Q1 2022 Columbia Sportswear Co Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to Columbia Sportswear first quarter 2022 financial results Conference call. At this time, all participants have been placed on listen only mode and we will open the floor for your questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Andrew sorry.
Floor is yours.
Good afternoon, and thanks for joining us to discuss Columbia sportswear company's first quarter results.
In addition to the earnings release, we furnished an 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 Columbia Dot Com with me today on the call are chairman, President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief Administrative Officer, Peter Bragdon. This conference call will contain forward looking statements regarding Columbia's X.
Spectation anticipations or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward looking statement is subject to many risks and uncertainties and actual results may differ materially from what is projected.
Any of these risks and uncertainties are described in Columbia's SEC filings, we caution that forward looking statements are inherently less reliable than historical information.
We do not undertake any duty to update any of the forward looking statements. After the date of this conference call to conform the forward looking statements to actual results or 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 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.
Also included in our first quarter 'twenty, two earnings release, and the appendix of our CFO commentary and financial review.
During our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions. So that 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, I hope everyone is well.
Before reviewing our financial performance I'd like to take a moment to focus on the Russian government's tragic and unjustified invasion of Ukraine.
Our Hearts go out to the people of Ukraine, and those impacted by this humanitarian crisis since the invasion, we have made it a priority to work with multiple aid organizations to deliver products and other support to refugees from Ukraine as well as displaced persons within Ukraine.
We are also matched all employee donations to nonprofits delivering humanitarian aid.
Columbia Sportswear does not have any direct operations in Russia, and as operators in that market through our contract with a third party international distributor on an advance order basis during the first quarter, we pause taking any new orders from this distributor.
Turning to our financial performance in the quarter.
2022 is off to a great start first quarter net sales increased 22% year over year and diluted earnings per share increased 23% or.
Our strong financial performance demonstrates that our brands are resonating with consumers and our strategies are excelling.
I'd like to thank our worldwide employees for their diligent work and perseverance has enabled the company to navigate operational challenges and achieve another quarter of record net sales performance.
Business momentum was broad based with growth across growth across brands, all brands channels and geographies.
Well in Colombia, led the charge growing 37% and 22% respectively.
Sorel is compelling new sneaker styles and a resurgence in the wedge category contributed contributed two phenomena of demand and brand heat.
Columbia's success is rooted in the brand's differentiated innovation value proposition and authentic outdoor heritage during the quarter Columbia continued its long history of innovation with several new product technologies, including the ods mesh fabric and outerwear and tech light.
Plush Cushing and footwear.
For the purpose of our revised financial outlook, we have removed any future sales to a Russia based distributor. Despite removing these sales we are reiterating our net sales forecast.
Since our last call our fall 'twenty two order book has strengthened in many other global markets.
Based on our encouraging start to 'twenty, two and lower share count we are increasing our full year earnings and diluted earnings per share outlook.
We remain focused on unlocking the tremendous growth opportunities, we see across our brand portfolio, while mitigating the impact of inflationary pressures and supply chain constraints.
We are also investing back into the business to drive favorable long term results I'll provide more detail regarding our updated outlook later in the call.
The confidence we have in our business as reflected in our elevated share repurchase activity during the quarter, we repurchased $217 million of common stock representing a 4% reduction in shares outstanding since December 31.
At the April Board meeting, our board approved a $500 million increase to our share repurchase authorization.
Even with this elevated share repurchase activity, our fortress balance sheet remains intact, we exited the quarter with cash and short term investments of $610 million and no bank borrowings.
Now I'll quickly review, our first quarter 'twenty to financial performance in more detail.
Our first quarter net sales were generally in line with our internal plan when combined with strong gross margin performance and lower than planned SG&A expenses diluted earnings per share exceeded our expectations.
First quarter net sales growth was broad based both our DTC and wholesale businesses increased 22%.
Within our DTC business brick and mortar increased 22% and e-commerce increased 21%.
Gross margin contracted 170 basis points with the largest driver being higher freight expenses gross.
Gross margin performance was ahead of our internal plan, primarily driven by a favorable full price selling environment.
SG&A leverage was able to partly offset gross margin pressure, resulting in only a 30 basis point decline in operating margin compared to first quarter 'twenty one.
Diluted earnings per share increased 23% to $1 three.
I will now review first quarter 'twenty, two financial performance and reference year over year comparisons versus versus the first quarter of 'twenty, one unless otherwise noted.
U S net sales increased 23% with our DTC and wholesale businesses, both increasing low 20% favor.
Favorable weather earlier in the quarter fueled strong late season cold weather product sales.
As the quarter progressed.
Combination of lean spring 'twenty to inventories at retail and the anniversary of prior year government stimulus resulted in sales growth moderating in March.
Our U S DTC business comped positively across all channels.
Traffic levels in our brick and mortar stores continued to improve as consumers return to in store shopping.
We achieved an important milestone in the first quarter with our U S outlet stores traffic returning to pre pandemic levels.
U S wholesale growth reflects higher shipments of our robust spring 'twenty two order book sales growth would have been even higher had it not been for later receipts and shipments of spring 'twenty two product overall. These these delays were largely in line with our expectations.
It's too early in the season to get a good read on spring 'twenty two sell through at our retail partners as many are still processing our shipments with that said we've been pleased with our recent DTC sell through we anticipate being well positioned with merchandise to meet consumer demand during the important spring holidays and summer sales month.
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For my review of International markets, I'll reference constant currency net sales growth rate.
During the first quarter most regions continued to see favorable recovery trends Latin America Asia Pacific region or L. A P net sales increased 14%.
China was flat in the quarter as favorable cold weather sales were offset by the impact of recent mandatory quarantines related to the continued COVID-19 outbreak in that region.
While the recent surge in virus cases creates near term uncertainty.
Long term, we remain focused on driving growth and enhancing the consumer experience in this important market.
Japan increased mid teens percent, reflecting favorable weather this year and the lapping of state of emergency declarations, which hindered sales in the prior year.
Korea grew high teens percent, reflecting favorable weather and strong outerwear performance.
L. A P distributor markets were up mid 60% driven by shipment of higher spring 'twenty two owners.
Europe Middle East Africa region, or EMEA net sales increased 42%. This was driven by robust growth in both the Europe direct and EMEA distributor business.
Europe direct grew high 30% fueled by a strong recovery in consumer demand across our wholesale and DTC businesses. Our performance in Europe direct markets has been encouraging and we have seen minimal impact from the Russia, Ukraine conflict in these markets to date.
Our EMEA distributor business was up low 60% driven by shipments of higher spring 'twenty two orders.
The bulk of our spring 'twenty two shipments to our Russia based distributor occurred in the fourth quarter 'twenty one.
A small portion of the spring 'twenty two shipments occurred in the first quarter 'twenty two prior to the onset of the conflict.
Canada net sales increased 27% with broad based growth across DTC and wholesale.
Growth was led by our DTC brick and mortar business, which benefited from the anniversary of prior year temporary store closures.
Looking at performance by brand I thought I'd break from tradition and start with Sorel This quarter given its outstanding performance net sales increased 37% despite supply challenges.
Driven by strong wholesale and DTC performance.
In addition to favorable cold weather product sales, we continue to see year round styles gained traction.
The Connecticut impact lay sneaker was the number one style in terms of units sold on Sorel Dot com highlighting the brand's growing presence in the multibillion dollar sneaker category.
As consumers return to in person and social activities Sorel has seen a tremendous resurgence in their wedge category led by the out and about collection.
So were all recently partnered with La based Alford coffee to create a limited edition collection.
Both sharelle and Alfred keep people moving forward and as co lab was designed to keep for those people on the go.
The collection is inspired by Alfred two most popular beverage they're world famous iced vanilla latte and ice matchup latte.
We see a clear path for Sorel to be a $1 billion brand and we are investing in demand creation and product to fuel that growth.
Turning to the Columbia brand net sales increased 22% in the first quarter growth was broad based across outerwear footwear and sportswear.
On the innovation front, our spring 'twenty two product line includes the launch of several new differentiated technologies and products.
We introduced outright extreme mesh fabric, which features next to skin comfort.
Ultimate Breathability superior waterproof and us and no added P F CS.
In footwear, we launched <unk> plush, our pinnacle cushioning experience. This responsive extra light phone provides long lasting cushioning, while an elevated midsole design improves heel to toe transition and maximizes comfort over uneven terrain.
We've also combined two of our top warm weather technologies in the new PFG terminal Deflector ice Buddy.
It utilizes omni shade Sun deflector to deflect sunlight.
And omni freeze zero ice to cool and Wick moisture away from the body.
<unk> to our new lightweight fabric. These two technologies deliver game changing Sun protection.
And cooling performance.
On the product partnership front Columbia partnered with Kith, a New York based boutique to watch an exciting spring collection in select U S and international markets. The collection featured iconic Columbia products and technologies interpreted through the KIF designs and lens.
The collaboration honored our outdoor heritage, while engaging our younger audience several of the top styles sold out online within an hour attesting to the equity of the Columbia brand in that space.
Columbia celebrated international Women's day by highlighting women, who inspire us from.
From the employees in our women's leadership initiative to our founder tough mother Gert Boyle.
Great fear spirit, no nonsense humor and high standards still guide us to this day Colombia.
Turning to our partnership with nonprofit girl Trek, which aims to unite black women by creating opportunities for them to work together.
In February Columbia sponsored athletes bubble Walsh kicked off the NASCAR season, with a second place finish up the Daytona 500.
At the event Columbia hosted an interactive booth showcasing Bubba is number 23 car wrapped in an omni heat infinity paint scheme as well as our recently released bubble Wallace collection.
Bubba collaborated with our product team to select fabrics color ways and design details to create a distinct collection inspired by his lifestyle and race team.
The Booth also featured a lifesize replica of intuitive machines, Lulu lunar lander, which utilizes omni heat infinity technology.
Ah lunar lander will carry that technology, and Columbia branding to the moon in the coming months.
Colombia will be the primary sponsor on Bubbas car in three ratio. This year at the recent Bristol Motor Speedways dirt Res bubble car featured a retro inspired theme capturing the essence of iconic Columbia styles with neon colors and bold color blocking congrats bubba on the strong start to this.
Season.
We would also like to applaud another of our Columbia Ambassadors, Luke Combs, who recently one country artists of the year at the <unk> Music Awards.
Luke and his wife are avid outdoors people and we're excited to partner with him on an upcoming hunting collection.
I'd like to congratulate Columbia sponsored athlete Cassie Sharpe, who won silver in the women's Halfpipe competition at the Winter Olympics. This is an especially incredible achievement is Cassie spent most of the last year recovering from an injury.
Our sponsorship of the USA curling team is off to a tremendous start the Columbia uniforms, and our logo where prominent throughout several weeks of Olympic competition and.
And the events captured the attention of new and avid currently fans alike.
I would also like to announce the hiring of pre shumate as the Chief marketing officer for the Columbia brand pre.
<unk> has extensive background in driving demand creation in multiple consumer categories and we're excited to have her leading the marketing efforts of the largest brand in our portfolio.
Shifting back to our emerging brands Prana net sales increased 4% sales growth in the quarter was constrained by late receipt of spring 'twenty two inventory.
Recently, prana and Sorel teamed up for an apparel and footwear colab.
This new collection includes sneaker and sandal styles that feature of the iconic design and comfort that Sorel is known for and an elevated active apparel collection with prana sustainability ethos.
Mountain hardware net sales increased 5% in the quarter sales growth was constrained by late receipt of spring 'twenty, two inventory, resulting in some shipments moving into the second quarter.
As a result, we anticipate mountain hardware second quarter net sales growth to exceed first quarter performance.
For spring 'twenty, two mountain hardware introduced the new core are shell collection.
This ultra light ultra packable stretch layer keeps wind and water out while it's super breathable fabrics provided near Weightless feel.
I'll now discuss our updated 2022 financial outlook.
This outlook and commentary includes forward looking statements.
Please see our form 8-K, and CFO commentary are financial Reserve review presentation for additional details and disclosures related to these statements.
The operating environment remains dynamic with significant growth opportunities as well as ongoing supply chain and inflationary pressures.
We are reiterating our 16% to 18% year over year net sales growth outlook.
We have removed any future sales to a Russia based distributor from our outlook.
This equates to about a 2% headwind to full year consolidated net sales.
We were able to offset this headwind given that our fall 'twenty two order book has strengthened and many other global markets since our last call.
As we noted when we gave our initial 2022 financial outlook, we have calibrated the forecast, we're giving you today to reflect ongoing supply chain bottlenecks as well as economic and market uncertainties.
To the extent, we can mitigate the supply chain constraints are market conditions allow we see potential upside to our financial outlook.
Gross margin is expected to contract approximately 130 basis points to approximately 53%.
We expect SG&A expenses to grow at slightly slower rate than net sales inclusive of strategic investments, we're making to drive long term profitable growth.
We expect operating margin to be in the range of 13, two to 13, 6% compared to 14, 4% in 2021.
Based on our year to date share repurchases, we now expect our diluted share count for the year to be $63 6 million shares.
This results in a diluted earnings per share outlook of $5 70 to $6.
<unk> 20 cents from our prior outlook.
For the second quarter, we anticipate mid single digit net sales growth and near breakeven earnings.
This lower level of sales growth reflects the removal of fall 'twenty two shipments to our Russia based distributor as well as the impact of the rise of COVID-19 cases in China.
Foreign teens on closures across several regions in China have reduced near term consumer demand in that market.
As we highlighted in our last call, we will be hosting an investor day at our campus here in Portland. This fall. The date has been set for September 22nd.
We look forward to showcasing the brand strategies and exciting products that are fueling our growth.
In summary.
I'm confident we have the right strategies in place to unlock the significant growth opportunities, we see across the business.
We're investing in our strategic priorities.
And that will drive brand awareness and sales growth through increased focused demand creation investments.
Enhanced consumer experience and digital capabilities in all 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 with that.
Absolutely. Thank you ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone pressing star two will remove you from the queue should your question to be answered and lastly, well posing your question. Please pickup your handset up listing on speaker phone to provide optimum sound quality. Please hold while we.
Poll for questions.
Again, that's still I'm wondering if you have a question or comment.
Yeah.
Okay. The first question is coming from Bob <unk> with Guggenheim. Your line is live.
Hey, Bob.
Tim can.
Can you you talked about the order books.
Improving since the last time, we talk can you elaborate a little bit more on that and can I think just in terms of.
How you see the inventory flow your inventories that you have on hand, but where do you see retail inventories are if you could give us little more color on that that would be helpful.
Certainly.
We take the bulk of our orders for seasons well in advance. So as an example for fall 'twenty. Two we took the bulk of the orders.
Call. It October November December and to a certain extent January .
January .
But we take orders beyond that period clear into them.
During the during the season itself. So we have visibility to the order book all the way through and it's it was quite strong and strengthened all the way through.
Order taking cycles. So we feel very comfortable where we are with the book.
We also know that based on the amount of inventory, we were able to deliver.
For fall 'twenty, one and the late winter weather.
In the early 'twenty two that we were.
We're going to have a very receptive.
Group of retail partners and consumers.
Looking for a winter winter merchandise.
Bob geographically that growth in the order book.
Theres a high concentration of growth that's focused in North America, where we have been stronger as well as in our European direct business.
Got it okay.
And I guess just in the in the inventory that you have on hand can you can you just tell us like with the increase in your order book how are you approaching.
Your DTC your outlet stores, a little bit more on the inventory as you think about the rest of the year.
Yes.
We're buying what our customers want from us what our wholesale customers want from us and we're buying merchandise also for the stores, but we have the ability to.
Put that merchandise.
Was required into the outlet stores later in the season. So we have a number of levers we can pull in the event that we've got inventory backup for whatever reason.
Got it thank you very much.
Eastbound.
Okay up next we have Jim Duffy with Stifel. Jim Your line is live.
Thanks, Hi, guys.
I wanted to start with.
On the footwear business first off congratulations on the Sorel momentum can you speak to the gender mix within Sorel and how that's changing is it one gender or the other that's really driving the momentum.
Then the strong footwear outlook for the year or is that led by Sorel or is it balanced and colombia's participating as well.
And then.
Lastly, I guess, what's the impediment to securing more capacity is it simply that the larger brands or are getting the priority as capacity comes online.
Certainly.
Well, let me tell you that.
It's led.
Quite evenly across the two brands, but Sorel is.
Is by far the fastest growing and it is primarily women's product that I'll have the numbers wrong that the scale is about right.
Probably in the neighborhood of 70% to 75% womens product in Sorel.
And especially in the first quarter, we had the benefit of some winter merchandise, but it's really the sneakers and the wages that are leading for Sorel, what's happening here.
So.
We're very excited about that.
And and the possibilities for it.
Olympias product line has been led with the Newton Ridge, which is a hiking style.
And that's been very popular throughout the pandemic than before.
One of our mainstays.
It's a terrific style done very very well for the company across the board and then as it relates to add enough inventory.
We're concerned specifically in the.
In the wedge is for Sorel is their specialty factories that need to build that merchandise. So it's more narrow for the company.
I would say the opportunities for the sneaker business, which is true.
<unk> factories are much more there are more factories able to make that kind of product, but we are building.
Relationships and strengthening our relationships with our with our Asian partners on footwear production and we expect that in 'twenty three will have.
As much as we want which would just frankly boiler today, yes.
Yes, Jim and just one other comment as it relates to our full year outlook for footwear.
Mid 20% growth and it's relatively balanced across both Columbia footwear and Sorel.
In the prior quarter, when we reported I think we indicated that <unk> would be up in la at or near the 30% that's come down a little bit and thats, mostly or entirely supply side effects with the anticipation of some of our fall 'twenty two production being a little bit late relative to the market if it happens to get in a little bit earlier.
Certainly what we're seeing from a consumer demand standpoint, and you'll see it in the first quarter, where demand demand quite strong balanced growth between the two brands.
Thank you guys.
<unk>.
Later.
Apologies for that the next question is coming from Laurence vessel ESCO with Exane. Your line is live.
Oh, good afternoon, and thank you very much for taking my question.
I wanted to ask about China.
China's a mid single digit percentage of your overall sales.
What are you baking into.
The <unk> guide of mid singles for China, and maybe for overall for the year in your revised guide.
And then.
I would love to hear if you're seeing I know China is an important hub for supply chain, if you're seeing any disruptions or are you seeing that the supply the factories remained open.
With the strict local COVID-19 policies in China.
Certainly well.
We all know that there's been quite a.
Amount of closures.
Almost everything in certain sections of China.
So we're not immune from that our headquarters are in Shanghai, and our our distribution center is in Shanghai. So we've been we've been hampered there certainly of late by the zero tolerance policy.
We expect that China is still will be a very important marketplace for the company and we're treating it as such.
Although the current.
Opportunities that we've that we expect to happen in that market are baked into the guidance. We've given you today as it relates to the supply chain. We have a very small amount of finished goods merchandise that enters the U S from China, but China is still a significant.
Provider.
Kona tree and raw materials.
For the company to be used in construction and other markets around the world.
So.
We have some visibility.
On the supply side for our factories and what we've given you today would indicate.
Where we expected.
The final <unk>.
Deliveries of merchandise to be yes, and then and then as it relates specifically to Q2, that's the one quarter, where I would anticipate China being the most impacted as you look at the first quarter on a constant currency basis. We were flat we had a really solid January February . So we were really encouraged by consumer demand early in the year, but as the corn.
Teens and Lockdowns begin to take effect that had a pretty detrimental impact on parts of our business in different geographies. So we've taken the Q2 down quite significantly and then obviously there is a fair amount of uncertainty and we baked in.
That into our outlook as well as best as we can.
Okay very helpful and then with two Q.
They're guiding.
Revenues mid singles gross margins down 200, so on a year over year basis. It looks like gross profit will be equal to last year.
And then last year's <unk> is about 61 cents of EPS. So I'm, just trying to understand how to square away.
Why you would have minimum EPS contribution to Q is there something like one time expense that you're baking into the SG&A.
We're just outsized profitability from China, just trying to figure that out to understand the one H EPS guide.
I think garage, it's effectively you know when you'll.
Look at our Q2 outlook at plus 5% on the top line is it really a function of the top line in changing our outlook relative to what we previously provided because previously indicated that the first half would be up high teens to low 20, and pretty balanced between the first and second quarter and with us having removed sales to.
Our Russian distributor from our outlook, coupled with what we just spoke of related to down the downward revisions to our China business. Those are fundamentally the two most significant changes we've made to our outlook aside from that in the first half we've actually increased.
Our outlook from a gross margin standpoint, as we've seen slightly lesser effect from ocean freight relative to what we previously estimated and continued strong oil price environment in which we're not as promotional so I think it's really a function of that top line and fixed operating costs of the business that create that breakeven point.
Do you see in the second quarter.
Very helpful. Thank you gentlemen, looking forward to the Investor day in September .
You bet. Thank you.
The next question is coming from Jonathan Komp with R. W. Baird. Your line is live.
Yes. Thank you maybe more of a near term question. When you look at the U S or Europe direct business.
The insight to what you're seeing from consumer behaviors more recently and then yeah.
When we think to the back half and the higher sales growth rate relative to Q2 could you maybe just bridge some of the pieces to think about to the higher overall revenue growth rate.
Yes, yes.
Yes, as it relates specifically to the U S. Europe from a direct to consumer standpoint, more recently, we saw solid demand throughout the throughout the first quarter as we began to lap certain of the economic stimulus certainly you would expect that.
Gross would be a little bit more subdued and it was for us, but we didn't go backwards.
Relatively on par with the elevated levels, we achieved last year, which.
Credibly pleased by that.
Europe , Likewise very strong demand.
Throughout the quarter and the D to C business and then.
As we've planned it for the balance of the year and as we've previously discussed we've moderated some of that growth thats factored in to the outlook.
That we've provided and how we've thought about that from in the back half of the year.
Yeah, and I just might comment that.
The growth in the outdoor business during the pandemic.
<unk> very significant and we expect that that's going to continue to grow people will spend more time outdoors.
As well as the casual <unk> of the workplace so.
No we're out here.
Hamzah lender.
But theres not many neckties.
Our building.
Yeah, there's a lot fewer here as well, but maybe as a follow up question for the Investor day since it'll be your first I know you've signaled.
The pathway to $1 billion or more of sales for Sorel, but are you planning to sort of lay out longer term financial targets for the whole business and when we think of the Columbia brand can you can you share kind of the main drivers that you see directionally.
For some of the growth drivers after 2022.
Yes, certainly it will be much more expansive when we get to the Investor segment, which we will have presentations from all of the brands.
During that period and there'll be focused primarily on the products that we're providing.
And how we expect our our products evolve and go forward with the consumer we're also going to talk about specifically as it relates to the Columbia brand the increase demand creation spend and focus that we're going to be that we're going to be talking about it. So we've talked for every quarter really about the increased investment.
And demand creation, and we will be able to show you.
Our plans as it relates to that which we believe that we've got the right product.
Right.
Investment in infrastructure to provide a very large growth for the company, which need to supercharge the brand awareness on all brands, but specifically on the Columbia brand.
And then John I think to your question on long term certainly we looked at it.
Included in that in that Investor day.
Our point of view.
We are driving growth across each of the brands and what that equates to from an overall growth and earnings algorithm perspective.
Great looking forward to that thanks again.
Thank you.
Alright of next we have John Kernan with Cowen Your line is live.
Good afternoon. This is krista zuber on for John .
Just wanted to circle back first on the SG&A and then I have one follow up.
The prior guidance as I understand it was first half SG&A to grow at a slightly slower pace than sales.
It's been revised.
Gotcha.
Net sales growth.
Okay. Thank you.
Give us a sense of what.
For the second half I guess of 'twenty true is it potentially possible then Q.
Had some leverage in order to get to the full year.
Guide, which is I guess modest leverage for the full year.
Yes, we do have we do have modest SG&A leverage planned for the full year. There is a slight increase in our SG&A outlook for the year and that's going to be mostly related to inflationary pressure and within within inflationary pressure is impacting many facets of our business.
Least of which is wage pressure and we've made wage adjustments.
In the business and certainly you are seeing that as it relates to ocean freight.
And we've also seen increases in oil prices that are equating to fuel surcharges bunch of adds up in our gross margin, but it's effectively the the inflationary pressures impacting that SG&A line.
Okay, great. Thanks, and then just on the pricing actions I think I recall that.
For the first half you were looking for at least for spring 'twenty, two sort of a mix.
I will get some pricing increase.
I'm planning sort of high single to low double for fall 'twenty, two I guess.
Any sort of pushback or what's the reception been so far in NGL anticipate further increases into 2023 and you start to build orders initially for for spring 2023. Thank you.
Yes, well, we don't obviously, we don't have any any consumer reaction to fall 'twenty, two yet, but the reaction from our dealers, which we take as a site for the consumer was quite good.
<unk> and the strength of our order book.
For spring 'twenty, two the modest increases.
We have not yet been.
Impactful and so our expectation is that consumers are expecting.
Inflation across the product categories that they buy.
<unk> been responsive so far.
Okay next we have Mitch commits with Seaport Global your line is live.
Yes, thanks for taking my questions.
Got a couple first off on gross margin. So you guys. Obviously raised your outlook for the first half and Jim I think you mentioned that was largely due to ocean freight in full price and becoming better than previous expected I haven't been able to do the math on the back half yet as to whats implied but any changes to your gross margin on that.
Back half, but any thoughts on how you view full price selling promotions ocean freight things like that.
The back half versus maybe what you were thinking after the last quarter.
I think the changes in the back half, we're going to be pretty modest most most of what we changed in the gross margin outlook is going to be in the first part of the year due to the two factors I talked about in terms of.
The ocean freight and the less promotional effect.
And as we look out at the.
The balance of the year here, we're normalizing the effective promotions and building in a bit promotions as we lap those we also in the last month or so here finalized our ocean freight contracts. So that gives us some confidence in expectation of not only securing allocation.
<unk> directly with the same ship lines, which is a bit inverted relative to the freight forwarders that we had to book through last year. So there should be more efficient for us and then with regard to the rate on.
Those negotiations.
Ben over the course of the last several months our ocean freight rates by four times, what you would consider kind of normal or prior levels and with the with the negotiations will be in much better shape, we certainly won't be back down to <unk>.
Free.
Inflationary rate increases but.
Much further below where we are today, so that'll be an offset.
At a gross margin tailwind, particularly as we get out into the into the fourth quarter and that's essentially where we'd looked at it when we last gave an outlook in February .
I think your prior thinking on pricing for fall was that the increases would offset.
The costs with ocean freight being one of them.
I assume the pricing hasn't changed so are you now thinking that you're more than offset those class or is it are you now seeing maybe more inflationary pressures on wages raw materials that are maybe offsetting any benefits from ocean freight versus kind of your prior thoughts.
Yes, we're seeing it as you know we're seeing increases across the board in the SG&A functions as well as.
The cost of labor et cetera. So.
Yes, if we're just isolating strictly on the product on the product input costs excluding freight.
We've covered those increased.
We've more than covered those increases with price and so with freight coming down in the latter part of the year with our new ocean contracts that will provide a bit of a tailwind. So we would anticipate that.
Third quarter continues to be a bit of a margin headwind overall.
For the fourth quarter, knowing that that ocean freight is playing a little bit more in our favor that our fourth quarter gross margins are actually better year on year than last year.
Okay and then just a quick question on Sorel, Tim do you you highlighted obviously you lead with it with your brand discussion you talked about it being a $1 billion opportunity you highlighted wedges in sneakers is there any way you can say you know what the split is these days between kind of spring summer versus fall holiday in terms of the mix and what that opportunity might might be.
Overtime.
Well certainly.
The winter product the Sorel, so famous for and has historically been the exclusive product with it.
Made is so expensive.
But we can't offset completely with spring.
Whats the pricing on those sneakers, but the opportunity glu.
Globally really to increase the revenue on Sorel is going to be led by the <unk>.
Sneaker and the more fashion styles.
So today I'd have to get back to you with it.
More accurate split certainly the future will be.
Much higher womens.
And much higher sneaker.
In fashion footwear.
Footwear.
Okay. Thanks, guys. Good luck.
The next question is coming from Camilo Lyon with BT <unk>. Your line is live.
Hi, This is mckenzie with penumbra kilo, thanks for taking our questions.
My first question is just on supply.
Supply chain and I, even talked about ocean freight costs kind of alleviating the back half, but in terms of actual believes you're seeing at the port.
Can you kind of talk about where that kind of stands today has it improved has it worsened. Thank you Allison.
Good morning.
Theres been modest improvement.
But it's still far away overall logistics lead times are far greater than they were relative.
Where we were just over a year ago.
The way, we've thought about that as we look out at the balance of the year.
It's really keeping it relatively stable with maybe some modest improvement which is part of the reason why when we think about our outlook for the year on the order book that we've taken from our wholesale customers and the revenue forecast, we put out there.
As adjusted that in part just due to certain of the uncertainty and risk associated with the supply chain and then just overall economic environment.
Perfect. Thanks, and then.
In terms of I think I saw on that.
Haynesville presentation $20 million incremental.
Incremental SG&A investments, you're making can you just kind of talk about it in detail kind of what those will be I think there'll be some digital but just any color there would be helpful.
Yes, there's a there's a handful of investments that are included in that $20 million.
Can be comprised of the combination of digital incremental demand creation as we bring our demand creation up to 6% and then we've got some some retail stores branded stores that we're opening in the year that are also contributing to that from a digital perspective, I would say that digital is sort of far reaching across the company, but predominantly we want to make sure that we're focused on.
The product onto marketing on the consumer so amongst the tools and capabilities is capturing.
An improved level of information around the consumer and being able to have data and analytic capabilities to build a feed that back into our product engine and our marketing team. So that's an example of one of many digital based investments that we're focused on.
Great. Thanks, so much.
Up next we have a riccio serna with UBS Your line is live.
Great. Thanks.
Thanks for taking my question I wanted to ask I don't know if you have talked about or given a figure about the revenue impact from supply chain constraints and specifically in the U S wholesale business.
And also wanted to ask about the gross margin outlook in the CFO commentary I had mentioned that one of the factors.
We'll drive that.
The decline or the contraction in gross margin is on favorable unfavorable regional mix shift so I'm trying to understand what would that be coming from.
From what I can recall also.
The test that the U S and Canada R. R.
Market.
We outperformed in terms of sales growth. Thank you.
Yes, I think on the on the region and mix our region and channel mix side of your question.
Part of that is due to the fact that our wholesale business is growing at a faster rate than our direct to consumer business on the year.
That's implied in the outlook and that's a little bit lower.
Gross margin so that can be part of the channel component of that and then as you think about the region I think our.
We look at our region mix, our highest gross margin region is going to be in Latin America Asia Pacific region, and that's just given the higher concentration of retail based businesses, there relative to North America, and Europe , and with North America, and Europe growing at a faster rate again, thats going to create a little bit of a a little bit of a mix shift.
And then on the part of that question as it relates to the supply chain Mauricio you ask that one more time I kind of missed the context of it.
Yes.
Gave out any figures out what was the revenue impact from exchange.
Strains.
Yes.
Nothing specific.
And to the degree there are timing shifts.
These are shifts of spring deliveries that are coming in quite a bit later last year, knowing that we have been impacted by late later or longer logistics timeframes, coupled with the Vietnamese factory closures last year. So we've got revenue shifting effectively out of Q1 and into Q2.
Previously provide an indication that our spring order book was.
Up at or near the 30% level and you can see we delivered 20 plus percent in the quarter. So.
It gives you a little bit of an indication of some of the shifts and then part of the reason why as you look at our second quarter outlook, its plus five youre not necessarily see that catch up and that's in part because we've reduced the Q2 outlook for the combination of the Russia business in backing those sales out coupled with.
The reduction in our China business.
Got it understood.
And I'm sorry, just one last quick last.
Follow up on on China.
Is your guidance I mean, just trying to understand the guidance implies that at some point in three accused Q3 things normalize or like what is the timeframe that.
The company is considering in it and its guidance.
Well, we're certainly looking at the second quarter as Dan.
Most challenged and that due in part because we've got our wholesale dealers they've not been able many of them are not being able to operate either so we're not likely to ship.
The bulk of the remaining of our wholesale order book as we get out into the third and fourth quarter. There's a lot of uncertainty we have.
We certainly contemplate a recovery in that market, but not not necessarily where we planned coming into the year.
Got it thank you and congratulations on the results.
Okay up next we have Alex Perry with Bank of America. Your line is live.
Hi, Thanks for taking my question. So I just wanted to ask a little bit.
To give some more color on the phasing of the sales guidance in the first quarter came in well above but Q2 comes down quite a bit and then it seems like the back half comes up with.
The Q2 guide is that all Russia, and China is there something out sort of embedded in there and then what are the assumptions and the rebound in the back half.
So as it relates to the <unk>.
Due to the takedown, it's almost entirely related to those two factors between Russia, and China to a lesser degree there might be some timing shifts as we begin receiving and shipping our fall season in that June timeframe, but that would be that would be much smaller and then Alex as it relates to the back half of the year.
We do anticipate that our fall deliveries, our fall inventory receipts and shipments are much earlier than they were last year, albeit not box.
We would consider normal levels, but with that in mind that would skew revenue growth pretty heavily to the third quarter still growing in the fourth quarter.
And that's really going to be.
Acceleration of growth if you will in the back half of the year a lot of that is just going to be driven by the strength of the overall.
Wholesale order book.
<unk> business is growing at a more modest rate in the back half of the year.
I also might point out that Q2 is our lowest quarter of the year from a revenue standpoint, so any any slight.
Changes in mix will be impactful.
Great and then could you just give us a little more color on maybe how the DTC business has trended.
In the quarter I think you may have called out some moderation in growth in March was that mostly sort of stimulus comp and then what is sort of embedded in the <unk> guidance in terms of DTC are you sort of assuming that that sort of trend right. The moderation you saw in March sort of continue.
Or what's sort of embedded in terms of EDC I guess, both for the second quarter and for the balance of the year.
Yes, well as you know.
We consider ourselves to be a wholesale company. So we don't provide many of the <unk>.
<unk> details that a retailer would provide but we're seeing solid numbers out of our kind of our own DTC business.
And it's impacted as well.
The.
Delivery issues that we've been talking about during the call. So.
The expectation is that.
The business will continue to be continue to grow and when we when we.
Present, our merchandise in our own stores the way, we'd like to have presented everywhere.
We see great results.
Alex maybe just a little bit more color in January and February were exceptional months aided.
<unk> I think in part by Cold weather.
Specifically to U S D to C and then March.
As we began to lap the stimulus.
Business did not contract.
We held our own and so we're quite encouraged by that.
The increase in volume during that during that stretch and then just in the last two weeks as we've begun to get further away from when the stimulus checks or.
Written and the public we've seen business be quite healthy and strong and I think Thats Testament to getting our more recently getting our spring product out to retail and on the floor for the consumer.
Perfect. That's incredibly helpful best of luck going forward.
Thanks.
Once again, if there are any remaining questions. Please press star one on your Touchtone phone them up next we have Paul.
<unk> with Citigroup Your line is live.
Hey, Thanks, guys can you just quantify what the size of the Russia business was in the second quarter.
Last year and does that business typically greater than <unk> versus the <unk>.
Quarters in the back half and any quantification you can provide there and then also I think you mentioned in your presentation. There are some year over year unfavorable changes to bad debt and just curious if you can.
Talk a little bit more about what drove that thanks.
Yeah as it relates to Russia will be down at a quarterly breakdown of that there was an indication that Tim provided in the prepared remarks.
It equates to 2% to 2% impact on our full year outlook.
On a full for a full year basis, I would say that the second quarter is typically the <unk>.
Most significant shipping quarter into the Russian distributor because thats when we shipped the bulk of our fall product. So it will have a disproportionate.
Impact would you see that in the outlook that we're providing and then as it relates to the unfavorable comparisons on bad debt, that's going to largely relate to the fact that in 2020, we booked up.
Serves for bad debts in light of the risks from the credit environment in the midst of the pandemic in 'twenty. One we released some of those reserves because things didn't pan out as bad as we thought they would so we're just lapping against more difficult comps, having release reserves last year and more of a kind of a normalized environment. If you will this year.
And where are your current reserves relative to like a pre pandemic sort of level.
They are on par with where we were from a pre pandemic perspective and that'll be in our it maybe I think it is in the release document. If you go back into the balance sheet. There youll see it is on par with where we were back in 2019.
Got it great. Thanks, and good luck guys.
Thank you.
If there are any final questions. Please press star one on your Touchtone phone.
Okay. We have no further questions in queue I'd like to turn the floor back to management for closing remarks.
Well. Thank you all for listening and we're very anxious to show you the products and plans.
For the future of the business in September right here in Portland, So we hope you can all make it.
Thank you for your attention.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.