Q1 2021 Columbia Sportswear Co Earnings Call
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Ladies and gentlemen, thank you for joining US today Your conference will begin shortly thank you for joining the say on your conference will begin shortly thank you.
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Greetings and welcome to the Columbia Sportswear first quarter 2021 financial results.
At this time, all participants are in listen only mode.
A 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. Please go ahead Andrew.
Good afternoon, and thanks for joining us to discuss Columbia sportswear company's first quarter result.
In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary on financial review presentation, explaining our results. This document is also available on our Investor Relations website Investor day at Columbia Dot Com.
With me on the call today are chairman, President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief administrative Officer, Peter Bragdon.
This conference call will contain forward looking statements regarding columbia's expectations anticipations or beliefs about the future. These statements are expressed in good faith in our beliefs are reasonable basis. However, each forward looking statement is subject to many risks and uncertainties and actual results may differ materially from what is projected.
Many of these risks and uncertainties are described in Columbia SEC filings, we caution that forward looking statements are inherently less reliable than historical information.
Not undertake any duty to update any of the following forward looking statements. After the date of this conference call to conform the forward looking statements to actual results or to changes in our expectations.
I'd also like to point out that during the call. We may reference certain non-GAAP financial measures, including constant currency net sales.
For further information about non-GAAP financial and other measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures. Please refer to the supplemental financial information section and financial tables included in our first quarter 2021 earnings release.
Our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions. So we can get to everyone by the end of the hour now I will turn the call over to Tim.
Thanks, Andrew and good afternoon, I hope everyone is well I'm pleased to report the pace on fundamental recovery exceeded our expectations in the first quarter, resulting in a return to net sales growth and financial results that were stronger than we anticipated at the time of our last call.
Based on first quarter results favorable early season spring sell through visibility provided by our fall order book and an improvement in business fundamentals, we are increasing our full year financial outlook.
Our fortress balance sheet remains strong with cash and short term investments totaling $875 million with no bank borrowings at quarter end.
It's hard to believe how much difference a year makes up just over one year ago, we were securing additional liquidity curtailing factory orders, reducing capital outflows and cutting costs to prepare for an unprecedented global health and economic crisis of unknown duration.
As new challenges emerge daily it was increasingly clear that the tremendous effort and dedication of our global workforce and our disciplined operating approach would be some of the most valuable strength.
Our fortress balance sheet allowed us to sustain our new product innovation pipeline and invest in critical areas of the business, including digital capabilities.
After the initial demand shock at the height of the global locked out as in 2020 consumer behavior began to change as market slowly reopened our powerful brand portfolio is well positioned to capitalize on many of the trends that emerged including growing participation in outdoor activities and more broadly the.
Amortization trend that accelerated as consumers adapted to their at home work environment.
It's hard to predict the future, but I believe many of these new outdoor enthusiasts will continue to share our passion for outdoor activities long after the pandemic is contained.
I suspect suspect that many consumers are in no rush to return to uncomfortable business attire as offices reopen.
The pandemic also accelerated the shift to online shopping which increased our confidence that the investments, we're making in digital capabilities such as our E. Commerce platform experience first or X. One are critical to driving sustainable and profitable long term growth.
The strong results and growth outlook, we reported today are driven by the combination of these factors.
Looking forward I believe our dedicated global workforce fortress balance sheet.
Ongoing investments in strategic priorities and powerful brand portfolio are contributing to Columbia sportswear company emerging from this pandemic stronger competitive position.
With that said, we remain mindful that the global fight to contain the spread on the virus is not finished reach.
Regional outbreaks are ongoing and vaccine availability remains limited in many markets.
Nearly all aspects of our business have been disrupted by the pandemic and we are continuously adapting to new operational challenges. There is no guarantee that these pressures will alleviate.
And unforeseen challenges may arise.
I'm encouraged by the strong start to the year, but we know that now is not the time to become complacent.
Uh huh.
Looking at first quarter results in more detail.
Net sales increased 10% year over year or 8% on a constant currency basis measuring 2021 financial performance versus 19 results, which were not impacted by the pandemic is a useful measure of our business recovery trend line.
Compared to first quarter of 2019, net sales were down only 4%, indicating great progress on returning to pre pandemic sales levels.
Globally, our DTC business grew 20% year over year in this first quarter, our DTC E. Commerce business grew 35 per cent and represented 20% of our total net sales mix.
Our DTC brick and mortar business grew 10% with continued sequential improvement in fundamentals as well as the benefit of lapping prior year temporary store closures and heightened pandemic related disruptions.
Store traffic levels vary by region, but remain below pre pandemic levels.
Better than planned wholesale shipments in Asia direct in Europe direct markets were able to offset later timing of spring 'twenty, one inventory receipts from the U S, which is experiencing industry wide supply chain disruptions.
Spring 'twenty one deliveries in the U S were delayed by approximately three weeks on average during the quarter.
To date, we have not experienced any material cancellations <unk> charge backs, resulting from delays, but this will result in a shorter selling season.
Our operations and distribution center teams did an amazing job mitigating these timing disruptions and adapting the heightened health and safety protocols to achieve unit processing levels that were above pre pandemic levels, while supporting e-commerce growth.
Footwear net sales grew 35% on the quarter significantly faster than apparel accessories, and equipment, which grew at 4%.
I would note that we continue to anticipate the year over year growth rate of footwear can be relatively comparable to apparel in 2021.
Turning to margins gross margins expanded 360 basis points to 51 four percentage of net sales, primarily driven by decreased reserve provisions related to less inventory less excess inventory.
Lower DTC promotional levels and favorable channel and regional sales mix.
SG&A expenses decreased 8%, primarily reflecting a reduction in bad debt expense driven by healthier a wholesale customer base.
Partially offset by higher incentive and personnel expenses.
This performance resulted in operating profits of $75 million or 11, 3% of net sales compared to an operating loss of $2 million in the first quarter of 2020 diluted earnings per share improved to 84 cents compared to breakeven diluted earnings per.
Share in the prior year.
Compared to first quarter 2019 diluted earnings per share of 107 first quarter 2021 diluted earnings per share were down 22%.
I will now review year over year growth performance by region.
U S. Net sales increased 9% on the first quarter first quarter, reflecting low twenties percentage growth in our deep T C business.
Partially offset by low single digit per cent decline in the wholesale business. The combination of favorable late season winter weather U S stimuli stimulus driven demand and the ongoing vaccination rollout all contributed to healthy retail backdrop and growing consumer confidence during the quarter.
And our DTC business stronger than anticipated consumer demand drove low 30% e-commerce growth and improved store performance.
We are pleased to see the continued recovery of our DTC brick and mortar businesses, but store traffic levels remain depressed and it will take time to fully recover to pre pandemic sales volumes.
In our wholesale business net sales were impacted by shipment delays I refer I referenced earlier.
And this inventory constrained environment, we're encouraged to see strong early sell through velocity and lower promotional activity.
For my review of International markets, I'll reference constant currency year over year growth rates, which we believe best reflect the underlying business trends.
Latin America Asia Pacific or L. AAP region first quarter net sales increased 3% across Asia performance vary greatly by market.
In China net sales were up low 60%, 66%.
Primarily driven by the anniversary of heightened pandemic related disruptions in the prior year and to a lesser extent earlier shipment of spring 'twenty one wholesale orders.
I'm pleased to announce we have appointed purely on as our general manager in China.
Joined our company in December 2020, and has been serving as our interim general manager since hiring.
<unk> has over 20 years of industry experience and has proven to be an exceptional leader.
We look forward to be are continuing to build a high performance culture and working to unlock China's full potential.
We know we have a powerful brand recognition in China and peers immediate areas of focus include elevating our product marketing and merchandising capabilities in this important region.
Korea net sales were up high 20%, primarily driven by the anniversary of heightened pandemic related disruption in the prior year.
We are encouraged by a renewed interest in outdoor activities. In this region is young consumers have embraced hiking and the outdoors is a safe socially distance activity.
In Japan, net sales were down low double digit percentage year over year as the country restricted nonessential activities for much of the quarter as they work to contain the spread of the virus.
Given the slow rate of vaccinations in Japan, and ongoing state of emergency we anticipate the recovery of our Japanese business to be slower than other markets.
L. A P distributor markets were down low 60% in the first quarter as many regions continue to experience significant economic and health impacts from the pandemic.
In addition, many distributors continued to work for Ya carryover inventory from the spring 'twenty season that was heavily impacted by regional Lockdowns.
Europe, Middle East Africa, or EMEA region first quarter net sales increased 18%.
Europe direct net sales were up high single digit percentage with wholesale and DTC e-commerce growth more than offsetting brick and mortar declines due to store closures and restrictions during the quarter.
Yeah me distributor net sales doubled compared to the first quarter of 2020, primarily reflecting the timing of spring 2021 shipments that shifted out of fourth quarter 2020 and into first quarter 2021.
Canada net sales decreased 3% on the first quarter, primarily reflecting later timing of spring 2021 inventory receipts and wholesale shipments as well as the impact of government mandated temporary store closures and restrictions.
Looking at performance by brand.
Columbia brand net sales increased 12% on the first quarter.
Favorable late season winter weather helped drive DTC sales, allowing our wholesale partners to sell through for all 2020 product and exit the season with clean inventory positions.
The combination of these factors fueled a strong finish to the fall 'twenty, one booking season, which contributed to the updated full year sales outlook, we provided today.
Well later timing of shipments impacted spring 'twenty one sell in we have been encouraged by early season sell through rates, which benefited from a healthy retail environment aided by U S stimulus driven demand as well as lean inventory positions at retail.
And this strong demand environment I believe the brand is well positioned heading into the summer sales months.
Columbia is innovations received several media call outs on awards during the quarter.
Women's health highlighted a facet 15 shoe is the most weather proved trail sneaker.
Calling on calling out its outer shell, it's capable of standing up the hardcore hikes over any terrain.
[noise] Runner's World included the Columbia escaped per cent and Theyre 2021 shoe awards issue.
This New addition to Columbia footwear line features exceptional fit and support and its adapt tracks outsold provides enhanced traction in wet or dry conditions.
<unk> notes that escape since advanced seamless mesh disruption.
<unk> weight without sacrificing stability.
On this health featured the men's PFG Bahama event as the ideal water shoe with its water resistant treatment then ports in the midsole and.
Absolutely.
It's great to see PFG footwear, gaining recognition looking at our season to date spring 'twenty, one sell through our PFG collection of apparel footwear accessories and equipment is once again, a top performing category.
Our PFG business surpassed.
$200 million in 2019 and is on track to have its best year ever in 2021.
<unk> Heritage is based on end use focused on providing solutions to our consumers while they're on the water in the Sun.
Many of our PFG products feature cooling and protective attribute including U P. F protection unique venting and proprietary technologies like omni freeze zero ice and omni shade Sun deflector to enhance their performance.
This authenticity as a differentiator as differentiated fishing and water performance brand has allowed us to expand the PFG product line into lifestyle categories, which reached a broad consumer base of multiple generations.
For the years, we've expanded the offering from being only apparel habits on assumption to the year round multi category head to toe collection, we have today.
While sportswear remains Pfg's top category rapid growth for footwear and accessories speaks to Pfg's long term potential.
The phenomenal growth of PFG ball caps highlights consumers' willingness to proudly show their affinity for PFG.
And is the direct expression of the strength of the brand.
Unlocking Columbia as global footwear potential remains an important area of strategic focus for the brand.
During the first quarter was launched our latest footwear collection Trail storm. This multi shoe multi sport shoe feels equally at home on the forest or the city and combines our latest technologies to deliver Uncompromised performance on the trail with the style and comfort of a sneaker.
In addition to expanding our assortment of modern athletic inspired styles like the trail storm and the fastest collection, we continued to refresh and improved traditional hiking styles like the Newton Ridge, which remains one of our best sellers.
On the marketing front, we continue to prioritize digital marketing spend to further attract active customers and propel online sales growth.
During the first quarter, our marketing activities centered around our made for outside campaign.
This global campaign is meant to inspire and encourage our consumers to get outside and highlights the Columbia brand strength, providing unparalleled apparel and footwear innovation to help them thrive in any conditions they may face.
We also celebrated international women's day during the quarter with a week of storytelling, highlighting women who pushed the boundaries we.
We celebrated women, who inspire us from the waters of the Atlantic to the peaks of Everest, whether it's the Ebony anglers a group of five black women balancing their professional lives with competitive fishing family and business for the first Saudi women summit Mount Everest.
Their stories inspire us just like our fierce founder Gert Boyle tough no not just later with a lot of heart.
As we look to fall 'twenty, one our marketing efforts will focus on the largest innovation launch in our company's history omni heat infinity.
This new highly differentiated addition to the omni heat's family.
Is the next evolution of thermo reflective warm.
It features a new expanded pattern of gold dots that reflect more of your body heat to deliver instant once without compromising breathability.
Retailers around the world have embraced our latest technology and fall 21 orders for omni heat infinity have been exceptional.
We will be supporting this launch with a global campaign, emphasizing digital and social media platforms as well as TV and print advertisements.
I look forward to share more details in the coming quarters.
Turning to our emerging brand portfolio strength net Sorel net sales increased 20% for the quarter led by DTC E Commerce growth.
Strong late season sales of winter products in North America, and Europe fueled growth.
In addition to consumers embracing the latest spring styles, such as the kinetic impact sneakers and sports sandals sneakers were once again, the fastest growing category with sales of sneakers more than doubling year on year.
On Sorel Dot com.
In wholesale Sorel early spring 'twenty, one sell through velocity is well ahead of last year and lean inventories are translating into strong full price selling.
It wasn't that long ago that Sorel is first quarter was anchored and late season winter product sales.
With Sorel is successful evolution to a year round brand first quarter 2021, net sales are approaching $50 million driven by strength in winter products as well as a powerful consumer driven rotation to non winter styles and categories.
Prana net sales declined 14% in the quarter.
Primarily reflecting lower spring 'twenty, one orders and the later timing of inventory receipts, which impacted wholesale shipments and e-commerce sales.
Recent sell through trends have been encouraging with lower than normal promotional activity.
In the first quarter. The men's category was a bright spot. This was led by the popular Zion product line of pants and shorts featuring stretched XI on performance fabric and the recently introduced reside on fabric, which features recycled nylon and PFC free durable water condensate.
The swim category was another bright spot on the quarter with consumers responding to this seasons elevated styles and colors.
100% of Prana Swimwear swimwear line as at least one sustainable attribute.
Highlighting <unk> ongoing commitment to clothing for a positive change.
Mountain hardware net sales decreased 4% on the quarter, primarily reflecting lower spring 'twenty one orders.
Later timing of inventory receipts and the conversion of its Europe business model from direct to distributor.
This was partially offset by strong DTC e-commerce growth, reflecting grower growing consumer interest in the brand.
We remain excited about mountain hardware anticipated momentum in fall of 'twenty one.
The order book reflects robust wholesale growth.
Consumers will be able to find mountain hardware products in hundreds of new points of distribution. The brand is hyper focused focused on elevating in store merchandising and signage alongside its digital and social media brand storytelling to maximize sales across all channels.
On the product front on the hardware has a series of new innovations and product introductions that are being well received in the marketplace.
This spring the brand introduced a new lightweight collection of tents and sleeping bags.
In the fall the brand is launching a new ski assortment as well as new extra skin layer called air mesh that delivers the perfect balance of warmth and breathability.
Before reviewing our full year financial outlook I'd like to discuss key areas of strategic focus in 2021, including creating highly differentiated product.
Investing in demand creation, enhancing digital and supply chain capabilities and talent.
First we are committed to creating products that inspire active consumers.
We know that products are the foundation of our success.
Across our brand portfolio, we have an exciting pipeline of new products and technologies and are actively planning the largest innovation launch in our company history Omni heat infinity as I referenced earlier.
We are also committed to investing in demand creation to leverage our compelling brand portfolio and connect with consumers.
Given the confidence in our products and brand portfolio, we are increasing our demand creation investments this year.
We anticipate demand creation, increasing as a percentage of sales to 6% in 2021 compared to five 7% in 2020.
Five 5% in 2019.
In 2021, continuing to enhance digital and supply chain capabilities are key enablers to support growth.
On the digital front, we're building on our recent investments of our X. One e-commerce platform with a focus on leveraging consumer data and deploying new capabilities to better segment and target consumer marketing efforts.
We are also enhancing our supply chain capabilities to improve inventory management processes and to adapt our supply chain to shifts in our business, including increased penetration of DTC sales, you already commerce sites and brick and mortar stores.
These supply chain investments include improvements to our demand planning and retail store allocation systems and processes.
The investments are intended to enable us to better fulfill wholesale and consumer demand as well as optimize fulfillment and productivity of our DTC channels in North America.
With our improved financial outlook, we're planning to invest a portion of this upside back into the business to fuel long term profitable growth.
Our updated financial outlook includes incremental investments in demand creation and investments.
To enhance digital and supply chain capabilities.
Lastly on the talent front I'd like to highlight the recent hiring of Craig's add on to serve as senior Vice president of emerging brands.
Greg has spent over 20 years in the industry and brings a wealth of experience that will help us accelerate accelerate the growth trajectory of Sorel mountain hardware and prana.
I look forward to seeing what he can accomplish as we build on our brand led consumer focused strategy that we've been pursuing for the last several years.
Greg will be filling the vacancy created by Doug Morris his retirement this summer.
Doug has been a crucial part of our senior leadership team and has helped guide our growth strategy is career Columbia spend well over two decades, and his business acumen and commitment to excellence will be missed.
I'll now review, our 2021 financial outlook.
This commentary includes forward looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements.
Based on first quarter results.
Favorable early season sell through visit.
Visibility visibility provided by our fall order book and an improvement in business fundamentals, we are increasing our full year financial outlook.
Our updated 2021 outlook contemplates 21.5 to 23 points.
21, 5% to 23% year over year net sales growth.
With growth across all four brands. This compares to our prior outlook of 18% to 20% year over year growth.
From a category perspective, we anticipate the year over year growth rate in footwear to be relatively comparable to apparel in 2021 day.
Demand for our footwear continues to improve and outpaced production capacity.
2021 footwear growth would be higher absent these capacity constraints and we're working to capture as much of the anticipated demand as we can across both the Sorel and Columbia footwear businesses.
Gross margin is expected to expand approximately 110 to 130 basis points, and we expect SG&A to grow slower than net sales.
Combined we expect operating margin to be in the range of 11, 4% to 12% compared to operating margin of five 5% in 2020.
This resulted in diluted earnings per share outlook of $4.05.
The $4 30 states.
Compared to our prior range of $3 75.
<unk> hundred five.
We are forecasting approximately $190 million and free cash flow in 2021.
And our act on that.
Acutely focused on managing inventory levels and improving terms.
Looking at the first half of the year, we now believe mid to high 20% year over year net sales growth is achievable.
Please note the second quarter is typically our lowest volume sales quarter and small changes on the timing of product shipments and expenses can have a material impact on reported results.
Historically second quarter profitability has been challenging given our fixed cost structure, resulting in the company reporting our second quarter earnings loss in most years.
Compared to 2019 financial performance, our 2021 financial outlook contemplates us returning.
Two.
Returning to or exceeding record 2019, net sales of three point O for failure.
We are focused on returning to and ultimately exceeding pre pandemic sales and profitability levels are.
Our 2021 operating margin outlook up 11, 4% to 12% remains below 2019 operating margin of 13%.
Note that this margin compression is primarily due to three factors.
First we are purposefully investing in the business to drive long term profitable growth.
One area of strategic focus is investing in demand creation.
As a percentage of net sales demand creation will be 50 basis points higher than it was in 2019.
Secondly.
We are incurring additional cost associated with operating in a pandemic.
Including higher supply chain and retail expenses.
Lastly, our DTC brick and mortar store traffic remains below pre pandemic levels, which impacts sales performance and profitability in this channel.
We remain committed to driving operating margin expansion over time.
In summary, I am confident in our strategy and encouraged by the fundamental recovery underway.
We're committed to driving sustainable and profitable long term growth and investing in our strategic priorities.
Drive global brand awareness and sales growth through increased focused demand creation investments.
Enhanced consumer experience and digital capabilities in all of our channels and geographies.
Expand and improve global direct to consumer operations with supporting processes and systems.
And invest in our people and optimize our 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 for that.
Yes. Thank you.
On that would be conducting a question and answer session. If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.
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One moment, please while we poll for questions.
Okay.
Yeah.
Thank you. Our first question is coming from the line of Bob <unk> with Guggenheim. Please proceed with your question.
Hi, guys good afternoon, Tim.
Bob.
I guess I'll stick to the two question rule.
And the first one can.
Can you just talk a little bit more about how the fall order book is it totally complete.
You know I think you were well along the last time, we spoke in and if you could just give us sort of an update on the second part of this would be when you are planning your inventories for the back half for the year.
Quarter, but also just the back half for the year. How are you planning your bricks and mortar DTC business on the inventory side.
Thanks very much.
Yeah, well thanks, Bob.
So our order book is.
Strong and.
It's basically a component of.
Early orders from our customers as you know the largest single component of that order book is for outerwear and footwear, both of which have incredibly long lead times. So we're basically done with the book although throughout the whole season, we will get orders.
And cancellations, but for all intents and purposes were.
A very high percentage over 90%.
Probably in the 95% range book, that's what gives us the confidence to talk about the.
For the balance of the year and such glowing terms.
And then as it relates to the inventories for the back half of the year on DTC, we have the opportunity to to load the stores with some merchandise.
Which is going to be relatively new for those for that channel purchased strictly specifically for that channel as well as some inventory that's going to be liquidated from prior periods.
At a high margin in the stores.
No.
We're basically very comfortable with how we're looking at the balance of the year and we're excited about the channel is incredibly clean and risk.
Great things happening on it.
Great. Thanks, very much Tim.
Yeah.
Yes.
Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Thanks, Good afternoon, everyone terrific job.
P. M. I wanted to started talking on the D to C brick and mortar store traffic in the quarter. It seems that exceeded your expectations seemingly came back across the quarter.
Commentary for the full year suggest you still expected subdued maybe roofing on Bob's question here, what's assumed in the guidance for brick and mortar productivity can you characterize.
How you're.
Assuming that falls relative to maybe where it was in 2019, yes, certainly well I think we were all frankly surprised at.
The level of comfort that consumers have going into a store.
We had assumed that there would be some reluctance on the traffic patterns have not yet returned to.
For the pre pandemic levels, but the conversion rates have been.
Really encouraging so people are coming into the stores you have to remember some of our largest stores were in markets, where we had a very heavy.
Consumers from outside the U S, whether that be south American tourists in Florida, or Chinese tourists either in Japan.
Or in Canada.
Canada.
So those those are continued to be depressed.
But in general they are.
Stronger stronger performance on what we thought we were going to see that Jim and I thought I might add.
We've seen steady improvement in our brick and mortar traffic trends and keep your eyes over the course of the last few quarters, including here in the first quarter I would note that there was a more significant pickup in traffic levels and sales levels in March I think on the back in part to some of the economic stimulus.
We've seen that carry into the month of April and then specifically as it relates to how we're thinking about the balance of the year. It would be continued improvement in that traffic and revenue, but we don't we're still contemplating that.
On the full recovery.
Probably extended out to 2022, so were from a productivity standpoint, we contemplate the business still being down a bit exiting of the year and of course, the pinpoint that's partially dependent upon traffic and tourism resuming.
Makes sense. Thanks for that and then one area of that commentary I'm still scratching my head on some Tim you mentioned footwear gross outpacing production capacity, what's the challenge to scaling production capacity is it just so competitive out there.
ER volumes come back that you're having difficulty with your partners getting additional capacity.
Yes, I mean, the general footwear business I think has been.
Fairly strong, especially on the casual athletic and outdoor categories and.
What we're finding is that the importance of scale in footwear.
It continues to be a challenge for us our business is growing incredibly well, but we're still not able to get the kind of.
Scale on a unit basis that we need.
I should say on a style basis that we need we have a number of styles, which are incredibly popular with large volumes, but we also have a growing list of Av.
Footwear styles that are just emerging.
Really small in.
So a large buyer in our factories gen.
Can take precedence over are smaller.
Yes.
Understood Thanks for that.
Yeah. Thanks, Tim.
The next question is from the line of Laura Faso with Exane. Please proceed with your question.
Good afternoon, and thanks for taking my question Jim.
It's five seven and 10 of the CFO commentary you talked about later timing of spring inventory receipts could you potentially parse that out and then I think in the prepared remarks, you guys called out debt second quarter profitability is generally the loss.
If I look back at my model <unk> 18, and <unk> 19 delivered positive EPS, just trying to parse out that little bit more on that commentary and then I have a follow up question on footwear.
Yeah, you bet as it relates to the spring the spring receipts.
Seen with.
But challenges from a supply chain predominantly due to port congestion baffles and containers by and large are our inventories coming into the U S market about three weeks later than anticipated.
That was factored in into our outlook and so we'll see some of the inventory shift into the second quarter, albeit most of this effect was early in January and February by the time, we exited the quarter, we were pretty well caught up and certainly by the early part of Q2 will be more fully caught up on spring.
Would note we do anticipate seeing like effects. This is Eddie.
Late to the supply chain disruption and likely late receipts for our fall product that also incorporated into our outlook.
Difficult to parse what degree of shift that is in.
And the inventory moving between quarters, I won't get down into the granularity of that.
As it relates specifically to Q2 and the guidance.
We've updated we provided top line guidance haven't gotten down into earnings and don't want to parse that too much but to your point historically speaking Q.
Q2 is a very small quarter for us and it can be very volatile from a profitability standpoint.
For many years, we've incurred operating losses in the second quarter Directionally I would anticipate an operating loss in the second quarter getting down into any more specifics than that would be difficult at this stage.
Okay helpful. Thank you very much Jim and then as a follow up for question on footwear to Jim's question.
You guys are talking about manufacturing capacity constraints, but just curious to see why why did footwear grows 35 per cent in the first quarter.
Just trying to understand that like when does the capacity constraints get resolved and then we're kind of where do you think again, where do you think footwear. It can go as a percentage of your overall revenues overtime.
Certainly well remember that many of these footwear factories were shut down during the pandemic.
Raging in China.
So.
On the capacity that they have is is being rebuilt.
And.
So even though we had significant sales growth in the first quarter. They were it was still constrained by availability, we could have grown faster on the business would be bigger with more capacity.
So as the footwear factories come.
Become more online.
There's likely to be increasing opportunity for us and when you are an emerging footwear business, which.
Despite the fact that we are.
A significant component of our volume as a company is in footwear, we're still not of the scale we need to be this is where we're going to get very very focused on footwear revenues, because we believe that footwear can be the largest single product category for the company.
It's about building.
Garmin is about building items in the white space, where we can be differentiated from the other.
Players there and that will include I'm sure a big component of PFG footwear, and Ryan keep in mind from a supply standpoint in terms of being able to support that level of revenue growth in the first quarter Theres a fair amount of inventory that we're carrying forward from the spring season of last year, just in light of the wholesale order cancellations.
That's helping supply the demand speaking up.
Very helpful. Thank you very much.
Our next question is from the line of Jonathan Komp with Baird. Please proceed with your question.
Yes, hi. Thank you first question just the comments around the spring sell through every week I think Barry you had spoken for.
Maybe sticking with the U S. Can you comment where you are seeing relative strength within the channel and then just given the positive comments on the sell throughs.
You see any inventory risk from the three week delay and shorter.
Selling season or.
Do you think that's mitigated by the strong sell throughs.
Certainly well I can tell you that the.
Sporting goods and outdoor store channel has been by far the best channel for Us and.
And Thats, where we see the biggest sales growth.
And it's been an incredible frankly, the revenues and volumes that are going through there with relatively lower inventories.
And then as it relates to the delivery impact.
The by far the largest <unk>.
Sales periods for us, meaning the highest revenue periods for us around Memorial day, and fathers day, and those are obviously, yet to come and we expect that.
Almost all of our spring merchandise will have been shipped by that time and in the stores and available for sale in those really important.
Sales periods.
Okay, Great. That's helpful. And then maybe Jim My broader question on the operating margin and really the path back to 13% the net growing from there.
Do you think about some of the factors you outlined this year store traffic being lower that should recover in 'twenty two.
And that make related expenses.
Theoretically go away and then you have channel mix going forward, how do you think about that path for 13% beyond that.
Okay.
For the likelihood that you get thereafter 2021 here.
Our aspiration is certainly our expectation would be the 13% operating margin that we achieved in 2019 as is not the ceiling.
There is opportunity for us to expand as we look forward and of course, we're not providing outlook beyond 2021 today, but obviously, we've got to get through some of the the current issues that we have as it relates to incremental costs associated with the pandemic I think one of the more significant hurdles that we got to work through as well as the <unk>.
We have the brick and mortar business could certainly having the fixed cost associated with with operating a store fleet and the lower revenue that'll that'll be a key.
To unlocking and continuing that margin expansion overtime as well.
Very good thank you.
Thanks.
Our next question is coming from the line of Alex Perry with Bank of America. Please proceed with your questions.
Hi, Thanks for taking my question congrats on a great quarter.
<unk>.
Just first I wanted to ask.
Are there opportunities for channel sell in market share gains in the U S. Given some of your large competitors have decided to consolidate the wholesale channel and exit a pretty significant amount of accounts.
Yes, I think there's definitely opportunities and we've been having.
Lengthy conversations with with some of those.
Some of those retailers who've had.
Certain brands removed from there.
So the opportunity to purchase on.
We're not squarely in the athletic channel, but certainly casual footwear outdoor footwear.
It has been a big growth area, and one that where we can compete.
As an authentic supplier.
And so yes, there is significant opportunity for us to fill those shelves.
That's really helpful. And then just a second question I think Oh AAP revenue was down 16% versus 2019. Despite earlier shipping of China wholesale can you maybe help us parse out.
The region and then I think you've said in the past that China's Columbia is much significant Gi from geographic opportunity.
Just maybe remind us on sort of how you're positioning yourself for the longer term opportunity in China.
Certainly well.
Japan is by far the most challenged geography for us.
Shutdowns et cetera freezes.
In an area, where we have significant business.
Korea has been on.
He has been a growing market for us as the market.
As the consumers are embracing the outdoor business again and many of the competitors that were flooded into the market have now left leaving us in a good position from a competitive standpoint, but clearly as we've said many times China is the big opportunity geographically.
We have a very well known brand there Columbia is known and has been in the market for 15 years, but we've just been underperforming there for a number of reasons and Thats why we made the change in our in our leadership there with a purely on.
Moving to head the business, we think there's a huge opportunity for us to be much better and operate a better business.
And become stronger and grow faster, it's one of the company's most profitable geographies. So there's really no reason why we can't be successful. We just have to focus on it and really start to perform and Alex looking at the rest of the la region and from an outlet outlook perspective.
Looking at full year 2021, Tim touched on the prepared remarks, there's a couple there's a couple of areas of that business that are a little more challenged Japan being one just given the low rate of vaccination and just ongoing state of emergency and the effects of the pandemic and on I would say likewise as it relates to our distributors in the la market.
On an outsized impact, particularly in central and South America.
On their businesses.
Perfect. That's really helpful best of luck going forward.
Thanks.
Our next question is coming from the line of John Kernan with Cowen. Please proceed with your questions.
All right good afternoon, guys and congrats on the guidance increase and the detailed guidance really for the rest of the year.
Maybe just one short term and one long term question.
Short term, we can back into your top line growth in the back half of the year that you are implying.
Is nice growth off on the back half of 2019.
You have a history of being fairly conservative with your guidance.
Tim and Jim So I'm, just curious where do you think you've left yourselves room. This year in terms of guidance and can you elaborate on the expectations for wholesale and retail for the remainder of the year.
Yes, well I mean, the approach that we've taken is consistent with <unk>.
Our track record.
We're seeking to provide.
Based on the best estimate we can based on the current trends that we see in the business. The fall order book that we have in hand.
And that we're seeing in our direct to consumer business and Thats essentially whats reflected in the outlook for the balance of the year and of course, you know as much as as much as we're seeing nice trends from a consumer demand perspective currently.
Keep in mind, the environment that we continue to operate in here as well.
A lot of there's a lot of risk associated pandemic, we've got store closures often on in various of our international markets that had been impactful. So theres still a lot of year left here for us for us to build manage and I'd also point out that.
The areas that we cannot control obviously the virus.
Vaccine uptake.
And really most importantly, the weather turns.
How we look at the balance of the year so.
Sure.
And the numbers, we've given you today, but thats, our best our best view.
Understood maybe longer term question, you talked about the spend to enhance digital and supply chain capabilities I think.
There should be some long term benefits to gross margin in their book from the mixed for digital but also on the planning and allocation side in supply chain and sourcing side.
Youre going to be at your all time peak gross margin. This year I am curious as to where you think.
Long term debt gross margin can get to on where you see low hanging fruit to produce more gross margin expansion.
Well I can tell you where I think we're underperforming.
<unk>.
And where I think that will ultimately yield margin is in the operation of our retail stores frankly.
We consider ourselves to be a wholesale supplier and we have operated retail stores relatively.
Recently, and the kind of scale that we have and obviously the digital business is.
It was also relatively new for the company and so we have systems in place that can.
Can be improved and are in the process of being improved in terms of inventory yield inventory carrying costs and.
In stock positions et cetera.
Where we think that business improvements will come what the ultimate yield is in terms of gross margin improvement, we haven't really set a timeline, but we know that there are multiple areas, where we can improve the business operations, which will ultimately provide us with better gross profit margin.
Alright sounds good thanks, guys.
Thank you.
Our next question is from the line of Mitch <unk> with pivotal research. Please proceed with your question.
Yes, thanks for taking my questions.
Europe that was better than what I was expecting.
And.
In your slide deck, you mentioned that our Europe direct was up high single digit constant currency, which I guess it was in line with the overall business and you call out wholesale as being strong can you elaborate on that I, just would have thought with with COVID-19 and the slow rollout of vaccines in Europe that that business would have been weaker and I'm kind of curious what you're seeing if that's market share gain or something else.
Well there is some market share gain there as well, but we have.
In Europe.
I don't say as opposed to the U S. But there are multiple.
Digital retailers that we've been very successful with so.
I would say that the biggest impact there has been the fact that these multiple digital retailers have been very successful with the brand.
And that I would say that's driving the bulk of our improvements there yes, a couple a couple of other comments I'd make to Mitch we had a nice.
Cold stretch in the months of January and February and so that aided some of the reorder business.
And of cold weather product during during that stretch.
Keep that in mind, and then as it relates to the spring season, I think a bit better of an order conversion on our ability to ship more.
For timely relative to the experience we've had in the U S. So those two factors combined with what Tim described.
Got it and then a second question just on margin is looking at your gross margin bridge as you call out as a headwind channel profitability and you mentioned a higher proportion of wholesale closeout.
That surprises me too I would've thought just with really clean channel inventory that wouldn't have been the case could you maybe just explain that and how do you think channel profitability in terms of in terms of Closeouts on promotions things like that how does that go moving forward.
Yes, sorry about that I think I think maybe there's a little bit of confusion just the interpretation there from an overarching standpoint channel profitability was in our favor during during the quarter and a couple of different things going on there one with as clean as that inventory channel is promotional levels have been far lower than they had been historically.
Comparison of last year, so a DTC margins were much better and then when we look at the overall net mix from a channel regional perspective, and knowing that theres a bit more of a concentration on the DTC side, both between E com and brick and mortar relative to wholesale that was in our favor as well and there is a partial offset to each of those.
As it relates specifically to.
A higher proportion of wholesale product sales and we were continuing to clean up some of the excess inventory and as Tim noted, our excess inventory exiting the quarter with pretty healthy shape, and a pretty significant reduction year on year.
Got it okay. That's helpful. Thanks.
Yes.
Our next question is from the line of Camilo Lyon with BTG. Please proceed with your question.
Alright, thanks for taking my questions.
I think just a quick couple of questions.
Could you just help us understand the mix between units and price in the order book is this.
Specifically referencing the.
The composition of our debt.
The benefit of Hebei.
The Trinity product and if you are generally taking price on.
On your products are hitting this fall season.
Yes I.
I think I have I want to make sure I understood. Your question I think you were talking about the average selling price.
And the order book on the entity, yes, and.
With the with the invention of omni heat infinity and the significant component.
Of that category of merchandise in the fall order book, which has higher margins for us and higher margins for our retailers. It is free.
Really.
The opportunity for us to improve our average selling price at both retail and our own businesses. So we would expect that the units.
This will be equal with gross margin.
And revenue will be higher.
Got it.
Then.
I'm curious you talked about.
Investing in data analytics and understanding.
More about those consumers that are coming to you from direct channel are you seeing a new consumer to come to the Columbia brand.
Through your direct channel and if so what are the characteristics of that because it was at a younger consumer.
Curious to see if your demographics are at all changing with this new with this more accelerated digital strategy.
Yes, I would say that we're not under the category of areas, where we can improve and continue we will continue to improve its data analytics to help us to make better decisions on the company's products, we know that the PFG product.
Youngest consumer in our in our entire portfolio.
No.
That's something that we need to understand more.
And how to sell more to that particular group of individuals.
<unk>.
The consumers coming to the brand or a function of the demand creation that debt.
<unk> invested in and we believe we're moving in the right direction to get the right age consumer.
Into the brand and Camilla some of what was referred to in the prepared remarks. There are some investments we're making on how we capitalize on that consumer data to more segment and target our marketing communications, whether that'd be email or certain of the mid funnel investment and making sure that we've got more targeted messaging to them.
The consumer.
Okay, Great and then just one final housekeeping question for me can you quantify that.
Benefit of it.
Bad debt reversal to gross margin and SG&A on a quarter.
Yes.
On a year on year basis, we booked a pretty significant provision as you recall in the first quarter last year.
That reserve provision was about $21 million and if you look at it this year given just the health of the retailer, which has improved quite significantly relative to the same time on last year, we unwound a portion of those reserves.
For the tune of around $8 million. So on a year on year basis, It's about 2000 $29 million change between Q1 of last year in Q1 of this year.
Alright, thanks, very much good luck for the season.
The next question is from the line of Paul Lajoie with Citi. Please proceed with your questions.
Hey, Thanks, guys I think you mentioned youre growing your points of distribution for some of the smaller brands wondering if you could quantify that for US also curious what's happening in terms of the points of distribution with the Columbia brand and then just also curious mix of business between mens and womens how has that changed.
This past year.
Do you think that looks going forward.
Certainly.
I think it's safe to say that the emerging brands.
Mountain hardware and Sorel have the narrowest distribution certainly geographically.
Got it.
Of our portfolio.
So the discussion around increasing distribution is.
Twofold, obviously geographic expansion, but in the case of mountain hardware, specifically there their channel of distribution, which is primarily <unk>.
High quality sporting goods stores high quality outdoor stores has improved and that's where we're going to be seeing the bulk of the growth.
For mountain hardware.
The other brands Sorel.
Additional distribution in Europe.
And with prana additional distribution really across the south and southwest.
That will be areas, where we're going to be focusing on as it relates to the Columbia distribution. We're currently everywhere, we want to be in terms of selling tickets to wholesale customers.
We just need to expand each of those.
Retailer's purchases from the company and we'll do that by building more gross margin for the retailer interest as we discussed on the omni heat infinity strategy as well as better and more.
More specific.
Where to fill some of the voyage that we've talked about in terms of other brands.
Vacating markets, So that's where we would expect.
Some small changes in the in the Columba.
Columbia brand, mostly around just.
<unk> customers retailers' shelves better.
Got it.
Men versus women.
<unk> I think it's about 50 50.
Now that would be across all the brands of course.
The Sorel business is probably our most heavily women's oriented it's about 70% to 75% womens.
And have you seen a big change in that for.
<unk> this past year.
Not in the past well no not in the past year I would say the percentages haven't changed obviously the Sorel business is much larger, but I would say the percentages are about the same.
Okay, great. Thanks, and good luck thank.
Thank you.
Our next question is from the line of Jay sole with UBS. Please proceed with your question.
Great. Thank you so much for taking my question. My question is just on the impact from supply chain constraints on gross margin.
Whether its shipping or freight are you seeing an impact there and can you quantify what that impact is.
Yes, we have to a degree here on the first quarter and predominantly related to ocean Ocean freight and some of the peak season surcharges that ocean carriers are passing along to us until our outlook would contemplate a continuation of that effectively through our fall 'twenty one season. So we're anticipating.
Incurring additional ocean freight charges here in the second quarter and we really.
Net underway with a lot of our fall production and deliveries.
Here in the month of May June we'll start to see inventory receipts. So we do anticipate continuing to incur those costs. That's all that's all embedded in our outlook so to get down into any more granularity than that I really cant hear today.
Okay, and then one more just on the DTC business being up 20% in the quarter I think can you help us understand what maybe the impact of stimulus was on March which maybe possibly drove some of the DTC growth versus what you've seen in April to give you that confidence that really the momentum you've seen the business is about people returning to outdoor activities and the <unk>.
<unk> getting momentum with consumers if you could give us a sense of what you grew in March versus what you've grown in April that would be helpful.
Yes, I think there's no question that we saw.
Sequential improvement in the business, we definitely saw a bump from the stimulus, but frankly, we believe the bulk of the growth is really a function of people recognizing that the outdoors is an area where they can be relatively safe with your families.
And in an area, where they can enjoy themselves and we believe frankly, it's a long term.
Change in terms of how people are spending time and enjoying themselves. So.
Yes.
Function that we saw in the DTC business.
From February to March when stimulus checks for issued we saw that both across our direct to consumer business frankly, we could see that also on the case of our rate of wholesale sell through and as we've continued to monitor sell through and DTC performance here in the month of April we really haven't seen those trends dissipates, then it's been pretty healthy over the course.
Several weeks here.
Got it okay. Thank you so much.
Yes.
Thank you at this time for each end of our question and answer session now I'll turn the floor back to management for closing remarks.
Well. Thank you all for listening and we're very excited about the opportunities in all of our brands and look forward to giving you more information.
At our next quarterly conference call.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.