Columbia Sportswear Company - Q1 2023

Transcript

Operator (participant)

Greetings. Welcome 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. You may begin.

Andrew Burns (VP of Investor Relations and Strategic Planning)

Good afternoon, 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 and financial review presentation explaining our results. This document is also available on our investor relations website, investor.columbia.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 at 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 to conform the forward-looking statements to actual results or changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and the financial tables included in our earnings release in the appendix of our CFO commentary and 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. I'll turn the call over to Tim.

Tim Boyle (Chairman, President, and CEO)

Thanks, Andrew. 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'm pleased to report that earlier receipt of spring 2023 inventories drove improved wholesale on-time delivery rates and a return to pre-pandemic service levels. For the last three years, supply chain constraints have impacted our ability to drive sales growth. As we look to maximize sales in this uncertain economic environment, it's great to have those 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. Apparel category performance was also a bright spot as sales trends benefited from better availability of spring 2023 product. In other areas of the business, consumer demand signals were more challenging. columbia.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 Hike & 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 is a top priority. Inventory exiting the quarter was up 34% year-over-year, driven by elevated carryover inventory, 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 reducing 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 forecasts for overall demand and 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. Gross 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 $0.74. I'll now review first quarter year-over-year net sales growth by region and brand. For this review, I'll 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 2023 orders relative to last year. The Columbia brand's 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-digit 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 for columbia.com. Turning to our international business. Latin America, Asia Pacific region or LAAP, net sales increased 22%. China net sales increased mid 20%.

Over the last several years, we laid the groundwork to enhance store productivity and re-accelerate 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 2023, we successfully launched a 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 2023 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 Columbia 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, Columbia is connecting with consumers in an authentic way through the buildup of hike communities, including the Hike 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 passions for the outdoors, we're building deeper connections with consumers and inspiring the next generation of outdoor enthusiasts. LAAP 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. 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 2023 product. Despite relatively warm and dry weather in the quarter, Columbia brand strength and better product availability fueled healthy sell-through. Columbia was recently announced as the first exclusive partner of Megamarsch, a series of hiking events that take place across Europe.

The series had over 35,000 participants in 2022 and is scheduled to host 23 events this year. We expect this partnership with one of the 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 2023 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 and 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.

Columbia 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 75 hiking shoe. This is our latest addition to the Facet 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 Facet 75 was featured in several outdoor publications, including articles from Gear Patrol and GearJunkie on the best new gear for 2023. Charles Melton from the television series Riverdale led a group of influencers who will be seen wearing it on social media in the next few months.

With the Peak Freak campaign last fall, and now the Facet 75 this spring, we're establishing a cadence of high-impact footwear launches. Shifting to PFG, 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 You Love is about conservation as well as protecting your skin with our sun-protecting 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 ranges from Wesley Locke, one of our fishing athletes, to the Dude Perfect team, who partners with Bubba Wallace to have a fishing competition in Miami.

Bubba Wallace also nearly won in a PFG wrapped car at the Talladega Speedway last weekend. In another feature story, New York Mets first baseman Pete Alonso speaks about growing up fishing and the importance of great gear in 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 Guide jacket and the Super 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. In our latest collaboration with New York-based boutique Kith, we harnessed the power of PFG with an assortment of fishing apparel, footwear, and accessories that blend functionality with style.

Several top styles sold out almost immediately, attesting to our ability to build brand and product heat with a younger audience. On the innovation front, we launched Omni-Shade Broad Spectrum. This product utilizes engineered combinations of fiber, yarn, and fabric structures to block a wider range of harmful UVA and UVB rays. Columbia is the first brand to label clothing as 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 offering are well positioned to meet the needs of consumers in this economic environment. Finally, I would like to welcome David Theiss as Columbia brand's new Senior Vice President of North America DTC. David has an accomplished background in retail and merchandising, 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 sales were down primarily due to the tough footwear 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 2022 product resulted in some fall product missing the peak selling window. To clear through this late-arriving fall inventory, the brand increased promotional activity on SOREL.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 sports styles like the Kinetic 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 Hardwear net sales increased 18%, driven in large part by earlier shipment of spring 2023 orders. Following Mountain Hardwear's product-driven resurgence, the team is now working to bring the brand's identity to life. This includes enhancing Mountain Hardwear's digital presence and launching a more robust organic social media strategy. PrAna net sales decreased 1% in the quarter. The sales decline was driven by the wholesale business, partially offset by DTC growth. To celebrate prAna's 30th anniversary, the design team pulled some of the brand's original styles from the archive and refreshed them to create a new prAna Originals 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 Meagan Martin to reinforce prAna's connection to climb. Senior Vice President of Emerging Brands, Craig Zanon, 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%-6% net sales growth outlook. While there are various trends across our regions, channels, and categories, our 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. Realizing savings from these actions will take time. We expect operating margin to be in the range of 11.6%-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-$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're investing in our strategic priorities to accelerate profitable growth, create iconic products that are differentiated, functional, and innovative, drive brand engagement with increased focus demand creation investments, enhance consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that is digitally led, omni-channel and global, and empower 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?

Operator (participant)

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 Drbul with Guggenheim Securities. Please proceed.

Bob Drbul (Senior Managing Director in Equity Research)

Good afternoon. Tim, I have two questions really. The first one is when you look at, you know, the outlook for the remainder of the year, have you seen any changes in your order book? You know, I know you kept your top line the same, but, you know, when you look at the performance, you know, in North America or in Europe, have there been any material changes from, you know, what you had seen, you know, a quarter ago? The second question is, you know, can you elaborate a bit more in terms of, you know, what's happening in the footwear category? I think you talked about Hike & Trail, and just how big. You know, what's the percentage of that in your business?

Just, you know, what do you think it'll take to Get that business to either, you know, slow down in terms of some of the declines or actually improve maybe in the back half of the year. Thanks.

Tim Boyle (Chairman, President, and CEO)

Yeah, Bob. No significant change. In fact, no changes really of any consequence on the order book. As you know, we take orders every day and cancels every day, so, but our order book is as we expected it, you know, several quarters ago. We're excited about the ability to perform on the order book in a much better and more timely manner than we had certainly last year. You know, last year was such an unusual period where we had an enormous order book, then the logistics issues really didn't allow us to fulfill it. The final result, frankly, was the inventory levels that we're seeing today. We're confident in that, and our ability to perform there.

As it relates to footwear, Hike & Trail over the total is the company's largest category of footwear. In the back half, it'll certainly be a challenge from a size perspective by our winter footwear business, which is actually the biggest part in the last part of the year. We're very focused on creating great products, which are highly differentiated and democratic in terms of their pricing and promotion. I still am confident that the company can provide innovative, differentiated products to have our business grow at the proper levels.

Bob Drbul (Senior Managing Director in Equity Research)

Great. Thank you very much.

Operator (participant)

The next question comes from Laurent Vasilescu with BNP Paribas. Please proceed.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Good afternoon. Thank you very much for taking my questions. I wanted to ask about SOREL, the guide originally, I think last quarter, 90 days ago, is to low double-digit growth. Now I think it's guided for high single-digit growth in the CFO commentary. Just curious to know what you're seeing there. Was there a pickup in cancellations? Go piggybacking off of Bob's question, I think fall order book was originally anticipated to be up mid-single-digits overall for the company. Is that still the case?

Tim Boyle (Chairman, President, and CEO)

The SOREL brand was impacted much like the Columbia brand in terms of a large order book last year and poor fulfillment on our part last year due to logistics issues. When we talk about the spring quarter and the quarter just completed, it was impacted with promotional activity from the winter merchandise that we carried over, as well as weather impact on spring products. As the quarter has concluded and we've seen activity in the latter part of the quarter and the early part of Q1, Q2, and we're seeing that the sandal category is now getting traction and improving.

You know, 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, that this will be a fast-growing brand for the company.

Jim Swanson (EVP and CFO)

Laurent, there's been no meaningful changes in the fall 2023 order book. We're still planning that part of the business up for SOREL on a mid-single digit percent for the season.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Okay. Very, very helpful. Jim, maybe a question for you on your, on your CFO deck. Last quarter, I think in the first half commentary, you were expecting, you know, 1H 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 on how we should think about 2Q gross margins. If they are below, maybe can you walk us through, like, the moving pieces to get to the full-year guide?

Jim Swanson (EVP and CFO)

From an overarching standpoint, we're still planning our gross margins to be up in the second quarter. They'll be up north of 100 basis points, Laurent. With the revision we've made in our outlook, we've indicated that we'll come in at the lower end of our first half outlook. If you do the math on that'll imply our Q2 operating income essentially being breakeven. If you look at gross margin being up just over 100 basis points, you can do the rest of the solve on that. 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's really been aligned to what our plan has been to date.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Okay. Very, very helpful. Just one last question on the Russia business. Can you just again maybe remind the audience the magnitude of the impact, it's just the timing as we think about modeling EMEA for the year by quarter?

Jim Swanson (EVP and CFO)

Yeah. On the full-year, in terms of what we fulfilled to Russia, it was around $50 million, and that was fulfilling orders that had been taken prior to the invasion. Then, specific to the first quarter, it's a mid-single digit millions of dollars that we shipped to Russia. I think it was in the $5 million range.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Okay. Most of it came into. Remind me, I think it was in 3Q 2022, right? When you fulfilled it?

Jim Swanson (EVP and CFO)

Exactly right. There was essentially nothing in the second quarter, it would have been predominantly third quarter that you would have seen those shipments.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Okay, very helpful. Thank you very much, Jim, for that. We can model it correctly. Thank you.

Operator (participant)

Next question comes from Mitch Kummetz with Seaport Research. Please proceed.

Mitch Kummetz (Senior Analyst)

Yeah, thanks for taking my questions. First question on supply or on the SG&A. You know, the SG&A rate has gone up. Sounds like that's primarily supply chain. I guess I'm wondering, you know, what's changed? Why are 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? Maybe kind of a follow-up to that. Like, when I eyeball the slide deck, it looks like maybe supply chain is up around $20 million. Like, what are you thinking for the year now on those year-over-year incremental supply chain expenses?

Tim Boyle (Chairman, President, and CEO)

Yeah, I'm gonna ask Jim to talk to you about the balance of the year, but what we saw in the first quarter was an impact of inventories on the efficiency of our logistics operations, just the sheer magnitude of inventory that was impacted the ability for our distribution centers to act efficiently during that period. We expect that as we reduce our inventories, and as we mentioned, we expect about a $600 million cash flow positive from this year. As the inventory levels are reduced, our efficiencies will also increase along the way.

Jim Swanson (EVP and CFO)

Mitch, and just to reiterate the point there, the increase in our SG&A on the quarter, that's not a function of inventory having 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'd be able to manage down the labor within our distribution center. That came as a bit of a surprise, and we've incurred some transition costs related to our third-party logistics. When you look at the change in our full-year outlook, which is in the mid-teens millions of dollars to the operating income line, essentially the entirety of that is associated with, you know, what we've seen in the first quarter as it relates to the incremental warehousing and fulfillment costs.

Mitch Kummetz (Senior Analyst)

Okay. Are these costs that essentially, you know, go away next year when you have, you know, what, you know, because you're expecting the inventory to be down $200 million?

Jim Swanson (EVP and CFO)

That would certainly be our expectation. You know, as we get the DCs back down into normal capacity levels and 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 nature that will accumulate during the year. I would expect that provides us a bit more of a tailwind as we get out to 2024.

Mitch Kummetz (Senior Analyst)

Okay. Just to follow up, Tim, on the footwear piece, the Hike & Trail, the challenges there. Is this kind of a, you know, post-COVID hangover where the pendulum is kinda over-correcting away from these categories? Like, if so, you know, when might that normalize, do you think?

Tim Boyle (Chairman, President, and CEO)

I think it's gonna be yeah, and I would say, yes, it's a combination of high demand during the COVID-19 period for hiking footwear and then, really a ability for us to provide new, fresh merchandise this year. I would think that over time, when we have a larger component of our footwear being along the lines of our Facet collection, which is a fast hike, more sneaker-ish type product, that you're gonna be seeing, you know, re-acceleration of the footwear, especially in Hike. That's the expectation, and we're working hard towards that.

Mitch Kummetz (Senior Analyst)

All right. Okay, thanks. Good luck.

Tim Boyle (Chairman, President, and CEO)

Thanks, Mitch.

Operator (participant)

Up next, we have John Kernan with TD Cowen. John, please proceed.

John Kernan (Managing Director and Senior Research Analyst)

Excellent. Thanks for taking my question, guys. Just on SOREL, obviously, you know, the targets you laid out at the investor day, 20%+ growth. It did have, you know, tough multi-year comparisons this quarter. I'm just curious how you're planning the business the rest of the year and, you know, how do we think about the return to growth?

Tim Boyle (Chairman, President, and CEO)

Well, the brand is, you know, an incredibly strong performer inside our emerging brand portfolio. We would expect that as we continue to gain traction in that business, with timely deliveries of product, and the high quality standards that we have in styling and design will again produce great sales results. That's our focus and that's the plan.

Jim Swanson (EVP and CFO)

John, as it relates to, you know, how we're envisioning growth for the balance of the year. In the CFO commentary, we indicate that SOREL's planned up a high single digit percent from what had been a low double digit percent. I would say that's pretty consistent across the quarters with the exception of third quarter will be a bit higher given the expectation of earlier delivery and shipment of fall product. I think, you know, we look at Q1 as being a little bit of an aberration, as Tim touched on, in terms of it being a transition seasonal quarter for us, and looking forward to the balance of the year.

John Kernan (Managing Director and Senior Research Analyst)

Got it. How should we think about inventory dollars as we start to cycle some of the bigger increases from last year? Within that, how do we think about the recovery of freight costs within gross margin?

Jim Swanson (EVP and CFO)

Yeah, as it relates to inventory for the balance of the year, there are some comments in the CFO commentary that we've provided in our first half outlook. We contemplate inventory continuing to grow at the end of Q2, albeit it'll begin to normalize from a growth standpoint. We were +30%, just over 30% here in Q1. We'll see that come down into the low twenties in Q2. Our expectation is, as we begin to move into the fall/winter season, leveraging that carryover inventory, utilizing that excess inventory through 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, and we're stretching to be far better than that as we exit the year. As it relates to, you know, to the degree, as we move through that excess inventory, we've got that planned into our margin in terms of, you know, and still really thinking about this from a normalized discounting perspective and any changes that might have in our obsolescence or inventory reserves is also factored into the outlook that we're providing here today.

John Kernan (Managing Director and Senior Research Analyst)

Got it. Maybe one follow-up. Obviously, nice to see the revenue guidance reiteration. Just 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, weather obviously not agreeable. How do you think people are prepared for the macro as we go into the back half?

Tim Boyle (Chairman, President, and CEO)

Yeah. I think in general, our order book is built on a conservative outlook from our retailers. No one was expecting great things from the back half of 2023. I think that's how retailers built the book, and our expectations are that we'll, based obviously on our inventory levels, that we have, we'll have something to fill their shelves with in addition to what they've already bought.

John Kernan (Managing Director and Senior Research Analyst)

Got it. Thank you.

Operator (participant)

Okay, the next question is from Jim Duffy with Stifel. Jim, please proceed.

Jim Duffy (Managing Director)

Oh, thank you. Good afternoon, guys. Just a couple questions from me. I wanted to start on the DTC trends. I'm curious, is the positive comp you're seeing there supported by better in-stocks or are you seeing good traffic in transactions as well?

Tim Boyle (Chairman, President, and CEO)

Yeah, 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, the traffic was quite strong in the stores this quarter. We think that's reflective of a number of issues, including, you know, consumers at this time looking for greater value, and we have a strong out-outlet fleet. Pricing has remained strong. I think we're positioned correctly. As we said, we were gonna be liquidating our carryover inventory primarily through our own outlet stores for the fall.

Jim Swanson (EVP and CFO)

Yeah, I'd say a modest benefit as it relates to the better stock levels. I think this is much more a function of traffic that Tim's describing and an increase in tourism in certain of our international markets.

Jim Duffy (Managing Director)

Good to hear. I'm also hoping you guys can speak to U.S. channel inventory dynamics. Is the footwear situation that you referenced unique to footwear in those categories, or are you seeing channel apparel inventories elevated as well? What do you see as, you know, kind of the timeline for path to resolution of that?

Tim Boyle (Chairman, President, and CEO)

Yeah. I think in general, our category of merchandise has been more challenged than others in the footwear area.

Jim Duffy (Managing Director)

Got it. How about apparel, Tim? Is the apparel channel inventory situation in a fairly healthy state, or are there imbalances there as well that you're contending with that are influencing the marketplace?

Tim Boyle (Chairman, President, and CEO)

Yeah. Again, our retailers took a quite conservative approach to spring orders. Frankly, we've seen improved sell-throughs versus last year, and 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 tailwinds.

Jim Duffy (Managing Director)

Okay, great. 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 of $100 million. What's behind the lift?

Jim Swanson (EVP and CFO)

I think more so than anything, we were a bit conservative when we put that together previously, Jim. As we've taken a harder look at, we've got more definitive 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 gonna end up in that north of $600 million range from an operating cash flow perspective.

Jim Duffy (Managing Director)

Great. I'll leave it at that. Thank you, guys.

Tim Boyle (Chairman, President, and CEO)

Thanks.

Operator (participant)

Okay. The next question comes from Abbie Zvejnieks with Piper Sandler. Abby, please proceed.

Abbie Zvejnieks (VP)

Great. Thanks so much for taking my question. Just on the earlier delivery of shipments in 1Q, are there any geographies or brands, where we should expect that to create difficult 2Q growth rates? On the SOREL brand, just with the U.S. wholesale order book being, you know, conservative like you just talked about, I guess what's driving the better SOREL results in the second half? Thanks.

Tim Boyle (Chairman, President, and CEO)

Yeah. Again, as it relates to the earlier deliveries, I think our business will be quite strong at our retail partners during especially the balance of the year. Our biggest seasonal sales period for the Columbia brand certainly is Father's Day. That's where, you know, our PFG performance really shines. I think our retailers are well stocked there and certainly in better shape than they were last year. Our expectations are for a good second quarter sell-through with our retailers. As it relates to SOREL, as focused as we've been on changing it from a winter brand to a more year-round brand, it's still heavily impacted by the sales of winter footwear.

Our expectations are that the back half of the year for SOREL will be a tailwind as it relates to winter footwear requests.

Jim Swanson (EVP and CFO)

Yeah. 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 first quarter. It'll be up a low single- to mid-single-digit percent, kind of in that zone. The difference between the two quarters is effectively gonna be the timing shifts on the wholesale business. By geography, where you'd expect to see the most of that would be in the U.S., Canada, and our European direct businesses, where we've received inventory and we're able to get it out to our customers sooner. You'd see the adverse effect of that coming out of the second quarter.

you'll see, well, that same trend, phenomena occur in the latter part of the year as well, where will be heavy Q3 growth and lighter Q4 growth.

Abbie Zvejnieks (VP)

Got it. Super helpful. Thank you.

Operator (participant)

Okay. The next question is from Jonathan Komp with Baird. Please proceed.

Jonathan Komp (Senior Research Analyst)

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 seasonally low period. Second half looks like embedding fairly healthy double-digit earnings growth for the second half combined. Could you just maybe walk through the pieces to sort of get comfortable with that outlook?

Jim Swanson (EVP and CFO)

Yeah. There's two to three drivers on that, Jon, that 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. If you set that piece aside, the other two major factors that are gonna 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.

The second point I would make here is that as you think about SG&A, you know, we come into the year with a heavier rate of growth from an SG&A perspective. You're seeing that in Q1. As we work ourselves into the back half of the year, again, we'll be lapping some of the investments we made last year, plus some of the cost containment actions that we've taken. 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. You know, we're perfectly confident in the plan we've put together around that with all the visibility that we have here today.

Jonathan Komp (Senior Research Analyst)

Yeah, that's really helpful. 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 some maybe conservatism at the low end coming in or are you including some optionality places you could pull back if needed? Just any thoughts there? Thank you.

Jim Swanson (EVP and CFO)

It's really just more a function of the discrete nature of the change in the outlook. When you look at first quarter where, you know, where the SG&A came in higher than we had expected, you know, because it's kind of a discrete event, you know, we felt that the high end required an adjustment. We didn't foresee as strong of a need on the low end of things.

Jonathan Komp (Senior Research Analyst)

Okay. Makes sense. Thanks again.

Operator (participant)

Okay. Up next, we have Paul Lejuez with Citigroup. Please proceed.

Tracy Kogan (VP)

Hey, thanks. It's Tracy Kogan filling in for Paul. My first question is on Columbia footwear specifically, I'm wondering what you're expecting for sales growth this year now compared to your prior expectations. What are you looking at for margins in that footwear business? 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 represents, right now, what you think it might eventually be, what's the price point like there compared to the rest of the assortment? Thanks.

Jim Swanson (EVP and CFO)

As it relates to the, as it relates to the Columbia footwear side of things, we from an overarching standpoint, we still see the Columbia brand growing at a high single digit rate of growth. Do I have that right, Andrew, or is it mid-single? I think it's more mid-single. Sorry. The footwear is slightly gonna 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 taken for our customers. Then I might pass it over to Tim as it relates to China and the Transit Collection.

Tim Boyle (Chairman, President, and CEO)

I just wanna make one more comment on footwear for Columbia.

The most important and impactful part of our business is winter footwear. Due to the logistics issues we had last year, this will be really an improvement, vast improvement, frankly, on delivery timeliness on the winter footwear. Our expectations are quite high there for a very successful season. The Transit Collection was born in China and designed by our China merchandising team based in Shanghai. The product itself was commercialized and manufactured by the global team, which is based here in Portland. We had great costs on it, a lot of very good gross margins, and proves to us that we need to be synchronizing our investments in product to include local influence merchandise.

I think what we've learned is that the more we link our global teams together and use design and creative folks that are based in market, the better we're gonna be doing.

Operator (participant)

Great. Thank you. Okay. The next question is from Mauricio Serna with UBS. Please proceed.

Mauricio Serna (Director of US Equity Research)

Hi, good afternoon. Thanks for taking my questions. I want to ask about the gross margin cadence. You know, just thinking about second quarter, you provided an outlook, but if I think about third versus fourth, where should we expect a, you know, higher gross margin expansion? I guess from the SG&A perspective, I understand fourth quarter SG&A dollars will probably be down or probably the quarter with the least growth. If I think about the other two quarters, how should we think about that, the growth in 2Q and 3Q? Thanks.

Jim Swanson (EVP and CFO)

Gross, gross margin, as I commented earlier, we do plan that to be up greater than 100 basis points in Q2. Sequentially, as you look at third, fourth quarter, they're both gonna be relatively equivalent in terms of the gross margin expansion and slightly above where we plan to be for the second quarter. It should be relatively consistent. With the understanding that, you know, the ocean freight, the inbound freight cost benefits will be flowing through each of those three quarters as ratably similar, that makes sense.

As it pertains to SG&A growth, I think we still have SG&A growth planned through each of the three quarters, albeit that rate of increase or rate of growth in SG&A will come down, particularly towards the end of the year and more in line with where we've got the full-year plan from a top line perspective.

Mauricio Serna (Director of US Equity Research)

Got it. Just to confirm, that implies that fourth quarter SG&A dollars will be up despite, you know, despite including the prAna impairment from last year?

Jim Swanson (EVP and CFO)

No, because the prAna impairment charge, we did not include that as SG&A expenses.

Mauricio Serna (Director of US Equity Research)

Okay. Got it.

Jim Swanson (EVP and CFO)

item in our P&L.

Mauricio Serna (Director of US Equity Research)

Got it. Just one follow-up maybe. If, if you could speak about the, you know, in the U.S. DTC business, a little bit more color on the sales growth trends inter quarter? Just trying to understand, like, how the sales evolve, like, across each quarter. Do you see a deceleration or acceleration? Any additional commentary would be very helpful. Thanks.

Jim Swanson (EVP and CFO)

Well, we certainly don't wanna get into the monthly cadence of it aside from the prepared remarks that we've made. You know, on the whole, what I would describe is that, you know, the DTC brick-and-mortar business was healthy really throughout the quarter. You know, we saw nice traffic in that part of the business in the U.S. and internationally. As Tim noted, I think in the prepared remarks, the e-commerce business was a bit slower in the early part of the quarter. With some incremental promotions that we've made, we began to see demand surge a bit there.

I would keep in mind, you know, we're lapping first quarter of last year in which consumer demand was still, you know, quite robust coming off of some of the stimulus from the year prior and a quite cold, favorable weather as well. You know, lapping against that and still be able to put up the growth rates, we still remain pleased with the overall performance of the business and that brick-and-mortars more than offsetting some of the shortfall that we saw on the e-commerce side of the house.

Mauricio Serna (Director of US Equity Research)

Got it. Thank you. Thank you very much.

Operator (participant)

The next question is from Alex Perry with Bank of America. Please proceed.

Alex Perry (VP of Equity Research)

Hi. Thanks for taking my questions. Just first, what's 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? How do you sort of square that away with, you know, your comments on sort of the consumer seeking out value with the really strong traffic you've seen in the outlet business? Just on the DTC versus wholesale outlook, I guess when you look at your DTC business, what are you sort of expecting in terms of, you know, DTC.com versus DTC brick-and-mortar? Is the thought that for the remainder of the year, given what you're seeing in your outlet business, that DTC brick-and-mortar, you know, continues to sort of outpace DTC.com? Thanks. Yeah.

Tim Boyle (Chairman, President, and CEO)

I would say that the promotional activity we expect to be on par to previous, call it pre-COVID-19 levels. We expect impact there offset partially by what we would see in terms of savings of freight. I think that we've guided appropriately on our gross profit margin for the balance of the year. As it relates to DTC.com versus brick-and-mortar, it seems like consumers, you know, at least in the first portion of the year, wanted to get out and shop. They did that in a, in a greater way, certainly in our operation than sitting at home and ordering online.

It's our expectations that that will likely continue, that we have, you know, a stronger performance from DTC, but we also expect our dot com business to rebound and be strong as well in the balance of the year. We really haven't, again, given great granularity on the two, but it certainly appears that consumers like getting out and shopping.

Jim Swanson (EVP and CFO)

Yeah, that's right. Alex, there is a subtle change in our revenue outlook, where basically previously we'd indicated that our dot com business would grow faster than our brick-and-mortar business, and that's reversed in 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 more or less offset each other.

Alex Perry (VP of Equity Research)

Perfect. That's really helpful. 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 or more next year? What exactly is sort of in there? Thank you.

Jim Swanson (EVP and CFO)

It'd be more second half, you know. It's much more a function of slowing rate of investment, slowing the rate of headcount additions, you know, those types of costs. I wouldn't necessarily describe it as, you know, 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. 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 and distribution, you know, we would expect that, you know, as we lap those, that should provide us a bit of a favorable comp to be more efficient in the out year.

Alex Perry (VP of Equity Research)

Perfect. That's really helpful. Best of luck going forward.

Jim Swanson (EVP and CFO)

Thanks, Alex.

Operator (participant)

We have no further questions in queue. We have reached the end of the question and answer session. I will now turn the call over to management for closing remarks.

Tim Boyle (Chairman, President, and CEO)

Well, thank you for listening in. We're excited about the potential for the future, we have great opportunities ahead of the company. We look forward to talking to you in about 90 days' time.

Operator (participant)

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.