Columbia Sportswear Company

Welcome to the Columbia Sportswear First Quarter 2025 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 would 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 Bracken. 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 we, 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, everyone. First quarter net sales and earnings exceeded our guidance range. Globally, our wholesale business was better than planned driven by late-season demand for winter products and early spring product shipments. Our business outside of North America, which represents approximately 40% of annual sales, remains strong. During the quarter, we generated healthy growth in nearly all of our international markets with double-digit percent growth in the LAAP region and high single-digit percent constant currency growth in the EMEA region. Before the April 2nd tariff increases were announced, our solid first quarter performance put us on track to achieving our target. I'd like to begin this call by outlining our view on global trade and our plans to mitigate the impacts associated with the recent U.S. tariff increases. Let me start by stressing the unprecedented level of public policy uncertainty that our industry is facing in the United States. We've been in business since 1938, and have navigated successfully through many incredibly challenging environments. But our industry has never faced a period when the rules and regulations around trade with the United States are simply unknown and unknowable. I have never been more excited than I am today about our brands, our strategies, and the overall strength of our company. We have a diversified supply chain and a team of experts with deep international trade experience. We began this year with a fortress balance sheet, healthy inventories, and building momentum in the Columbia brand's accelerated growth strategy. These strengths give me confidence in our ability to emerge from this period as a stronger company with an improved position in the marketplace. When the rules around trade are unknown, it's impossible for any company to predict with confidence what the cost of U.S. products will be what the returns on certain investments in the U.S. will be, and ultimately, how the U.S. marketplace will be impacted overall. Quite simply, companies are unable to confidently plan and invest in their U.S. businesses until there's clarity with respect to U.S. trade policy. History has shown that tariffs are designed to raise the price of imported goods. In the U.S., Well over 90% of all apparel and footwear is imported and is already heavily taxed under legacy trade laws. The additional 10% universal tariff is on top of already existing high duties. The magnitude of the additional proposed country-specific tariffs has the potential to profoundly impact our industry and significantly raise prices to US consumers. For many consumers, the affordability of apparel and footwear will increasingly become a household issue. This would be further exacerbated if higher tariff rates go into effect. To date, we have taken several actions. Prior to the April 2nd tariff declarations, we domesticated all on-hand U.S. inventory to our own foreign trade zone distribution centers, saving us millions in potential tariffs. For products that are impacted by the reciprocal tariffs, we are accelerating shipments to the extent possible in order to receive products during the 90-day tariff clause. Because it's not practical at scale nor affordable, we do not intend to utilize air freight as a solution to accelerate inventory receipts. China remains a strategically important country for us, and we intend to continue leaning into opportunities for increased product creation and manufacturing in China, not only for our China direct business, but for other markets around the globe. We have very little direct exposure to tariffs on products from China. A low single-digit percent of our finished good products imported into the US are manufactured in China. Given the exorbitant tariffs on these goods, we will be diverting the vast majority of this product to other markets where it can be sold profitably. While much of our Fall 25 product has been ordered and sold, we are rationalizing inventory buys where possible to reduce the risk of excess inventory in a challenging environment. We're also taking actions to restrain discretionary spending and, where appropriate, pausing capital investments in the U.S. until we have clarity. For Fall 25, we're focused on maximizing our marketplace opportunity. We're working with our retail partners to deliver value to consumers and keep inventory and dealer margins healthy. As a result, we expect to absorb much of the incremental tariff cost in 2025 at the current incremental 10% universal rate. For 2026, we're contemplating strategies to offset the impact of higher U.S. tariffs on our business. We have a team of experts exploring possibilities mitigate the impact of increased tariffs including redesign redevelop resource and reprice products among other mitigation factors overall we're taking a multi-pronged approach to managing the business during this period of uncertainty on the one hand we're taking decisive actions to preserve capital and to mitigate the impact of higher us tariffs on the other We believe that our brands and strong financial position can enable us to gain market share. The Columbia brand's exceptional value will be a competitive advantage in this period of rising prices for U.S. consumers. As part of the Columbia brand's accelerated growth strategy, we remain committed to increasing our investment in demand creation to bring our new, highly differentiated marketing campaign and enhanced product assortment to life. We have a long history of irreverent, daring, and downright hilarious brand advertising, often featuring Gert herself. Columbia's marketing has always been distinctive from the rest of the outdoor category. In recent years, that has been less present in our marketing. With the Columbia Accelerate Growth Strategy clearly defined, this is the moment to embrace our roots and write a new chapter for our iconic brand. Starting this August, we will begin to roll out our new global marketing platform that will be the Columbia brand character and voice for years to come. We will scale our new distinctive voice through a full funnel strategy with greater emphasis on a consistent year-round share of voice in the market. Not only are we planning to invest more in marketing, we're also leveraging modern digital and social first strategies to be more efficient and effective with our demand creation investments. In this period of tariff turmoil, we have the opportunity to set ourselves apart. Turning to our financial outlook, given the heightened uncertainty regarding tariff rates and the impact this will have on product costs and consumer demand, we are withdrawing our full-year 2025 outlook. With that said, I'd like to provide some details on how we're approaching the balance of the year. Prior to the tariff increases, we were on track to deliver on full-year financial targets. For the second quarter, we anticipate net sales to grow 1% to 5% year-over-year. This is in line with the first half net sales outlook we provided in February. As of the date of this release, the incremental 10% universal tariff and the higher tariffs for China are in effect. Applying these tariff rates to the product that we have yet to receive in the U.S. for the fall 25 season would add between 40 to 45 million to the cost of sales as the underlying inventory is sold. Given our focus on delivering exceptional value to consumers and maximizing the marketplace opportunity, we do not expect to offset these higher tariff costs in 2025. Our tariff mitigation strategy will evolve response to trade policy changes. We continue to make progress on our profit improvement plan and have identified cost savings and profit-enhancing opportunities beyond the $150 million three-year target we established in 2024. We expect the U.S. market to be challenging in the back half of the year. Consumers will be paying higher prices for many of the goods they buy then we expect this to negatively impact consumer demand. Our fall order book has not meaningfully changed since our call in February, but we anticipate retailers will be cautious with their inventory intake in this uncertain demand. As a result, we're planning our U.S. business conservatively to minimize inventory risk and preserve profitability. We haven't seen a meaningful change in trends in most of our international businesses, which were quite healthy in the first quarter. It's not possible to predict the extent to which U.S. tariff actions will impact international economic growth and consumer demand for our products globally. I'll now quickly review first quarter financial performance. Net sales increased 1% year-over-year to $778 million. Wholesale net sales increased 2% while direct-to-consumer was flat. Gross margin expanded 30 basis points to 50.9%, and SG&A expenses increased 1%. This performance resulted in diluted earnings per share of 75 cents, up 6% year over year. Looking at net sales by geography, U.S. net sales decreased 1%. U.S. wholesale business was relatively flat. Spring 25 shipments worked up modestly. During the quarter, winter weather boosted late-season fall product sales but hindered early spring season sell-through. In addition to weather, challenging outdoor category trends and consumer uncertainty had weighed on spring season demand. U.S. DTC net sales declined low single-digit percent. U.S. e-commerce net sales were down high single-digit percent. We had an excellent winter clearance sale in February, but it was not enough to offset challenging market conditions. U.S. brick-and-mortar net sales were up low single-digit percent, driven by contribution from new stores. We exited the quarter with eight temporary clearance locations, down from 28 exiting the fourth quarter. For my review of first quarter year over-year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying performance in each market. LIAP net sales increased 14%. China net sales increased low teens percent, led by strong e-commerce growth. Through our product offerings, marketing activations, and marketplace strategies, we're working to create a more premium Columbia brand experience for Chinese consumers. Building off the prior season success of our transit line, we continue to expand our localized product offering designed to meet the unique needs of younger Chinese consumers and the growing outdoor market. This quarter, we opened our first high street store in China on Waihai Road in Shanghai that celebrates Colombia's deep heritage and drove consumer engagement through both online impressions and in-store events. We remain committed to investing in our business in China in the years ahead. Japan net sales increased mid-teens percent benefiting from strong demand for late-season winter product with growth across all channels. Our localized product in Japan blends style, functionality, and performance to create wear-anywhere product. Our team in Japan has done a great job building successful franchises that resonate with consumers. Some local product highlights from this quarter include our Sapland winter boots, Hawthorne waterproof footwear, and backpack offerings. to support the back-to-school season. In May, we'll be opening a Columbia High Street location in the center of Harajuku, a premier retail area in Tokyo. I'm excited to see this premium expression of the brand come to life. Korean net sales increased low single-digit percent aided by late winter weather. LIAP distributor markets were up low 20%, primarily reflecting robust Spring 25 order growth. In both our LNAP and EMEA distributor markets, OmniMax Footwear has continued to be an incredible success story, demonstrating the power of great product, marketing activations, and retail presentation. The Columbia brand is strong, and our partners are investing in retail door expansion. EMEA net sales increased 7%. Europe direct net sales increased high single-digit percent with growth across all channels led by DTC stores. For spring 25, Europe's key marketing campaign positions Columbia as the leader in hike. The team is focused on bringing young, active consumers into the brand through local activations like the Columbia Hike Society, as well as social content with hike influencers. Across the European marketplace, Our team is doing a great job evaluating the consumer experience with in-store marketing and brand-managed spaces in concert with our strategic partners. Our EMEA distributor business was down slightly despite strong spring 25 orders as the timing of shipments is more heavily weighted to the second quarter. Canada net sales were down 2% in the quarter with sales down modestly across wholesale and DTC. Looking at first quarter performance by brands, Colby and Net Sales increased 3%. On the product front, we introduced our lightest shoe ever, the OmniMax Chronos Featherweight, designed to perform on the trail and in the city with adaptive cushioning, flexible support, and grippy outsole. The incredible versatility of this product is being highlighted to consumers with the new footwear marketing campaign, Every Surface is a Trail. Marketing efforts to promote Columbia's new running shoes include title sponsorship of the View Trail Race Series in Sedona, Arizona. The event draws unique runners from across the Southwest and provides our teams with the opportunity to engage with this important audience at the grassroots level. Our new Rain No Shine jacket was a rewarded Condé Nast Traveler's best overall pick for lightweight rain shield. This jacket is designed to keep you dry in the wettest conditions and features our OutDry Extreme waterproof gradable membrane and a new matte finish. In March, Columbia partnered with KIPP and Japanese clothing brand South 2 West 8 to create a custom outdoor-inspired collection. Each piece blends KIPP and South 2 West 8 silhouettes with Columbia's utility and outdoor functionality. Our popular PFG fishing line had several collabs and collections this spring. Our PFG artist series featured popular South Florida artist Bentley. This limited edition collection highlights original work inspired by Miami's graphic artists and its local fish species. We activated this collection with a Bubba Wallace in-store event at Dick's Sporting Goods House of Sport in Miami. For the Homestead Miami NASCAR race, we wrapped from his car in PHE graphics inspired by the collection. During the quarter, we also partnered with Columbia brand ambassadors Luke and Nicole Combs to create their own collections. We collaborated with Nicole to create a PHE specialized edition of apparel and accessories designed to take her from the boat to the beach and beyond. We worked with Luke to create a PHE special edition turkey hunting collection featuring premium field-ready features, advanced tech, and his favorite Mossy Oak green leaf camouflage. These incredibly successful collections and collaborations validate Columbia Brand's authenticity and allow the brand to reach new consumers. I'd also like to congratulate the Columbia team for earning the top apparel and Footwear brand score in Newsweek's America's Best Loyalty Program survey. Newsweek takes input from thousands of loyal program members to uncover which offerings consistently deliver the most rewarding experiences. It measures customer satisfaction, perceived value, customer support, trust, and overall benefits. Columbia's Greater Reward Program delivers a meaningful portion of our DTC sales and is an important component of our overall consumer retention strategy. Well done, team. Shifting to our emerging brands, Mountain Hardware net sales decreased 14% in the first quarter. While full-price selling was healthy across channels, we had lower closeout sales compared to elevated PFRS clearance activity last year. We remain committed to investing in the Mountain Hardware brand including elevating our presentation at wholesale. For spring 25, we opened a handful of branded retail environments in this specialty outdoor channel. Initial sell-through trends have been promising at these locations, and we plan to open more for fall. Front-end net sales decreased 10% in the quarter, reflecting challenging e-commerce performance, in part due to lower clients' activity compared to elevated levels in the prior year. I remain excited about Prana's product and marketing direction. As we head into the fall season, new product collections and refreshed brand imagery will be increasingly evident to consumers. During the quarter, Prana refreshed its Boulder, Colorado retail location to better highlight key product franchises and elevate brand storytelling. The immediate width of store performance indicates that Prana's improved product assortment and presentation at retail is resonating with consumers. Sorrel net sales decreased 8%. The team is making great progress refreshing the product line with new styles like the Ona Avenue sneaker and the Roman clog, which have the potential to become important product franchises in the seasons to come. Sorrel's evolution will continue into the fall season with new women's styles and expanded men's selection high-energy co-labs, and refreshed brand imagery. In closing, Columbia's Fortress is a strong company that has weathered many challenges. We have an amazing portfolio of brands, decades of international trade experience, and a Fortress balance sheet. I'm confident we have the strength to navigate near-term uncertainty and unlock significant long-term growth opportunities. We remain committed to 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, could you help us with that?