Q2 2021 Columbia Sportswear Co Earnings Call
[music].
Greetings and welcome to the Columbia Sportswear second quarter 2021 financial results call. At this time all participants are in a 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 on your telephone keypad.
As a reminder, this conference is being recorded and is now my pleasure to introduce your host Andrew Burns. Thank you Andrew you may begin.
Good afternoon, and thanks for joining us to discuss Columbia sportswear company's second quarter results.
And to the earnings release, we furnished an 8-K containing a detailed the CFO commentary and financial review presentation of explaining our results. The document. It's also available on our Investor Relations website, Investor Doc Columbia Dot Com.
With me today on the call are chairman, President and Executive Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, and Swanson, and Executive Vice President and Chief administrative Officer, Peter Bragdon.
This conference call. The forward looking statements regarding columbia's expectations, anticipations or beliefs about the future.
These statements are expressed and good things and I believe you have a reasonable basis. However, each forward looking statement and 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 as SEC filings.
We caution on forward looking statements are inherently less reliable and historical information, we do not undertake any duty to update any of the forward looking statements. After the date of this conference call to conform the forward looking statements to actual results or the changes and our expectations I'd also like to point out the during the call. We may reference certain non-GAAP financial measures, including constant currency net sales.
For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures. Please refer to the supplemental financial information section and financial tables included in our second quarter, 2020.1 earnings release.
Following our prepared remarks, we will host the Q&A period during which we will limit each caller to 2 questions. So we can get to everyone by the end of the hour now I'll turn the call over to Tim.
Thanks, Andrew and good afternoon, hope everyone's well and.
I'm thrilled to report second quarter financial performance that exceeded our expectations.
The robust recovery and our business fueled record setting second quarter and first half net sales gross margin operating income and diluted earnings per share. We eclipsed pre pandemic first half of 2019 financial results, which represented record performance at that time. This marks an important milestone.
Style and our recovery.
Net sales outside of the second quarter was primarily driven by a better than planned performance and our U S wholesale and DTC brick and mortar businesses. It's important to highlight the even as consumers return to in store shopping our ecommerce business also remained strong.
Measuring second quarter 2021 financial performance versus the second quarter 2019 results, which were not impacted by the pandemic is a useful measure of our business recovery trend line.
Globally net sales were 8% above 2019 levels and the second quarter with all 4 brands, surpassing pre pandemic levels.
Second quarter net sales on our U S DTC brick and mortar business slightly exceeded 2019 levels and U S. DTC E Commerce sales.
Increased over 80%.
The clear that our brand portfolio is resonating with consumers and we are well positioned to benefit from current.
Consumer and outdoor trends.
Columbia is value proposition and differentiated innovation position.
Positions the brand to capitalize on the increasing popularity of outdoor activities.
Consumers are gravitating to Sorel and energize spring summer product line validating its evolution to a year round brand.
Mountain hardware spring 'twenty, 1 sell through rates and fall of 'twenty, 1 orders demonstrate consumers are responding to the brand's authentic and innovative mountain sports product line.
As consumers' interest and the sustainability of the outdoors grows prana is well positioned at the intersection of these 2 powerful trends.
These record results were achieved despite ongoing pandemic.
Related disruptions industry wide supply chain disruptions are causing production and delivery delays as well as shipping cost pressures ongoing periodic lockdowns and temporary store closures are also impacting DTC and wholesale and brick and mortar store performance in several international markets.
Thanks to the tremendous efforts of our dedicated global workforce, we were able to overcome these disruptions to achieve record sales results.
I'd add debt. We also achieved these results with the lower inventory position and.
During the quarter with inventory down 16% year over year.
Overall, our spring sell through has been exceptional retail inventory positions are very low and our fall 'twenty, 1 and spring 'twenty 2 order books and point to continued momentum on the business.
Looking at the seasons ahead, I'm confident of our pipeline of innovative products and the ability to execute in this dynamic marketplace. Our fortress balance sheet is intact with cash and short term investments totaling $821 million with no bank borrowings.
Based on second quarter results, we're raising our financial outlook for 2020.1 are.
Our updated outlook now calls for 25% to 26, 5% net sales growth and the diluted earnings per share of $4.32.
The $4.55.
This outlook includes our current view of the impacts from supply chain disruptions, which are impacting fall 'twenty, 1 production and deliveries. Furthermore, and our revised outlook, we're assuming approximately $40 million of incremental ocean freight costs not contemplated in our prior outlook as we.
The supply chain continuity and market share gains over the costs.
Now quickly review, our second quarter, 2021 financial performance and reference year over year comparisons versus second quarter 2020.
When reviewing second quarter of year over year growth rates and margin performance. It's important to remember that the second quarter is our lowest volume sales quarter and small changes can result in large percentage changes and.
Additionally, second quarter, 'twenty, and 'twenty was significantly disrupted by the pandemic.
Any of our DTC and retail partner stores were closed for the majority of the quarter last year.
Second quarter net sales increased 79% driven by 89% growth on our wholesale business and 69% growth and our DTC business.
Wholesale gross growth was lit was led by the U S and was primarily driven by later timing of spring 'twenty on shipments compared to spring 'twenty and higher spring 'twenty 1 sales.
While shipments were delayed several weeks on average order cancellations were minimal in this inventory constrained environment retailers remain eager to get product as it arrives.
Globally, DTC brick and mortar net sales grew 149% as we lapped prior year of temporary store closures.
Sales and this channel significantly exceeded our expectations and store traffic levels and sales improved faster than anticipated.
Overall, we made great progress on the quarter store traffic still remains below pre pandemic levels.
[noise] DTC E Commerce net sales grew 5% and represented 16% of the total sales mix.
These results were in line with our expectations as we lapped the prior year surge and ecommerce sales.
Gross margin ex.
[noise] spanned at 540 basis points to 51, 6% of net sales. In addition to decreased inventory reserve provisions relative to elevated levels last year, we benefited from lower DTC promotional activity and favorable wholesale product margins. This was partially offset by unfavorable.
Channel sales mix.
Our SG&A expense increased 20%, primarily reflecting the variable component of our expense structure with increased sales volume.
This performance resulted in operating income of 35 million or 6.2% of net sales compared to an operating loss of $70 million and the prior year.
Diluted earnings per share improved to 61 cents compared to a loss per share of <unk> 77.
And the prior year.
Looking at first half financial performance net sales increased 35% year over year and diluted earnings per share increased to $1.44 compared to a loss per share of <unk> 76, and the first half of 2020.
I will now review second quarter year over year net sales growth performance by region and brand for this review I will reference constant currency year over year net sales growth range unless otherwise noted.
U S net sales increased 107%, reflecting low of 140% growth and our wholesale business and mid 80% growth and our DTC business.
The robust economic recovery and proving vaccination rates and strong consumer demand for outdoor products created excellent retail backdrop during the quarter.
And our U S wholesale business spring 'twenty, 1 season to date and sell through rates have been exceptional driving double digit sell through growth compared to spring 19 on lower retail inventory stock levels.
And our U S brick and mortar business.
DTC brick and mortar business. It was apparent and consumers are increasingly willing to shop in store net sales increased mid 250 per cent year over year as we anniversary prior store temporary temporary store closures during the quarter same store sales and traffic trends recovered much.
<unk> and expected.
Even though international tourism remains quite low and we experienced a meaningful improvement in stores that historically relied on this business.
U S. DTC E Commerce net sales increased low single digit percent inline with our plan with significantly less promotional activity compared to the prior year.
Turning to international sales performance during the second quarter. Many regions continued to struggle with the vaccination rollout.
We experienced sporadic lockdowns and temporary store closures at various points throughout the quarter and several markets, including Japan, China, Europe, Canada and distributor markets.
Latin America Asia Pacific or L. A P region second quarter net sales increased 11%.
Across Asia performance was mixed in.
And China net sales were down low single digit percentage, primarily reflecting lower wholesale sales, resulting from earlier timing of spring 'twenty, 1 shipments, which shifted to the first quarter.
China DTC net sales were up year over year.
Led by E Commerce growth.
China represents 1 of our largest geographic growth opportunities and we know that E. Commerce will be an integral part of unlocking Columbia as full potential in this important market.
Our management team is hyper focused on enhancing our digital capabilities strengthening strategic partnerships and developing talent to drive growth and enhance the consumer experience.
<unk> first half net sales in China increased by 30% and we anticipate full year net sales to approach 2019 levels.
Korea net sales decreased mid teens percentage as we anniversary growth and the prior year. It was aided by government stimulus, which boosted retail consumption.
And Japan net sales increased mid 50% as we anniversary prior year of pandemic related disruptions, which were more impactful.
Which were more impactful than the state of emergency declarations in various regions throughout the second quarter of 'twenty 1.
L. A P distributor markets were up high 30 per cent as we anniversary of prior year of pandemic related or related order cancellations and euro.
Europe, Middle East Africa, or EMEA region second quarter net sales increased 46%.
Europe direct net sales increased mid 30% driven by higher spring 'twenty, 1 sales and later shipments of spring 21 orders.
EMEA distributor net sales increased mid 50 per cent as we anniversary prior year pandemic related to the order cancellations and earlier delivery of fall of 'twenty, 1 product compared to fall 2020.
Canada net sales increased 140% and the second quarter, primarily the <unk>.
Given by later shipments of spring 'twenty, 1 orders and higher spring 'twenty 1 sales.
Looking at performance by brand.
Columbia brand net sales increased 79% and the second quarter.
Despite the delays in shipments and sell through of of our spring 'twenty 1 product line has been fantastic.
Top performing categories included head wear footwear, and fleece with particular strength and PFG products. It's important to note that these high sell through rates were achieved with strong full price selling resulting in favorable product margins.
Columbia is innovations received several media call outs and awards during the quarter.
Outside magazine featured the PFG zero rules, I share and Theyre Roundup of best fishing gear, highlighting its unique omni freeze cooling technology and U P F protection.
Outside of also feature of the escape summit outright shoe and its list of best hiking shoes.
Gear patrol feature of the outright extreme rain jacket as the most innovative rain jacket and this list of S..3 and jackets of 2020.1.
And the feature noted the jackets and differentiated look and unique proprietary.
Jerry waterproof construction.
On the product and partnership front. This June we continued with our successful collaboration with Disney Lucas films with Columbia is first spring Summer Star Wars collection. This new outer rim collection and combines iconic elements of the Star Wars legacy with the comfort and performance that are.
And then be at PFG apparel is known for.
And the media coverage of this launch generated over 20 million impressions and the product quickly sold through and our branded stores and online.
During the quarter Columbia broadened our partnership with the Greening Youth Foundation to promote equitable outdoor industry career paths for diverse use and Lee on adults as part of this ongoing relationship Columbia has made a donation of product and funds to support its historical black colleges and universities.
Internship program.
This program connects young people from underrepresented and 3 entities with outdoor industry job opportunities.
In addition to releasing a special Pride month collection and June Columbia was excited to celebrate our partnership with the venture out project during the quarter. This nonprofit organization helps individuals' gain skills and confidence through shared outdoors experience.
We will be working closely with this organization and the amongst of the car.
On the marketing front and we're eager to launch our global Omni heat Infinity campaign. Later this month omni heat Infinity is the newest and largest innovation launch and our company's history. This new highly differentiated and in addition to the omni heat family is the next evolution of <unk>.
<unk> reflective of warm.
We will be supporting the launch with the comprehensive global marketing campaign that will create awareness throughout the season.
Our full funnel campaign will be visible to consumers in store and across traditional and digital and social outlets.
On October 1 and we'll celebrate gold metal day, which will feature content from a group of partners and outflow of insurers promoting the initiative across social media platforms.
There'll be inviting consumers to join with them and taking Columbia's challenge to spend 24 hours outdoors, and total warmth and comfort wearing omni heat infinity.
Given the challenging retail landscape I believe it's worthwhile to reiterate our distribution channel strategy.
The out of our long history, we have been we have valued the strong relationships, we've built with our top global retail partners for the Columbia brand, we believe broad Democratic Omni channel distribution is an integral part of the brand's success, we will continue to partner with retailers to sort of our loyal consumers wherever they choose to share.
Shop.
We'll also continue investing and are profitable and growing DTC businesses.
With our broad omni channel strategy in mind, we see sales opportunities and some brands exit wholesale accounts.
We are actively engaged with these retailers to help serve their customers and we believe the Columbia brands exceptional value and differentiated innovation is a winning proposition for retailers and consumers alike.
Turning to our emerging brand portfolio.
Sorel net sales increased 71% and the quarter was strong wholesale growth led by exceptional sneakers and sandals performance.
The strong sell through velocity and full price selling reflect consumer excitement ground sorel of.
Gold spring summer styles.
And on Sorel Dot com and the kinetics channel was the top selling style. The sport style sandal expands the kinetic collection and builds on the success of the popular sneaker product line the.
And the brand also noted strong growth and the newly introduced sandal collections Cameron led by the led by the camera platform.
Drink Pride month, Sorel and partner with paper magazine to spotlight 3 individuals as they use style to express their everyday price.
And the kinetic rush price sneaker created and their honor the program captured these bold and confident of individuals' and their unique element.
As part of this collection Sorel made a donation and on behalf of each of the individuals to the charity of their choice.
Prana and net sales increased 43% and the quarter led by wholesale growth and <unk>.
Spring 'twenty, 1 product reached our retail partners, we were encouraged by sell through rates and full price selling.
During the quarter prana demonstrated belief and adventure for all with the Pride collection and partnership with debenture of apart.
Interest and promised recently introduced resign and fabric continues to bill with strong orders noted across key retailers for spring 'twenty 2.
In June Prana, Vice Prana brand President Russ Hopkins announced his pending retirement this fall over Russia's 8 years with Columbia, and prana and he's been a valued member of our senior management team and 1 of thank him for his contributions of <unk>.
Purchase underway for his successor.
Mountain hardware and net sales increased 95 per cent and the quarter with strong wholesale and DTC performance.
Spring product sell through was excellent and driven by especially strong sportswear and the equipment demand.
For fall 'twenty, 1 the order book reflects continued strength and the business. The mountain hardware team has done an amazing job, bringing new innovations on the marketplace and elevating the brands online and in store presence with the important wholesale accounts.
We're excited to see mountain.
C Mountain hardware athlete Kyra condie take the global stage and the debut of sport climbing and the Olympics.
She was 1 of only 4 USA sport climbers to represent the country and this inaugural event.
We look forward to sharing her journey through mountain hardware social media platforms. Good luck Kara.
After 4 years, leading non hardware business brand President Joe <unk> made the decision to pursue on other opportunity.
Joe has made tremendous impact of mountain hardware and is leaving the brand and the strong position.
With a very talented team we thank him for his contributions of <unk>.
Search for his successor is underway.
I will now discuss our 2021 financial outlook as commentary includes forward looking statements. Please see our CFO commentary and financial review of presentation for additional details and disclosures related to these statements.
As we begin the important fall sales season, we're focused on navigating pandemic related disruptions and delivering products that inspire active consumers.
We're also investing and demand creation and capabilities to leverage our compelling brand portfolio to connect with consumers and enable long term profitable growth.
Based on the second quarter results, we're increasing our full year financial outlook.
Our updated 2021 outlook contemplates 25 to 26, 5% year over year net sales growth with growth across all 4 brands and this compares to our prior outlook of 21, 5% to 23% growth. This outlook assumes assumes no meaningful deterioration of current supply chain or.
Market conditions related to the ongoing pandemic.
Gross margins are expected to expand 95 to 115 basis points a revised gross margin outlook includes approximately $40 million of.
The incremental ocean freight costs not contemplated in our prior outlook.
Currently global demand for Ocean vessels and containers is far outstripping available capacity.
In general we've been successful securing allocation of containers and vessel bookings the transport our products. We have worked to incorporate what we know about ocean freight rates into the financial outlook. We are providing today, but these markets are highly volatile and rates are difficult to estimate.
And this environment, we have prioritized supply continuity and market share gains over costs.
We are diligently working with our logistics partners industry Representatives and government officials to address these challenges.
We expect SG&A to grow slower than net sales demand creation is anticipated to increase as a percentage of sales to 6% and 2021 compared to 5.7% and 2020.
Combined we expect the operating margin to be in the range of $11.7 to 12, 2%.
Diluted.
Per shares diluted earnings per share is anticipated to be in the range of $4.32.
The $4.55.
Compared to our prior range of 405 to 430.
While it's too early to provide specific details around our first half 2020.2 planning process I would like to share. Some initial thoughts on our spring 'twenty 2 order book.
As I referenced earlier strong consumer demand for our spring 'twenty 1 products has driven exceptional sell through rates. This has resulted in very low channel inventories and high retail restocking demand for our spring summer product line as a result, our spring 'twenty 2 order taking process has been substantially completed.
Far earlier than the season and is normal or bookings point to high teens to low 20% growth and our spring 'twenty 2 order book over spring 'twenty, 1 sales levels.
And with inflationary pressures building across our business, we have implemented price increases to help mitigate these higher costs.
We're confident that our brands portfolio's pricing power as a reminder, our order book only covers our wholesale business and is not an indicator of DTC performance expectations.
Sure.
Before my closing remarks, I'd like to highlight that we recently released our 2020 corporate responsibility report, which is available on our website I'd encourage you to review the report, which outlines the progress on the accomplishments that we've made empowering people and <unk>.
Sustaining places and promoting responsible practices 2.
2020 was an incredibly challenging year for everyone, but our commitment to our core values do not waiver 20.
2020 highlights include setting of climate target goal for a 30% reduction and manufacturing emissions by 2030.
Establishing of senior level of diversity equity and inclusion leadership team.
Report also features spotlights on Columbia, sportswear response to issues, including COVID-19, voting, social and ratio of Justice and climate.
In summary, the.
The momentum of our business is incredibly strong.
Believe we of the right strategy in place to navigate pandemic related disruptions and drive sustainable and profitable long term growth.
And committed to investing and our strategic priorities to drive global brand awareness and sales growth through and through increased focused demand creation investments.
Enhanced consumer experience and digital capabilities, and all of our channels and geographies.
Expand and improve global direct to consumer operations with supporting processes and systems, and investing and our people and optimize our organization across our portfolio of brands.
That concludes my remarks.
We'd welcome your questions for the remainder of the hour operator could you help us from that.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is and the question queue. You May press star 2 and he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star kids 1 of them.
And planes, while we poll for questions.
Thank you. Our first question comes from Bob Trouble with Guggenheim Securities. Please proceed with your question.
Thank you.
Afternoon, guys and congratulations.
Bob and Bob Great quarter.
I guess the first question that I have it's Tim when you look at the competitive landscape and I guess the.
And the comments you made about market share opportunities can.
Can you just talk a little bit more in terms of like where you see the opportunities that you're pursuing either by category or by region.
And just what you see happening on the competitive front that you're going to be a little bit more aggressive and go after it from that perspective, and I think the second question that I have maybe for Jim is the the price increases can you give us a little bit of flavor sort of you know.
How much you've taken price up or in the inflationary pressures that you're seeing and the business.
If you could just help us quantify that and would be helpful. Thanks.
Sure well I think Bob the probably the number 1 area, we're taking share would be and smaller brands that may not have the capital and the balance sheet to be able to provide them. The the solace to pay these exorbitant prices that we're all facing in terms of our.
Our freight rates coming in so that would be an area, where we would be able to point quickly to where we can take share. Additionally, we've got a number of businesses, where we have a unique position that would include specifically PFG and North America, where the business is incredibly strong and geographically that would be focused on the.
South and southeast.
But across the business and across the globe frankly, and the business has been very strong very low inventories and I think where we've all been surprised at the brick and mortar.
Traffic levels and just the extraordinary.
Consumer demand for outdoor products and the.
Those of the first things that come to mind, when I think about where we're where we're growing somewhat and so rapidly and.
And then Bob as it relates to your question on price increases and specific to sprint and 22, the price increases were contemplating or a low single digit percentage. So when you look at the order book that Tim commented on with the low 20 to high teen growth. Most of that's unit volume, we do expect to continue to see costing pressure off of.
Fall of 'twenty, 2 season and of course, we'll be looking further into price increases to help mitigate and offset those.
And that that inflationary pressure.
Got it great. Thank you very much.
Yes.
Thank you. Our next question comes from Jonathan Komp with Robert W. Baird. Please proceed with your question.
Yes. Thank you maybe a broader question on the earnings outlook. It looks like the first half of the year. Your earnings were above 20, and 19 for the full year, that's not what you're assuming so maybe just wondering as you look to the back half how we should think about the earnings potential, especially in light of other.
The 2019 numbers that you delivered.
Yeah. Good question John.
It hadn't been for and Tim commented on that and Ben for the Ocean freight cost and the vast majority of the $4 million of incremental of ocean freight costs and we anticipate incurring this year it will be in the in the latter part of the year. So absent that the 77 and beat the we delivered for the <unk>.
Quarter, we would've delivered for the full year and and you know if you do the math on that you know the earnings recovery I think we'd be looking at and overall earnings at or better than where we were in 2019. So we're awfully encouraged with and then the momentum of the business you know obviously the supply chain challenges will deal.
And we'll deal with those and and manage what we can.
And I think that pretty well covers it.
And and maybe it's the follow up how do you think about.
The recoverability of some of those margin pressures, especially since you're taking some pricing next year theoretically the freight issue should be temporary at some stage. Once you get past them. So any thoughts on the margin Recoverability and then even as you look to fall.
22 orders any any high level thoughts on you know some of the swing factors as you look out 2 of fall 'twenty 2.
Yes, I think the brand what were realizing is the brand and really has the power of up to 2 to price appropriately.
We're also very mindful of.
Our business. This industry has been incredibly deflationary over the last 20 years merchandize, becoming less and less expensive. So this is an area where we've been very focused on managing.
Our ability to raise prices and.
To be mindful of what the cost of portions of the business are going to be as well as continuing to invest and innovations, which will separate us and allow us to differentiate ourselves.
And lastly, our investment and brand building and brand awareness.
And what really.
Cash big dividends, and the future and John absent the ocean freight costs that we're incurring and and based on everything that we're learning from the.
The logistics partners that we work with and and various other advisers, we anticipate continuing to see these elevated freight charges through the first half of next year absent those charges and we're not providing specific gross margin guidance today, but absent those those charges, we would have expected our spring 'twenty 2 pronged.
Margins to be better than spring 'twenty, 1 based on where we priced and how the the order books come in.
That's helpful and just lastly, if I could could you comment any on any direct the shipping delays you're baking into the third quarter and is that impacting the omni heat and infinity launch plans at all and thank you.
No, we've really prioritized omni heat infinity, because it's so important for the company and in total and and for.
On the investment that we've made and we want to make sure we have the product in the <unk>.
And the stores. So we prioritize shipping of that merchandise, we expect that there will be delays on other categories and other items, but.
All of those delays of and built into the guidance. We've given you today and we're continuing to experience. The 3 to 4 week delay generally speaking as it relates to the timing of our inventory receipts and our wholesale shipments and so what we will see some pushed out out of the third quarter and into the fourth quarter.
And as Tim touched on there there is some commentary related to our second half growth rates, including Q3, and Q4, and that's all baked into that outlook.
Okay. Thanks again.
Thank you. Our next question comes from John Kernan with Cowen. Please proceed with your question.
Excellent. Thanks for taking my question nice job on the quarter.
Just wanted to talk to the SG&A rate as well at the low end of the guidance on a rate basis, it's still.
Above 2019, you're on.
Our guidance at the high end of sales to be above that.
And that fiscal 19 day, so just curious.
On the tick up and the SG&A relative to 2019, and if theres any costs related to supply chain and that are and how should we how we should think about all of the SG&A rate.
Yeah, a couple of couple of comments on there John I guess first and foremost would be demand creation.
We did plan to make incremental investments and demand creation. This year, you'll recall 2019 of our demand creation spend was at 5.5% of sales and our outlook. We're currently pontiff blade and 6%. So that's a pretty meaningful component of that as it relates specifically to the supply chain you know the the 1 item or 2 items it would be and here specific to the supply chain.
And as you know Theres, a fair amount of labor pressure and the market right now and so we have we have made wage rate adjustments for our distribution centers. We've also done likewise with regard to our retail store associates in order to attract talent as we go into the end of the whole theme of the fees and that lies ahead. So those are those are the other.
Predominant drivers when you think about the SG&A deleverage over 19, theres sort of incentive comp and I believe as well as it relates to just the strong year that we've had thus far.
The that'd be really the recap.
That makes sense.
And just to go back to the supply chain it sounds like theres going to be some headwinds.
In the fall 2022.
When you take a look at all of the equation here whether its shipping.
Ocean and air.
Some of the headwinds regarding production and Vietnam and other places.
Yeah.
When you look and into a crystal ball, how do you think that on.
And on Wise I mean at what point do we start to see what the.
It seems like.
Cyclical in place and come down.
And particularly with some of the freight rates.
It doesn't sound like you're assuming that they're going to get much better into 2022, I'm. Just curious if there's anything you'd see it could alleviate some of these cost pressures and when we might see that.
Yes, I think capture and the only thing that will significantly impact the ocean freight rates will be government intervention, whether that's European government of our U S government.
Acting to break up some of these monopolistic.
Organizations that are really.
Causing the.
Bulk of the problems I mean, it's 1 thing to deal with delays, which we all understand that's possible due to the the.
The container dislocation, but the freight rates are clearly.
The nominal monopolistic and.
And in my opinion.
So when will that happen.
Anybody's guess, but I think in general as I said earlier, we are entering the period of inflation when in fact, the industry and the whole has been and a deflationary.
Spiral for many many years, so it's going to be incumbent upon the companies that are well organized like ourselves to be able to have brands with pricing power that can continue to grow and.
Gross sales and.
And strong margins.
Scott.
Follow up on the comment earlier comment on product margin and.
2022 for the fall versus 2021, I know, we're a ways out but.
Did you confirm the fault to the Atlas spring.
Spring 2022 product margin would be up versus 2021, even with the inflation.
Yes.
The strong margins and spring 'twenty, 1 and correct me if I the state this Jim but we had strong increase in gross margins for spring 'twenty, 1 day did not offset.
The freight costs, which have been higher and we have not yet set prices for fall of 'twenty 2.
We expect that we will be able to.
Cover known.
Cost increases.
And a better way certainly.
All coming true Yeah, I think I think John the comment I made and if you had set aside the ocean freight costs and we're currently seeing in the business and we're just look on the product margin before that our spring 'twenty 2 margins are more healthy than they would've been for spring 'twenty..1 now obviously you know we're looking at those the the ocean freight costs and there's a lot of estimation in terms of what lies ahead.
As we think about the first half of next year, but that'll that'll put some pressure on there and as Tim touched on we're a bit early as it relates to fall of 'twenty 2 as we're finalizing the line and our pricing before we go to market.
Understood.
Thanks for all of the information.
Thank you.
Thank you. Our next question comes from Jim Duffy with Stifel. Please proceed with your question.
Thank you good afternoon.
Few questions from me guys around the trends Youre seeing and how that's translated to the guidance change did I hear you correctly. The U S direct to consumer brick and mortar was up and the 2 Q versus 2019, and if so I'm curious is that was that consistent across the quarter and and into the third quarter.
Yeah, that's that's correct, Jim so our brick and mortar business was up low single digit percent through Q2, which on a nice tick up in that D to C business day to back to March around the time that we saw from the U S stimulus and and we've really been able to sustain that level, having said that consumer traffic levels still remained.
Down quite significantly relative to pre pandemic, but we've been making up for it with improvement and all other operating metrics and the stores, including conversion. So it held and as we look at the quarter month by month. It held steady through the month of June and and we've continued to see nice trends as we sit here and the month of July and it's the.
And then as it relates to how we factor that into our outlook. We've taken a prudent approach in terms of not expecting the traffic would get back up to pre pandemic levels exiting this year and and that revenue would be.
At or slightly slightly down.
No.
And that gives you a little a little backdrop on that.
Okay helpful. Thanks, and you mentioned inventories tight retailers anxious to get product, where you're able to make any adjustments to fall orders to up the upsize those too.
Capture some of that demand and the second half of the year.
Well, we have as we've said we have.
Logistics.
Issues were dealing with before the merchandize and we've already sold.
And for fall of 'twenty, 1 and we have inventory available.
And we believe that will work.
Obviously at a much lower inventory position and we were exiting the quarter last year. So to the extent, we can fulfill orders will be there from.
And the merchandise.
Okay. Thanks, guys I'll leave it at that.
Thank you thanks Kim.
Thank you. Our next question comes from Alex Perry with Bank of America. Please proceed with your question.
Thanks for taking my question and congrats on a great quarter.
Wanted to circle back I think he talked about rising cases, and sourcing countries across southeast Asia and <unk>.
Pack and the product availability and the Liberty delay.
Deliveries I guess you just given the shutdowns you have seen and the last few weeks are you still on track to hit shipping Windows for peak selling periods I guess another way of asking is you know is the upside potential of kid of cap given sort of what you're seeing and the supply chain.
Oh and taken.
And we've approached our forecast and the way we have historically as it relates specifically to.
Some of the closures and Asia, which would include Vietnam as we sit here today.
About 70% of our inventory has either been either been produced.
Or you know the didn't transit and we are we've received it so we're in pretty good position as it relates to having inventory available for the season now and we still have some obviously to produce and certain of that inventory is and factories in Vietnam that are experiencing closures. So there'll be some risk associated with that but by and large.
Those are those impacts of our business, including the supply chain disruptions are reflected in the revenue outlook that we provided today.
Perfect. That's really helpful. And then I just wanted to touch on on a bit more attempts and some of the comments you made about you know the.
The approach of your competitors are taking to the wholesale marketplace and North America.
Can you just comment on sort of you know the white space opportunity and you sort of see there from what you. The position your competitors are taking and you know what you're sort of doing the capitalize on that.
And certainly well.
It's been well publicized.
And the reduction and and major brands distributions.
And partners is and the billions of dollars and.
And that's just in North America, So there's lots of opportunity for for our brand which is high demand.
Just to fill portions of that.
So I mean, it's a significant amount of it eclipses our current.
Our footwear business.
Just the footwear portion eclipses, our current footwear volume so.
And it could be very significant and if we can if we're able to capture.
A good portion of that business.
Perfect. That's really helpful best of luck.
You kind of it.
Thank you. Our next question comes from Lauren VAT, the ESCO with Exane BNP Paribas. Please proceed with your question.
Oh, good afternoon, and thanks for taking my question, Jim I think and the CFO commentary. It says that there has been and we're shifting the Canadian and European direct sales from <unk> could you, possibly quantify those shifts and then if I look at the third quarter fourth quarter implied guidance with regards to on a 2 year stack basis, it looks like <unk> would be down the.
Single digits, but then.
<unk> be up mid teens.
Is it the right way to think about it if you didn't have the the delays.
Third quarter and fourth would be more normalize on the 2 year stack basis across both of course.
But as it relates to your first question on Europe, and Canada from a wholesale perspective, and you know I might approach that just kind of looking at it from more of a global standpoint, because certainly we got a fairly significant shift and our inventory receipts for spring 'twenty 1.
And that of shifted out of Q1, and Q2, and hence add and impact on our ability to deliver and ship those and Q1.
The impact of that are our spring 'twenty, 1 order book ex timing, we're at the low 20%.
From a global standpoint.
There'll be.
Both Canada, and Europe, I can't recall specifics, but theyre going to be in or around that that level of growth. So certainly the outsized growth you're seeing on the quarter is largely.
Related to the later inventory receipts and shipments and then as it relates to Q3 Q4 of the Rod you know I think the.
The only detail I can share with you is that what youre seeing and the CFO commentary and the fact that.
We see relatively balanced growth and Q3 and Q4 at the low 20% there of the there was a fairly significant shift out of the third quarter into the fourth quarter and just in light of the fall of 'twenty..1 later inventory receipts and just impact that that's having on the wholesale business.
Okay very helpful and then drilling down on footwear I think your full year revenue guide at the company level implies low single digit growth on a 2 year stack.
And the CFO commentary it says that apparel will grow faster than footwear. So far of your footwear has grown 20% your day on the 2 year stacks up.
Footwear supposed to grow slower than apparel.
Does that mean, we should think that footwear actually declines and the second half of the 2 year stack basis, maybe if you could help us kind of quite the the puzzle.
Puzzled forget that'd be really helpful.
And I don't think it is declining and the second half at certain debt.
Certainly decelerate from the growth standpoint might of some of the manufacturing capacity constraints that we anticipate on the year, but we're still seeing footwear growth and the.
Low 20% level, so not quite to the level that we are from an apparel.
Standpoint.
Okay, and maybe if I can squeeze 1 more and on the gross margins the reversal of provisions on.
And you've had 2 quarters in a row do we expect any.
Any more reversals of or maybe asked another way of how much is your gross margin guide of about 100 beds and how much of the embedding reversals for the full year.
And.
And what we've realized to date is essentially at or aren't I wouldn't anticipate given how clean our inventories are at this point and time relative to where they were at the same point and time last year last year, you know the economy and shut down with the book fairly significant reserves in light of our unbilled positions and as we sit here today, the aging and the unsold position.
We have and and our inventories quite healthy and so we brought our reserves down on a more normalized basis. So I wouldn't assume that there's any further benefit as we look at the balance of the year.
Okay very helpful. Thank you very much of it and the best of luck.
Thank you.
Thank you. Our next question comes from Camilo Lyon with BTG. Please proceed with your question.
Thanks, very much good afternoon, everyone.
And I just wanted to clarify on the $40 million of incremental supply chain expense for the back half and can you help us think about the weighting of when that $40 million just kind of hit more Q3 versus Q4 or is it a should we think about evenly split.
I would look at it and just in terms of if you look at the the relative revenue volume than we do on each of the 2 quarters I'd weighted against that because we're essentially realizing those cost.
In line with the the rate of sale.
The best way.
Perfect.
And is that the right amount of cost incremental cost of we should think about for spring 'twenty, 1 and as well.
Upper Springs for spring and I'm sorry, you.
Plenty here between the 20th year pardon me.
Yes.
Tough to call right now, we're certainly going to see that pressure out of next year I mean, all indications as Tim touched on you know absent government intervention here, we would expect that we will continue to see elevated freight charges through the Chinese new year and so by then we will effectively received all of our spring 'twenty 2.
So the first half of the year would be impacted by what we're currently seeing based on everything that we know today and obviously, there's a ton of volatility of these.
Rates have skyrocketed and last 60 days and we had had the conversation 60 days ago, we wouldn't be out of this you know we saw a 4 fold increase and ocean freight from June 1 through kind of I'll call. It the middle part of July.
Yeah, no it it's pretty pervasive everywhere.
Okay, Perfect and then and then and if we could just step back for a second and maybe if you could detail and and Peel back the layers on what you're seeing and Europe seems like there are you know.
A little bit behind us in terms of behind the U S and terms of vaccination rates.
And I'm, just curious to see how that.
We can has been.
The pursuing your brands and and driving that growth relative to what you've seen that's been a much faster kind of recover here in the U S and and maybe you know if there's a time line that we can put around of time.
Time differentially, we can put around Europe for us of the U S or the a quarter behind us in terms of that recovery curve really starting to ramp up and look more like the U S or is there further out period before they start to really embrace them they'll carry the weight that the the the way out here.
Our European business is still recovering.
And then it is behind the.
The us in terms of vaccination uptake and.
And so we haven't.
Less.
Visibility on that because as the country by country.
Obviously the vaccination.
Mandate.
But our inventories in Europe are less and the U S.
Less of an opportunity to capture any particular on trying to we might have.
It's more.
More difficult and more challenging there for us and Bruce.
The U S.
Got it and then if I could squeeze 1 more and for the back half of this year would you be able to.
Parse out how we should think about wholesale versus DTC assumptions within the context of that 20% back half revenue growth.
Protection.
No I don't think we've broken that detail out, but I would just comment on our fall 'twenty..1 wholesale order book was quite robust coming off of the retailers being exceptionally clean come out of the fall 'twenty season. So we will see outsized growth in the wholesale business keep.
And mine and e-commerce is going to be going up against some fairly significant comps and we delivered last year. We did provide commentary that we anticipate the ecommerce business from an overall penetration perspective, and we were 19% of sales and 2020 that we would see that come down ever so slightly and then you'll have the recovery pick up of the brick and.
The order business.
Very helpful. Thanks, very much guys and the good luck.
Yeah.
Thank you. Our next question comes from Jay sole with UBS. Please proceed with your question.
Great. Thank you so much.
And I asked about.
And your thoughts about the underlying growth rate and your categories. Because you know you mentioned the spring summer 'twenty 2 order book up high teens low 20, as you mentioned the sell through and this quarter was up strong double digits versus 2019.
And just between the different moving pieces of restocking versus you know price increases and some of the things that are changing.
What do you see the category growing and you get into 2022, just because of the increased consumer trend toward outdoor activities.
Ben and playing out for you know the.
And the last few quarters.
Well I think the smallest impact is going to be price increases frankly.
The underlying business is incredibly strong sell through rates have been among the best co.
And he has ever seen and.
The.
And the brands are a really riding and incredible.
Wave of.
The demand.
Sure.
And the strength of the brands as well as the strength of the industry in General and then again as I mentioned earlier, the smaller brands it would.
And would be delivering a portion of products and the store might get are just going to be an incredible.
Incredible pressure.
And so I think it's really sort of a great opportunity for the company.
At a time line on the brands are strong and we were investing heavily and demand creation.
And.
Understood and so maybe 1 more from me just in terms of the guidance that you've given for the full year.
You know if we think about the supply chain and all of the impact that's having on the ability to chase into possible upside to orders or are just just a man and your direct consumer channel.
Is the ability of the company to sort of beat the guidance of different this year, just because of all of the the complications of that have happened through the supply chain, how should we think about that.
Well, we really giving you the best the best view, we have of of.
The highly complicated business.
Which is.
Global in nature and.
The spread across multiple brands.
And we've really given you our best shot at what we think you will turn out.
Got it okay. Thank you so much.
Thank you. Our next question comes from Paul luxury with Citigroup. Please proceed with your question.
Good to talk about the second quarter of DTC business and kind of curious about the the driver of the.
So all of the improvement versus 2019 in terms of units.
Price.
Related to that and can you talk about merch margin by channel.
And we thought we filed ex the Brad do you think the business in 2019 on.
And same question of the wholesale.
Hey, Paul I'm, sorry, the the sound quality is pretty poor, we didnt catch that and I heard something with regard the D to C.
Revenue and Asp's and gross margin, but maybe have you repeat of any clear.
Hey, it's Tracy filling in for Paul I think he was asking what the drivers 1 of the U S. DTC channel on the drivers of the improvement.
And this quarter versus last quarter in terms of the price.
And traffic.
And we saw significant uptick and our traffic relative to where we had been the last few quarters.
And we're still quite a ways under where we were from a pre pandemic standpoint, but theres been a nice flow of traffic I think consumers are generally with vaccination rates and the U S. In particular and gotten the levels. They are I mean consumers are showing signs of getting back on physical retail, which is which is great to see and and our in store operating metrics as I touched on earlier on.
Store operating metrics.
And between conversion and just the other metrics, we monitor with the consumer we're all quite good as it relates to the price itself.
You can see and our growth margin or gross margin was up several points on the quarter. Most of that is due to the fact that were less promotional and so to the degree were less promotional and there is some price you know there's some price benefit we're picking up from that vantage point.
And then the second part of the question I believe went and merchandise margin performance, we didn't channel wholesale merchandise margin birth, and a 2019 as and then DTC merchandize margin.
And I think we and strong margins across all of our channels and.
The way, we analyze the business.
We because of the shortfall on the amount of inventory available to retailers. We had we had strong margins across the business.
Great. Thank you guys.
Thank you. Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Well. Thank you very much for listening and we're looking forward to great results when we talk to you.
At the end of Q3 and.
Please stay healthy.
Yes.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.
Yeah.