Columbia Sportswear Company

Greetings. Welcome to the Columbia Sportswear fourth 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 fourth 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 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 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 the 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. As we begin 2025, I'm encouraged by the continued momentum we see in our international business and the fact that we are returning to growth in North America. I'd like to thank our global workforce whose hard work and dedication allowed us to overcome challenges throughout the year. I'm proud of the many accomplishments our teams were able to achieve including exiting the year, our inventories were down 7% and we are rapidly closing our temporary clearance locations Inventories are healthy, supporting our outlook for gross margin expansion. Our profit improvement program delivered $90 million in cost savings, and we're actively pursuing additional ways to lower our cost structure. We also returned meaningful cash to shareholders with $318 million in share repurchases and around $70 million in dividends paid. We also maintained our Fortress balance sheet, exiting the year with $815 million in cash and equivalents and no debt. While we made progress in many areas, our 2024 financial performance was short of my personal growth and profitability goals. Overall, 2024 net sales decreased 3% to $3.4 billion, reflecting challenging marketplace conditions in North America. The net sales decline and ongoing cost pressures resulted in operating margin contraction and a decline in earnings. On the last call, we introduced the Columbia brand's Accelerate Growth Strategy. This strategy is intended to elevate the brand and attract younger and more active consumers while continuing to serve existing customers with accessible outdoor essentials. During 2024, we laid the foundation for the Accelerate Growth Strategy, including a refreshed marketing direction enhanced consumer segmentation, and a new product construct. I'd like to provide some updates on the progress we're making. Our product teams are focused on creating products and driving growth with our targeted consumers who value innovation and style. For Fall 25, we're expanding our innovation-led offerings like our premium titanium product line. We are also bringing new collections to market with elevated style, like the amazed puff, insulated jacket, and rock pant. We are expanding our OmniMax footwork collection, which delivers consumers lightweight, ultra-comfortable performance. The Columbia brand is fun, irreverent, and authentic, and our refreshed marketing strategy will bring this to life. You will begin to see the new brand voice in our fall marketing campaigns. To amplify our refreshed marketing, we are increasing our targeted demand creation spend to 6.5% of sales compared to 5.9% of sales in 2024. To activate the brand and product strategies, we will be elevating the brand storytelling and consumer experience across the marketplace. We're investing alongside our strategic retail partners to enhance in-store presentations. In our direct-to-consumer business, We've already begun to evolve Columbia.com to be the best expression of the brand. In brick and mortar, we're opening a small number of branded stores in high-traffic centers in North America. These new branded stores feature elevated product assortments that showcase Columbia's apparel and footwear innovations. These North American stores will join the hundreds of Columbia-branded stores that raise the image of the brand in important international markets. Taken together, we're thoughtfully evolving how the Columbia brand is perceived by consumers and how we show up in the marketplace. We're being thoughtful about how, when, and where we utilize promotions across all channels and consumer segments. Overall, it's great to see the energy and alignment around the Accelerate Growth strategy across the organization. I'm excited to bring it to life in the seasons ahead. Our initial 2025 net sales outlook contemplates modest growth. In addition to Columbia brand growth, our outlook contemplates a return to growth for Prana and continued momentum at Mountain Hardware. While we expect the Sorrel business to remain down in the spring, efforts to reinvigorate the brand will be more evident in the fall. Our initial 2025 operating margin outlook contemplates similar performance compared to 2024. with healthy inventories entering the year. We anticipate less clearance activity that will contribute to gross margin expansion. This is expected to be offset by SG&AD leverage, resulting from demand creation investments and ongoing cost pressures. When we announced the Profit Improvement Program last year, we targeted $125 to $150 million in annual cost savings by 2026. This program has meaningfully slowed SG&A spending growth, but it has not been enough to align our cost structure with current sales levels. With this in mind, we're expanding the review of our cost structure as we pursue additional savings and enhanced profitability. It is too early to quantify the financial impact of this review, and our outlook does not include additional cost savings or potential charges that may occur. We will update you on our efforts as our plans are formalized. Turning to fourth quarter financial performance, we were able to overcome a slow start to the winter season with strong December performance resulting in fourth quarter results within our guidance range. Net sales increased 3% year-over-year to $1.1 billion, driven by a 7% increase in wholesale net sales and 1% direct-to-consumer growth. The gross margin expanded 50 basis points to 51.1%, driven primarily by lower closeout sales at improved margins compared to elevated clearance activity in the prior year. SG&A expenses increased 6%, primarily reflecting higher incentive compensation and DTC expenses. This performance resulted in operating income and diluted earnings per share within our guidance range. Looking at net sales by geography, U.S. net sales decreased 1%. The U.S. wholesale business declined low single-digit percent, reflecting our lower fall 24 order book and challenging outdoor category trends. Even though sell-through was down year over year, our retail partners are exiting the season with clean inventory levels. This is helping to fuel our positive order book for both spring and fall. U.S. DTC net sales declined low single-digit percent, with lower e-commerce sales partially offset by modest brick-and-mortar growth. U.S. e-commerce net sales were down mid-single-digit percent, reflecting challenging market conditions, as well as lower planned promotional activity and a shift in digital marketing strategies on Columbia.com. December trends significantly improved as colder weather arrived, and we invested in marketing to spur the move. Brick and mortar net sales were up low single-digit percent, driven by the contribution from new stores and temporary clearance locations. With improved inventory health, we will be closing most of our clearance locations in the first half of the year. A small number will remain open as we assess their potential as permanent stores. For my review of fourth-quarter year-over-year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying performance in each market. Latin America, Asia Pacific region, or LAAP, net sales increased 7%. China net sales increased mid-teens percent, with healthy growth across wholesale and DTC. For the year, China grew over 20% in constant currency. The outdoor industry is experiencing a powerful growth trend in China, fueled by growing consumer interest in outdoor activities and outdoor brands. We are capitalizing on this trend by connecting with consumers through meaningful brand activations, localized product collections, and a robust digital strategy. E-commerce was China's fastest-growing channel in 2024. During the year, we expanded Columbia's TikTok platform, adding new stores for women and footwear. We had amazing brand activations during peak sales periods like Double 11 and participated in successful Super Brand Day events with both Tmall and TikTok. Columbia's premium transit product line, designed specifically for Chinese consumers, continues to perform incredibly well. To build on this momentum, we will further expand our localized product assortments in China this year. Across our product offerings, marketing activations, and marketplace strategies, we are working to create a more premium Columbia brand experience for Chinese consumers. We expect China to once again be our fastest growing market in 2025. Japan net sales increased mid-single-digit percent with continued strength in international tourism. Despite high inflation and sluggish domestic spending, our team in Japan continues to deliver growth through compelling localized product offers, unique marketing activations, and strong digital and in-store execution. Korea net sales decreased mid-single-digit percent in the quarter. 2024 was a challenging year in Korea, including macroeconomic headwinds and political unrest. Despite these challenges, the team made meaningful progress resetting the marketplace and laying the foundation for future growth. In 2025, our team in Korea is focused on accelerating digital sales, revitalizing the DTC store fleet, and optimizing marketing investments. LIAP distributor markets were up low double-digit percent, primarily reflecting Spring 25 order growth. Europe, Middle East, and Africa region, or EMEA, net sales increased 21%. Europe Direct net sales increased high teens percent, led by robust DTC growth. Europe Direct was a top-performing market in 2024. The European team is doing an exceptional job expanding our DTC businesses and growing wholesale sales with key strategic retail partners. Our EMEA distributor business increased over 30%, primarily reflecting spring 25 order growths. Canada net sales were up modestly in the quarter. The Columbia brand remains well positioned in Canada, and we forecast constant currency growth for this geography in 2025. Looking at fourth quarter performance by brand, Columbia net sales increased 6%. This fall, our top innovation stories were OmniHeat Infinity, and our newest cold weather innovation, OmniHeat Arctic. These differentiated innovations and technologies were prominently featured by numerous media outlets. Columbia products were named in over 20 best-of lists from top media outlets, including Esquire, Men's Journal, Travel and Leisure, and Ski Magazine. Product awards and reviews from trusted editors validate and bring awareness to the innovation and value we deliver to consumers. OmniHeat Infinity remains one of the fastest-growing parts of our business and our top marketing story globally. OmniHeat Infinity will once again be featured on Intuitive Machines' next lunar lander named Athena. In addition to Infinity, the lander will utilize a second Columbia technology, OmniShade Sun Deflector. This patented material, which is part of our Sun Protection Apparel line, uses titanium dioxide reflective dots to deflect sunlight and mitigate heat generation. The launch window for Athena begins later this month, so stay tuned for more details. On the collaboration front, we turn to the dark side with our largest Star Wars collab to date, the Vader Collection. This was the first Star Wars launch where a Columbia Raider Rewards member got early access to the product. The consumer response was incredible, resulting in the highest demand hour we have ever had on Columbia.com. Early access is just one of the unique benefits of our new enhanced membership program. Since the relaunch of Columbia Greater Rewards this past June, our active membership continues to grow. I'm especially encouraged by the engagement of our titanium members who spend more than $300 annually. We will continue to expand our membership benefits and deepen our connections to this key customer base in 2025. I'd like to congratulate two of Columbia's athlete ambassadors on their recent halfpipe skiing wins. This past Sunday, Alex Ferreira won gold in the Free Ski World Cup in Aspen, continuing the success of his unprecedented perfect season last year. Cassie Sharp won the X Games gold medal in the Super Pipe event and a triumphant return from a two-year break from competing following the birth of her daughter. Congratulations to Alex and Cassie. Shifting to our emerging brands, Mountain Hardware net sales increased 5% in the fourth quarter, led by e-commerce growth. Consumers responded well to Mountain Hardware's fall assortment, including new snow sports offerings and an expanded Ghost Whisperer collection. In November, Mountain Hardware released another highly sought-after collab with iconic streetwear brand Stussy. The collection featured expedition-quality gear, including jackets, beanies, bibs, and shells. I'm confident in Mountain Hardware's product line and refreshed brand positioning. To further elevate Mountain Hardware in the marketplace and attract new consumers, we're investing in the brand. This includes demand creation investments to supercharge its e-commerce business, as well as partnering with outdoor retailers to elevate in-store presentations. I believe these investments will lay the foundation for growth acceleration in the years ahead. We expect Mountain Hardware to continue to grow in 2025, including strong Fall 25 wholesale orders. Prana net sales decreased 2% in the quarter. In 2024, the Prana leadership team made amazing progress reinvigorating the brand. This will come to life in 2025 with exciting new product collections and creative brand activations. Prana is also expanding its wholesale account base with new brand-ride specialty retail partners. We're very excited to get Prana's new product and marketing direction in front of consumers in the seasons ahead. Prana is expected to return to growth in 2025 including robust fall 25 wholesale order growth. Sorrel net sales decreased 16%, driven by lower wholesale and DTC sales. During the quarter, Sorrel created brand heat with its first collab with streetwear brand Supreme. The limited edition caribou boot came in two colorways, introducing Sorrel's iconic style to Supreme's fashion-conscious consumer base. 2024 was a challenging year for Sorrel, but the team made meaningful progress for finding future season product assortments and building strategies to re-energize brand marketing. 2025 is expected to be a year of stabilization with modest growth in the second half of the year. I remain confident Sorrel has meaningful long-term growth potential. I will now discuss our 2025 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. This outlook and commentary does not include any potential impact on the company as a result of the recent U.S. administration change, other than the direct cost of tariff actions announced on February 1, 2025. It also does not include any potential impact from actions we may undertake as we review our cost structure and look to expand the profit improvement plan. For the full year, we expect net sales growth in the range of 1% to 3%. Based on current exchange rates, foreign currency is expected to be an approximate 140 basis point headwind. This outlook also assumes most of our temporary clearance locations are closed in the first half of the year. Combined, the FX headwinds and temp store closures resulted in nearly a three-point headwind to reported sales growth. Gross margin is expected to expand 80 basis points to approximately 51%. The improvement in gross margin is primarily driven by a healthier underlying inventory position and favorable input costs. SG&A is expected to grow in 2025, driven by investments in demand creation and higher incentive compensation, and DTC store growth. Based on these assumptions, we expect an operating margin of 7.7% to 8.3%, leading to diluted earnings per share in the range of $3.80 to $4.15. I note that this range includes a $0.30 negative impact of diluted earnings per share due to changes in foreign currency exchange rates. In summary, I'm confident we have the right strategies in place to unlock the significant 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 is driven by 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?