Q3 2019 Earnings Call
Greetings and welcome to the Columbia Sportswear company third quarter fiscal year 2019 financial results.
This time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr., Andrew Burns director of Investor Relations and competitive intelligence for Columbia sportswear.
Thank you you may begin.
Good afternoon, and thanks for joining us and it's got to Columbia Sportswear Company third quarter results 2019 outlook.
Additionally, the earnings release, we furnished it can't continue detailed CFO commentary, explaining our results and the assumptions behind our 2019 outlook CFO commentary is available on our Investor Relations website, Investor Dot Columbia Dot com.
With me today on the call, our President and Chief Executive Officer, Tim Boil Executive Vice President and Chief Operating Officer, Tom Cusick, Senior Vice President and Chief Financial Officer, Jim Swanson, Executive Vice President and Chief administrative Officer, Peter Bragdon.
Scott This call will contain forward looking statements regarding columbia's business opportunities in anticipated results of operations. Please bear in mind are forward looking information is subject to many risks and uncertainties actual results may differ materially from what is projected many of these risks and uncertainties are describing Columbia's annual report on Form 10-K in subsequent filings with the.
Yes, he see forward looking statements in this conference call are based on our current expectations and beliefs and we're not undertake any duty to update any other forward looking statements. After the date of this conference call to conform with forward looking statements to actual results or to changes in our expectations. I'd also like we're not the during the call me reference certain non-GAAP financial measures, including.
Our GAAP results for 2018 for further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an exploration or management's rationale for reference you. These non-GAAP measures. Please refer to the supplemental financial information section and financial tables included in our third quarter 2019 earnings release.
During their prepared remarks, we will host a cure in a period through which we will limit each caller just two questions. So he is everyone by the end of the hour now I'll turn the call over to Tim.
Thanks, Andrew welcome everyone and thanks for joining US this afternoon record third quarter results exceeded our expectations with broad based growth across our geographic segments channels and product categories. We were able to ship a greater portion of our fall 2019 order book in the third order at the share compared to the fall 2018.
Each season as retailers restock depleted inventory positions after harsh winter weather had exceptional sell through in North America last year.
Our largest brands Colombians shrill, both generated impressive double digit growth, which was led by North America. We also generated 100 basis points of operating margin expansion compared to prior year non-GAAP results driven by project connect margin benefits together this fueled earnings per share gain.
Well in excess of 20%, while continuing to make substantial investments in our strategic priorities based on strong year to date performance, we're raising the low end of our net sales outlook and raising our operating margin and earnings per share outlook for the full year.
In the third quarter net sales increased 14% growth may gross margin expanded 110 basis points and diluted earnings per share increased 24% to a record $1.75 cents compared to non-GAAP third quarter 2018 diluted earnings per share of $1.41.
On a year to date basis net sales increased 11% gross margin expanded 130 basis points in diluted earnings per share increased 35% to a record $3.15 compared to non gap year to date 2018 diluted earnings per share of $2.34.
Regionally U.S. net sales increased 17% in the quarter and 15% year to date in the quarter growth was driven by low 20% growth in wholesale at mid single digit percent growth in DTC, which included brick and mortar net sales growth in a high single digit percent increase in e-commerce .
Well show growth was driven by higher advance orders and earlier shipments of fall 2019 product.
In DTC, both our brick and mortar and ecommerce businesses were up against exceptional sales performance last year.
For my review of International markets and brand performance I will reference constant currency growth rates, which we believe best reflect the underlying business trends.
Net sales outside of the U.S. increased 11% in the third quarter and 8% year to date with growth in all international regions in Canada, net sales increased 22% <unk> third quarter and 15% year to date.
Third quarter net sales growth was primarily driven by earlier shipments of fall 2019 wholesale product as well as increased fall 2019 advance orders.
Our international distributor business net sales increased mid teens percent in the third quarter and low double digit percent year to date in the third quarter.
Hey, P. distributor net sales increased low 20%, resulting from timing shifts in the shipment of fall 2019 product EMEA distributor net sales grew high single digit percent driven by higher fall 2019 advance orders.
Japan net sales grew mid mid single digit percent in the third quarter and high single digit percent year to date.
We've experienced over 20 years.
Of steady constant currency growth in this important market, which has continued in 2019.
Europe direct net sales increased high single digit present in the quarter at mid single digit percent year to date in the quarter growth was aided by earlier shipment of fall 2019 product as well as higher closeout sales, we continue to experience a challenging retail environment in several European markets.
But remain optimistic about our long term growth opportunities.
Given our relatively low market share in that market today.
Korea net sales increased high single digit percent in the third quarter and mid single digit percent year to date.
Columbia remains one of the few successful outdoor brands managing to grow at nights in 2019, Despite a Korean outdoor market that continues to contract.
In China net sales decreased low single digit present in the third quarter, but are up low single digit percent year to date during the quarter higher outlet store sales and E. Commerce growth helped partially offset difficult wholesale performance, we're working to optimize distribution and remain focused on invest.
Staying in our consumer experience to reinvigorate growth.
Columbia's brand has strong market position in China, and we believe the decisions and investments we're making this year are building the foundation for long term growth in this important market.
Turning to gross margin performance third quarter gross margin was up 110 basis points to 49.3% largely reflecting project connect benefits, including are designed to value assortment optimization and manufacturing efficiency initiatives. These benefits more than offset modest head.
Wins due to channel inflows that product mix.
Year to date gross margin is up 130 basis points to 49.7%, including greater than 100 basis points of benefit from project connect.
It's important to note that 2019 gross margin performance is on top of full year 2018, non-GAAP gross margin expansion of 170 basis points.
Regarding the current U.S., China trade battles, we reiterate that we believe our diversified supplier base is us competitive strength.
For 2019, we received the majority of our fall 2019 product prior to the September 1st tariff increase resulting in minimal financial impact 2019.
When assessing the impact in 2020, it's important to remember that nearly 40% of our sales are outside the U.S. and are not directly impacted by the us China trade battle.
Based on our projected 2020 production base products sourced in China for the US market is expected to represent a low double digit percent of the total estimated imported value.
As with tariffs around the world, we're actively working to mitigate the financial impact.
Looking beyond the direct impact to Colombia, we believe escalating trade battles globally are disruptive for American businesses bad for the global economy and costly for consumers.
In an industry that already suffers from punitive tariffs Sean this is 37.5%.
Adding additional taxes on our products places an undue burden on consumers and employers.
Furthermore, raising tariffs I appreciate that matter creates uncertainty for business, which discourages investment.
History has shown the cost of these tariffs are borne by us consumers.
Turning to wish DNA performance, Yes, DNA expenses grew 14% compared to last year's non-GAAP SG expense, yes, DNA expenses, resulting in ESG and as a percent of sales of 33%, which was flat when compared to non-GAAP SGN, a as a percent of sales in the prior year by.
I guess drivers of FG SGN, a growth were planned investments to support our expanded expanding global BPC operations.
Higher personnel and technology related expenses and increased demand creation spending.
Moving to performance by brand I'd like to remind you that will be referencing constant currency growth rates.
Looking at the Columbia brand globally sales increased 15% in the third quarter and are up 12% year to date in the third quarter, we were able to ship a greater portion of our fall 2019 order book compared to the fall 2018 season as retailers restart depleted fall.
Season inventory positions.
Our team has done an excellent job executing on fall 2019 deliveries and we believe retailers our position for success when winter weather arrives in markets, where winter weather has arrived we've been pleased with our initial fall 2019 Sellthrough performance in regions that are still waiting the onset of cold weather.
The benefits of our product diversification efforts are evident.
As our popular PSG line has been a top performer.
During the third quarter Columbia's innovative product continued to receive media call outs and awards.
In apparel outside magazine featured the road runner jacket, and flare gun flannel in their annual winter buyers guide.
Backpacker highlighted the northern temperature in their article on the best women's hiking and backpacking apparel of 2019.
In outerwear.
Frisco years annual buyers guide featured the Columbia powder, Keg jacket, and snow rival Pat as one of the best ski tips of the year.
For fall 2019, the Columbia brand has several compelling product stories to highlight including our newest collection of insulated product called heat seal, which utilizes several of our innovations, including omni heat and advanced baffling construction, so that he'd stays in cold stays out.
The heat seal collection includes both casual and technical products and will be prominently featured in our marketing this season.
We've also joined up with the team behind Disney is highly anticipated frozen to movie to create a beautiful beautifully designed limited edition outerwear collection inspired by the iconic characters of the film.
This product will be available on our website and thats select retail locations starting November 15th.
During the quarter, we launched our new shift footwear platform at an exclusive mediate preview event in Brooklyn, New York amplify the launch with comprehensive marketing campaign, including Influencers digital in store and out of home advertisements.
Grammy Award, winning artist Xad helped to share the shift story with consumers around the world.
Since the launch coverage has reached over 288 million impressions, including placement in major outlets and publications such as CNBC Billboard people gear Patrol, Hi, Beast, and men's health, which award of the shift out drive mid 2019 sneaker.
Our award in their hiking category.
We are pleased with the launch and believe this exciting new product is reaching younger urban consumers around the world.
We all of this initial August launch of the low and mid product with the release of the shift hiker and boot collections in October we're excited about shifts potential as well as several new footwear platforms that will be launching in the coming seasons.
For omni our most successful cold weather technology I'd like to note that since it was launched in 2010 cumulative sales of far exceeded $1 billion and we still see tremendous opportunity in the years ahead for fall 2020 will be celebrating omni heat tenure.
Anniversary with our most innovative omni heat product to date I look forward to share a more details as we get closer to launch.
Moving to marketing.
In August .
The Columbia sponsored you TMB trail run event or Ultra trail Debone blog.
Highlighted columbia's relevance to the global trail running community and created a powerful brand experience for participants spectators and online viewers from around the world.
Collectively are you TMB sponsorship and content has generated over 200 million impressions since 2015.
Several Columbia sponsored athletes competed in the race as well as our Americas General manager Franco Fogliato, who successfully finished the grueling race in a mere 41 hours.
In the fourth quarter, we're executing two key city attack plans one in Denver next month and one in the Tri State area, including New York City, where our market amplification has already begun.
During most of October thousands of consumers today, we're able to view our window displays at the iconic Macy's Herald square location.
We continue to believe this focused marketing effort in targeted cities drives brand awareness and growth across our wholesale partners DTC stores and Columbia Dot com.
For our cereal brand 2019 has been a fantastic year that validates the brand strategy and positioning as a year around function first fashion footwear brand.
So rail net sales increased an impressive 29% in both quarterly and year to date.
Both in the quarter was led by US wholesale, Canada and us DTC businesses.
The real success can be attributed to its evolution beyond its legacy winter utility business to become a year round footwear brand.
To put this in perspective in 2016 winter product represented 70% of US sales in 2019 winter products is expected to be just 45% of us mix and within that the product mix has shifted significantly towards lighter winter style.
Products.
For fall 2019, surreal has added several new bold products to its collection, including that Joe next winter light boot and the Joan wedge Zip code.
We're also excited to expand our successful Disney partnership beyond the core Columbia brand with the recently launched surreal frozen to collection for women and kids.
So rails brand and product momentum are evident and we are investing in demand creation to unlock its full potential.
In October so real hosted hosted its biggest of it yet creating a mile long runway through the streets and the high line of New York City.
100 women walk in a full mile walked a full mile in Soros fall collection transforming the event to a celebration of unstoppable women and demonstrating the meeting of function first fashion footwear.
In recent quarters Cronto sales performance has slowed with net sales down 3% in the quarter and down 1% year to date.
To reinvigorate the business product team is focused on recent brand awareness solidifying the brands position at the intersection of style and outdoor.
Optimizing distribution and refining the product offering.
We believe the prana brand continues to resonate with consumers and we're taking the necessary steps to drive sustainable long term growth.
Mountain hardware sales declined 2% in the quarter and year to date.
In the third quarter Mountain Hardwear launched a refreshed and Reenergized fall 2019 product line, including a new Gore Tex No sport line, which fueled robust growth in our us wholesale business. This was more than offset by a decrease in international sales some of which was impacted by timing.
And lower DTC sales.
We are excited about the new product direction and mountain Hardwear and expect strong growth in the fourth quarter will drive full year net sales growth.
During the quarter Mountain Hardwear also created a unique product and brand story with their Everest expedition.
A group of six employees embarked on a 10 day track to Everest base camp meeting up with a team of climbers, including brand President Joe We're not show as they prepare for their chance to reach the highest summit on Earth.
Field tested products along the way.
Learned first hand about the community that enables climbers in the fall.
Connected with places that inspired the brands existence as well as connected with each other bringing a stronger foundation back to mountain Hardwear is on base.
I will now quickly review, our balance sheet and cash flow.
Total inventory exiting the quarter was up 16% to 717 million, primarily reflecting current and future season inventory well aged inventory increased modestly.
Inventory levels are slightly elevated driven primarily by a more aggressive by and lower risk styles and the effects of level loading to alleviate capacity constraints.
We are well positioned to capture consumer demand and confident in our ability to manage inventories by leveraging the strength of our brands and the breadth of our distribution channels.
We anticipate high teens inventory growth at year end, primarily consisting of current fall season inventory and to a lesser degree future spring season inventory.
This is a slight changed versus prior expectations, reflecting earlier than anticipated receipts of spring 2020 products.
We are focused on aligning inventory and revenue growth in 2020 .
Our balance sheet remains extremely strong with cash balances of over 240 million exiting the third quarter.
I'd note that our cash position is typically lowest at the end of the third quarter and rebuilds in the fourth quarter driven by collections of wholesale receivables and fourth quarter DTC sales.
Year to date, we repurchased 1.2 million shares of common stock for approximately 116 million.
At an average price of 97 50 per share and paid 49 million in shareholder dividends.
Excluding the quarter, we had $220 million remaining under the current stock repurchase authorization.
Before reviewing our updated 2019 financial outlook I'd like to provide an update on current areas of investment.
On the technology front, we rolled out our new retail platform consumer first or see one to our North America store fleet in the third quarter.
These stores now have enhanced point of sale systems, including mobile checkout access to our greater rewards loyalty program.
As well as improved merchandising and pricing functionality.
Customers also have the additional payment options, providing an improved consumer experience.
As a reminder, we implemented our new mobile platform experienced first or X one last quarter in our Europe direct and product ecommerce businesses.
Excellent enables us to create mobile first design sites more efficiently, which in turn will elevate the consumer experience as they shop our brands.
We still expect the remainder of the X one North America implementation to occur in 2020.
As part of our headquarters expansion initiative, we recently purchased a property adjacent to our headquarters campus for $33 million in order to provide room for further future expansion.
And employees that are currently off site.
We expect to begin occupying the property next year.
We're also continuing to make strategic investments across our supply chain to enable growth improved productivity enhance service levels and add capacity throughout our distribution and fulfillment networks.
I'd now like to provide some detail on our updated 2019 financial outlook and preliminary 2020 commentary.
For 2019, we anticipate 7.5% to 8.5% full year net sales growth.
Gross margin is expected to improved by approximately 60 basis points with the largest driver of year over year improvement coming from project connect benefits.
Partially offset by difficult fourth quarter comparisons given last year's record performance.
We expect operating margin to be between 13, and 13.2% compared to 20018 non-GAAP operating margin of 12.9%.
Diluted earnings per share is expected to be between 470 to foureighty up 17% to 20% from 2018 non-GAAP results.
For the fourth quarter, it's important to remember we're lapping last year's record results that benefited from an extremely favorable retail environment as well as ideal winter weather.
Additionally, fall 2019 shipments were more heavily weighted to the third quarter this year compared to fall 2018 shipments.
Including these factors, we anticipate low to mid single digit percent net sales growth and diluted earnings per share growth excuse me earnings per share of a $1.55 to $1.65, which compares to 2018 non-GAAP fourth quarter diluted earnings per share of $1.68.
Regarding our current planning efforts for 2020.
Based on advanced wholesale and distributor orders for spring 2020 season and plans for continued growth in our global direct to consumer business. We currently believe we can achieve mid to high single digit percent net sales growth in the first half of 2020.
We will provide our full year 2020 net sales growth outlook. When we report fourth quarter results next February and have better visibility to fall 2019 performance as well as fall 2020 advance orders.
In 2020, we believe we'll be able to sustain meaningful gross margin benefits related to project connect that were achieved in 2019.
Based on our visibility this spring and fall 2020 product costs higher tariffs and anticipated product mix, we expect gross margin to be relatively stable compared to 20 high teen.
Beginning in 2018, we initiated significant investments in the business to support our strategic priorities.
These investments increased in 2019 and will continue into 2020.
Based on the full year impact of initiative spending that commenced in 2019 as well as planned investments in 2020 to support our strategic plan, we expect modest SGN a de leverage as a percent of net sales.
We will provide our full year 2020 financial outlook, when we announce fourth quarter results in February .
In summary, our record year to date performance as evidenced that our brand led consumer focused strategy is working.
Our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence from which we will continue investing in our strategic priorities to.
Dr. global brand awareness and sales growth through increased focus demand creation investments.
Enhanced consumer experience and digital capabilities in all of our channels and geographies.
Expand in improved global direct to consumer operations with supporting processes and systems.
And invest in our people and optimize our organization across our portfolio brands.
You can find more detail on our third quarter results in 2019 financial outlook in Jim CFO commentary available on our website.
That concludes my prepared remarks, we welcome your questions for the remainder of the our operating could you help us with that.
Thank you at this time of the conducting a question answer session if you'd like to ask a question. Please press star one on your telephone keypad a confirmation tunnel indicate your line is in the question can you.
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To allow for as many questions as possible. Please ask one question and one follow up each.
Our first question comes from the line of.
Bob Terminal with Guggenheim Securities. Please proceed with your question.
Hi, good afternoon.
Hey, Bob.
Tim I guess two questions for you and the first one is.
The performance in footwear business was very strong you talk to finance the launch on the shift product can you just comment on early reads for October and sort of what you're seeing in terms of sell through and the second pieces can you elaborate a little bit more on the DTC performance for the quarter, maybe just to break out.
Between what you did see digitally versus your bricks and mortar stores and a little bit more color would be great. Thanks.
Certainly well.
Yes, our shift launch was really one of the most comprehensive we've done in the sales sell through was quite good in several areas, especially our own DTC business, especially the ecommerce business. So was that I would say the best sell throughs were in our.
Specialty sneaker areas and if you remember we we were very methodical in terms of how we launched this product with with the larger chains and the the mall operators. So.
I would say it was good theres going to be way more shift type product.
Product in that collection to be launched a further in October as well as in 2020. So we're pleased with the launch and.
Let's give us a lot of confidence in that part of the business.
As it relates to the DTC quarterly performance as you know Bob would we consider ourselves to be really a wholesale business. So we don't report a lot of information that a typical retailer would report.
On that Bob at one one quick comment, but I think Tim touched on this in the prepared remarks, we did see some deceleration in the growth rates within our DTC business relative to the third quarter last year and I just keep in mind the growth rates that we achieved in the third quarter last year.
Were significant we were up a low 20 to a low 20% in our brick and mortar channel at a high 20% within the E. Commerce channel. So we're lapping we're lapping those and then we've continued to see nice growth within within those channels both from.
The contribution from new stores and our existing stores have continued to be productive.
And I guess, if I could just follow up.
So when you think about those comparisons and a third quarter can you just give us an up ideas remind us what you're up against in the fourth quarter and sort of how you're playing the fourth quarter and this updated guidance today, especially in the DTC piece of it.
Yes, we've continued to plan the business business on a more normalized basis is we've suggested in the past.
As it relates to the what we achieved in the fourth quarter last year, the brick and mortar business was up a mid teen percent.
And the ecommerce business the high 20% and so we've taken that into.
Account as we've provided the outlook that we have here today.
So thats reflected in based on the result, we've seen.
Thus far in the quarter, it's consistent with.
Expectation.
Great. Thank you very much.
Okay.
Thank you. Our next question comes from the line of John Kernan with Cowen. Please proceed with your question.
Hey, Thanks for taking my question then that congrats on all the momentum great to see.
Thank you.
So Tim you talked about 100 basis points gross margin benefit from project connect so far this year, how are we thinking about that in the fourth quarter I know, we're keeping in mind that there are there.
Channel mix is going to work against you and I.
Potentially tariffs, but just how do we think about the overall benefits and puts and takes to gross margin because it if we if I look at your guidance assuming.
Yes, we have to look into project connect benefits on a really a two year stack basis, and maybe Jim can make sure I don't.
Guide you incorrectly but.
We saw we saw some benefits in 2018, and some in 19 and they're going to be spread across the business quite dramatically.
Jimmy you might want to just get more specific yes, thats right. Tim. So if you look at on the two year stack bases. Our gross margins were up 170 basis points in 2018 and with the updated outlook that we're providing here today, we anticipate 60 basis points of improvement for the full year.
As you look at that you think about the fourth quarter certainly as we look at the first three quarters of the year, our gross margins going up well over 100 basis points and that by and large reflecting.
The effects of project connect we would anticipate.
Along those same.
Lines of improvement from project connect going into the fourth quarter. There are however, a couple offset into one of those off that's going to be the environment. The positive environment that we had in the fourth quarter of last year and then the other component of which is we do anticipate some incremental close out mix.
Obviously, what's the lower gross margin relative to some of the full price selling that we see that fourth quarter and those are those are really the delta that are going to drive the gross margin down I.
I think it's 70 basis point, there so that we've got contemplated in our fourth quarter outlook.
Sure. Okay. Thank you and then just maybe a follow up on the X One initiative I think it.
Largely falling into next year sounds like.
You're looking for modest question a de leveraged such as.
Maybe any puts and takes the X one initiative and how we should think about the costs and benefits that as we go into next shirt surely X. One is up and running now on 20 sites now 20 sites, which would include all of our Europe business, which have multiple sites multiple brands multiple languages as well as the krona site here in north.
Erica and.
So we like it if it's offering a lot of opportunity for enhanced consumer experience, but the big business, The North America, Colombia Soro business.
For next year.
With X one will be next year sometime and X. One is just one of a few platforms that are being revised slashed.
Improved so it's probably the most recognizable but there were other significant investments.
In digital.
Capacities going on throughout next year.
Got it thanks and.
And then my Darice, we'll be looking forward to the Olaf collaboration.
Correct.
For sure.
Thank you. Our next question comes from line of Alex Paris with Bank of America Merrill Lynch. Please proceed my question.
Hello, Congrats on a Sean quarter. Thanks for taking my question.
Just first maybe for Jim can you help us frame the impact of the timing shift given the earlier shipment of the fall 2019 orders.
So if you normalize it if you normalize set out could you help us quantify maybe to dollar value our EPS impact that pull forward.
Yes, absolutely so in our in our second quarter earnings call. It indicated that the shift within the about 20 million out of the fourth quarter and ended the third quarter relative the experience that we'd had last year and as we sit here today and obviously, we had the earlier receipt of our inventory that we've been reflecting an inventory balance though.
That shift became about 45 million.
From again from Q4 and into Q3 and call. It two thirds of that was in the US there's a portion of that that.
International well and that by and large what drove the upside to our outlook for for the quarter.
It's more of a timing shift than anything.
Perfect Thats really helpful.
And then if I could just get some more color on the assumptions behind these sort of stable gross margin outlook for 2020.
Given the strong 2019 performance just sort of what the puts and takes sorry, there and if you will continue to see.
Project conduct talents to 2020 or do those start to moderate.
And then maybe any specific sort of care commentary you can give us with regards to that as well. Thanks.
And Alex I missed the first part of your question, but.
As it relates to as it relates to project connect.
By and large we'd anticipate that the benefits that we were striving to achieve from a gross margin standpoint, we've effectively realized those is we as we get through the balance of the year here and obviously, it's been reflected in the outlook that we provided and so we've seen a nice step function improvement in our gross margin.
Both in 2018, some of which stem from project connected certainly as we get into as we wrap up 2019 as well as we get into next year with Tim's prepared prepared remarks on our 2020 outlook, we do not anticipate that step function improvement.
To continue into 2020 with that said the processes that we put in place to the part a project connect those are sustain sustainable processes in which we be seeking to maintain those those margin gains that we previously achieved.
As it relates to up to tariffs you know the company prides itself on its ability to navigate tariffs globally, we have a really excellent team here and there are focused on.
Modifications to can be made and garments as well as location of manufacturing et cetera, but nobody can really predict.
The capricious nature of these.
Tariff.
Impacts when we can't predict an advance where or when it's going to happen or so.
Once they happen, we can we feel comfortable being able to with our diverse source base in our our expertise and tariffs we can do what we can but.
In this environment is quite difficult.
Perfect that's really helpful Best book.
Thank you.
Thank you. Our next question comes from the line of Paul Lashway with Citigroup. Please proceed with your question.
Thank you I'm curious, excluding the timing shifts.
That you've talked about as benefiting the quarter can you just talk about where you saw results come and ahead of plan versus below plan, where are you feeling better or worse as you look across the business.
I think by and large the results came in where we would have anticipated them. We did have this shift, but I referred to where we came in about 25 million better on the wholesale side relative to our internal outlook.
Our internal outlook.
We came in about 15 million better. So there are there are a couple offsets in there.
Part of that would relate to the direct to consumer business. So as we've gotten off to a slightly warmer fall winter season, particularly in the month of September which was quite a bit colder last year that we've seen some offsetting that and to a lesser degree in parts of the wholesale business for the same reason.
We've we've captured all of that in the updated outlook that we provided today.
Thats it thanks, and you'd mentioned I believe any higher closeouts.
Plan for Fourq, you can you just talked about what's what's driving that.
Also what are your margins on the close out.
Look like this year versus close out last year, you getting better margins, our worst margins on the close out product. Thanks.
Well last year. This year as you know we mentioned in our prepared remarks, our inventories are slightly elevated so that's that's driving an expectation of some additional closeouts last year, we actually ran out of inventory so close out comparison to prior periods, it's not really accurate.
I Didnt hit historically, our close out margins run fairly high by comparisons to our to our regular gross margins. So.
No not like we're trying to build additional inventory to close out, but we have healthy margins typically on our closeouts, yes, all I had one other comment to our close out level last year were at an exceptionally low level, just given how well sell through was in our inventory position. Even this year. Despite the fact that as an increase relative to last.
Last year, there are still relatively low relative to some of our historical level.
Okay. Thank you good luck.
Thanks, Thank you.
Thank you. Our next question comes from line of Jim Duffy with Stifel. Please proceed with your question.
Thanks, Good afternoon guys.
First question.
Point of clarification did Dover Nacho summit Everest with the team.
No you know what actually is.
As a testament to his good decision, making there was a very significant.
Rockfall present.
Actually last year killed a few people and so once they got close enough to the.
To the summit, where they can recognize this this danger exist today, they determined that it was too too dangerous and so they came back down so we're happy to report that.
They had a lot of great experiences, but they did not some of it but they did come home.
Okay good to hear.
And then I had a question around the 2020 commentary. Thanks for that you Didnt provide a full year revenue view, but Tim you spoke to expectations for de leverage would you change that view based on revenue outlook or is that kind of the plan irrespective of what you see is.
As growth for the year.
Well, we have as I'd mentioned, we have several.
Initiatives in flight, which you're going to be helping us to become a more efficient business and and more focused on.
Demand creation and consumer connections and so.
It's difficult for us to predict the full years results because the big fall season, we havent signed any business up yet but.
The expectation is that we know we need to add these additional capacities to the business and so they're very likely going to be built in investments.
And of course, if we have a a terrific revenue year, we'll we'll be back to leverage and that's our ultimate goal.
Okay. Thanks for that.
Okay.
Thank you. Our next question comes from the line of Mitch Kummetz with pivotal research. Please proceed with your question.
Yeah. Thanks got two questions. So one of the gross margin so you've taken Jim you've taken the guide down.
20, Bips I can appreciate that you know closeouts or few and far between last year on year, assuming a more normalized level. This year, but why did it come down 20 Bips from your prior outlook is it on a close outsiders on something else.
It's predominantly that Mitch.
In terms of close outs.
We weren't anticipating quite the degree to close out, but as we evaluate inventory position.
We've taken the close out forecast up for the year, and there's probably a bit more normalization that we've done in our gross margins well just given the experience that we saw in the month of September with some of the warm weather. So we've made some adjustments on that and as well.
Got it and then.
Jim on 2020, I know last year, you gave a sales outlook for the full year this you're giving it for the first half.
If I recall collect correctly last year at the time that you gave it you mentioned that sell throughs Regrade spring or you referred to your spring Order book for Spring 19, you talked about early feedback on the fall 2019 line all of that give you a little a lot of confidence to guide to full year sales for 2019 is there something.
Missing today that that's not giving you that confidence is it that last year. The season started so strong that it was kind of fully baked at the time of the Q3 call and this year. There is just on a lot of the season more the season, the left or how should I think about that I would say, there's a number of factors certainly we will have.
Better.
Opportunity to be more accurate later in the year after we've seen some orders.
We just all have to recognize the global headwinds that are talked about non GM.
To consumers so the expectation for.
You know for difficulties ahead, our AR.
Our many.
I have been trapped in a conference from all day. So I don't know what the fed did today are what they plan to do tomorrow, but.
If there if there are lowering rates to what a near zero or something like that it. So it's an indication that.
Maybe the experience. So we've all had in the last several years to just incredible growth is is moderated.
Got it alright, thanks, guys.
Yep.
Thank you. Our next question comes from the line of credit with Wedbush. Please proceed with your question.
Good afternoon, and thanks for taking my questions I guess just.
Just to go to that.
Consumer initiatives X one C.
How do you think about those initiatives driving direct consumer growth I.
I guess to a degree Q4, but more importantly, as we start to look to to next year to accelerate growth from those key initiatives if any.
All of them out.
Right.
Certainly well, we look at the E Commerce business that we do directly here at all of our brands as being really two parts. One is obviously the commerce that they generate and the ability to to have a.
Highly profitable revenue stream, but additionally, they provide a terrific marketing tool for the company. So if we if we get open rates of.
10% or 15% and then we get an.
Conversion rate, which is more normalized to the industry, we get millions of people getting a terrific marketing message from the company and it's much more valuable than than a mere billboard or an AD, which we do those in addition, but.
It's a very robust way for us that connect with consumers. So we need to be making to to confirm that whatever consumers see from us digitally is of the highest quality and has the most interest. So that's that's the two reasons that were really moving.
Forward on this on this X one platform it and addition.
The the consumers are moving rapidly to their mobile phones for almost everything and so this is going to enable us to be much more mobile first than we have been ever.
Let me if I can ask a follow up to that is there any color you can add since you've.
Layered in some of these initiatives.
Particularly X one on the international side, whether from a conversion perspective, or just anything you're seeing and I guess similar view probably on C. One here in North American it's early days, but anything you're seeing at all.
That.
Positive.
Yes, certainly it's early days on both see want an X one in terms of seeing their returns but.
Certainly there there the returns have been gratify enough for us to continue to invest in those and these are not insignificant investment so.
We wouldn't go forward with them, we didnt have the expectation were going to get great results.
Okay, and and I guess, Jim for you just on the.
The point of leverage I know, you're making investments as you think about 2020.
Where where would you argue or work we get a handle on where the leverage point is from a revenue perspective.
And the business I mean, you're potentially can grow almost 80% or thereabout. This year, you know I think in some regards you're making disproportion investments this year, but.
Just curious where that leverage point could be from a revenue perspective.
I'd take a step back here and look at what we've been able to deliver each of the last few years from Haven, an operating margin or EBITDA margin margin there was well below our peer group in as we sit here today, we've got to EBITDA margin that.
Every bit of competitive or in the upper quartile of what we view our peer group to be until we step back and look at the Ash DNA investments that we made in 18, we've made a 19 and what will continue to do in 2020.
Strong return to shareholders arbiter, our return on invested capital is quite quite frankly and tone and so as we go out to next year, there are going to be years in which we're in an investment cycle, it's going to require a bit more from a top line standpoint to leverage that overtime, certainly our expectation would be that we're generating.
Positive returns and leveraging that.
But.
Outlook provided today, it's going be it can take a little bit more revenue growth to leverage the DNA next year.
Okay.
Thank you mentioned last Manchester on the inventory piece.
I'm just curious as you come at a 20 as you come out of this year.
Looking for growth, but at any any color how much you can break out between watts.
And spring receipts are says.
Maybe some of the residual close that inventory that you move in the fourth quarter and any color you can break out between those two.
Pieces to go out.
Towards the end of year.
Well with the with the outlook, we provided in terms of our inventory being projected up high teens rate at the end of the year and keep in mind, it's incredibly difficult to forecast the timing of inventory receipts typically the ended the fourth quarter. The end of when were when receiving heavily on inventory. So there can be volatility.
Weighted to that so.
Sitting here today, though and what we've contemplated in that high teen rate of growth into the year It would.
Tim that our spring 20 receipt are slightly greater than where we were from a from a spring 19 perspective, obviously, which had pulled forward quite a bit in light of the project connect in the production capacity changes that we've made so most of the increase will have at the end of the year in our inventory will be fall 19.
I mean inventory we're carrying.
The age died last point I'd make theres no art, aged inventory positions are really remain really quite healthy. So it's more current season.
Okay. It's more current season inventory my time to get to the end of year.
Current fault current both 19 season that we carry on and sell through the first part of the year and if necessary move into the latter part of the year leverage our outlet and then and then it will also be there'll be current season or future season spring inventories get the spring 20 and to a far lesser degree is it something that is older season inventory meeting a year old.
Got it okay. Thank you.
Yes.
Thank you. Our next question comes from line, Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, guys. This is carlin Lynch on for Susan. Thanks for taking my question just had a quick question on mountain Hardwear I know you it's.
We saw a little bit of pressure this quarter.
And but you had guided fourth quarter for some strength I just wanted to get a sense of what was driving that strength is it the new product that you announced rolling out in Europe or is it just kind of easier compare in fourq versus last year.
Yes. So if you if you look at the mountain Hardwear business over the last several years.
It's declined and primarily because our.
Prior management team Didnt have as good a handle on its on the the product offering that we that we know needs to be unique and differentiated.
So Joe Vernaccia and his team have been working diligently to to get that.
Product line correctly organized and correctly.
Set up for for success. So the comparisons when we talk about the decline have been in many ways a function of the liquidations that took place in prior periods. So chose products are now just hitting the stores and for we're we're expecting good sell through and a robust growth in sales in the fourth.
Order of 19, and I just add the the lion share that growth will see in the US now and we'll be focused in the U.S. wholesale business. We've got order book on that would support that the point.
Got it and then just as we think about that into calendar 20.
His joe's product expected to kind of roll out more globally in spring of calendar 20 or is it going to be a kind of wait and see on us sales before we roll that out globally. Thanks, no its global today, including Nineteens product is global.
And so the spring product is is going to go out a portion of it small portion in Q4, but the bulk of it in Q1 of next year.
And there will be global.
Got it thanks.
Right.
Thank you. Our next question comes from the line of Jonathan Komp with Robert W. Baird. Please proceed with your question.
Yes, hi, Thank you I just wanted to ask on the U.S. wholesale business.
I think you slightly bumped up the outlook for the year to mid teens growth I, just wanted to confirm that and maybe ask what what drove that as well.
When you when you look at the wholesale business today, if you could comment on any any at a high level any pockets of strength or weakness across the various segments.
Certainly well I think.
Our business at wholesale is quite good in the U.S., we're gaining market share.
I would say of all the the product sorry, the channels, where we're doing.
The best as it relates to sell through et cetera are probably in the department store.
Channel, but we've had good uptake new new business with customers like Macy's et cetera, and.
That that business has been quite good we had as you may have noticed.
And exceptional promotional event with Macy's.
At their Herald square store.
Great views of our outerwear et cetera and.
So thats been probably the best.
Area.
Great sell through and John we did take the forecast up slightly from a low double digit up to.
Or low to mid teen or sorry, low double digits low teens sorry.
And part of that reflecting in the quarter in particularly when the early in the third quarter, our conversion rate in a replenishment on our spring summer goods in feel real good real good shape softened up a little bit which is the warmer winter.
That we got in the month of September but conversion was generally pretty positive.
In the quarter.
Okay, Great and then maybe just one clarification on the inventory I just wanted to confirm our you are you now expecting to have more fall 19 product on hand at the end of a year and if I could maybe just understand if that is the case.
Why that might be.
Yes, we expect to have slightly more fall 19 inventory, we're we're comfortable with the quality inventory frankly, we talked in the prepared remarks that it's we have slightly more than we would like but.
We have the ability with our balance sheet that Garrett.
Into next year and liquidity through our own.
Outlet stores, and we saw choose or to liquidate it either this year next year and close out and part of that stem. John from we came out of a really clean fall 18 season. So we bought in more aggressive land and thats effectively while you've seen a bit more inventory as we as we exit this year.
Okay, Great and then maybe just last one from me bigger picture on kind of the evolution of the Columbia brand certainly with the footwear you're more of a.
Kind of a fashion performance fashion orientation and to some of that too with some of the retro or even streak where elements and parts of the apparel assortment I'm just wondering how you're viewing that evolution for the brand and maybe any thoughts going forward on where you think it can go.
Sure what weve.
We are we say frequently inside the company that nobody needs another brand of apparel footwear. So the key for us to differentiate ourselves.
From the other.
Zillions of brands of apparel and footwear that are available globally, and we really chosen to focus on the the points of differentiation differentiation around innovation.
And technologies and I think if were critical of ourselves, we probably havent thought of the F. word as much as we should mean fashion and I think we're we're really beginning to blend much more of our technology and fashion together to give ourselves a real opportunity to grow the business.
And that's our plan will continue.
The point of differentiation around technology, but we know we need to have really trend right product.
Okay I appreciate the color. Thank you.
Thank you. Our next question comes from the line of line Chang with Evercore ISI. Please proceed with your question.
Hi, Thanks for taking my question just actually a follow up on the last question I was asked.
How much of the new footwear innovation that will see from Peter and his team.
Over the next year or two how much of that will be targeted towards your traditional channel in winter categories, and how much will be new categories like we saw the shift launch.
Well really depends on how good a job we do with the shift product.
The expectation is that we'll have continued design investments against shift and against the whole concept of urban outdoors and technology and fashion together.
We're really focusing on a younger urban consumer.
So it's a function. It's a question how well we do against that initiative, but Additionally, we have the opportunity and it's fairly significant too to grow our PMFG footwear business, where we really have.
Very tiny competitive set and a real whitespace there that.
We can we can lean on the the well known PMFG brand.
That focus our technology et cetera, so theres a number of different areas, where we can be really successful not to mentioned the.
The real franchise, we have in winter footwear between the Columbia brand and the Ciro brand. So there's really lots of opportunity for us in that category.
Got it thanks and the other question I had one you've been piloting some pretty interesting new marketing initiatives with Influencers.
Product collaboration is there any data you can share on.
Your new versus existing customer mix, whether those collaborations and also some of the new products is bringing new customers into the rent.
Certainly well I think there's it's interesting because ed.
Aberration or.
Acceleration was a real opportunity to bring us newer customers that maybe new the brand, but didn't recognize its effect there was more forward than they had thought.
And that was really gratifying to see the number of.
Of.
Visits and visibility that that brought us, especially from younger folks but.
Simultaneously we had.
Luke Combs, who.
It was a very popular young country Western Sanger that just happened to find our brand and.
His popularity.
Both as a young performer as well as a fisherman NATO Guy who does what his parents and grandparents and Don.
It's a nice combination of opportunity for the business that we can we can speak to both of those kinds of generations and b and be really.
Relevant.
Great. Thank you.
Thanks.
Thank you ladies and gentlemen that concludes our question answer session I will turn the floor back to Mr. Boyle for any closing comments.
Thank you very much for listening in we look forward to talking to you in February of up to our results the Q4 and about our plans for 2020.
Thank you. This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation.