Q2 2022 Columbia Sportswear Co Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Columbia Sportswear second 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 house.
Andrew Burns, Sir the floor is yours.
Good afternoon, and thanks for joining us to discuss Columbia sportswear company's second quarter results.
Listen to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation, explaining our results.
Documents are also available on our Investor Relations website, Investor Columbia Dot Com.
With me today on the call are Chairman President Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief administrative Officer, Peter Bragdon.
This conference call will contain forward looking statements regarding columbia's expectations anticipations beliefs about the future. These.
These statements are expressed in good faith are believed to have a reasonable basis.
However, each forward looking statement is subject to many risks and uncertainties actual results may differ materially from what is projected.
Many of these risks and uncertainties are described in Columbia's SEC filings.
Caution to 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 to changes in our expectations.
I'd also like to point out that during the call. We may reference certain non-GAAP financial measures, including constant currency net sales for further information about non-GAAP financial 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.
Included in our earnings release, and its index of our CFO commentary financial review.
Following prepared remarks, we will host a Q&A period during which we will limit each caller to two questions. So we can get to everyone by the end of the hour now I'll turn the call over to Jeff.
Okay. Thanks, Andrew and good afternoon, everyone I hope everybody is well.
As I review, our first half 2022 financial performance in the current environment I'm confident that our strategies are working and we.
Tremendous long term growth opportunities ahead.
In the first half Sorel net sales surged, 33%, Colombia grew at 12% Mountain hardware grew 11% and product grew 3%. These results reflect the strength of our combined brand portfolio.
The Columbia brands differentiated innovation value proposition and outdoor heritage uniquely position the brand to capitalize on the popularity of outdoor activities.
Sorel continues to outperform the marketplace led by the brands all do summer and year round styles.
Mountain hardware product driven resurgence is underway with innovation fueling continued growth.
From his leadership continues to sharpen the brand's focus on the opportunities ahead.
Globally trends vary greatly by region, Canada, Europe , direct Japan, and Korea, All had excellent first half performance. These markets continue to realize a healthy pandemic recovery curve with strong consumer demand.
In other regions, our business was impacted by external headwinds in.
In China.
The impact of recent zero carbon policy restrictions resulted in a sharp net sales decline.
We anticipated.
Our EMEA distributor business also declined substantially reflecting the impact of the ongoing Russia, Ukraine conflict.
In the U S. We generated strong first half net sales growth. Despite later receipts and deliveries of spring 'twenty two product.
Which constrained inventory availability and sell through.
The U S market also faced difficult comparisons as we anniversary government stimulus, which boosted consumer demand last year.
We remain focused on unlocking the growth opportunities, we see across all regions as we navigate these market specific challenges and supply chain constraints.
As we look forward I believe it's prudent to take a more conservative approach to our financial outlook for the balance of the year.
As the second quarter progressed, it became increasingly clear that the operating environment is evolving and.
In the U S inflationary pressures rising interest rates and recession fears are weighing on consumer and retailer sentiment.
Our updated outlook contemplates higher order cancellation risk and more conservative DTC assumptions.
It also assumes a more promotional environment as the marketplace seeks seeks to rationalize inventory levels.
We have navigated numerous economic cycles of our companies 84 year history, I am confident that our differentiated brand portfolio operating discipline and strong financial position will enable us to effectively manage this cycle.
We are monitoring retail trends in our order book against this uncertain backdrop.
I'm confident in the quality of our inventory, which includes a high proportion of evergreen styles that did not change season to season.
This reduces our exposure to promotional pricing.
We also have a fleet of outlet stores, which enables us to sell the remaining high quality inventory profitably.
As the demand environment shifts, we're focus on restraining expense growth to manage profitability.
I'm excited to launch our innovative product into the marketplace as we head into the important fall season.
Outerwear and winter merchandise inventories are very lean at retail after an exceptional sell through last season.
We have a robust fall 'twenty two order book to deliver against and retailers are keen to get initial floor sets in place ahead of weather driven consumer demand.
I'll provide more detail regarding our updated outlook later in the call.
From our review of second quarter, 2022 financial performance I will reference year over year comparisons versus second quarter 2021, unless otherwise noted.
When reviewing second quarter year over year growth rates and margin performance. It is important to remember that the second quarter is our lowest volume sales quarter and small variances can result in large year over year changes in profitability that may not be indicative of the underlying business trends.
Overall, our second quarter results were mixed net.
Net sales growth of 2% reflects robust growth robust growth in many markets tempered by essentially dull, Russia based distributor shipments zero COVID-19 restrictions in China, and foreign currency exchange headwinds.
Net sales were below our outlook, primarily reflecting shortfalls in the U S and China.
Right. The shortfall, we were able to slightly exceed our operating income forecast.
By channel wholesale net sales decreased 1%, including the impact of substantially lower Russia based distributor net sales.
Excluding distributor markets global wholesale increased low teens percent, reflecting shipments of our robust spring 'twenty two order book.
Our DTC business grew 5% year over year in the second quarter, driven by 11% brick and mortar DTC sales, partially offset by a 5% decrease in DTC E Commerce net sales.
Brick and mortar growth exceeded e-commerce growth in the quarter in part due to consumers increased desire to shop in store.
E Commerce sales declined in the quarter due to lower prana and China E Commerce sales.
Gross margin contracted 240 basis points with the largest driver of contraction being higher inbound freight expenses.
Gross margin performance was roughly in line with our forecast and the overall promotional environment remained favorable during the quarter.
SG&A expenses increased 7% and represent 48, 7% of net sales compared to 46, 2% of net sales in the second quarter of 'twenty one.
The increase in SG&A expenses reflect.
Broad based growth across the enterprise to support sales growth as well as technology and supply chain capabilities.
Personnel expense growth was driven by incremental head count as well as wage increases.
This performance resulted in a one 5% operating margin and diluted earnings per share weapons.
I will now review net sales performance by region.
For international markets, I will reference constant currency growth rates and please note that strength of the U S. Dollar resulted in a 10 point translation headwind to international direct markets and a two point headwind to consolidated net sales.
U S net sales increased 9% with wholesale increasing low teens percent and DTC, increasing low single digit percent.
U S wholesale growth reflects shipments of a robust spring 'twenty two order book.
Early season sell through of spring merchandise was impacted by later shipments of inventory stemming from Vietnam factory closures in 'twenty, one and logistic delays.
As the spring season progressed mounting inflationary pressures and economic uncertainty appear to tempered demand in the marketplace.
Retailer on hand inventories increase year over year as we anniversary prior year inventory shortages.
With higher marketplace inventories and a rapidly changing economic environment retailers are rationalizing their inventory needs.
Despite these pressures retail product margins retailer product margin remained healthy in the second quarter.
Low single digit U S DTC growth reflected higher brick and mortar net sales, partially offset by a modest decline in E. Commerce net sales our DTC business remained generally healthy across both channels in April and May before softening in June .
Latin America Asia Pacific region, or L. AEP net sales increased 2%.
China was down high 40% in the quarter as the market faced strict restrictions due to its zero Covid policy.
Our China headquarters and distribution center located in Shanghai, which was locked down for several weeks.
In addition to store closures, we were unable to fill fulfill e-commerce orders for a lengthy period of time.
Shanghai begin began reopening in June several weeks later than we initially expected.
Retail traffic trends are still recovering.
On a positive note. The 618 online sales event was a success with double digit year over year growth.
Japan increased mid 30% driven by strong consumer demand and the lapping of state of emergency declarations, which hindered sales in the prior year.
Korea grew high teens percent led by strong DTC performance.
Improving our retail operating efficiency is contributing contributing towards six our success in Korea. The team continues to focus on enhanced in store marketing and heightened <unk> productivity.
The pandemic has reinvigorated consumer interest in outdoor activities in Korea during the quarter Columbia participant participated in the go outdoor Camp Festival.
Attendees celebrated camping and outdoor life and toured Columbia's high energy installation.
L. A P distributor markets were up low double digits percent driven by shipment of higher fall 'twenty two orders.
Europe Middle East Africa region, or EMEA net sales decreased 30%.
This decline was driven by substantially lower sales to our Russia based distributor, partially offset by strength in our in our Europe direct business.
Europe direct grew 30, low 30% fueled by Columbia brand momentum and a recovery in consumer demand.
We experienced strong performance at brick and mortar across both DTC and wholesale channels.
Robust growth with strategic partners in the sporting goods channel was notable.
Our EMEA distributor business was down low 70%.
Canada net sales increased 74% with high growth across wholesale and DTC as we anniversary prior year pandemic related disruptions.
Looking at performance by brand Sorel was our fastest growing brand in the quarter net sales increased 24% despite supply chain challenges driven by strong wholesale and DTC performance.
By category growth was given.
Growth was driven by year round and summer categories, including sneakers and.
In sandals.
So where else potentially become a billion dollar footwear brand is evident and we're investing in demand creation and product decide to fuel that growth.
Turning to the Columbia brand net sales were flat in the second quarter.
Strong growth in many markets was tempered by essentially no Russian based distributor business.
Covid restrictions in China.
Foreign currency exchange headwinds.
On the product partnership front.
Were continuing our successful collaboration with Disney and Lucasfilm was another star Wars offering.
This collection, which will be released in the coming days, we've combined the iconic PFG Tamiami shirt was elements of classic Star Wars Comics. The shirts print features legendary Star Wars characters Chewbacca are too detailed and Han solo.
Columbia recently collaborated with Matt happy to launch a new summer 'twenty two outdoors collection Matt.
Matt Happy as a global lifestyle brand on a mission to make the world a more.
We're optimistic place.
The collection brings awareness to the connection between spending time outdoors and improving our mental health.
<unk> features a variety of styles and silhouettes that incorporate colombia's innovative outdoor technology.
During the quarter, our number of Columbia products have been featured in consumer and industry publications.
In apparel Colombia's innovative Sun protection technology was featured in gear patrol and outdoor gear laugh articles highlighting the terminal deflector zero Buddy.
The silver rich long sleeve shirt, and the PFG titled T Honey.
Columbia's backbone place made outside magazine's list of best places of 2022.
In footwear, both travel and leisure and outdoor gear lab featured the new rich hiking boots in their list of best hiking boots for women.
Earlier this month Columbia sponsored athletes bubble Walsh unveiled a bright new look to his number 23 car for the NASCAR Cup series race at Road America. The car featured the PFG Fischbach scheme with dozens of fish, forming the red stripes of the American flag down the side of the car.
Yeah.
The PFG fish flag is our top selling baseball cap with millions of units sold suggest launch.
The ball caps are one of our fastest growing products.
We believe this speaks to the consumers' brand affinity for Columbia, combined with a product that celebrates the love of country and outdoors.
We will continue to bring products to market that celebrate prices and build emotional connections with consumers.
As we look forward to this fall the Columbia brands top global priority from a product and marketing standpoint is continuing to build momentum around omni heat infinity.
We will be running a worldwide integrated marketing campaign, featuring omni heat Infinity is the gold standard in warrants.
Focus on how the technology works and why it matters for consumers.
As you know Pauline Felicia one of the largest outdoor product categories. We believe the introduction of omni heat. He looks this fall will bring disruptive innovation to this largely undifferentiated categories.
On the helix is the first of its kind patented visible technology.
It utilizes highly efficient installation sales to maximize warmth and provides breathability.
Shifting back to our emerging brands Prana net sales increased 3% sales growth in the quarter was constrained by late with street of spring 'twenty two inventory.
The prana team is working to reposition the brand in the marketplace in the coming seasons.
Mountain hardware net sales increased 18% the brand had several product highlights of the quarter.
For spring 'twenty, two mountain hardware introduced the new core Air Shell collection. This ultra light ultra Packable stretch layer quickly became mountain hardware top performing shell.
The New York Times Wire cutter product review website concluded that mountain hardware mineral King temp is the best two person car camping tab.
The <unk> features an ultra light suspension system and was described as one of the easiest tenths in the market to setup.
Before moving to our financial performance excuse me.
Before moving to our financial outlook.
Like to note. The recent appointment of Cristiana Smith to our board of Directors Cristiana is currently the principal at Lovejoy advisors, where she helps brands digitally transform their business. She also serves on the board of two other publicly traded companies.
I look forward to leveraging her insight to help us grow our company.
I'll now discuss our updated 22 financial outlook.
This outlook and commentary include forward looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures relating to these statements.
Based on the current environment.
And growing economic uncertainty, we believe it's prudent to take a more conservative approach to our financial outlook for the balance of the year.
Supply chain challenges remain elevated and our.
Are anticipated to continue throughout the rest of the year.
We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners.
West Coast Port Labor contract negotiations could further complicate inbound freight logistics.
We have diversified our port exposure and expressed and expect less than 40% of our second half inventory will go through west coast ports covered by the <unk> labor contract.
Our updated outlook contemplates higher order cancellations at a more conservative DTC assumption as well as a more promotional environment as the marketplace seeks to rationalize inventory levels.
We have also taken a more conservative outlook in China for the balance of the year as Covid restrictions are impacting the markets.
All in the innovation of Ukraine.
I was taking any new orders from a Russia based distributor, Russia, Ukraine and Belarus.
As we disclosed last quarter the company had preexisting contractual obligations for fall 'twenty two orders taken before the invasion.
Given the uncertainty surrounding these fall 'twenty two orders, we previously removed any of those sales from our financial outlook.
Our updated financial outlook now includes a portion of this distributors contracted fall 'twenty two orders being realized in the second half of the year.
Foreign currency exchange win headwinds are now expected to unfavorably impact full year net sales growth by 3% and diluted earnings per share by 15 to 20.
Based on these and other factors, we now forecast net sales to grow 10% to 12% year over year.
Gross margin is expected to contract.
Between 180, and 210 basis points.
SG&A expenses are forecast to grow roughly in line with net sales.
We expect operating margin to be in the range of 12, 1% to 12, 8% compared to 14, 4% in 2021.
This results in a diluted earnings per share outlook of $5 to $5 40.
Based on our year to date share repurchases, we now estimate our diluted share count for the year to be 63 million shares.
For the third quarter, we anticipate net sales growth of approximately 20%.
This high level of sales growth is primarily driven by the sale of our fall 'twenty, two order book and modest DTC growth.
As we highlighted on our last call, we'll be hosting an investor day at our campus here in Portland on September 20 <unk>.
We look forward to showcasing the brand strategies and exciting products that are fueling our growth.
Invitations for this event will be sent out in the coming days.
Before my closing remarks, I'd like to highlight the fact that we recently released our 2021 environmental social and governance report, which is available on our website at.
I'd encourage you to review the report, which outlines the progress and accomplishments that we made empowering people sustaining places and promoting responsible practices.
In summary, I am confident we have the right strategies in place to navigate this dynamic environment.
Lock the significant growth opportunities, we see across the business.
We're investing in our strategic priorities too.
Drive brand awareness and sales growth through increased focused demand creation investments.
Enhanced consumer experience experience and digital capabilities in all of our channels and geographies.
Expand and improve global direct to consumer operations with supporting processes and systems and invest in our people and optimize our organization across our portfolio of brands.
That concludes my prepared remarks, we welcome your questions 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 of removing from the Q should your question be answered and lastly, while posing your question. Please pickup your handset up listening on speaker phone to provide optimum sound quality.
While we poll for questions.
And the first question is coming from Bob <unk> with Guggenheim. Your line is live.
Hi, Tim.
Hi, guys.
A couple of questions from from your perspective on I guess, if we could start on the inventory side.
Can you just give us a little more color around the composition of the inventory you know maybe some color on.
Cancellations.
How you're approaching it will you will you just solely use your outlet business on on the inventory I don't know if there's like buckets of sort.
So you said, you've got a lot of evergreen type merchandise in there, but any more color on the inventory and sort of plans for disposition I think it would be pretty helpful for us and any more color on the order book and any early numbers on twenty-three. Thanks.
Sure.
Well as you remember we're at seasonal business. So we have a high percentage of our inventory today is is fall fall inventory and we're looking at global.
Lack of inventory at retail in winter merchandise. So we're confident that we've got.
Good opportunity to fulfill our order book and get that merchandise into retailers, we're just a little concerned about that.
The state of the consumer at this point and so.
So thats why we noted the potential for cancellations later in the season.
We have a strong balance sheet, we have multiple methods to liquidate our inventories not only through the value channel and some of our regulatory retailers in terms of Closeouts, but also through our own extensive.
Outlet chain.
And so that's how we're looking at it.
Got the potential to be to improve our situation and but a lot of it is depending on what the consumer does in the next few months as it relates to the order book, We've got a high percentage of our order book in already for fall for excuse me for spring 'twenty three and it shows that we're going to grow them.
<unk> 23, so we're.
With that we got a lot of great opportunity ahead of us.
Bob and I would just add as it relates to inventory.
Composition.
The quality of our inventory remains quite healthy.
Aging.
As a highlight current in line with where we've historically been certainly inventories a bit more elevated we're carrying a bit more access than we traditionally do but as Tim touched on we believe it's very manageable and we would certainly look to leverage our outlet stores and buy more tightly to anticipated demand as we look out to next year.
<unk> and leverage those outlets to sell that product profitably.
Great. Thank you very much.
Okay. The next question is coming from Jim Duffy with Stifel. Your line is live.
Thanks, Good afternoon, thanks for taking my questions.
I wanted to start just digging in some on the second quarter can you help us understand how much the U S was light of expectations in the quarter and how much of that was change in demand.
End market demand versus product flow issues that caused you to miss from shipment.
Yeah, Jim as it relates to our second quarter versus our internal outlook, we were off kind of a high a mid to high teen number and half of that was associated with.
China, and the lockdowns lasting longer in duration than we had initially anticipated the ballots for the half call. It in the $8 million to $10 million range that was U S related and part of that was wholesale base with regard to.
The cancellations that we thought I think you know those cancellations are by and large what Tim had reflected in terms of being late and delivering supply to the marketplace.
And the early part of the quarter and then some softening that we saw in the latter part and then Dana team made up of component of that as well we touched on.
In the month of April and May our DTC business performed quite well.
We got into the month of June we saw some declines in traffic levels, where that thought, but that's essentially where youre seeing the.
Our performance relative to.
The guidance, we previously provided.
Understood and then can you help us think about spring product inventories.
The channel currently.
In the CFO commentary document there was some mention of anticipated accommodations are you indeed building.
Building that into the guidance that you've provided for.
For the back half.
Well as it relates to as it relates to spring inventory Jim.
We did take incremental cancellations relative to what we historically would have given where marketplace inventories stand at this point in time until we really see them as being much more a function of cancellations as opposed to.
Anything significant in the way.
Accommodations of returns there until a lesser extent theres some of that but by far and away. The more significant element that's impacting us and we've been tentative to this as well we want to make sure that we're keeping the marketplace clean.
In terms of about inventory that we have out there. So we've been proactively working with our with our retailers throughout the season.
Helpful. I'll leave it at that thank you guys.
Operator can you please assist us.
Okay.
Okay.
Operator.
The next question is coming from Laurent that's Alaska can you Harriss Laurent with BNP, Yes, I can.
Thank you very much for taking my question.
I was hoping to ask about the full year guidance.
600 basis points midpoint full year <unk>.
Jim I think about 180 bps is FX versus the last CFO commentary.
Got it to about 420 beds.
Of our pressure here, how do we think about that from from a brand perspective, I think your CFO commentary talks about.
That Sorel is still the fastest growing brand, but is there any really step change function in one particular brands and then another way to look at it is I think you gave us some high level color about regions and the CFO commentary, but how do we think about just that that bridge of that 420 bps decline from a geo perspective.
Yeah, the reduction in our in our outlook on the years predominantly revenue and to a lesser degree related to gross margin.
And from from a revenue standpoint, it's probably a bit more weighted.
On the on the Columbia side.
The Columbia brand is the only brand as an example that we distribute in China. So there's going to be a factor related to that the size of the Columbia business internationally and when you think about some of the currency pressures that's going to.
Also pertain to the Columbia brand, so by and large it's going to be in that part.
Laurent the other emerging brands are certainly going to have.
Reductions as well because a lot of the pressure that we're anticipating.
Our second quarter results were still quite strong. This is really in anticipation of the broader economic climate, particularly here in the U S. So when we took the top line down in our full year guidance aside from currency and China. The lion's share of the balance of the change in U S based.
Our business internationally.
In U S and other of the Asia markets ex China are.
Continuing to perform quite well.
Very helpful. Jim and then in your CFO slides are calling for about 20% growth in <unk>, which would imply for Q, we'd be up low single digits.
Is the 20% growth rate that you're calling for higher lower or equal to what you expected 90 days ago and on <unk>, what's driving that slowdown is it driven by wholesale order cuts, which I think you alluded to or just just increased caution from them for the macro factors and with the economy.
Yeah, a lot of so the.
The difference between Q3, and Q4 Lora is largely going to relate to timing shifts and the delivery of our wholesale shipments for the fall 'twenty two season.
Call. It a year ago, we were late in getting fall 'twenty, one product to market and so it was a bit more weighted to the fourth quarter, we've seen some improvement and our expectations around that.
Receipt of inventory and ship it out to our customers, albeit not where we'd like it to be and it'll be late relative to historical.
Terms are better than where we were last year and so the the.
<unk> share of the 20% growth is going to be exactly that just the shift in our expectations around around the wholesale business and then how much that's changed.
Versus where we were 90 days ago I don't have that.
I don't have that handy.
No worries. Thank you for that and if I can squeeze in one on the G. M last question here.
Obviously, you've notched down the gross margin by 100 bps for the full year, but if.
If I can kind of bridge the 20% growth for top line and then the imply lets say $1 62 in EPS with <unk> It would imply pretty significant gross margin.
Impact in <unk> I don't know maybe upwards of 300 to 400 beds is that the right way to think about it or are you can you give us any guardrails of how do we think about three Q4 Q evolution of Gms.
Yeah, I mean, the third quarter will be on par with essentially what we've experienced through the first half of the year.
Keep in mind, we will continue to have certain of the inbound.
Ocean freight costs hit us disproportionately in the third quarter before that becomes a bit more of a tailwind in the fourth quarter. So if I think if you would.
Think about it in those terms gross margin will still be down in the fourth quarter, but not to the degree that we've seen through the first nine months and the reason being is we.
The Ocean freight will become a tailwind and then the big thing also that we've adjusted in the gross margin outlook is just that we're contemplating a higher inventory balance and with that.
We do see the risk of the marketplace being more promotional and making sure that we.
We've adjusted our outlook to be able to respond to changes in consumer demand and market conditions.
Okay.
Okay. The next question is coming from Camilo Lyon with <unk>. Your line is live.
Hi, This is Mckenzie Boydston umbra chemo and thanks for taking my question.
Kind of Dovetailing on why you don't get any your last response on ocean freight.
Confirm so it seems like Q4, then you're still contemplating will be.
A tailwind to margins and then continuing into 'twenty three.
Yeah.
We secured freight contracts with our ocean carriers dated back early this year so.
But with the contracts that we've got in place we have built into our outlook. However, given where oil prices are we have built in some costs as it pertains to fuel surcharges until we see oil abate.
Okay, that's great.
And then I guess.
In terms of demand trends you saw in Q2 is there any sense in a class by month, you can provide and then kind of any update on that consumer landscape that you're seeing into July would be helpful.
Well as it pertains to Q2 and as Tim touched on the prepared remarks, you know April and May business was still quite healthy looking at the D to C business.
Particular, we were essentially on plan.
And I think as <unk>.
The economic news.
Inflation in particular, and just risk of recession has continued to weigh on the minds of at least the U S. The least the U S. Consumer that you know we began seeing some of that trickle through in the form of lighter traffic levels and softness in demand in the latter in latter part of the quarter and we've seen that to some degree I would say.
That trend has continued in the early part of in the early part of July .
Okay.
Great. Thanks, so much.
Okay. The next question is coming from John Kernan with Cowen John .
Hey, good afternoon, guys. Thanks for taking my question.
Could you talk to where you think inventory levels will be maybe by the end of <unk>.
Some of the peers in the space.
Spoke of inventory, peaking this quarter I'm, just curious where you think.
Inventory shakes out as we get into next year.
Yeah, I think as it relates to inventory, we would anticipate that at the end of the third quarter is where we would anticipate more of our peak.
And looking at the rate of growth and inventory being out or or greater than where we are here in the second quarter at June 30, and then as we get out to the end of the year, we would anticipate it to begin to come down, albeit you know remain elevated I would put it probably in the low 30% range, but keep in mind.
Trying to nail that number down just given the amount.
The amount of inventory production that we'll have for spring 'twenty, three and the timing of that.
Some volatility and what our inventory positions are end of the year.
Understood maybe just.
On price increases can you talk to the impact of price increases being anticipated in the guidance for the back half of the year.
Are you talking about our cost or our selling prices.
Selling right.
Yeah, I mean, I think there's been some but just basically been moderated.
Concept for US is to make sure that we've got a highly differentiated product innovations that.
Ken.
Pricing power in the marketplace and we haven't seen.
Any any degradation of any meaningful amount.
In our order book based on pricing.
Yeah.
Okay.
Thanks, Tom.
Okay. The next question is coming from Mitch Cummins.
With the Seaport Research your line is live.
Oh, yes, thanks for taking my questions.
Just to follow up on the margins and and freight in particular, so you're expecting gross margins to be down.
Hundred and 80 to 210 bps year over year, how much of that is free.
Freight and and.
It looks like you expect year over year benefit in Q4, I know you're not looking to get.
'twenty three guidance, but if ocean container freight routes or ocean container rates kind of hold where they are today.
How much pickup could you, possibly see next year.
But I think maybe just to put it in perspective, Mitch the way out of the way I would think about it is through the first half of this year.
Ocean freight at about 300 basis point impact on our gross margins.
And then we'll see that step down in terms of the agreed as an impact in the third and fourth quarter before it becomes a tailwind, but I think that's probably the best way of framing it in obviously as you're in the first part of the year.
And they are a little bit more of a disproportionate impact, but I wouldn't anticipate it quite being at 300 basis points in the third quarter it'll begin.
Decline a bit.
Yes, Mitch I might have wanted to go.
Go ahead Mike.
I just pointed out that the even.
Though we have a tailwind against last years.
Freight rates Ocean freight rates, there is still incredibly elevated.
Based on our historical.
Experience and.
So that's important to understand that.
Sure.
Then timber Jimmy you guys talked about.
Now, assuming a slightly more well a more cautious stance.
Over the balance of the year around cancellations promotions D. T. C. I guess two questions. One is that really focused on the fourth quarter more than the third quarter and two as you think about your assumptions around those items are you kind of assuming a normal environment I mean last year would have been.
Better than normal environment, along those metrics are you basically just sort of assuming this year's normal or are you assuming.
No better or worse than that.
Well last year was much higher demand from the consumer and much less supply from from all bankers, including ourselves. So this year, we have more supply who knows what the consumer is going to be.
Looking at so it is very likely that.
The Doe.
Has the propensity for.
Promotional activity as retailers look to clear inventory so.
It's hard to describe and then when you throw the.
Closures in China.
The mix it just eventually.
Difficult year to call. It normal so we're we want to make sure that we're.
Cautiously approaching the business, we have certainly the balance sheet to allow us to make.
Right decisions not necessarily.
The most expedient ones, but.
We're managing the business in order to.
Come through this at the end.
Just as strong as we went into it and Mitch typically within our wholesale business.
Wouldn't anticipate to see significant cancellations until we get deeper into the quarter as Tim touched on inventories as it relates to seasonal fall winter merchandise is quite low to some retailers are going to have the need in the early part of the season to take those goods. So it can be until we get out to September really October November when we'd see anything.
Meaningful in the way of cancellations and then the other way to think about how normalized we plan the business in the back half of the year. Our D to C business is planned up a mid single digit percent growth.
Combined between brick and mortar and online E com globally.
So that gives you a little bit of a sense of we agree what a low teen number through the first half of the year with Q2 coming down to where we planned it a little bit more in line with what we've seen in the second quarter.
Got it all right. Thanks, guys. Good luck.
Okay. The next question is coming from Paul <unk> with Citigroup. Your line is live.
Hey, Thanks, guys I'm curious within the U S. Wholesale channel. If you can maybe talk about failed to hear sporting goods retail.
Partners versus department stores versus the others, you know how you're how you're seeing the trends in each and I think you mentioned seeing some cancellations just just curious.
Where where you might be seeing those pop up.
Out of those out of those different channels and I believe just secondly, you talked about high single digit low double digit price increases wondering if that's what you have.
Falling through into the spring season as well so when you talk about the spring order book being up I'm curious how much of that is price versus units.
Well the channels.
Companies quite broadly distributed in terms of its products and so we've seen.
No the impact across all channels I would say that the department store channel probably is growing the most.
Most rapidly among all of the channels.
But we had great business with with our Internet.
Retailers as well I would say, maybe the slowest might be the sporting goods channel.
And then as it relates to spring orders were seeing solid improvement across really all of the.
The brands and.
Categories.
But.
Understanding that retailers are going to be leaving the season this year with a little bit more inventory than they otherwise have been in prior seasons.
Yes that as it relates to price versus unit, Paul If you look at the second quarter as an example, where we grew two 2%.
That's gonna be units are going to be down a bit knowing that our pricing for the spring season was up a mid single digit a mid single digit percentage.
And how about for the for the spring season does that.
King same dynamic pricing up units units down.
Oh looking at looking at spring 'twenty, three or so my comment I made was with regard to spring 'twenty two spring 'twenty three I think it would be premature at this point to provide any details with regard to how we're thinking about rate of growth and mix between price versus units.
We're certainly continuing to operate in an inflationary environment. So there are further price increases that are contemplated in our spring 'twenty three order book.
Got it thanks good luck.
Okay. The next question is coming from <unk> Sirona with UBS. Your line is live.
Great. Thanks, so much for taking my question I just wanted to ask if you could elaborate a little bit more on your sales growth expectations.
By region in the second half of the year and particularly in Europe . I was wondering if we should expect that kind of a negative growth rate to continue in the second half and maybe just elaborate also on China.
How would that impact though.
Latin America, and Asia Pacific business. Thank you.
Well I think as it relates to Europe , specifically, our European direct business is growing and as Tim touched on it's quite it's quite healthy and we'd anticipate that Europe continues to drive growth in the back half of the year. So essentially what's driving the declines in our Anda business. When we look at the first half. It's it's the fact that.
We didn't ship or by margin shipped to Russia.
During the during the second quarter.
So that's going to be there's not going to be the big factor there and then I missed the second part of the question on <unk>.
You basically.
China, we expect that there will be continued shutdowns.
Certain geographies in China, and whether or not we have.
Business relationships or customers in those specific regions, where really detailed how we do.
In China for the back half of the year. So we're being cautious in terms of how we're how we're guiding in that geography, but as Jim said, we've got solid business and our direct to Europe .
Direct to our direct business in Europe , as well as in many of our EMEA regions, including Turkey, and Israel, where we have solid business. Good growth. It really is the Russia impact for that for this year.
Okay.
Alright, thank you.
Okay, we have Alex Perry with Bank of America, Alex Your line is live.
Hi, Thanks for taking my questions.
Just first I wanted to ask a little bit more in terms of what you're seeing from a or what you're expecting from a promotional environment, especially with some.
Mass retailers, calling out bloated inventory levels in a parallel does that affect you at all and what have you seen sort of the overall promotional environment come online yet or is that just what youre expecting given what youre seeing from the consumer.
Yes, we have actually spin.
Modest promotional activity.
Certainly in the U S, where we have the most data around our customers' activities.
It's been more modest.
In the first half, we're expecting because of the consumer.
Sentiments that we're all reading about that they'll likely be more promotional activity.
As inventories.
Carol.
Become elevated.
So it's hard to understand.
I understand to know in advance, which one of our customers have the ability.
<unk> two two.
Keep inventory longer which ones have to liquidate.
Our expectations are that.
The economic conditions will dictate a more promotional environment.
Our whole Alex when we look at our second quarter results and we monitor.
Hi.
High proportion of our U S customers and their promotion levels and promotion levels are quite quite lean through the second quarter. So there hasn't been an overreaction to.
You know, what's going on with the consumer and likewise can be said for our DTC business, and which margins were really quite healthy through Q2. So the adjustments. We've made in our outlook are really just in contemplation of the risks that we proceed with everything that we're that we're seeing in the news.
Yes that makes a lot of sense and then my second question is I just wanted to ask about what you're seeing in terms of product input cost pressures.
Pressures are in and maybe just a little more color on how that would sort of flow through in terms of the gross margin guide.
Certainly well.
Our analysis about half of our product input costs are a function of the collusion in the in the Ocean freight carrier network.
The balances is a function of.
Factory disruptions.
And oil.
Oil commodity impact on the products that we.
We make them.
<unk> that we use I would say, it's a mid single digit.
Just slightly north of that impact on costs.
Well.
And we were able to pass those on.
We'll see what happens in terms of the ocean freight carriers.
Our charges and then.
What happens with oil over the next several years.
Perfect. That's really helpful best of luck going forward.
Thanks, Alex.
I would now like to turn the call back to management for closing remarks.
Alright, well, thank you for listening and we're really excited about the opportunity to show you the various.
<unk>.
Activities are branch have plan for the future in our September 22nd Analyst day, we hope that you'll be able to come in and see those things in person.
Look forward to sharing that with you.
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.