Q3 2020 Columbia Sportswear Co Earnings Call
[music].
Greetings welcome to Columbia, Sportswear third quarter 2020 financial results.
At this time, all participants will be in listen only mode.
Brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Andrew Burns Director of Investor Relations Mr. Burns you may begin.
Good afternoon, and thank you for joining us to discuss Columbia sportswear company's third quarter results.
In addition to the earnings release refreshing 8-K, containing a detailed CFO commentary, explaining our results and updates regarding cobot 90 impacts and the company's response.
The CFO commentary is also available on our Investor Relations Web site, that's their dot Colombia.
With me on the call today are chairman, President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Operating Officer, Tom Cusick.
Your Vice President and Chief Financial Officer, Jim Swanson, Executive Vice President and Chief administrative Officer, Peter Bragdon.
This conference call <unk> forward looking statements regarding columbia's expectations into anticipations or beliefs about the future.
These statements are expressed in good faith and are believed to have a reasonable basis. However, these forward looking statements are subject to many risks and uncertainties and actual results may differ materially from what is projected.
Any of these risks and uncertainties are described in Columbia's FDIC filings.
We caution that forward looking statements are inherently less reliable than historical information, we do not take 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 changes in 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 measures and result, including a reconciliation of GAAP to non-GAAP measures and exploration of managements rationale for referencing these non-GAAP measures. Please refer to the supplemental financial information section in the financial tables included in our third quarter 2020 earnings release.
Following our prepared remarks, we will execute right here.
During which we will limit each quarter to two questions. So we can get to everyone by the end of the hour now I'll turn the call over to Jeff.
Thank you Andrew good afternoon.
I hope everyone is well and your families are all safe and healthy as we continue to work through this unprecedented year I'm pleased to report third quarter results exceeded our internal forecast.
Our results were down substantially in comparison to last year sales and profitability trends sequentially improved compared to second quarter. We expect continued improvement in the fourth quarter and into 2021.
The tremendous efforts of our global team of dedicated employees as well as our cost containment and capital preservation actions have preserved our financial strength.
Position us well to recover from the pandemic and execute against our strategic plan.
We exited the quarter with 315 million in cash and short term investments no bank borrowings and nearly 1 billion in total liquidity.
Before reviewing our results and outlook I'd like to discuss the senior leadership changes, we announced today in a standalone press release and form 8-K filing after.
After eight years with the company, Tom Cusick has announced his intention to retire next year Oh.
During the transition period.
There's been a true source of leadership and instrumental to our success over his tenure.
It will be sorely missed.
We are thankful for the time energy has devoted to elevating elevating Columbia sportswear to what it is today.
Acted by timing right.
Approximately $45 million of fall 2020 shipments shifted into the fourth quarter due to previously communicated production and logistics disruptions related to the pandemic that is resulting in later inventory receipts.
Excluding this timing shift total consolidated third quarter net sales would have decreased 18%.
Direct to consumer net sales declined 10% in the third quarter.
E Commerce was once again, the bright spot growing 55%, while brick and mortar store performance remained under pressure.
In accordance with the plans we described earlier in the year, we successfully completed the deployment of our new E Commerce platform X one during the third quarter. Following the implementation across 10 countries in Europe direct and for the product brand last year. We went live on the platform in North America.
For the Columbia, Sorel and mountain Hardwear brands during the third quarter.
The newly refresh sites have been aesthetically enhanced performed exceptionally well and offer consumers improve search navigation and checkout capabilities as well as new payment mobile payment tenders.
We're excited to have this enhanced mobile experience deployed and ready for the holiday season.
While much uncertainty remains we are confident in our strategy as fall 2020 gets underway I am encouraged by early sell through and reorder trends, we believe inventory in the channel is lean compared to prior seasons, and we have the inventory to chase in season demand during our peak season.
I'd now like to provide an update on the impacts and our response to the ongoing pandemic.
During the pandemic our objective remains to carefully navigate this environment with our historically disciplined approach and emerge in a stronger competitive position.
The vast majority of our global DTC stores remained open throughout the third quarter.
Overall brick and mortar store traffic and sales trends remain well below prior year levels.
Stores and destination locations and tourist dependent markets remain some of the most severely impacted stores.
We anticipate traffic in these markets to remain depressed until tourism resumes.
We continue to evaluate our own store fleet and have made the decision to permanently close a small number of locations year.
Year to date, we've permanently closed eight stores in the us and one in Europe.
We continue to evaluate portfolio and anticipate closing additional underperforming stores.
To enhance store profitability, we're focused on improving store labor efficiency and lease negotiations are ongoing.
As I referenced earlier in my remarks, our DTC ecommerce business grew 55% in the quarter.
New customers purchasing product on Colombia dotcom for the first time grew 65% year over year, which demonstrates the strength of the brand and the success of our marketing tactics.
As a percent of the mix our DTC E. Commerce sales grew to 12% of total net sales in the quarter, a two fold increase in penetration relative to last year.
It's important to note that these sales carry a higher contribution margin than our corporate operating margin.
If you include our wholesale partners online businesses, along with our own E. Commerce site. We estimate online sales were about one third of the Columbia brand's us sales mix in the quarter.
We continue to prioritize digital marketing spend within our overall marketing mix to further attracted active customers propel online sales growth and elevate our differentiated brand and product story.
It's mitigate impacts of this disruption and position us for success this holiday season.
On the cost containment from.
We realized $45 million in SG&A savings for the quarter from lower variable expenses and cost containment actions.
Year to date savings have been greater than we initially planned and will exceed $100 million in annual cost savings in comparison to last year.
Before any expenses related to defend demick.
In addition to the immediate cost containment actions outlined above we are executing cost reduction and resource allocation actions that will impact the companies cost structure for 2021 and beyond.
We're taking these actions to ensure the businesses structured for sustainable and profitable growth in the face of evolving market landscape.
We plan on providing an update on anticipated 2021, SG&A expenses expense levels of the next call.
Now I will quickly review third quarter results sales trends in most regions during the quarter were correlated to each Marcus management of the pandemic and consumers willingness to shop in store.
Net sales decreased 23% to 701 million in the third quarter.
As a reference earlier in my prepared remarks, this decreased primarily refracts the ongoing negative effects of the pandemic and to a lesser extent the timing of fall shipments shifting into the fourth quarter.
Breaking down this performance by region.
Use net sales decreased 23%.
This performance reflects a high 20% decline in wholesale and a low double digit percent decline in DTC net sales.
Within our DTC business U S E Commerce net sales increased hi, 50%.
While you S brick and mortar declined mid 30%.
While September was our strongest month of the quarter and our Usdt's business, we have not seen a sustained improvement in brick and mortar store traffic to date.
Vermont review of International markets, I will reference constant currency growth rates, which we believe best reflect the underlying business trends.
In our Latin America, Asia Pacific or La region net sales decreased 27%. This decline was most pronounced in the law happy region wholesale and distributor business with direct to consumer net sales performing better I'll bet still down year over year.
And Asia, which ended depend demick first store traffic trends improved during the quarter and recently, we've actually seen some periods with positive year over year traffic group.
While the environment remains challenging we're committed to supporting in investing in this region to unlock its full potential over the long term bye.
By market, China net sales were down mid 20%, Japan declined low 20% in Korea declined high teens percent.
L. IAP distributor net sales decreased hi, 40%, reflecting the outsized impact of this pandemic in central and South America, as well as geopolitical and economic headwinds in several markets.
And our Europe, Middle East Africa, or EMEA region, net sales decreased 8%, reflecting a low double digit percent decline in our Europe direct business, partially offset by a high 20% EMEA distributor net sales growth that was driven by a greater portion of fall 2020 shipments fall.
Going into the third quarter.
Which more than offset lower fall 2020 advance orders.
We're closely monitoring the European shutdowns that are occurring in real time and are not factored into our financial outlook, we are providing today.
In Canada net sales declined 33% in constant currency.
Shifting to profit and margin performance gross margin declined only 40 basis points to $48, 9% of net sales and <unk> expense SG&A expenses decreased 13%.
This performance resulted in an operating margin of 12, 2% of net sales down 460 basis points from the prior year.
Diluted earnings per share decreased 46% year over year to 1994.
Exiting the quarters eggs.
Exhibiting the quarter, our inventories were up 8% year over year, nearly 90% of the inventory a quarter and consists of current and future seasons.
Aged inventories increased year over year, but continued to represent a small percentage of our total inventory mix.
Unsold inventory as of September 30th 2020 was slightly elevated year over year.
But declined sequentially compared to second quarter 2020, we.
We are comfortable with our inventory composition and our physician to support unplanned demand.
As a reminder, our sales are comprised of a high concentration of evergreen styles and our product line that changed very little season to season and have minimal fashion risk. These.
These carryover styles as we call them typically represent over half our style count and an even higher percentage of our sales mix. Historically, we have utilized our balance sheet strength to drive manufacturing efficiencies that improved gross margin and capitalize on sales opportunities.
This strategy helps drive sales, but also led to hire inventory levels and slower inventory turns.
As we've mentioned on recent calls in the current environment, we are acutely focused on managing inventory and improving turns.
We remain confident in our ability to profitably sell the remaining inventory and current and future seasons, leveraging the companies wholesale customers E commerce platforms and fleet of outlet stores.
Moving to performance by brand Columbia brand net sales decreased 23% of the quarter.
Even though results were clearly impacted by the pandemic, we had several exciting marketing and product innovation stores during the quarter to keep consumers engage and differentiate the brand in the marketplace.
On the marketing front.
We proudly announced bubble Wallace's Columbia's newest brand Ambassador in addition to his racing talent Bubba as an outdoor enthusiast, whose courage and charisma aligned with the Columbia brands tested tough ethos. This announcement was extensively covered by media outlets, including the Washington Post Forbes men's.
Journal and Fox business among others.
You may have already seen our dorado PFG paint scheme or omni heat wrapped car on race day.
I am excited to see what bubble can achieve next season with this new NASCAR team Who's principal owners include Michael Jordan.
This year, we're celebrating the 10th anniversary of Columbia's patented innovation omni heat thermal reflective career.
Originally inspired by foils space blankets omni heat is one of the best selling winter technologies in the world.
Early in the fourth quarter, we kicked off the season long celebration on 10, 10, 20 with a full day of online events with special messages Q&A and interviews with Columbia brand ambassadors, including key athletes and country Star Luke Combs.
Luke has been on an award winning streak in recent months, including three Billboard Music Awards, including top country artists and two ACM awards, including album of the year Congratulations Luke.
On the innovation front, we launched our newest technology omni he's black dot during the quarter.
The outdoor industries first external thermal shield this.
This new textile act as a heat magnet featuring thousands of multi layered black dots that capture solar-heat and trap warrants to keep people warmer in cold weather.
This limited collection is available at Columbia, Dot Com and select retail locations.
What where it continues to be one of Colombia's best performing categories, driven by classic styles like our new ranch hiking boots as well as newness across the entire product line.
Are successful PFG footwear in line with popular stars like the Dorado.
And a growing assortment of sneakers and modern hiking styles, including the recently launched asset collection are all expanding the brands reach in this important category.
In December.
Columbia's fifth annual Star Wars collection will be released.
This year's collection is based on demand delorean the hit streaming series that launches its second season on Disney plus beginning October 30th.
While are hesitant to provide too many details at this early stage, we can confirm that we worked closely with the team at Disney and Lucas feeling the.
The Star Wars collection is our most extensive to date with several styles for adults and children.
Historically these collaborations have sold out quickly and have been a fantastic way for Columbia and Star Wars fans to enjoy the outdoors Inauthentic Star Wars style.
Looking to 2021, we will continue to bring new innovation into the marketplace.
For spring 21.
Launch omni heat excuse me omni freeze zero ice.
Touch activated cooling fabric takes on the heat before you start sweating, while improved sweat activated pattern enhances moisture management and evaporative cooling combined is the most advanced solution for dry and wet cooling power we've launched to date.
For fall 2021, we're planning the largest innovation launch in our company's history with the introduction of omni heat infinity.
This new addition to the omni heat family provide significantly more heat reflection and dramatically different visual appearance to the consumer.
A new expect expanded pattern of gold dots reflect more of your body heat to deliver incident warmed without compromising breathability.
Beyond the heat Infinity launch will be able to leverage and build on the well established consumer and retailer awareness, we've created around omni heat over the last decade.
And footwear, our product engine is not slowing down in 2021 with several new PFG trail and hiking styles coming to the market.
Before moving on to the rest of the brand portfolio I'd like to congratulate Columbia's DTC customer service teams. We recently received a number one ranking in newsweek's best customer service in the outdoor and athletic apparel category. This.
This recognition is in addition to Newsweek's best and state customer service study that we mentioned on our last call.
Great customer service creates loyal lifelong customers and I couldnt be proud of our team for this well deserved recognition.
Jerome net sales declined 21% in the quarter, reflecting lower wholesale selwyn, partially offset by strong E commerce growth.
Continued online momentum was fueled by the sneaker category with the kinetic collection and function first fall products, including the out and about and explore collections. Sherelle is also seeing encouraging traction and it's expanded men's line, including new sneaker boot collections, such as that <unk>.
<unk> and updated icons like the medicine and caribou.
Yeah.
Charles brand power and momentum as a year round fashion footwear brand will not be deterred by the pandemic Sherelle launched a comprehensive media plan defined by content partners partnerships with the leaders in fashion and lifestyle publisher.
One of the highlights as the second season of Ciros podcast the step.
In partnership with pop sugar, which highlights unstoppable female leaders in the community that.
The team has an excellent innovative and design forward product pipeline ready to propel the brand back into growth mode.
<unk> net sales declined 21% of the third quarter with lower wholesale wholesale performance, partially offset by strong E commerce growth.
Promised E Commerce business continues to experience record customer acquisition trends as new consumers flock to the brand during the quarter top performing categories online included women's active and managed lifestyle assortments.
<unk> also recently launched an exciting new outerwear line available exclusively on crime dot com and and branded stores.
In August Chrono reinforced his commitment to be an industry later and sustainability and its mission to create clothing for positive change by launching the responsible packaging movement the.
The goal of this movement is to completely eliminate plastic from consumer packaging by 2021 as well as eliminate use of materials from ancient and endangered forest by 2022, and Virgin Forest Pfizer's by 2025.
Not hardware was our best performing brand in the third quarter with net sales declining 15%.
Mountain hardware generated the fastest E commerce growth of our brand portfolio in the third quarter led by equipment as well as popular outerwear lives like the stretch down and goes whisper insulated collections and apparel styles, including the Dynamo Pan collection.
As we mentioned in past calls or a mountain hardware team has been hard at work reinvigorating their product line, starting with the fall 2019 collection.
While unfavorable winter weather last season, and a pandemic have interrupted sales velocity. Since then it's increasingly clear the refresh product line resonates with consumers and brand momentum is building.
This is not only evident and robust TTC E commerce growth. It's also apparent at key wholesale accounts that are embracing the brands new product line is direction.
I'd now like to provide some detail on our 2020 financial outlook and preliminary 2021 commentary.
Please note that significant business uncertainties and risks surrounding the ongoing pandemic.
Economic conditions logistics capacity constraints global geopolitical tensions and changes in consumer behavior in confidence.
Outlook and commentary assume no material deterioration or disruption to the company's current business operation or consumer demand.
For the fourth quarter. The company anticipates continued sequential fundamental improvement net sales are expected to decline 8% to 11%.
Operating margin is expected to be between 10, seven and 12, 7% compared to 14.5% in 2019 Duluth.
Diluted earnings per share is expected to be between a dollar seven and $1 32.
For the full year 2020, we anticipate of 19% to 20% decline in net sales.
Resulting in diluted earnings per share range of dollars 25, two $1.50.
Despite the significant financial impact of the pandemic that is evident in this outlook, we still anticipate generating approximately $150 million in free cash flow during the year.
While it's early in our 2021 planning process I'd like to provide limited commentary on the first half of 2021 net sales.
Based on advanced Wholesales orders for spring 2021 season, and plans for a return to growth in our global DTC businesses as we anniversary prior year store closures. We Kearn. Currently believe we can achieve high teens percent year over year net sales growth in the first half of 2020.
Fine.
I would note that we're taking a disciplined approach to buying inventory for the spring 2021 season and will be maximizing utilization of on hand, carryover spring inventory with an acute focus on managing inventory levels generating cash flows and improving turns.
We anticipate providing more detail on the 2021 outlook when we announced financial results for the fourth quarter of 2020 next February.
In summary, I am confident with Columbia Sportswear company's best days are ahead of US I believe our global team of dedicated employees are powerful brand portfolio are long term retail partnerships and strong financial position and operating discipline will all contribute to Columbia sportswear emerging.
From this pandemic and a stronger competitive position.
We're committed to driving sustainable and profitable long term growth and investing in our strike or strategic priorities too.
Drive global brand awareness and sales growth through increased focus demand creation investments.
Enhance consumer experience and digital capabilities in all our channels and Geography's.
Expand and improve global direct to consumer operations with supporting processes and systems and invest in our people at optimizer organization across our portfolio of brands.
That concludes my prepared remarks, we welcome your questions for the remainder of the hour.
Operator could you help us with that.
Hey, you think you will now be conducting a question and answer session. As you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone to indicate your line as in the question queue.
Give me a fresh start to if you would like to move your question from the queue.
Physicians using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
One moment, please so we pull for questions.
Thank you and our first question comes from the lineup Bob <unk> was Guggenheim. Please proceed with your question.
Hi, guys. Good evening in Tomah, congratulations on your retirement and best of luck. Thanks for everything in the last 20 years or however, 10.
Tim I got a couple of questions I'm not sure I can stick to one but I guess the first question is.
From the business standpoint, I think when he came out of queue to the trends from June can you talk through the monthly progression in terms of what you saw sort of July August September and I would also be curious if you could just give us some insight on what you've seen thus far in October that's my first question.
Sure.
So, yes, we saw sequential improvement Bob and those three months obviously.
As consumers are beginning to.
Learn how to accommodate the impact of the pandemic.
And.
Begin to.
Somehow get back to normalcy, we saw increased.
Consumption, especially of outdoor products in September.
Really helps when Anthony felt she's telling people to go outside.
We were the beneficiary of that in September where we had the best month of the quarter certainly.
As it relates to October we really haven't started talking about queue for yet but.
We can see and our sales trends.
At retail and remember that we have visibility of about 80% of our wholesale customers selling.
That our cell through.
Has been stronger and.
We see.
Depletions ahead of prior periods and that's on lower inventories frankly, because.
Ourselves and others have had logistics issues getting merchandise to customers.
As fast as they wanted so.
I'm quite encouraged by all these signs and absent.
Closure.
The unanticipated closure of stores for whatever reason.
That we could we could end up with a good year this year and Bob I might I might add as you are aware Q threes, typically a fairly significant selwyn quarter for us where it's much more heavily weighted to the wholesale business. So looking at month to month progressions, a little bit more difficult when we look inside the direct to consumer business itself is.
Tim touched on on E. Commerce growth was really quite solid throughout the quarter and we've seen that trend continue through the month of October here, and then with regard to the stores traffic remains quite depressed we saw exiting the second quarter. We continued to see those trends through July and August and then a bit of an improvement.
As we got into the the month of September which is which is encouraging.
Okay, Okay, and I guess just.
When you think about.
I sure did the tie that the next two together, but Tim from my channel inventory seems lane.
There is established some opportunity for you but.
And the guidance that you're giving us today on the fourth quarter.
Can you just talk through like the assumptions on your wholesale business, you're reorder business and your your DTC business sort of how you see that this quarter and just the opportunities on Ah leen inventory position and the channel on your own inventory.
Yeah of course, obviously, it's difficult to.
Have much visibility on this when you have received the pandemic and of course the additional.
Question Mark around the the election next week.
But I personally feel comfortable and quite encouraged as I said.
Jim to give you a little bit more detail of the specifics.
Bob We look out to the end of the year in my CFO commentary comment, where we see inventory coming out the end of the year to low single digit percent of growth but.
As Tim touched on in light of where early season fall 2020 sell through is at retail and the fact that we see inventory position as being relatively lean we felt like a really good position going into the quarter in terms of inventory that we've got available.
To fill fill that demand and likewise R E commerce business continuing to see nice grow through that channel as well. So we will stay after hearing.
That inventory balance down.
Okay, I guess, just if I could just sneak in a third in terms of just market share market share opportunities. When you think about what's happening in either the outerwear category of the footwear category can you just talk through where you see your positioning and how it sort of transpiring currently Tim.
Sure well.
Among our most among our most the known competitors there was a significant retrenchment.
And several of those in terms of buying and and innovation around future season. So we did not.
Retrench as it relates to.
Inventory acquisition and.
And really.
Focusing on innovations that are going to differentiate the company. So.
We are in a position I believe.
Significant strength.
Not only from our balance sheet.
But from Ah Ah market and market acceptance position to be able to.
Get more business this fall as it relates to filling the shortfalls.
That were provided by other other competitors as well as.
Gathering market.
Space market share in 2021, former because we we've as we said launch this new.
Outerwear.
On the heat.
Infinity.
Innovation, which is which is going to get a significant boost from the marketing efforts that we're putting forward as well as just the fact that it's new and exciting and different.
Okay, great. Thanks, very much thanks, Thanks, Bob.
Our next question cushion line of the rent Vasu with excellent BMP part of US. Please proceed with your question.
Good afternoon. Thank you very much for taking my question.
Thank you guys for all the color on the fourth quarter on revenues and EPS, Jim to square away.
The guidance or at least the color.
We've got the remaining balance of SG&A savings cost savings for the fourth quarter, how do we think about the gross margin for the fourth quarter as we start to lap some of the challenges that you've seen in the last few quarters.
Yeah, I think there.
I think I think if you look at the SG&A side of that in the wrong, you'll be able to kind of more or less back into.
The SG&A.
Guidance is based on the variable rate of expense and just and what our track record over the last couple of quarters on cost containment in general, but as it relates specifically to the gross margin what's implied in our guidance is a bit more contraction and the gross margin with that said I mean, it's going to be highly dependent or.
<unk> consumer demand in the marketplace and what we generally see in terms of the promotional effects across the industry to date as we sit here in the month of October.
I can share with you that we've approached this on a very much on a normalized basis and our product margins through.
Our own DDC channel of them have been quite healthy. So I think we're poised and ready to react should we need to but.
Well, we'll we'll see on the corner plays out here.
Okay very helpful and then I think you.
You mentioned high teen growth Hi.
High level color for one age 21.
Is there are there any hurdles for you to get back which would imply about $1 billion in revenues, let's say for one H 21 are there any hurdles for you guys to to that would prevent you from getting back to your historical level of 3 billion in revenues.
That we should consider yeah.
Yeah, I mean, we have been measuring ourselves frankly against 19.
<unk> is such a unusual.
Time periods, so we're measuring ourselves against 19 and all the <unk>.
Stretch goals and and focus as it relates to.
How we were planning the business I think we have we have a chance to get there were certainly not guiding as you know from that period, but.
The opportunity exists, especially when we look at the weakness in and many of our competitors.
That we globally compete with Enron I think part of your question. There in terms of the hurdles I think the biggest hurdle for us in part is going to be with regard to the direct to consumer business and particularly the brick and mortar stores until there is essentially an end to the pandemic and we see a resumption of <unk>.
Traffic backed up more of a normalized level, particularly in those destination based stores or these tourist market.
That's going to be a pretty key factor in being able to return to that level and the and the.
The time period that that will require.
And then lastly, just one more question if youre inventories look like they're in good shape about 75%.
There are some questions out there in the marketplace around just inventory levels for your brand.
Not on your balance sheet, but with regards to your retail partners any thoughts like how how you see the inventory levels.
For for your brand within the key retailers in the United States, Yeah, again, as I said, we have visibility to around 80% of our our.
Our wholesale partners selling an inventory levels and frankly.
We're very pleased.
The inventory levels are lower than last year and the rate of sales has been higher. So that's what gives us a lot of confidence for Q or in that we believe inventories are light and then there's a there's a high degree of demand for the product so.
We're very comfortable with our positions too.
And the reorder trend that we've seen in the quarter has been quite positive as much as retailers cancelled orders in the first part of the year, there's there's definitely an appetite.
Now that they're getting into the season.
Very helpful. Thank you very much best of luck.
Thank you.
The next question is from the line of Jim Duffy with Stifel. Please proceed with your question.
Thanks, Hello, guys.
Jenkins for me.
I'm just starting on the fourth quarter would you expect a wholesale business to inflict positive would be offset being the outlet stores is is that the right way to conceptualize it.
I don't think it quite gets to that level, Jim there's there's that $45 million shift that will certainly.
Have an impact on where the wholesale business isn't down a significant nearly as significantly as it was in the third quarter, but we would still project that part of our business.
Being down for for the quarter and then the offsets obviously be we're continuing to see nice growth out of e-commerce channel. We've got that planned in the third quarter, and then and then offset by some weakness in the brick and mortar channel.
Okay.
Can you guys help a little more explanation on the logistics challenges you spoke to for four Q.
Is the product not already yet and the the right countries are you talking about domestics logistic issues that could be a challenge.
We bought.
By we by and large received.
Most of our inventory for the fall 2020 season, we did have some delay.
Delays related to some of the port congestion and which.
Inventory receipts were a bit later and as a result, you see some of this shift out into the out into the fourth quarter.
As it relates to the ongoing disruption as we look at the capacities both within our distribution centers.
Of which our team has done an incredible job over the course of the last several weeks delivering the growth that we've demonstrated to date and as we plan for the peak volumes in the fourth quarter. We believe that we've got the capacity in place to.
Achieved the forecast that we're providing here today and there's there's likely some upside the consumer demands there, where we can support it and and and the other.
Challenge to this obviously as in the case of the third party logistics providers and we've also confirmed with those vendors that we work with that we've got capacity from them to support the forecast we provided now to the degree.
Outside to our forecasts that becomes the productivity and that strained becomes increasingly challenging but.
That'd be that'd be a good problem to have.
Understood I'll leave it at that thank you guys.
An issue.
Our next question is from the line of can be a little lion with BTG. Please proceed with your questions.
Great. Thank you. This is Mckenzie white Samantha tomorrow. Thanks for taking your question Uhm. My first question is just about any additional color you can provide.
Sales by geography, Uhm, specifically, the down mid 20% in China compared to any of the U S and you're out than any current chenier seeing seeing in Asia recovering quicker than the U S, especially with rising can count and just kind of <unk>, what you're saying right now thanks.
Yes, I think.
It's clear that we are underperforming our opportunity in China, two single largest geographic opportunity for the company and we need to be better there.
I think the other regions in the in the World, We're having frankly good success by comparison to our competitors and the opportunities for us.
Really can to continue to gain market share and those other markets. There are some places in the world were outside of our control where the stores have all been closed due to the government regulations.
Or there have been significant.
Political disruptions similar to Hong Kong.
Where we just there's nothing we can do that is going to overcome those things and I think in a lot of these markets. There is a pretty significant correlation, particularly on our direct to consumer brick and mortar business between.
Pieces of the virus and what we see in the performance. So if you look at the corner with our Japan and Korea business.
Being down in the in the twenties, both a lot of that reflects some of these.
<unk> waves that have come through and more recently with some of what's going on in Europe, we've seen impact.
Got it thanks, and then on the wholesale side on any differences and you're seeing to note between sporting goods store Menhir Department store in any kind of think what you are saying there. Thanks.
Yes, I think our best performance from a shelter perspective has been in the sporting goods channels.
When people are thinking about going outside buying camping equipment buying out outerwear. They typically think first of of.
Of sporting goods and and.
An outdoor stores or that's where we've seen significant.
Improvement in businesses, so that plus I think can come to Columbia get good good service directly from R. E Com sites.
Okay, great. Thanks first of all can keep one.
Our next question is from the line of John Kernan. It was Cowan. Please proceed with your questions.
Good afternoon. This is Chris turns around for John Thanks for taking our questions too. If I may just first as you continue along your digital transformation could you kind of talk to your digital economics.
Soon started the margin differentially, you're seeing in the potential you see for your knee comments versus what you're seeing in wholesale and a headline follow up thank you.
Yes, I think is is Tim touched on.
We saw a phenomenal growth in the corner E Commerce business and we look at the overall contribution margin that comes from R. E Commerce business.
It's north of the company's overall operating margin. It's a very it's a very healthy contribution margin, it's not quite to the level of our wholesale business, which is R, which is our most profitable.
But given given the.
Contribution that it does have we continue making that it.
Investments that have strong returns in that category in our area of our business.
Yes, I think it is important to note that the company really considers itself to be a wholesale business and the wholesale business provides not only profitable revenues, but significant scale that we would not be able to accomplish through our own direct to consumer business. So we have a we have a significant opportunity to have a broad.
Distribution of our company's products, we consider is supposed to be a very democratic brand and.
That's an important the wholesale business an important part of our future.
Alright, Thanks, and then second just in terms of your capital allocation from here in terms of certain metrics driving a restarted the quarterly dividend our share repurchase could you just touch on what you're looking to see to start a proceed on that front from here. Thank you very much.
I think we're really looking to.
See some of the uncertainty lift a bit.
We're we're in the process of pulling together of 2021 plan.
And among the things that were looking for in the business as a more sustainable predictable flow of both profitability and cash flow and as we begin to see that increasingly we would revisit our capital allocation strategy.
I would anticipate we come back around to our year end earnings call in February will provide some more details on that topic.
Thank you very much.
The next question is from the line of Polish way with Citigroup. Please proceed with your questions.
Let's take a look into coming in for Paul I have a question about expansion you guys mentioned at $45 million and saving for sharing that you are looking for more paintings in 2021, and I guess I was just wondering if you could give us a sense preliminarily what the big buckets are where you think you have savings last few achieve.
Maybe if you could give.
<unk>.
Some quantification thanks, yes.
Yes, it's difficult to provide quantification of that and we'll come back to that one of our future calls, but in terms of where we see the greatest opportunity here and really break it down into for primary areas.
Within the supply chain area, certainly look at how we can drive efficiency in the flow of product and our freight and logistics costs, It's a pretty significant item in the P&L, what's in our gross margin.
In our retail business really two major areas that were looking out within the retail business part of which ties to how we can drive more efficiency within the stores from a labor standpoint, and then we've commented on <unk>.
In discussions with our landlords with regard to lease negotiations as a result of the poor traffic that we're seeing in the stores and then the fourth component is going to be much more around the organizational side of things and really streamlining the business from an organizational perspective, and then I think the only offset to that in part is going to be.
We need to be mindful of where we need to reallocate capital and resources to support our strategic priorities the growth in the business, including that we're doing it from a digital strategy standpoint.
Again, we'll look forward to appear in more detail in February.
Great. Thank you and I have one follow up I was wondering if you could talk a little bit about the demographic.
Customers can you customer here drawing.
E Com channel with a table.
<unk>.
<unk>.
Court and customer thanks.
Certainly I think are typical demographic would be a family.
Young family, because we have a significant.
Children's business you'd goes well, obviously women's and men's.
And I think we've had the bulk of our success around attracting new consumers has been utilizing the digital.
The ability to find consumers, who look like our existing consumer base.
And finding more of those.
So as I said families and then frankly, having Dr factory tell people to go outside that spirit significant advantage for the company.
Alright. Thank you good luck guy.
Thank you.
The next question is from the line of Chris face yet with Wedbush. Please proceed with your questions.
Good afternoon, gentlemen, thanks for taking my questions I got some just the first one just to go back to the cadence of the of the third quarter for a moment.
And you made the comment that I think June.
You were down 20% in total of somewhere along those lines.
And you made the comment can accuse showed improvement sequentially every month of the third quarter, but yet overall sales down 24%, how just sort of cared September pain in the past month. So I'm. Just curious was there just the fact that that was the 45 million that fell out that.
Yeah, I guess, so it's not so much thought through I guess, maybe on our side or where the case.
That's something really slowdown somewhere enter corner I'm, just trying to connect adopt a little bit between where Joe June was and where third quarter ended and the sequential improvement yet you're still down yeah, Chris but yeah, let me jump in and shed some light on it and again I think we commented back in June the month of June tiny quarter in the Grand scheme.
Or a tiny months in the Grand scheme of things and when you look at the third quarter, if predominantly a wholesale ship in.
Quarter, and so it's difficult really to look at the month on month progression. What I would say is when we look at our our site. If you set aside the wholesale business, which is much more of what the timing of shipments and deliveries and whatnot and you look at the directed consumer business that E. Commerce performance that we put up a 55% was really pretty steady.
Throughout the quarter and we've continued to see a like level of growth as we sit here in October as it relates to the brick and mortar business I think my mutton part of the comments were pertaining a bit more to the brick and mortar brick and mortar business as it relates to the progression and essentially the exit right that we had seen in a brick and mortar.
Business dated back to June that really kind of held at that level.
Pretty challenged in the market through July and August we saw a nice improvement in traffic, albeit well below prior years or pre pandemic levels in the month of September. Thanks.
Things still remain a bit challenged in that and it's going to take time like we mentioned just given the dependent on travel and tourism and just people, having confidence going out and shopping physical retail.
Okay.
Okay that is that helps a bit there with regard to.
With regard to what you're seeing on the market today, which seems like.
Fell through is accelerating what are the retailers, telling you are saying to you about willingness to take on additional inventory in other words, if you see the product moving at higher velocities and you feel like they're going to have an inventory they coming to you and saying look we rather case, we're really have to.
Or are they accepting of additional private strike that effective connecting those two pieces about yes, yeah. At this point in the season retailers are buying more merchandise and less what they have is selling and they're buying more of what selig in and they are less interested in taking stuff is not selling so we've been the recipients of.
The largest there and we've had reorders of our merchandise switched it which is tending to be selling better today.
So.
That's true.
We haven't had to go.
Return, a reorder trends been as good as it's ever been but I mean, some of that's indicative of how significant the cancellations were earlier in the year. So given the fact, they're lean I mean, there's there's definitely appetite as they see that sell through coming through.
Okay, and then just the RV.
Commentary about how.
Hi, Tina growth for the first half.
The year, maybe just.
Any color about how you think about the orbach versus.
T C.
And also do you have better visibility I guess, maybe a Q1, just because it's more of I guess a cell in court or in queue to make it a little more reorder always have timing distributorship Shipman, just trying to get an idea of overall visibility when you when you yes.
Well of course coughing up against.
Several months in some cases, where stores were completely closed so we are we.
We have confidence that will be store closure for sure.
And then Q2 is really a very tiny quarter and rely it.
It can fluctuate wildly based on what merchandise gets shipped from Asia to a particular.
Independent distributor market and.
So in general we believe that Q1 next year, which will probably still be impacted by the existence of the pandemic.
Should do very well to make sure.
Based on order book and and just again, our reliance on we're comprehends against an easy quarter.
Okay.
For the auto book is pretty even between Q1 Q2 is what you're saying.
We haven't gotten really down into that level of detail, but I mean looking at a high teens rate of growth through the first half certainly the direct to consumer business with a brick and mortar stores haven't been closed for the lion's share of the second quarter, that's going to be a key driver.
But are looking at our wholesale order book for the <unk>.
Spring 21 season.
It'll it'll it'll be up a pretty good.
Know percentage wise it'll be in the low double digit level.
Okay.
Okay I'll leave it there thank you might not all of that.
Thanks.
Thank you. Our next question is coming from the line of Alex parent with Bank of America. Please proceed with your questions.
Hi, Thanks for taking my question I.
I guess, Tim just sort of higher level broader question sort of how are you thinking about the demand for the cold weather apparel footwear given.
Consumer spending more time outdoors, I guess, what I'm trying to reconcile some of the differing commentary out there in the market with demand for some of the hardgoods category. So strong, but it seems like the soft lines categories are sort of lagging do you think there's sort of a delayed impact and then I guess just trying to square that away with a lot of the retail.
That you guys sell interior of reported.
Strong results. So just just trying to sort of reconcile all the different commentary out there. Thanks.
Yes, certainly well again as I said we've had.
Very good early selling so it gives us a lot of confidence that our products that we have in the marketplace are in demand the brands well known and.
On a typical year.
Whether trumps almost everything in terms of shelter.
Fell through so we're going to get our first real dose of <unk>.
Or whether this coming weekend.
In the northeast we've already had snow in the Rockies and so we're pretty excited about the potential for a great year this year and again.
We're competing with people who in some cases have not delivered well.
And so there is a.
An opportunity for there to be a bit of scarcity.
In the marketplace.
Gotcha, and then can you just elaborate a little more on I guess the market share opportunity that exists in the fourth quarter given.
And for Paul to the earlier question. Some of your competitors have called out sort of very lean inventory receipts and.
Not having the ability to fulfill demand I mean, how much upside could that driving the fourth quarter and then.
Will you run up against the capacity constraints off of that like just trying to square way sort of.
<unk> at the upside there.
Given the competitive environment, yes, certainly well when we talk about competitors. We're all we're talking about our global competitors. We should include some small brands both in North America and in Europe.
Which are stressed.
Stressed financially and not able to really.
Keep their inventory levels error.
Area that they want.
The outerwear business is such a high.
Degree of componentry by that I mean, there could be 60 or 70 pieces of.
Various components in a piece of outerwear requires us to make a bet early a lot of the year. So.
Everything that we've got to sell is already for all intensive purposes, and a distribution center somewhere ready to be shipped so.
We think there's upside.
In terms of.
The opportunity, but it is finite based on the amount of inventory that we have so.
As it relates to how big it could be I Dunno. We gave you what we think will happen based on everything that we've seen today.
Gotcha and then just just final one could you comment on sort of how are you thinking about how the promotional environment may shape out given sort of your comments on.
Overall, it sounds like the overall channel inventory levels are pretty clean so I.
I guess this.
Shouldn't be a lotta from a promo sort of higher higher thinking about that for the fourth quarter, Yes, I think you're right I mean in a normal situation you would expect a scarcity would would not.
Foster promotion Harbor, you have the other components, which include.
Some customers that made financially needs to drive cache, and therefore become more promotional than they otherwise would.
So there's just so many components in areas that we look at that could cause a disruption in the in the promotional plan.
And I think I think on that Alex are fourthquarter outlook would contemplate an increase in promotional activity, but academies. So highly uncertain to it's not that we have necessarily seen that to date as we're sitting here in the month of October but not knowing how various retailers are going to react.
As we get closer into the holiday season here and really needing to drive the conversion on that traffic.
Perfect. Thank you best of luck going forward.
Thank you.
The next question is from the line of Jonathan comp with Barrett. Please proceed with your questions.
Yes, hi, Thank you maybe touched a bit on that.
A little bit already but just thinking kind of a broad strokes for next year I know you shared the first half Bu.
Trying to get a sense when you think of inventory in the channel and any sort of bar replenish matter of fact that you might have is there do you think there's going to be meaningful differences in kind of a fall winter products and what it looks like in the channel versus.
What you're signal spring summer just just trying to think about the already any differences in a positioning in the channel there.
So you are talking you asked me a question about 421.
Yeah, just trying to trying to understand.
What might impact your replenishment relative to the state of the channel.
Tori coordinate and advocates either the next year.
Right well, it's it's difficult to.
We haven't given any guidance at all the past two one.
First half of 21, but I can tell you in my experience historically, when we start off with low inventory levels at retail such as we have today and.
And we have decent cell.
Sell through.
Which means the weather continues to cooperate that there'll be healthy.
<unk> for fall.
And we.
We believe that we have ammunition as it relates to.
Innovative product, including are on the infinity that could.
Could provide good opportunities, but so far in advance of of that season, we really don't want to be going.
To deepen that but.
My assumption is that they will be very low inventories at the end of the winter season. This year.
Okay. That's that's really helpful and look forward to seeing the initiatives quite out maybe separately one other question.
Really really a bigger picture question, but it seemed like book the shifts in your business combined with.
The cost opportunities you're realizing it seems like there's more structural tailwind has been headwind tier margin. So.
Whatever you do get back to kind of prior peak sales is there anything structurally about.
You think will prevent you from getting back towards a margin you've seen historically.
While we're definitely pushing on driving SG&A efficiency in the business and I think it's too early to provide any indication of.
Investment that may be required.
To continue to drive and growth grow the business I mean, certainly we would be committed to certain investments to continue to drive growth from a consumer experiencing from a digital standpoint, I think our supply chain at some level will require.
Investment, but what that equates to in providing specific outlook regarding.
SG&A, an overall coster operating margin structure, a bit a bit early but we certainly expect the actions we've taken this year to drive efficiency in our business.
Yeah, and I guess I know, Tim you've already talked about being pleased with your margin, but certainly see further opportunity and that's what I was at higher levels were introduced today.
I wanted to make sure it got payments shifted or changed in the amount of investment that you think the business will need going forward no I think we concluded.
2000 to 2019 at.
Top quartile profitability and we believe we can improve on that.
Our goal certainly to be top quartile in a precarious for our investors that'd be great.
Alright, Thank you very much that's all for holiday. Thanks.
Thanks, John.
Thank you at this time if reached the end of our question and answer session. I will now turn the call over to Tim Boyle for closing remarks.
Well I want to thank you all for listening in and we're looking forward to nice cold weather globally and talking to you again in February about the results. Thank you.
Thank you. This will conclude today's conference you may disconnect your lines to time. Thank you for your participation.
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