are seeing strong growth in markets like China and Europe. In the coming seasons, our brand, product, and marketplace strategies in the U.S. will focus on reaching younger, more active consumers. We know that when we deliver the right product to the right consumers at the right time, we win in the marketplace. The second shift is elevating consumers' perception of the brand. We're doing this with a refreshed, creative strategy that brings Columbia's unique brand personality to life. We're embracing the spirit of the brand that our one tough mother, Gert Boyle, made famous. We engineer exceptional products for whatever life throws at you, helping to keep consumers warm, dry, cool, and protected, And at the same time, we don't take ourselves too seriously. The Columbia brand is fun, irreverent, and authentic, and this will become increasingly evident in our marketing. To lead this new marketing direction, we recently hired Matt Sutton as the Columbia brand head of marketing. Matt has extensive experience in brand and digital marketing and will be leading the strategic integration of the Columbia global marketing efforts. We've also announced a new global ad agency of record, Adam and Eve, to help us bring our vision to life. The third shift is around product. The foundation of our success is creating iconic products that are differentiated, functional, and innovative. Under the leadership of Woody Blackford, our product teams have a new product construct to drive growth with targeted consumer segments. Consumers already trust the Columbia brand for its quality, value, and reliability. In the coming seasons, we will be emphasizing innovation and style with new products, as well as updates to our most iconic styles. We're reducing our assortment to focus our efforts on fewer, more powerful collections with clear purpose. The fourth shift in Accelerate is elevating the position of the Columbia brand in the U.S. marketplace. To activate our brand and product strategies, we will invest alongside our best-in-class strategic retail partners to elevate in-store presentations and bring our unique brand and products to life. In our direct-to-consumer e-commerce business, we've already begun to evolve Columbia.com to be the best expression of the brand. We want visitors that come to the site to see our latest products and innovations with enriched brand storytelling. In our brick and mortar stores, we're focusing on enhancing our assortments and in-store presentations to tell better brand stories and drive sales. The next shift in Accelerate is our integrated full funnel marketing strategy. We will have a greater emphasis on the consistent year-round share of voice in the market. Not only are we planning to invest more into marketing, but we're also going to be more efficient with how and where we activate these demand creation, investments. We will be more differentiated with creative marketing activations and immersive ways to experience the brand. Combined, our accelerated product, marketing, and marketplace strategies are engineered to get the right product to the right consumers at the right place and time. This will enable us not only to meet our consumers where they are, but inspire them to go further with us. We're excited to bring Accelerate to life. This will be a multi-year strategy that steadily builds momentum in the seasons ahead. As 2025 progresses, the changes we're making will be increasingly evident to consumers. While we are not prepared to provide financial metrics for the Accelerate growth strategy at this point, I firmly believe these actions will drive brand-right, profitable growth. We will seek to balance brand investments with disciplined expense management to achieve our goal of profitable growth with operating margin expansion over time. I will now review our third quarter financial performance. Net sales of $932 million declined 5% year over year, driven by a 9% decline in global wholesale net sales, partially offset by 2% direct-to-consumer growth. Gross margin expanded 150 basis points to 50.2%. This was ahead of plan, driven by favorable international gross margin performance, lower than expected promotional activity in the U.S., and lower freight expenses. SG&A expenses increased 3%, primarily reflecting higher DTC expenses, partially offset by lower supply chain expenses. Favorable gross margin and SG&A underspend resulted in operating income and diluted earnings per share coming in at above our guidance range. Looking at our net sales by geography, U.S. net sales decreased 10%, primarily driven by mid-teens percent decrease in U.S. wholesale. As a reminder, our fall 24 order book in the U.S. was down a mid-single-digit percent. While still very early in the season, wholesale sell-through has gotten off to a slow start. We expect sell-through to pick up with the arrival of cold weather. USDTC net sales were relatively flat. Brick-and-mortar was up mid-single-digits percent, driven by a contribution from the temporary clearance locations, increased store productivity, and new stores opened over the last year. U.S. e-commerce net sales were down high teens percent, reflecting challenging outdoor market conditions, as well as a shift in Columbia.com digital marketing strategies. For my review of third quarter year-over-year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying growth in each market. Latin America, Asia Pacific region, or LAAP, net sales increased 18%. China net sales increased low 20% with healthy growth across wholesale and DTC. Despite broader economic headwinds in China, the outdoor category continues to grow. Columbia is capitalizing on this trend with localized product lines like Transit and unique brand activations that highlight Columbia's heritage and innovation. During the quarter, Columbia hosted a hiking event in Shangri-La National Park. The well-attended event featured music and hiking in the first-of-its-kind event at this premier hiking destination. The event was amplified by celebrity brand ambassadors whose online content generated millions of impressions. China's e-commerce business continues to build momentum with several highlights in the quarter. Columbia had an incredibly successful Super Brand Day on Tmall, ranking third in sales volume across all outdoor brands. On TikTok, Columbia's first footwear store launched and is off to a strong start. It's exciting to see the Columbia brand realize its full growth potential in this important region, and it remains on track to be one of our fastest-growing markets this year. Japan net sales increased double-digit percent, aided by continued strength in international tourism. Korea net sales increased mid-single-digit percent. During the quarter, we appointed Jeff McPike as the new general manager of Columbia Sportswear Korea. Jeff is a 25-year industry veteran with a passion for building innovative, omni-channel consumer experiences. His marketplace expertise will be instrumental in building the right strategy to drive our business forward in Korea. LAAP distributor markets were up mid-20s percent, primarily reflecting robust Fall 24 orders. Europe, Middle East, and Africa region, or EMEA, net sales increased 10%. Europe direct net sales increased low single-digit percent, led by a robust DTC growth. The European team is doing an exceptional job of creating brand visibility and relevance with unique marketing activations like the Hike Society. This season, we hosted 90 Hike Society events, creating grassroots connections with young hikers and introducing them to Columbia Technologies. Our Europe Direct business remains on track to be one of our fastest-growing markets this year. Our EMEA distributor business increased by approximately 130%, driven by a shift in timing of shipments, as well as higher Fall 24 orders on the strength of the Columbia brand in many distributor markets. Canada net sales decreased 19%, driven by lower wholesale sales, the Columbia brand remains well-positioned in Canada with high brand awareness and consumer trust. Looking at performance by brand, Columbia brand net sales decreased 1%, primarily reflecting a challenging marketplace in the U.S. and Canada, partially offset by a continuation of healthy trends in most international markets. This fall, we have several innovations that are integral to our product and marketing strategies. OmniHeat Infinity remains our largest innovation platform and one of the fastest growing parts of our business. Our newest cold weather innovation, OmniHeat Arctic, will be prominently featured in our DTC channels. As a reminder, 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. I'd like to congratulate our Chief Product Officer, Woody Blackford, and our Vice President of Innovation, Haskell Beckham, who were honored by the American Association of Textile Chemists and Colorists for their significant contributions in developing new fabrications and technologies in the apparel industry. Thank you for everything you do to make Columbia a leader in the outdoor space. Great work, team. On the collaboration front, this fall we partnered with Disney on Mickey's Outdoor Club Collection. Inspired by the iconic artwork from the Mickey Mouse comic strip, this collection featured beloved Disney characters on a camping trip. Top styles quickly sold out, and the line was featured in numerous Disney-focused and outdoor media outlets. This holiday season, Columbia will launch our ninth annual Star Wars collection. The first content promoting the collaboration will go live tomorrow and will feature a surprise appearance from a Star Wars special guest. Fans of Star War and NASCAR are going to want to see this. Shifting to our emerging brands. Mountain Hardware net sales increased 2%, driven by DTC growth. The brand has several exciting brand and product activations for the balance of the year, including an expanded Ghost Whisperer collection, new snow sports offerings, and a soon-to-be-announced product collab. Mountain Hardware's product line and brand positioning are on track, and the team is focused on accelerating growth. Prada net sales decreased 7% in the quarter. I'm encouraged by the progress the Prada leadership team has made in recent months. activating wholesale distribution, refreshing marketing, and recruiting new talent to the team. I'm confident these actions position the brand for growth, starting with a positive order book for spring 25. Sorrel brand net sales decreased 39%, driven by lower fall 24 orders and elevated clearance and promotional sales activity in the prior year. The Sorrell team is focused on building brand, product, and marketplace strategies to drive the long-term growth potential that I know the brand is capable of. This process will take time, and I expect sales trends will remain under pressure in the spring 25 season. I will now discuss our 2024 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. Looking across the global marketplace, there are many external risks and uncertainties, outdoor industry and US consumer headwinds, weather, geopolitical conflicts, supply chain disruptions, and the upcoming US elections. These factors, among others, have the potential to impact consumer demand and our operations. With this uncertainty in mind, we are reducing our net sales outlook to reflect a 3 to 5 percent decline this year. Gross margin is now expected to expand 40 to 90 basis points. SG&A is expected to be 42.8 to 43 percent of sales, leading to an operating margin of 7.7 to 8.4%. The profit improvement program is on track to deliver approximately 90 million in cost savings this year. We are slightly raising the low end of our diluted EPS guidance range, which is now 370 to 405. As we noted on the last call, our spring 25 order book reflects a return to growth in our wholesale business in the first half of the year. This order book reflects growth across Columbia, Prana, and Mountain Hardware, and growth in the U.S. and international markets. Based on the Spring 25 orders, we anticipate first-half wholesale net sales to increase mid-single-digit percent. While we are not providing any full-year 2025 guidance at this time, our objective is to deliver net sales growth and operating margin expansions. who will provide our next update on 2025 when we report in February. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. The Accelerate Growth Strategy provides clear strategic shifts that will unlock brand-right profitable growth for years to come. We are investing in our strategic priorities with renewed emphasis 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'll welcome your questions for the remainder of the hour. Operator, can you help us with that?