Q1 2023 Columbia Sportswear Company Earnings Call
Greetings.
I come to the Columbia Sportswear first quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now.
Turn the conference over to your host Andrew Burns.
May begin.
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 Doc 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 Chief administrative officer, and General Counsel Peter Bragdon.
This conference call will contain forward looking statements regarding columbia's expectations, anticipations or beliefs about the future.
These statements are expressed in good faith 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.
Many 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 critical form 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 tables included in our earnings release, and the appendix of our CFO commentary financial review.
Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions. So we can get to everyone by the end of the hour now I will turn the call over to Tim.
Thanks, Andrew and good afternoon, everyone.
First quarter results highlight the importance and value of our diversified global business model and strong balance sheet.
Overall, we were able to generate healthy net sales growth up 8% year over year and up 10% in constant currency.
I am pleased to report that earlier receipt of spring 'twenty three inventories drove improved wholesale on time delivery rates and a return to pre pandemic service levels.
The last three years supply chain constraints and impacted our ability to drive sales growth as.
As we look to maximize sales in this uncertain economic environment. It's great to have this product lead time delays behind us.
Looking at first quarter results consumer demand in many areas of our business remains strong.
International markets were resilient growing 17% on a reported basis and 25% on constant currency basis.
In the U S outlet stores generated healthy growth as consumers seek out value and promotions in the marketplace.
Oral category performance was also a bright spot as sales trends benefited from better availability of spring 'twenty three product.
Other areas of the business consumer demand signals were more challenging Columbia Dot com had a softer start to the quarter, but performance improved in February and March as we increased promotional levels to spur demand.
In the U S footwear market headwinds impacted both Columbia, and Sorel performance pockets of elevated footwear channel inventory unfavorable weather for spring product and overall retail cautiousness presented headwinds.
Additionally, key categories, such as hiking and trail have softened following growth over the last several years.
We remain confident in our footwear strategy and our ability to unlock our long term growth potential in this category.
As I mentioned on the last call, reducing our inventory and aligning it with demand as a top priority inventory exiting the quarter was up 34% year over year, driven by elevated carryover inventory earlier.
Earlier receipt of current season inventory and to a lesser extent increased older season inventory.
We anticipate incurring higher SG&A expenses tied to our elevated inventory levels.
These expenses will persist until inventories normalize towards the end of the year.
We're executing our plan to manage down inventory levels, while focusing on profitability.
We have a clear path to reduce our year end inventory by over $200 million compared to last year.
For the full year, we are reiterating the net sales and gross margin outlook, we provided in February .
While there are puts and takes across our diverse business.
Our forecast for overall demand in promotional activity have not meaningfully changed we are lowering the high end of our EPS range to account for higher SG&A expenses, which I'll discuss in more detail later in the call.
In times when there are high levels of economic uncertainty our strong financial position is a strategic advantage.
We exited the first quarter with over $460 million in cash and short term investments as well as no bank borrowings.
I believe our diversified business model financial strength, and operating discipline will enable us to navigate near term challenges and emerge in a stronger position.
I'll now review, our first quarter 2023 financial performance.
Net sales of $821 million were up 8% year over year and up 10% on constant currency basis.
Margin contracted 100 basis points and was roughly in line with our outlook.
As expected the biggest driver of contraction was higher promotional activity in the marketplace as we lapped an exceptionally low promotional environment in the prior year. This was partially offset by lower inbound freight costs.
SG&A expenses increased 16% and were 42, 3% of net sales compared to 39, 3% in the prior year.
SG&A expense growth, primarily reflected elevated supply chain costs higher DTC expenses to support growth and investments to support our strategies.
During the quarter, we incurred higher than expected warehousing and fulfillment expenses.
Largely resulted from elevated inventory levels.
Diluted earnings per share decreased 28% to 74 cents.
I'll now review first quarter year over year net sales growth by region and brand for this review I will reference constant currency net sales growth.
To illustrate underlying growth in each market.
All regions outside of the U S were unfavorably impacted by foreign exchange rates.
U S. Net sales increased 3% U S wholesale increased mid single digit percent and benefited from earlier shipment of spring 'twenty three orders relative to last year.
The Columbia brand spring selling season performance has been encouraging with apparel sell through trending above last year.
U S. DTC net sales increased low single digit percent.
Brick and mortar was up high single digits percent with healthy outlet store performance driven by strong traffic trends as well as contributions from new stores opened last year.
U S E Commerce net sales were down high single digit percent, primarily due to a slow start of the quarter were Colombia dot com.
Turning to our international business.
Latin America Asia Pacific region, or L. A a P net sales increased 22%.
China net sales increased mid 20%.
Over the last several years, we laid the groundwork to enhance store productivity and reaccelerate growth in China, we invested in talent.
Localized product and go to market activities to strengthen our capabilities in this important market.
I believe we are starting to see the benefits of our efforts.
The easing of COVID-19 restrictions resulted in a surge of consumer demand, which was sustained throughout the quarter.
For spring 'twenty, three we successfully launched our new China specific product collection designed for Chinese consumers.
The new collection named transit is attracting new younger consumers to the brand.
Initial sell through performance has been exceptional.
We're encouraged by the first quarter performance and anticipate China to be one of our fastest growing markets in 2023.
Japan net sales increased high teens percent.
Net sales growth was driven by improved demand as we lapped prior year COVID-19 impacts.
Net sales growth was also aided by earlier shipment of spring 'twenty three orders.
Following two years of pandemic restrictions, we are encouraged to see DTC traffic recovering and international tourism starting to return to Japan.
Korea net sales declined high teens percent.
Our new leadership team in Korea is in a multi year process of rebuilding the business to further elevate the brand and drive productivity across all channels.
We're in the early phases of this effort, we know that there's a significant market share opportunity for Colombia in the future and despite a slow start of the year, we still see a path to full year growth in Korea.
Across our Asia direct markets, Colombia is connecting with consumers in an authentic way through the buildup of height communities, including the hikes Society in China, and Korea, and the hiking school in Japan.
These grassroots clubs celebrate the outdoors through hiking events and experiences.
As we share our passion for the outdoors, we're building deeper connections with consumers and inspiring the next generation of outdoor enthusiasts.
L. A P distributor markets were up over 100%. This growth reflects the strength of the Columbia brand and our distributor partnerships in these markets as well as favorable timing of shipments euro.
Europe Middle East Africa region, or EMEA net sales increased 20%.
Europe direct net sales grew high 20% benefiting from strong demand across all channels and earlier shipment of spring twenty-three product.
Despite relatively warm and dry weather in the quarter.
Columbia brand strength and better product availability.
Fuel healthy sell through.
Colombia was recently announced as the first exclusive partner of Mega Marsh.
A series of hiking events that take place across Europe .
The series had over 35000 participants in 2022 and is scheduled to host twenty-three events. This year.
We expect this partnership.
With one of our largest hiking communities in Europe to help drive continued momentum in the important hike category.
Our EMEA distributor business was down low teens percent the decline in sales reflects the lack of sales to Russia, partially offset by growth in other EMEA distributor markets.
Canada net sales were up 43% driven by strong demand across all channels and earlier shipment of spring twenty-three product.
In Canada, we're continuing to grow our dedicated in store footprint with strategic retail accounts. This includes a number of enhanced in store displays and shop in shops set to open in 2023. These efforts strengthen our retail partnerships and further highlight our unique product offering.
Across both footwear and apparel.
Looking at performance by brand.
Lumpier brand net sales increased 12% during the quarter.
Growth was led by apparel.
Partially offset by softness in footwear.
We remain focused on unlocking the long term growth in the footwear category and continue to make strategic investments in the business.
In the first quarter, we launched our be the goat footwear campaign, featuring the new facet seventy-five hiking shoe.
This is our latest addition to the fastest collection and is designed to provide hikers exceptional traction on difficult terrain.
The integrated global campaign spans social media e-commerce print and in store displays the.
The fastest seventy-five was featured in settle outdoor publications, including articles from gear patrol and gear junkie on the best New gear for twenty-three.
Charles Melton from the TV series Riverdale led a group of Influencers, who will be seen wearing it on social media in the next few months.
With the peak free campaign last fall and now the fastest 75 this spring.
We're establishing a cadence of high impact footwear launches.
Shifting the P. F. G. We launched our protect what you Love campaign. This marketing investment in our iconic PFG product line is designed to deepen its authentic position in fishing.
Protect what she loves about conservation as well as protecting your skin with our Sun protection technologies.
PFG also partnered with captains for clean water to raise awareness about the challenges that the Florida Everglades and fisheries are confronting.
The campaign features our distinctive product innovation and highlights Columbia's passion for the pursuit of fishing.
The cast of characters in our campaign rages from Wesley Locke, one of our fishing athletes to the Dude perfect team, who partners with bubble was to have a fishing competition in Miami.
But bill Walsh also nearly one in a P. F G wrap car at the Talladega Speedway last weekend.
And another feature story, New York Mets first baseman Pete Alonso speaks about growing up fishing and the importance of great gear and baseball and fishing and what the sport means to him.
PFG products have recently been featured in several fishing and boating enthusiast publications, including Marlin magazine, Boating magazine and fish Alaska. These articles highlight styles such as the skiff Guy jacket.
In the Super tank terminal vented hoodie.
We also invested heavily in digital media, highlighting both our apparel and footwear.
Through our marketing PR and grassroots community engagements, we're creating deep consumer connections and building affinity for the Columbia PFG brand.
And our latest collaboration with New York based boutique KIF, we harnessed the power of PFG within assortment of fishing apparel footwear and accessories that blend functionality with style.
Several top styles sold out almost immediately attesting to our ability to brand to build brand and product heat with a younger audience on.
On the innovation front, we launched omni shade broad spectrum. This product utilizes engineered combinations of fiber.
And fabric structures to block a wider range of harmful UV, a and UVB rays glum.
Colombia is the first brand to label clothing is having broad spectrum protection.
Overall, the Columbia brand has had an encouraging start to the year.
The Columbia brand's exceptional value proposition and innovative product offerings are well positioned to meet the needs of consumers in this economic environment.
Finally, I would like to welcome David that sees as Columbia brands, New Senior Vice President of North America DTC, David is an accomplished background at retail and Merchandizing and we look forward to utilizing his expertise to help the Columbia brand expand and evolve our DTC operations.
Shifting to our emerging brands.
Sorel brand net sales decreased 3% net.
Net sales were down primarily due to the tough, but we're environment. The first quarter is a small transitional quarter for Sorel, consisting of late winter and early spring product sales.
The late receipt of fall 'twenty two product resulted in some fall product missing the peak selling window.
To clear through this later, arriving fall inventory the brand increased promotional activity on Sorel dot com during the quarter.
Additionally, unfavorable cool and wet weather contributed to a late start in the spring selling season.
I'd note that spring season sell through has improved in recent weeks with the arrival of warmer spring weather.
The sandal category has led this resurgence fueled by new sport styles like the Connecticut impact collection.
Near term sales trends are below our long term growth ambitions for Sorel.
We remain confident in the brand and its potential to become the next global footwear force.
Mountain hardware net sales increased 18% driven in large part by earlier shipment of spring 'twenty three orders.
Following mountain hardware product driven resurgence the team is now working to bring the brand's identity to life. This includes enhancing mountain hardware digital presence and launching a more robust organic social media strategy.
Prana net sales decreased 1% in the quarter the.
The sales decline was driven by the wholesale business, partially offset by DTC growth.
To celebrate promised thirtyish anniversary the design team pulled some of the brand's original styles from the archive and refresh them to create a new prana original collection. The product has performed well and yielded strong social engagement.
The climb the HBO Max reality series sponsored by Prana concluded in late January .
This marketing investment peaked awareness with current and new customers.
We will continue to partner with legendary climbers, Chris Sharma, and Meghan Martin to reinforce promised connection to climb.
Senior Vice President of emerging brands, Craig Zanan has taken over as interim president of the Prana brand, we're conducting a search for a new leader.
The prana team is focused on repositioning the brand to energize growth.
I'll now discuss our 2023 financial outlook.
This outlook and commentary include forward looking statements.
Please see our CFO commentary and financial review presentations for additional details and disclosures related to those statements.
We are reiterating our 3% to 6% net sales growth outlook.
While there are various trends across our regions channels and categories are forecast for overall demand has not meaningfully changed.
We are reiterating our gross margin outlook for expansion of 60 basis points to approximately 50%.
Marketplace promotional activity continues to normalize in line with our expectations.
Compared to exceptionally low promotions in the prior year.
We expect SG&A expenses to grow faster than net sales growth.
Our outlook for SG&A expense growth has increased since our last call, reflecting incremental warehousing and fulfillment costs associated with elevated inventory levels as well as transitional costs associated with third party logistics.
We have and continue to implement cost containment actions, but realizing savings from these actions will take time.
We expect operating margin to be in the range of 11.6 to 11, 8%.
Operating margin performance will not be linear year to year, and we remain fully committed to improving operating margins over time.
This operating performance leads to a diluted earnings per share range of $5 15 to $5 40.
We anticipate strong operating cash flow of at least $600 million in 2023, as our inventory levels normalize.
In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities, we see across the business.
We are investing in our strategic priorities.
To accelerate profitable growth.
Create iconic products that are differentiated functional and innovative.
Drive brand engagement was increased focused demand creation investments.
Enhanced consumer experiences by investing in capabilities to delight and retain consumers.
Amplify marketplace excellence that is digitally led omnichannel and global.
And then power talent that is driven by our core values.
That concludes my prepared remarks, we welcome your questions for the remainder of the hour.
Operator could you help us with that.
Absolutely at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment.
It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
The first question is from Bob <unk> with Guggenheim Securities. Please proceed.
Yeah.
Hello.
Tim two questions really.
The first one is when you look at you know the the outlook for the remainder of the year have you seen any changes in your order book you know I know you kept your topline the same but you know when you look at the performance in.
In North America or in Europe .
There been any material changes from what you had seen you know a.
A quarter ago and then the second question is can you elaborate a bit more in terms of.
What's happening in the footwear category and he talked about how you can trail just how big you know what's the percentage of that in your business and just you know.
What do you think it'll take to.
Get that business to either.
Slowdown in terms of some of the declines or actually improve maybe in the back half of the year. Thanks.
Yeah, Bob So no no significant changes that no changes really of any consequence on the order book.
We take orders every day and cancels everyday so but our order book is is as we.
We just as we expected it.
Several quarters ago.
And we're excited about the ability to perform on the order book much better and more timely manner than we had certainly last year last year.
With such an unusual period, where we had an enormous order book and then the logistics issues really.
Good to allow us to fulfill it.
The final result, frankly was the inventory levels were shaped.
Yeah.
So.
We're confident in that.
And then our ability to perform there as it relates to footwear I can trail over the total is as the Companys largest category of footwear.
Sure.
But in the back half it will certainly be challenged.
Size perspective by our winter footwear business, which was actually the biggest part of the last part of the year.
So we're very focused on creating great products, which is which are highly differentiated.
Democratic in terms of their <unk>.
Michigan promotion.
Yes.
I am confident that the company can provide.
Innovative differentiated products.
Okay.
Our business grow at the property levels.
Great. Thank you very much.
The next question comes from Laurent <unk> with BNP Paribas. Please proceed.
Good afternoon, and thank you very much for taking my questions.
I wanted to ask about so well the guide originally I think last quarter 90 days ago for low double digit growth and now I think it's guided for high single digit growth in the CFO commentary just curious to know what youre seeing there was.
Was there a pickup in cancellations.
Piggybacking off of Bob's question, I think fall order book was originally anticipated to be up mid single digits.
Also the company is that still the case.
Yeah.
Yep.
The Sorel brand was impacted much like the Columbia brand in terms of.
A large order book last year.
Poor fulfillment on our part last year.
Shoes.
So.
We talked about.
The spring quarter and the quarter just completed.
It was impacted.
With promotional activity.
Carry over as well.
Weather impact on spring products.
As the quarter has concluded.
We've seen activity.
In the latter part of the quarter and the early part of Q1 Q2.
<unk>.
Sandal category is now getting traction.
So.
We're very bullish on the brand.
And we expect that that will get us up to.
Clearly to where we guided.
At our Investor day.
Fast growing brand for the company and.
Theres been no meaningful changes in the fall 'twenty three order book, we're still planning that part of the business up for Sorel.
Mid single digit percentage for the for the season.
Okay very very helpful. And then Jim maybe a question for you on your on your CFO deck.
Last quarter I think were in the first half commentary you.
You were expecting.
One <unk> gross margin to expand in the late modestly below the full year I didn't see that commentary.
In this CFO commentary just curious maybe for the audience. If you can kind of give us some guardrails and how we should think about <unk> gross margins and if there. If they are below maybe can you walk us through the moving pieces to get to the full year guide.
Yes from an overarching standpoint, we're still planning our gross margins to be up in the second quarter there'll be up north of 100 basis points a lot with the revision we made.
Look we've indicated that we'll come in at the lower end of our first half outlook. If you do the math on that that will imply our Q2 operating income essentially be at breakeven.
And so if you look at gross margin being up just over 100 basis points you can do the rest of the salt.
We're still anticipating.
The inbound freight cost benefits that we previously indicated as Tim touched on as it relates to what we're seeing from a promotional standpoint. The market has really been aligned what our plan has been to date.
Okay very very helpful. And then just one last question on the on the.
On the on the Russia business can you just again, maybe remind the audience. The magnitude of the impact is just the timing as we think about modeling EMEA for the year by quarter.
Yeah. So on the full year in terms of what we fulfilled to Russia. It was it was.
<unk> 50 million and that was fulfilling orders that had been taken prior to the invasion and then specific to the first quarter.
Mid single digit millions of dollars that we shipped to Russia I think it was in the $5 $5 million range.
Okay, and then said most of it came in to remind me I think it was <unk> 22, right when you fulfill that.
That's exactly right. We didn't there was essentially nothing in the second quarter and then it would have been predominantly third quarter you would've seen those shipments.
Okay. Okay very helpful. Thank you very much Jim for that so we can model it correctly. Thank you.
Next question comes from Mitch commits with Seaport Research. Please proceed.
Yes, thanks for taking my questions.
On supply or on the SG&A so.
G&A ratio has gone up some.
Like that's primarily supply chain I guess I'm wondering whats changed wire those incremental costs now higher than you know three months ago is that because it's taking longer to work through the inventory than you expected and then maybe kind of a follow up to that like.
When I eyeball, the slide deck, it looks like maybe supply chains up around $20 million.
Like what are you thinking for the year now on those.
Year over year incremental supply chain expenses.
Yes, I'm going to ask Jim to talk to you about the balance of the year, but what we saw in the first quarter was.
Impact.
Inventories on the.
The efficiency of our logistics operations, just the sheer magnitude of the inventory.
Impacted the ability for our.
Okay.
Distribution centers Act efficiently.
During that period, so we expect that as we reduce our inventories and as we mentioned, we expect about a $600 million cash.
Cash flow positive.
This year.
Yes.
As the inventory levels are reduced that our efficiencies will also increase along the way.
Yes, and just to reiterate the point there.
The increase in our SG&A in the quarter, that's not a function of inventory haven't been greater than what we had planned inventory is really where we thought it would be it's just the degree of productivity I think frankly, we probably planned the business too aggressively with regard to how well, we build and manage down the labor within our distributions.
Center, so that came as a bit of a surprise and we've incurred some transition costs related to our third party logistics.
You look at the change in our full year outlook.
Which is in the mid teens millions of dollars the operating income line.
Essentially the entirety of that is associated with.
What we've seen.
First quarter as it relates to the incremental warehousing and fulfillment costs.
Okay and are these costs that essentially go away next year when you have.
What could you expect inventory to be down a couple hundred million.
That would certainly be our expectation you know as we get the D. C is back down into normal capacity levels at a better mix of what's running through our own distribution centers and what's in third party logistics plus there are certain transition costs that would be one time in onetime in nature that will accumulate during the year. So I would I would expect that.
Just a bit more of a tailwind as we get out to 2024.
Okay, and then just a follow up Tim on the on the footwear piece that I can trail.
The challenge is there is this does this kind of a post COVID-19 hangover, where the pendulum has kind of overt correcting away from these categories and if so when might that normalize do you think.
I think it's going to be a car, but yes, and I would say yes.
Combination of high demand during the Covid period for hiking footwear and then.
Really the ability for us to provide new fresh merchandise. This year, so I would think that over time.
When we have.
Hum.
A larger component of our footwear.
Along the lines of our fashion collection.
Fast hike.
Stinker ish type product.
Youre going to be shake reacceleration of the footwear, especially in hike.
So that's the expectation we're working hard towards that.
Alright, okay. Thanks, good luck.
Is that true.
Up next we have John Kernan with TD Cowen John Please proceed.
Excellent. Thanks for taking my question guys.
So just thoughts around obviously the targets you laid out at the Investor day.
20% plus growth it did lab.
Tough multi year comparisons this quarter I was just.
Curious, how you're planning the business the rest of the year.
How do we think about the return to growth.
Well the brand is.
In an incredibly strong performer inside our emerging brand portfolio.
We would expect that as we continue to gain traction in that business.
With timely delivery of product.
And the high quality standards that we Havent styling and design, we will we will again produce great sales results.
That's our focus.
That's the point.
And John as it relates to you know, how we're envisioning growth for the balance of the year.
The CFO commentary, we indicate that or else planned up a high single digit percent from what had been a low double digit percent.
I'd say, it's pretty consistent across the quarters with.
With the exception of third quarter, it'll be a bit higher given the earlier delivery of the expectation of an earlier delivery and shipment of all products. So I think we look at Q1 as being a little bit of an aberration.
Touched on in terms of it being.
A transition seasonal quarter for us and then looking forward to the balance of the year.
Got it how should we think about inventory dollars as we start to cycle. Some of the bigger increases from last year and then within that how do we think about the recovery of freight costs within gross margin.
Yeah as it relates to inventory for the balance of the year.
There is there are some comments in the CFO commentary that we provided in our.
First half outlook, we contemplate inventory continuing to grow.
End of Q2, albeit it'll begin to normalize from a growth standpoint, though we were plus 30% just over 30% here in Q1, we'll see that come down into the low Twenty's in Q2, and then our expectation is as we begin to move into the fall winter season, leveraging that carryover inventory utilizing that.
Excess inventory to our outlets that we would see a sequential drop in our inventory in the back half of the year.
We're still targeting and feel like we've got a clear path to our inventory being down north of 200 million of restriction to be far better than that.
Year, and then as it relates.
To the degree.
As we move through that excess inventory, we've got that planned into our margin in terms of you know still.
So really thinking about this from a normalized discounting perspective, and any changes that might happen or obsolescence or inventory reserves is also factored into the outlook that we're providing here today.
Got it and then maybe one follow up obviously nice to see the revenue guidance reiteration.
How do you think your wholesale partners are positioned for the back half of the year I think.
March and April were tough on a lot of people, whether obviously not agreeable.
Do you think people are prepared for the macro as we go into the back half.
Yes, I think in general our order book is built on a conservative outlook from our retailers.
No one is expecting.
Great. Thanks from the back half of 2023, So I think that's helped.
That was built to booking expectations.
Based on inventory levels that we have.
Okay.
Shelves with an addition to what they believe.
Got it thank you.
Okay. The next question is from Jim Duffy with Stifel. Jim. Please proceed.
Oh. Thank you. Good afternoon, guys. Just a couple of questions for me I wanted to start on the D to C trends I'm curious is the positive comp you're seeing they're supported by better in stocks or are you seeing good traffic and transactions as well.
Yes, Jim.
Well as you know.
We consider ourselves to be a wholesale company. So we don't typically.
Talk about the metrics in our own DTC stores that having been said.
Traffic was quite strong in the stores.
This quarter.
We think that's reflective of a number of issues, including.
Tumors at this time looking for greater value.
We have a strong out.
That fleet.
But pricing remains strong.
Sure.
Were positioned correctly.
And as we said we were going to be liquidating.
Our carryover inventory, primarily through our own outlet stores.
So.
Yeah, I'd say, a modest benefit as it relates to the better stock level thing because it's much more a function of traffic that tends describing an increase in tourism in certain of our international markets.
Good to hear.
I'm also hoping you guys can speak to U S channel inventory dynamics as the footwear situations that you referenced unique to footwear in those categories or are you seeing channel apparel inventories elevated as well and what do you see as kind of.
The timeline for path to resolution of that.
Yes, I think in general our our category of merchandise has been more challenged than others.
Got it but how about apparel, Tim is the apparel channel inventory situation in a fairly healthy state are there imbalances, there as well that you're contending with it are influencing in the marketplace.
Yes again.
Our retailers took a quite conservative approach to spring works.
But frankly, we've seen improved sell throughs versus last year.
It would indicate that the merchandise categories that were strong in PFG sportswear rainwear are all performing well.
I think in that area, we've got good siblings.
Okay, Great and then last one Jim I wanted to ask on the cash flow from operation guidance, maybe I missed this earlier, but it looks like a bump up a 100 million what's behind the real lift.
I think more so than anything we were a bit conservative when we put that together.
The German is we've taken a harder look at and we've got more we've got more definitive view.
View into the inventory purchases that we've made for the for the fall season and looking at our overall working capital. It just gives us increased confidence that we're going to end up in that north of $600 million range from an operating cash flow perspective.
Great I'll leave it at that thank you guys.
Thanks.
Okay. The next question comes from Abby <unk> with Piper Sandler Abby. Please proceed.
Great. Thanks, Thanks for taking my question just on the earlier delivery of shipments in <unk> are there any geographies or brands, where we should expect that to create difficult <unk> growth rates and then.
The Sorel brand just what the U S. Wholesale order books being you know conservative like you just talked about I guess, what's driving the better surround the adults in the second half.
Yeah again as it relates to the earlier deliveries I think.
Alright.
Our business will be quite strong.
At our retail partners.
Especially the balance of the year that our biggest.
Seasonal.
Sales period for the Columbia brand certainly his father's day and that's work.
Our PFG performance really shines and I think our our retailers are well stocked there and certainly in better shape than they were last year. So our expectations are for a good second quarter sell through.
With our retailers.
As it relates to Sorel.
This focus has really been on changing it from a winter brand to a more year round brand, it's still heavily impacted by winter weather.
Sales of winter footwear, so our expectations are that the back half of the year for sure would be.
Be a tailwind as it relates to winter winter footwear request and then maybe just to add to Tim's comments from an overall perspective. When you look at second quarter, we do anticipate second quarter being a slower.
Growth quarter on the whole relative to the first quarter, so it'll be up.
Low single to mid single digit kind of in that zone and that the difference between the two quarters is effectively going to be the timing shifts on the wholesale business and by geography, where do you expect to see the most of that would be in the U S, Canada and our European direct businesses where are we.
Received inventory and we're able to get it out to our customers sooner. So you can see the adverse effect of that coming out of the second quarter and you'll see that same trend.
So nominal that occur in the latter part of the year as well were accused will be heavy Q3 growth and wider Q4 growth.
Got it Super helpful. Thank you.
Yeah.
Okay. The next question is from Jonathan Komp with Baird. Please proceed.
Yeah. Good afternoon. Thank you can I just ask a broader question thinking about the shape of the earnings outlook for the year.
First half it looks like it'll be down quite a bit year over year near a seasonally low period and.
Then second half looks like embedding a fairly healthy double digit earnings growth for the second half combined so could you just maybe walk through the pieces that to sort of get comfortable with that outlook.
Yeah.
There is two to three drivers on that John but I would call out first keep in mind that we're lapping the prana impairment charge that we took in the fourth quarter last year of $35 6 million. So if you set that piece aside the other two major factors that are going to be in here is one we anticipate gross margin being healthier.
In the latter part of the year that being as we see the full benefit of the lower inbound freight costs.
Being a larger benefit to the gross margin coupled with the fact that from a retail promotional standpoint, the comps year over year will be a little bit easier in the latter part of the year and then the second point I would make here is that as you think about SG&A, we come into the we come into the year with a heavier rate of growth from SG&A perspective.
As you are seeing that in Q1, as we work ourselves into the back half of the year again, it'll be lapping some of the investments we made last year plus some of the cost containment actions that we've taken so when you look at the combination of those three things that's why you'd see a bit more of an inflection with second half.
Second half earnings growing faster than first half and we're perfectly confident in the plan we've put together around that with all the visibility that we have year to date.
Yes, that's really helpful. And then just maybe a follow up Jim just the thought on bringing down the high end of the earnings guidance for the year, but not changing the low end was there something maybe conservatism at the low end coming in or are you, including some some optionality places you could pull back if needed.
Any thoughts there thank you.
It's really just more a function of the discrete nature of the change in the outlook and so when you look at first quarter, and where you know where the SG&A came in higher than we expected you know because instead of a discrete event.
We felt that the.
The high end it required adjustment we proceed as strong or the need on the low end.
Thanks.
Okay makes sense. Thanks again.
Okay up next we have Paul <unk> with Citigroup. Please proceed.
Hey, Thanks, It's Tracy Kogan filling in for Paul My first question is on on Columbia, footwear, specifically and I'm wondering what you're expecting for sales growth. This year now compared to your prior expectations and then what are you looking at a margin.
Footwear business and then secondly, I was hoping you could talk a little bit more about that China specific product that you mentioned I'm wondering how much of the assortment that represent from now what do you think it might eventually be and then what is the price point like there compared to the rest of the assortment. Thanks.
Yeah.
So as it relates to the as it relates to the Columbia footwear side of things.
Yes, we from an overarching standpoint, we still see the Columbia brand.
Growing at a high single digit high single digit rate of growth I have that right. Andrew is it mid single I think it's more of a mid single I'm sorry.
The footwear is slightly going to outpace still where we are from an apparel standpoint.
As we look at the order book that we've taken for the fall winter season.
That would contemplate that higher rate of growth in terms of the orders that we've that we've taken for our customers.
And then pass it over to Tim as it relates to China on the transit collection.
I just want to make one more comment on on footwear for Colombia.
Yeah.
Most important.
Well part of our business is winter footwear.
Due to the logistics issues, we had last year this will be here.
<unk> vast improvement frankly delivery timelines on the winter footwear, so our expectations are quite high there.
A successful season.
<unk> collection.
<unk> was born in China, and designed by our China merchandising team based in Shanghai.
The product itself was commercialized.
Yes.
Manufactured by the global team, which is based here in Portland, So we had great cost on it.
Barry.
Very good gross margins and proves to us that we need to be.
Synchronizing our investments.
<unk> to include local influence.
Merchandise so.
What we've learned is that the more we link our global teams together.
[noise] designed.
Creative.
They are based in market the better we're going to be doing.
Great. Thank you.
Okay. The next question is from Riccio Serna with UBS. Please proceed.
Hi, Good afternoon. Thanks for taking my question I wanted to ask about.
Our gross margin.
Cadence.
And then just thinking about second quarter, you provided an outlook, but if I think about 30% or more should we expect.
Higher gross margin expansion and I guess from the SG&A perspective, I understand fourth quarter, SG&A dollar and probably be down or probably the corner with the lease growth mode. If I think about the other two quarters, how should we think about that the growth in <unk> and <unk>.
Gross margin as I commented earlier.
We do plan that to be up greater than a 100 basis points in Q2 and sequentially. If you look at third and fourth quarter.
They are both going to be relatively equivalent in terms of the gross margin expansion and slightly above where we planned to be for the second quarter. So it should be relatively consistent.
With the understanding that our you know the ocean freight inbound freight cost benefits will be flowing through each of those three quarters is ratably similar that that makes sense.
And then as it pertains that SG&A growth I think we still have SG&A growth planned through each of the three quarters, albeit that rate of increase our rate of growth in SG&A will come down.
Towards the end of the year and more in line with where we've got the full year plan from a topline perspective.
Just to confirm so that implies the fourth quarter SG&A dollars will be up.
5 million, including a prana impairment from last year.
No because the prana impairment charge, we did not include that as SG&A.
Got it got it item in our P&L.
Got it and then just one follow up maybe.
If you could speak about the endo.
U S DTC business.
I'll get more color on the sales growth trends intra quarter, just trying to understand like how the sales have all like.
Across each one of you see a deceleration of accommodation any additional commentary would be very helpful. Thanks.
Well, we certainly don't want to get into the monthly cadence.
Cadence of it aside from the prepared remarks that we've made on.
On the whole what I, what I would describe is that are you know the D to C brick and mortar business.
With healthy really throughout the throughout the quarter, we saw nice traffic.
And that part of the business.
The U S.
Internationally.
And then.
As Tim noted I think in the prepared remarks, the e-commerce business was a bit slower in the early part of the quarter and then.
With some incremental promotions that we've made we began to see demand surge a bit there and I would keep in mind, we're lapping first quarter of last year in which consumer demand was still quite robust coming off of some of the stimulus from the year prior and quite cold favorable weather as well so.
Lapping against that and still be able to put up the growth rates. We were we still remain pleased with the overall performance of the <unk>.
And that brick and borders more than offsetting some of the shortfall that we saw in the e-commerce side of the house.
Got it thank you very much.
The next question is from Alex Perry with Bank of America. Please proceed.
Hi, Thanks for taking my questions just first whats embedded in the guidance in terms of promotional environment from here is the assumption that it sort of moderates in terms of year over year pressure and how do you sort of square that away with some of your comments on sort of the consumer seeking out value with the really shrunk trap.
You've seen in the outlet business and then just on the DTC versus wholesale outlook I guess when you look at your DTC business, what do you sort of expecting in terms of D. C dot com versus DTC brick and mortar is.
I thought that for the remainder of the year, given what you're seeing in your outlet business that you'd need to see brick and mortar continues to sort of outpace D to C dot com. Thanks.
Yes, I would say that the promotional activity, we expect to be.
On our previous call at pre pandemic levels.
So we expect to impact their offset partially by.
What we would see in terms of savings of freight so I think that we've guided appropriately.
Gross profit margin for the balance of the year as it relates to DTC deep dotcom versus brick and mortar it seems like consumers.
At least in the first portion of the year wanted to get out.
Shop so.
Did that in a greater way certainly our obligations.
Sitting at home in Florida, and online and.
It's our expectation that that will likely continue that we have.
Stronger.
Performance from DTC, but we also expect our hard Brexit excuse.
Our dotcom business to rebound in the store.
As well as the balance of the year. So we're really happy to get given great granularity on that too.
It certainly appears that kill tumors like getting out shopping.
And Alex there is a there is a subtle change in our revenue outlook.
Basically we previously we had indicated that our dotcom business would grow faster than our brick and mortar business and that's reversed.
And the outlook, we've provided here today, where we do see.
The consumer shifting a bit more to physical in store shopping versus dot com, but they stay more or less offset each other.
Perfect. That's really helpful. And then I guess just my second question on the cost containment actions when do those start to flow through the P&L is that towards the end of this year more next year and now what exactly is sort of in there. Thank you.
It would be more second half you know it's much much more of a function of slowing rate of.
Investment slowing the rate of head count additions.
Those types of costs that would I wouldn't necessarily describe it as a.
A full blown.
Cost reduction plan, but really just seeking to moderate our level of SG&A to bring it back down more in line with where we are from a sales perspective, and then of course to the point made earlier you know to the extent there's.
Some incremental costs, we're incurring as it relates to the supply chain of distribution, we would expect that.
We lapped those that should provide us.
Favorable favorable comp to be more efficient in the out year.
Perfect. That's really helpful best of luck going forward.
Thanks.
Yeah.
We have no further questions in queue. We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Well, thank you for listening in.
We're excited about the potential for the future and we haven't.
Great opportunities ahead of the company, we look forward to talking to you in about 90 days' time.
Thank you. This concludes today's conference and you may disconnect your lines at this time.
For your participation.