Q2 2023 Columbia Sportswear Co Earnings Call
Greetings and welcome to the Columbia Sportswear second 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.
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Please note this conference is being recorded.
I will now turn the conference over to your host Andrew Burns Vice President of Investor Relations you may begin.
Good afternoon, and thanks for joining us to discuss Columbia sportswear company's second quarter results.
In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary on financial review presentation, explaining our results. This document is also available on our Investor Relations website, Investor Columbia Dot Com.
With me today on the call are chairman, President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President 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 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 Colombia.
SEC filings, we caution that forward looking statements are inherently less reliable that historical information, we do not.
Undertake any duty to update any of the forward looking statements. After the date of this conference call informed 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 tables included in our earnings release, and the appendix of our CFO commentary in finance.
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's questions by the end of the hour now I'll turn the call over to Tim.
Thanks, Andrew and good afternoon.
Second quarter financial results reflect a dynamic environment with varying trends across our global omni channel business.
Overall, we were able to generate 7% net sales growth in the quarter. This was ahead of our prior outlook due to earlier than planned fall 'twenty, three shipments, which more than offset slower growth in our U S DTC business.
International net sales increased 34% fueled by earlier international distributor shipments and continued recovery in China.
In the U S sell through trends softened adopting cautious consumer behavior. Additionally.
Inventory levels, particularly in footwear.
You may begin to heavier clearance and promotional activity.
As I mentioned on the last call reducing inventory is our top priority inventory exiting the quarter was up 21% year over year.
As we progressed through the second half of the year the combination of lower inventory buys.
All 23 orders and increased excess inventory sales in our outlet stores will reduce our inventory position.
We expect inventory to be down year over year exiting the third quarter and we remain on track to reduce year end inventory by over $200 million.
Periods of last year.
Returning inventory to a healthy position as a vital step to improving our financial performance.
Given our year to date performance and current trends, we see across the business, we're taking a more conservative approach.
Planning the balance of the year.
Well provide more details on key drivers and assumptions influencing our updated financial outlook later in the call.
I remain confident in our strategy and our ability to achieve the significant long term growth opportunities, we see across the business with that being said our brands are not immune to macro economic pressures.
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In this environment, we're focused on what we can control, including expense discipline and executing our inventory reduction plan.
We're also continuing to invest in the business to drive long term profitable growth.
We exited the second quarter with over $300 million in cash and short term investments and no bank borrowings.
This position will strengthen further as we are on track to generate 550 $600 million of operating cash flow this year.
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 second quarter financial performance.
I'd like to remind everyone that the second quarter is our lowest sales volume quarter.
Year over year changes in the timing of wholesale shipments can have a material impact on our reported results.
When reviewing second quarter results. It is important to note that John Spring 'twenty three shipments resulted in sales shifting into the first quarter compared to last year, when we deliver the product slate.
This presented a headwind to second quarter growth.
Conversely.
We are shipping all 23 orders earlier, this year, which created a tailwind just second quarter growth.
This timing movements create a pronounced impact in regional and brand net sales results.
Net sales of $621 million were up 7% year over year and up 9% on a constant currency basis.
Gross margin expanded 140 basis points and it was roughly in line with our outlook.
As expected the largest driver of expansion was lower inbound freight costs.
This was partially offset by higher clearance and promotional activity as well as higher distributor shipments, which generally carry lower gross margins.
Overall promotional activity is elevated compared to 2022 when promotions were exceptionally low.
Within our DTC business, we have increased plant maintenance activity as we focused our efforts on reducing inventories.
SG&A expenses increased 11%, primarily driven by increased expenses across our DTC business supply chain and enterprise technology.
Diluted earnings per share increased 27% to 14 cents.
I will now review second quarter year over year net sales growth by region and brand.
U S net sales decreased 3%.
The us wholesale decreased high single digit percent driven in large part by autumn time spring 'twenty, three shipments, which shifted sales into the first quarter.
In the U S. The Columbia brand spring selling season performance is down slightly compared to last year. After a stronger start to the season driven in part by better inventory availability.
Sell through trends slowed in the second quarter.
U S. DTC net sales increased low single digit percent.
Brick and mortar was up mid single digit percent driven by the contribution from new stores opened last year as well as incremental sales of temporary outlet stores.
U S E Commerce net sales were down mid single digit percent.
Online environment has become more competitive and promotional as consumers seek value in the marketplace.
In the first half of this year, our U S. DTC business grew low single digit percent, reflecting a challenging environment.
Wholesale shipments remains a priority for the company I believe there are long term opportunities to accelerate our DTC growth and improve efficiency and profitability.
Under the leadership of our new SVP of North America, DTC, David Dice.
Were actively identifying growth opportunities and operational improvements that can further elevate the Columbia brand.
David has experienced building a balanced store fleet is profitable and elevates brand performance across all channels.
Turning back to the second quarter financial performance I will now review our international business.
Latin America Asia Pacific region, or AAP net sales increased 35%.
China net sales increased over 140%, reflecting strong consumer demand compared to last year, which included the impact of pandemic restrictions.
Improved store productivity and enhanced marketing are among the key drivers, enabling us to capitalize on growing consumer interest in outdoor activities in this important market.
Our new premium China specific collection named transit is attracting new younger consumers to the Columbia brand.
Sell through has been exceptional.
We're building on the success of our initial spring launch with new styles for fall.
Another bright spot is ecommerce, where we drove strong results during the 618 event across all our key platforms, including Tmall JD and kicked off.
E Commerce has continued to perform very well.
Physical traffic returns and is indicative of the team's ongoing efforts to better serve consumers through digital channels.
We continue to anticipate that China will be one of our fastest growing markets in 2023.
Japan net sales increased mid single digit percent led by healthy growth in our DTC brick and mortar stores.
We continue to see encouraging traffic trends in our branded stores as the tourism industry recovers.
In April we opened the store in <unk> National Park, this top hiking destination and the Japanese Alps attracts over 1 million visitors per year.
Historically attrition unique Columbia products with designs for local artists.
<unk> net sales declined double digit percent as we mentioned last quarter. We are in the early phases of resetting our business in Korea.
Management is focused on several initiatives across talent distribution marketing and product.
To close unprofitable doors in the first half of the year and are focused on improving the productivity of the remaining fleet.
We believe these efforts to reposition the brand.
Elevated distribution will drive a deeper connection with the next generation of consumers and fuel long term sustainable growth.
L. A distributor markets were up low 80% this growth primarily reflects earlier shipments.
All 23 orders.
Europe , Middle East and Africa region, or EMEA net sales increased seven 5%.
Europe direct net sales declined mid single digit percent.
Spring 'twenty three shipments shifted to the first quarter.
This was partially offset by healthy DTC growth, which was strong across both e-commerce and brick and mortar.
This quarter Columbia Hiked Society, UK posted several successful events, including special hikes led by Columbia brand ambassadors.
These grassroots clubs.
Promote spending more time outside and attracting a younger generation of hikers. We believe these unique brand experiences as well as our exclusive partnerships with Mega Marsh hiking events that take place across Europe will help drive momentum in the important type category.
Our EMEA distributor business increased approximately 310%, reflecting earlier all 23 shipments.
Canada net sales were down 16% as spring 'twenty three shipments shifted into the first quarter.
This was partially offset by healthy DTC growth.
Which was strong across both e-commerce and brick and mortar.
Colombia was recently voted the number one trusted sportswear brand and number three most trusted brand overall in Canada or the eighth consecutive year in the University of Victoria Brand Index Survey included over 400 brands in 33 categories.
Our high brand awareness and consumer Trust provide a healthy foundation for growth in this market.
Looking at performance by brand.
Columbia brand net sales increased 11% during the quarter, including the benefit of earlier fall 'twenty three shipments.
The Columbia brands differentiated cooling technologies and Sun protection products have never been more important.
We have a broad range of innovation in our product line.
Omni shade Sun Deflector, and our most recent addition, omni shade broad spectrum.
These innovations differentiate the Columbia brand in the marketplace and position us as a leader in Sun protection.
As we look forward to fall we are building on the success of omni heat infinity with an expanded assortment of styles.
Perenchio weighted visible technology remains one of the fastest growing parts of our product line and it will be our top marketing store. This fall.
Another innovation in storage with ball is omni heat helix, our disruptive poly's release.
Visible technology, we're excited to build on this unique technology in both 'twenty three and beyond.
We will also continue to invest in footwear, including the launch of the facet 75 Alpha.
Despite near term category headwinds footwear remains a key growth accelerators for the Columbia brand.
Shifting to our emerging brands Sorel brand net sales increased 32%, primarily driven by earlier fall 'twenty three shipments and increased wholesale closeout sales.
Overall, Sorel spring sell through is up versus last year, largely reflecting higher clearance and promotional activity and a challenging weather environment.
Sandals is not a top performing category. This spring led by popular styles.
Medicaid back somewhat.
During the quarter, we announced mark knee now stepped down from his role as brand president to focus on his health.
Mark oversaw sorel during a period of tremendous growth and he helped transform the brand into a womens function first fashion footwear brand.
We thank mark for his outstanding contribution to the Columbia and Sorel brands during his long tenure.
Senior Vice President of emerging brands, Craig Zanun will lead the brand until a new president was appointed.
Mountain hardware net sales decreased 19% driven in large part by on time spring 'twenty three shipments, which resulted in a sales shifting into the first quarter.
<unk> net sales decreased 32% in the quarter with a decline in wholesale driven in part due to on time spring 'twenty three shipments, which resulted in sales shifting into the first quarter.
As well as the DTC.
We were excited to announce the appointment of Tricia Schamel one as the president of the Prana brand starting in September Tricia brings vast experience in the apparel industry, having served in leadership roles for several global brands, including most recently as the global VP of sportswear or ideas.
Tricia will be able to leverage with deep roots in design product management and merchandising to position the prana brand for growth in future seasons.
I will 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 these statements.
The current environment is making it difficult to achieve the long term growth algorithm that I believe we're capable of.
Given current trends, we're seeing in the business, we are taking a more conservative approach to how we plan the second half of the year.
We now expect full year net sales to grow two to three 5% year over year.
Gross margin is expected to expand by 40 basis points to approximately 49, 8%.
Place promotional activity continues to normalize and we are anticipating a higher level of clearance activity as we opportunistically work down inventory levels.
We expect operating margin to be in a range of nine 8% to 10, 3% operating margin performance will not be linear year to year, and we remain firmly committed to improving operating margin over time.
This operating performance leads to a diluted earnings per share range of $4 40 to $4 65.
We anticipate strong operating cash flows of $550 to $600 million.
In 2023, as our inventory levels normalized.
Before my closing remarks, I'd love to note that later this month, we will be releasing our 2022 impact report highlighting our efforts across environmental social and governance matters I'd encourage you to review the report which will be available on our website to learn more about the prop.
<unk> and accomplishments, we've made empowering people sustaining places and promoting responsible practices.
As we've previously said.
<unk> been working to eliminate PFS chemicals across our global product line.
Our intent is to stop manufacturing any apparel or footwear with PFS prior to our fall 24 season.
New products manufactured with all 24 are designed to be PFA is free.
We have been working on all alternate chemistries for some time and are making these changes in advance of regulatory restrictions in a small number of jurisdictions.
We're very pleased with the technical performance of the new chemistry, but recognize that that transition has the potential to impact the floor of our wholesale business in 2024.
How we and others manage their existing inventory.
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 with increased focused demand creation investments.
Enhanced consumer experiences by investing in capabilities to delight and retain consumers.
Amplify marketplace excellent that is digitally led omnichannel and global and.
And empowered 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.
Certainly at this time, we will be conducting a question and answer session.
If you'd 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 case once again Thats star one if you wish to ask a question.
And one moment, please while we poll for questions.
The first question today is coming from Bob Turbo from Guggenheim Bob Your line is live.
Thank you good afternoon.
Hey, guys a.
Couple of questions for me Am I guess just on on the outlook.
The can you just talk through I guess your your updated visibility I think on the lowered sales can you just talk through a little bit more how you're planning the wholesale business for the back half of the year.
Are your orders all firmed up now and I think you've made some adjustments to your buys as well if you could talk through that I think that would be.
Pretty helpful to Us and then I guess just with some of the early shipments is that just a function of you had the inventory and your partners. You know one of them wanted the product. So maybe you could just talk a little bit about sort of where you think things sit with the wholesale guys.
A bunch of business. Thanks.
Yeah, no problem, Bob well, yes.
As you know we have a firm order book and its strong with all product.
Our partners are selling off their balance up their spring merchandise and looking forward to receiving spread which some of them have already done so.
We're planning for a normal winter so the the.
The variability of winter as impactful on our business, especially when we are selling outerwear and winter boots and as it relates to the early shipments I mean, frankly as we've noted we have too much inventory.
A large portion of our SG&A spend this year was a result of having too much inventory, having merchandize stored offsite locations et cetera. So it was great that we can both move the merchandize out to retailers and our wholesale partners and distributors.
Earlier than last year.
In order to free up some space and give us some relief on our extra spend.
No the our retailer.
Partners were happy to receive the merchandise, especially now.
Knowing that as in prior years, we have been late on this merchandise hey, Bob and just to add a little bit more color in terms of the change in the outlook. The lion's share of the change is due to the softness we've seen in the U S business and that's been essentially across our U S wholesale business, which is roughly half of the overall change in our outlook and then too.
A slightly lesser degree U S E Commerce, and then lesser extent Korea. So those are the major moves as Tim touched on as it relates to the wholesale business. We had so much seen.
Significant changes so to speak as it relates to the fall order book, but what led us to.
There's been some softness in the market. So that's contributing to that overall change in our outlook.
Great. Thank you.
Thank you.
The next question is coming from long <unk> from BNP Paribas launch your line of sight.
Thank you and good afternoon, and thank you very much for taking my question.
Jim I wanted to follow up on your CFO slides, they're always super helpful.
Notes that wholesales into per se to grow low single digits for the year, which implies that wholesale in the second half should be down low single digits to mid single digits.
Just curious to know how do we think about that.
I know you don't guidance explicitly by quarter, but just any dynamics as we think about <unk> and especially how youre lapping the.
The Russian distributor sales in the third quarter.
Yes, that's a good point I would keep in mind comparison looking at the flow of our business even from a first half second half perspective.
Act of the shifts in the timing of deliveries to export much earlier this year for both the spring and fall season does create challenges in terms of the comparative differences year over year.
As you pointed out yes, we do plan on the business.
At a lower rate of growth on the wholesale side in the back half of the year keep in mind. There is a very material component of shipments from the fall 'twenty three season.
Particularly for our distributor business that shipped in the second quarter.
That's that's to the tune of across our global wholesale and distributor business roughly $70 million.
Adjust for that timing difference coupled with you all.
As I mentioned the shipments that we made the latter part of last year for Russia, which are orders, we took pre invasion those equated about 45 million. So if you adjust for each of those two items.
The rate of growth that we see in our wholesale business would be.
In the mid single digit percent range, but from an overall standpoint, when you look at the full year, which I think is much more indicative of.
The trends, we're seeing across the business relates to the wholesale side were up a low single digit percent on a year.
Very very helpful. Thank you, Jim and then I want to follow up on margins.
I think in your 10-K, it notes that freight inbound freight was 180 basis point impact to FY 'twenty two gross margins just curious to know how much it looks from your CFO slide deck today that if you recaptured about 200 basis points in this quarter just curious to know how how much freight is gonna be a benefit for your full year gross margin.
And then clicking down to the SG&A.
Last 10-Q that you had about $18 $8 million of logistics costs in your SG&A, just curious to know how much that was impact for QQ <unk> and.
In dollar terms and how much do you think it could impact for the full year. Thank you.
Yeah as it relates it relates first to the gross margin.
Winds that we had last year of 180 basis points, we continue to anticipate greater than 200 basis points.
Most margin favorable gross margin impact this year as those inbound freight costs have come down.
Really for us.
And then as it pertains to SG&A, we've continued to see Youll.
Youll see it in the same CFO commentary document among the more among.
Among the higher rates of growth in SG&A continues to be operations.
And that's compasses, our warehousing distribution fulfillment costs, that's still a meaningful part of what's driving our SG&A up in.
In the quarter.
Would anticipate those costs continuing through the balance of this year and then of course, we do believe those to be transitory and we get our inventory back down to more normalized levels going into next year that should become more of a headwind in terms of quantifying that Leroy it's gonna be in.
In or around the $30 million range would be a ballpark estimate.
The impact in that area of our business.
Very helpful. As we think about the next fiscal year. Thank you very much Jim.
Thank you and the next question is coming from Mitch Collett from Seaport research.
Your line is live.
Yeah. Thanks for taking my questions, Jim if I heard you correctly it sounds like the biggest.
Part of the of the change in the sales Guy is replenishment your thoughts around replenishment in the back half.
How do you I mean, how do you how do you guys come up with that or are you just looking at kind of.
No trends over the last month or two and extrapolating that I'm, just trying to get a sense as to how conservative you might be with that assumption.
Yes.
The replenishment business for us.
Very helpful and we are in the process of automating that.
Assess today.
Just love to meeting, where we talked about.
Increased accuracy around the replenishment business.
So it's it's going to be important for us in the future.
We're getting much better at but it is impactful this year, especially when you consider the.
The potential impact of the PFS.
Change.
So yes.
It's going to be an important part of our business.
We're getting much better at it all the time, yes, I think just in terms of that niche that's based on a statistical forecast looking back at what we've seen it in trends over the last several weeks and I would say that's the case in terms of our wholesale replenishment business. That's also the case in terms of how we're thinking about <unk> growth in the back half of the year and so the.
Our outlook would contemplate D to C growth rates being similar to what our experience has been when you look at the first half of the year.
Okay, and then I also had a question on the margins I haven't fully penciled out your revised guidance, yet, but if I'm not mistaken you know it looks like your sales are coming down your gross margins coming down I think from an SG&A dollar standpoint that really hasnt changed or maybe it's up a tick from where it was.
Before I may have done my math wrong, but if that's the case I would've thought that you guys would have been with our revised sales guidance you'd be sort of you know.
Turning over every rock looking for cost savings I assume youre doing that but are there other expenses that are going up and the process. How should I think about that SG&A dollar number, which which is leading to you know a fair amount of deleverage on the ear.
Yeah, I mean, we're certainly to your point turned over every rock that we can in terms of executing on cost containment in certain cases, even cost reduction actions internally.
As well so that's that's top of mind I would agree ordinarily you would expect a little bit more pass through of variable based expenses given the reduction in the top line. There are investments, we're making along the way here to ensure though.
That is we look at the distribution and the third party logistics side of our business. There are some professional fees and other costs. We're incurring are incremental investments to ensure that we.
So we set those operations up going forward to be more streamlined and productive. So there are there are certain one time costs in there Mitch I won't get done into specifics in terms of each one of them individually, but they're offsetting some of what you otherwise believed to be a greater degree of variable based expense savings.
Okay. That's helpful. All right. Thanks, good luck.
Yes.
Thank you. The next question is coming from John Kernan from TD Count John Your line is live.
Thanks for taking my question.
Yes, Kevin.
I love the macro headwinds out there that are clearing.
Curious if all the cable who also a competitive environment, the Columbia brand with all of them.
Really help us get more of an entry level price point in the year.
In the wholesale channel and versus some of your peers.
Is there any change in the competitive environment is really difficult.
Difficult periods being here of anybody.
Our broader macro.
Environment I'm curious about some of your high level thoughts there.
Yes, I Love you ran a little bit of trouble with the audio here. So I want to make sure I got your question, but I think youre asking about whether our position.
The value brand is.
Is impacted and we believe that over time this is going to be a real strength for the company.
We talked about the impact on the SG&A the carrying cost of inventories.
We were able to keep high.
The high gross margin.
Based on.
The companys strikes in sourcing.
You have too much inventory, so that's going to be impactful for the balance of the year on the SG&A line.
We're finding great strike.
Strike.
Comfort is the fact that we have the balance sheet that can help us to hang out of inventory.
All it profitably.
During a period like this.
Yeah.
And I know, there's some background noise right now with equal Haley.
Any thoughts on obviously with the new model.
Yeah.
Any thoughts about that.
So they are cyclical.
Yes.
Yes, I'm, sorry, I'm, having a real a real difficult time understand the question I will be happy to.
To capture that if we can.
Later time, if you're able to call yet.
Thank you and the next question is coming from Jonathan Komp.
Baird Jonathan Your line is live.
Yeah, Hi, Thank you good afternoon.
Jim I just wanted to follow up a question on the updated guidance.
It sounded like at least through June the message was you know you really werent, assuming any improvement in the sales environment or the promotional cadence for the year. So I'm just wondering.
Should we should we assume that the environment has shifted pretty meaningfully in the last couple of months or any other color.
Just going back to the the change in the full year guidance and the drivers.
I think that's fair John .
When we had our earnings call in April up to that up to about that time, we were continuing to see the same trends that we saw in Q1, which we reiterated the topline guidance. We provided earlier in the year. The month of May was I would describe it.
Was exceptionally challenging.
<unk> improved a little bit in June and and they've been a bit better here in July but in light of what we saw during the quarter and particularly as we got into the mid to latter part of quarter. Yeah. Thanks, we're thinking of it or more challenging and that led to the revision. We made both on the wholesale side in terms of how we're thinking about reorder replenishment.
And then also in terms of E Commerce, and Youll recall E. Commerce was a channel of our business that we thought would be the highest rate of growth business coming into the year and as we sit here through the first half of its been the slowest growing part of our business at a low single low single digits. So we thought it was appropriate and prudent to realign our outlook.
Look and de risk some of the trends that we're seeing in the business through the quarter.
And do you have any ability to tell if those risks or the adjustments to the business will.
There will be concentrated in the second half of 'twenty, three or any you know any any.
Perspective, and when you might get some color on how our wholesale trends in any destocking might carry into 2024.
Yes, the biggest variable for the back half of the year is going to be the weather.
No.
Our retailers will be there.
Relatively low inventory levels of winter merchandise carried over from prior periods. So that we started the year with brand new merchandise.
Full stocks really the balance of the year in terms of whether it will be much more of that.
Yeah, that'd be economy, I think John retailers have generally been more cautious.
As we sit here today, with where spring sell through and Tim touched on spring sell through has been a bit slower, but I described inventory levels in the marketplaces being moderately elevated so when you look at some slowdown in higher inventories naturally they're going to be a bit more cautious. So that's that's what we're reflecting in terms of the change in how we're seeing the revenue.
Cash for the balance of the year and then.
In terms of getting a better read on that.
Third quarter is typically the point in time, where we're shipping an initial force that so it doesn't come until we get into the early fall, where we start to see that sell through through back to school and some of the early fall sales to get a better read on how things are progressing.
Okay, Great and just last one for me Jim It looks like the guidance is assuming.
Operating profit below 2019 levels through the third quarter, followed by a pretty significant shift to positive in the teens in the fourth quarter comparing against the 2019 base I don't know if that's the right comparison to think about but just any more color on factors that would drive that profitability flip.
By the by the fourth quarter.
Yeah, I tried to go back to fourth quarter and comparing it to a prior period like that I would have difficulty doing that what I would say John no is certainly be ended at 10% ish operating margin this year.
Disappointment from our perspective, we've got much higher expectations in terms of driving the right profitability and expanding operating margins over time, I think bear in mind.
Tim touched on certainly the most significant item impacting and having a deleveraging effect on our operating profit and the elevated inventories that we're carrying.
We're not ready to provide an outlook as we think out to 2024 here today, having said that if you look at the pressure that's putting on the P&L and twenty-three across SG&A that we've touched on as well as the clearance type activity at lower margins as we move through certain of is inventory or outlet it's north.
Of 200 basis points.
So as we get that inventory back down into a more tolerable level and think about a potential to expand the operating margin all subject to how the top line plays out next year that should be a tailwind for us.
That's very helpful. Thanks, again for all the color.
Yeah.
Thank you. The next question is coming from Jim Duffy from Stifel.
Jim Your line of sight.
Thank you good afternoon, I wanted to ask on pricing in general just given the pressures to consumer spending, but do you feel about your MSRP in the marketplace.
You are you revisiting pricing at all looking at making adjustments there I recognize you have promotion as a tool, but how do you feel about your go in pricing in the price value equation.
Yeah, Jim I think we're in good shape actually I don't believe that piece.
The reduction in our guidance is a function of the products being overpriced.
I think we're in the right spot.
Exactly yes.
The business normalizes from an inventory perspective, we intend to increase our.
Our marketing spend over time to to give us a larger voice.
To the consumers so.
No I think we're in great shape, we've got a very efficient sourcing operation.
We expect to be able to continue to use that as a lever.
Get them, where their balance sheet to make them better organized approach to the marketplace.
Okay. Thank you and I also thought I would ask just spud inventory composition and in in the past you had spoken about footwear versus apparel.
How does that split are you heavier in footwear than you are in apparel or is it relatively balanced.
They were slightly heavier in footwear and apparel.
We.
We're pretty good at estimating the values were going to be garnering a lot of this inventory so it.
Generally a pretty accurate on the inventory.
Gross margin guidance so.
We've built in the right approach to how we plan to liquidate.
Yes.
Looking at the composition of the inventory Jim.
At a high level call it around 50% of the inventories current season.
20% of it's aged and then the balance would be the carryover the evergreen type styles that 20%. That's H, that's not too far off of it it's more elevated than where we would like but in light of.
The outlet stores that we have the leverage we've opened up some temporary stores, we feel perfectly comfortable working that inventory down in the latter part of this year.
Very well thank you.
Yeah.
Thank you. The next question is coming from Abbvie sufficiently X from Piper Sandler your line of life.
Hi, Yeah. Thanks for taking my question and I know, it's smaller piece of the business, but can you talk about kind of how you're thinking about the go forward growth trajectory of both the prana and mountain hardware.
Yes, I don't know about hardware.
I and Alpinist brand.
And we believe that we've got the right team managing that business today.
It's been challenged in the past, but frankly I think we're in the right spot with that brand and there's a large opportunity for us.
Especially in the U S as we approach.
Some specialized.
Yes, it's an area, where where is sort of a smaller niche consumer and I believe that that's going to be really success for that brand.
The right people in place to manage it.
Okay.
Okay.
Thank you. The next question is coming from Mauricio Serna from UBS Reseal. Your line is open.
Great. Thanks for taking my question.
Wanted to ask about the sales guidance and just if I look at the <unk> outlook you provided I think an implied.
Sales will be down two 8% and <unk> just wanted to understand is that all related to shift in wholesale shipments you know like between the quarters.
And from a regional perspective, how should we think about that I just wanted to confirm I would think that a lot of that maybe is coming from U S.
And then maybe if you could talk about you know you commented about some challenges in the footwear category I just want to make sure like if those challenges that you were talking about or that related.
Related specifically to outdoor or would you say, it's more like throughout overall sportswear. Thank you.
Okay.
One that I'll come back on the sales.
Yeah, I can talk about the Fort worth it.
The outdoor category.
Been softening a bit.
That's where the primary business for the Columbia brand is.
The Sorel brand.
Yes.
Yes.
Primarily.
With.
Women's fashion brands, we've seen great success.
Sandal category with that brand and the expectation for the balance of the year as well as growth in womens.
Protective footwear.
As well as fashionable products so.
We're excited about that but there is some softness in the ER.
Outdoor category as it relates to the Columbia brand.
And then mourinho as it relates to the sales guidance. So we've provided third quarter revenue growth of 4% to 6% and then.
If you.
Engineer that act and what the what would be contemplated in the fourth quarter. It would be down in mid single digit percent.
To your question there are still a lot of timing shifts.
Each quarter, you know last year for the fall 'twenty two season, we were awfully late getting inventory to the market and so there was a higher proportion of our fall 'twenty two wholesale orders that shipped in the fourth quarter. So we're contemplating begin much earlier than we would expect our wholesale direct business.
Being up quite substantially in the third quarter, However, theres going to be an offset as we shifted international distributor fall 'twenty three orders in the second quarter. So there is an awful lot of noise when you get into the overall timing impacts of our wholesale and distributor business. So.
Keep that in mind when you look at quarterly flows and then as it relates to the direct to consumer side of the business I think we planned it relatively stable in Q3 Q4 mid single digit percent of of growth.
Can you repeat that number mid single digit for DTC.
Yes, that's right.
Alright, Thank you very much.
Thank you and the next question is coming from Alex Perry from Bank of America, Alex Your line is live.
Hi, Thanks for taking my question I just have one here I just wanted to ask can you talk about how youre thinking about gross margins in the third quarter should they be up year over year and do you still expect a fairly promotional environment as we enter the back half like I guess within the full year gross margin guide what is sort of the expectations for.
For promos in the back half and any color on sort of <unk>.
<unk> gross margin would be super helpful. Thank you.
Yeah as it relates to Q3 gross margin, but not gotten down into specifics from a guidance standpoint, aside from providing revenue and operating income outlook, having said that we would we would expect gross margin to be up in the third quarter. We will continue to benefit from the lower inbound freight costs.
Those that should be up 300 basis point.
Benefit in the in the third quarter Theres going to be some favorability as it relates to the region and channel mix as well with.
Lower sales from our distributor business, which carries a lower gross margin.
And so there is an offset however, and that's to your point in terms of what we're expecting from a promotional and clearance standpoint, so that's by and large offsetting a lot of that.
In the third quarter, and that's effectively as we move through this inventory through our outlets.
We're more or less holding the promotions that you would see marketed but as it relates to in store.
Through the excess inventory moving through there from a player standpoint, those are marked down a bit more.
So that's essentially the offset that you see in the margin and then the fourth quarter, we anticipate being up as well. It's really those same drivers that are going to that.
That are going to play it.
Perfect. That's really helpful best of luck going forward.
Thanks, Doug.
Thank you there are no other questions at this time I would now like to hand, the call back to Tim Boyle for closing remarks.
Yeah.
Thank you very much.
Thanks for listening in and look forward to talking to you at the end of Q3.
Yeah.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.