Columbia Sportswear Company - Q1 2024

Transcript

Operator (participant)

Greetings. Welcome to the Columbia Sportswear Q1 2024 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, and thanks for joining us to discuss Columbia Sportswear Company's Q1 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 and Chief Administrative Officer and General Counsel Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations, or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings.

We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and 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. Now I'll turn the call over to Tim.

Tim Boyle (Chairman, President and CEO)

Thanks, Andrew, and good afternoon. I'm pleased to report that 2024 has started out broadly in line with our expectations. We are reiterating our full-year net sales outlook while modestly raising our diluted earnings per share range. In this challenging environment, we continue to take a disciplined approach to expense management, and our commercial teams are working to maximize sales across all channels. Our fortress balance sheet enables us to take a thoughtful approach to unlocking the long-term growth and profit improvement opportunities we see across the business. During the quarter, we made meaningful progress on our top priorities. Our inventory reduction plan has yielded substantial benefits. Inventory was down 37% year-over-year exiting the quarter. I'm proud of our team's efforts to navigate the supply chain challenges of the last several years while generating healthy gross margins.

We are now shifting our focus towards longer-term supply chain goals, including improving inventory turns and enhancing the speed and efficiency of our operations. Growth is vital to our success. We are implementing strategies across the portfolio to accelerate the business. For Columbia, we're focused on bringing younger, active consumers into the brand through a reinvigorated product line that further emphasizes innovation, performance, and style. On the marketing front, we're targeting a more balanced, full-funnel approach to drive consideration from new customers. We are also focused on elevating our product assortment and enhancing our in-store retail presentations across all channels. We have several proof points across the globe that this strategy is successful. We've driven meaningful growth in recent years in China and several markets across our Europe Direct and distributor businesses. We know that when we target the right consumers with our innovative products, we win in the marketplace.

In our emerging brands, we have new leaders at SOREL and prAna formulating the brand and product strategies to fuel their next phase of growth. Mountain Hardwear has strong momentum from its recent brand refresh, and the team is thinking bigger as they map out paths to meaningfully scale the business. Turning to our profit improvement program, we're on track to deliver between $125 to 150 million in savings by 2026, including $75 to 90 million in cost savings this year. We are eliminating expenses associated with carrying excess inventory and driving cost efficiencies throughout our supply chain. We've also begun realizing indirect spend savings. During the quarter, we completed a reduction in force. It's never easy to lose valued members of our team who have contributed to our company during their tenure. Our teams handled this process with respect and thoughtfulness, consistent with our core values.

We remain confident that our fortress balance sheet, differentiated brand portfolio, and strategies position us to reaccelerate growth and capture market share over time. I will now review Q1 financial results. Net sales decreased 6% year-over-year to $770 million. This exceeded the high end of our guidance range, primarily driven by earlier timing of spring wholesale shipments. Direct-to-consumer net sales increased 3%, led by brick-and-mortar growth. E-commerce sales declined as we anniversary last year's promotional activity. Our wholesale business declined 14% year-over-year, primarily reflecting lower Spring '24 orders. Gross margin expanded 190 basis points as lower inbound freight costs and favorable channel mix more than offset promotional activity. SG&A expenses were essentially flat as higher DTC expenses were offset by lower supply chain and variable demand creation spending. Diluted earnings per share decreased 4% to $0.71.

I'll now review Q1 year-over-year net sales growth by region. For this review, I'll reference constant currency growth rates. Overall, North America remains our most challenging market. We are facing several headwinds in this market, including: Consumers continue to grapple with inflationary pressures, which is impacting soft goods demand. Traditional outdoor category trends are weak, particularly in footwear, and retailers are taking a cautious approach in placing future season orders. Outside of North America, we have stronger trends in several markets, including China, Japan, and our Europe Direct businesses. In the US, net sales decreased 8%, driven by mid-teens percent decrease in wholesale sales, resulting from lower Spring '24 orders. US DTC net sales were down slightly. Across all channels, we experienced strength in January, fueled by favorable winter weather, followed by softer trends in February and March. US DTC e-commerce net sales were down mid-teens percent.

SOREL.com was particularly hard hit in the Q1, and the overall e-commerce environment remains challenging. Since late last year, we have been proactively managing promotional activity on Columbia.com to help establish the site as the best expression of the brand. We know that our site is already an important destination for our younger, active consumers. We want to ensure that when they visit Columbia.com, they see our latest products and innovations with enriched brand storytelling. US DTC brick-and-mortar sales increased high single-digit percent, driven by the contribution from temporary clearance locations, new stores opened over the last year, and to a lesser extent, improved store productivity. In 2023, we used our fleet of outlet stores and temporary clearance locations to profitably liquidate excess inventory.

This year, we will continue to leverage these stores to manage inventory levels, including PFAS inventory, and to drive sales as consumers seek out value in the marketplace. Latin America, Asia-Pacific region, or LAAP, net sales increased 7%. China net sales increased high 20%, led by exceptional e-commerce performance across our platform partners. In fact, the team was proud to receive special recognition from TikTok this quarter as one of the fastest-growing outdoor brands on the platform. The Spring '24 Transit line of premium China-specific collection is outpacing last year's sell-through and clearly resonating with younger Chinese consumers. We expect China to continue being one of the fastest-growing parts of our business in 2024. Japan net sales increased low double-digit percent benefited by increasing foreign tourist activity, which is helping to offset softer domestic consumer spending. Korea net sales declined mid-single-digit percent.

LAAP distributor markets decreased high 20%, reflecting a greater portion of Spring '24 orders shipping in the Q4 of last year compared to the Q1. Excluding the impact of shipment timing, LAAP distributor sales were relatively flat. Europe, Middle East, and Africa region, or EMEA, net sales decreased 6%. Europe Direct net sales were essentially flat as healthy DTC growth offset the impact of lower Spring '24 wholesale orders. The Columbia brand continues to perform well in the marketplace, measured by healthy DTC and wholesale sell-through despite economic and geopolitical pressures. This quarter, we extended our popular Hike Society program into France following its successful launch in the UK last year. As a reminder, we have Columbia Hike Society programs across several European and Asia Direct markets.

This series of events allows young hikers to meet like-minded people to explore the outdoors and learn about the Columbia brand's technologies. To further strengthen Columbia's presence in the important hike category, we're continuing our exclusive partnership with Megamarsch. This year, it includes a series of 23 hiking events that take place across Germany, Austria, and Switzerland, with each event typically fielding over 1,000 participants. Our EMEA distributor business declined low 40%, reflecting a greater portion of Spring '24 orders shipping in the Q4 of last year compared to the Q1. Excluding the impact of shipment timing, EMEA distributor sales were down only slightly, despite several markets being impacted by geopolitical conflicts. Canada net sales declined 11% as lower Spring '24 wholesale orders were partially offset by modest DTC growth. Some of the US

Canadian consumers are seeking out value in the marketplace, which is driving healthy performance at our outlet stores. Looking at performance by brand, Columbia brand net sales decreased 6%, reflecting lower spring orders, partially offset by DTC brick-and-mortar growth. The delivery of our spring shipments is well underway, and we're excited for consumers to gain access to our newest product innovations. Our industry-leading cooling and sun protection innovations, like Omni-Freeze and Omni-Shade Sun Deflector, differentiate Columbia from the competition. This spring, we launched Omni-Shade Broad Spectrum Airflow, offering exceptionally breathable sun protection with Omni-Wick evaporation for fast-drying next-to-skin comfort. We're also focused on re-energizing PFG with new products like the PFG Uncharted collection. This new assortment features a younger, more active fit, tech-packed performance, and new fabric versions. In footwear, we launched the Omni-MAX system, which combines versatile cushioning, enhanced stability, and increased traction.

Omni-MAX is available in a variety of hiking, trail running, and fishing styles. In our DTC stores, we supported the launch with in-store and window displays, helping to drive encouraging sell-throughs of higher price point Omni-MAX styles like the Konos. I'm encouraged by the consumer response to several of the new footwear and apparel offerings that I referenced. These are early indications that the Columbia brand's strategies to attract new consumers and drive long-term growth are on the right path. We look to build on these successes in the coming seasons and years as we expand our consumer base. In February, Columbia's innovative spirit was on full display as our Omni-Heat Infinity technology helped protect Intuitive Machines' lunar lander on its historic mission to the Moon. Columbia Sportswear is a proud scientific partner of Intuitive Machines.

Our thermoreflective technology helped protect the Nova-C lunar lander from the extreme temperatures of outer space. This partnership brings Columbia's technology full circle. We're sending a product to the Moon that was inspired by NASA space blankets. The mission was featured in hundreds of media outlets, creating billions of impressions worldwide. We are proud to share that we've signed on to Intuitive Machines' next mission, scheduled for later this year. In April, we partnered with Academy Sports + Outdoors to host the special Bubba Wallace Meet and Greet in Dallas ahead of the NASCAR race at Texas Motor Speedway. Both Columbia PFG and Academy have a long history with NASCAR, and this event created a unique opportunity to further connect Bubba's energetic fanbase with our brand. The week was capped off with Bubba driving an Academy and PFG-wrapped car on his way to a seventh-place finish.

As we have mentioned before, the wholesale channel remains a top priority for the Columbia brand, and we're excited to leverage our ambassadors to create brand heat with our key strategic partners. This spring, we launched our latest collaboration with New York-based boutique Kith, featuring apparel, accessories, and footwear designed for outdoor camping. The collection blends functionality with style while appealing to a younger audience. Shifting to our emerging brands. As a reminder, our emerging brand portfolio sales mix is predominantly in North America, which is our most challenged market. The headwinds we outlined earlier on the call are evident in our emerging brands' performance. SOREL brand net sales decreased 24%, with challenging trends across DTC and wholesale. With new leadership now in place, the SOREL team is focused on revitalizing the brand, building a compelling product range, and driving long-term sustainable growth.

I remain confident in the future of the SOREL brand. Mountain Hardwear is building on the momentum from its recent brand refresh. In the quarter, net sales increased 17%, reflecting earlier timing of spring shipments and DTC growth. The product line and brand positioning are on track, and the team is focused on accelerating growth. prAna net sales decreased 4%, with a decline in wholesale partially offset by modest DTC growth. The prAna team remains focused on building brand awareness, refining the product assortment, and unlocking the brand's growth potential. We're encouraged by fall 2024 orders and the potential to return to growth in the H2 of the year. I'll now review our 2024 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements.

Looking to fall 2024, our teams are continuously working to minimize any shipment delay resulting from disruptions in the Red Sea. At this time, delays appear manageable. The vast majority of our product line is expected to be delivered on time and in full. We are reiterating our net sales outlook of a 2% to 4% decline. While there are modest changes across our portfolio, our overall net sales expectations have not meaningfully changed. Gross margin is now expected to expand approximately 80 to 120 basis points to 50.4% to 50.8%. We are expecting modestly higher clearance and liquidation activity as consumers seek value, and we will continue to opportunistically work down inventory levels and maximize sales. SG&A is expected to be 43% to 43.4% of net sales, leading to an operating margin of 7.7% to 8.5%.

Our diluted earnings per share outlook has increased modestly to $3.65 to $4.05, driven by higher interest income, licensing income, and a lower share cap. We expect strong operating cash flows of at least $350 million in the year. Overall, I'm confident in our team, our strategies, and our ability to achieve the significant long-term 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, enhance consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that is digitally led, omnichannel, and global, and empower talent that's 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, thank you. 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star keys. One moment, please, while we pull for questions. Once again, please press star one if you have a question or a comment. The first question comes from Bob Drbul with Guggenheim. Please proceed.

Bob Drbul (Senior Managing Director)

Hi, good afternoon. I guess, Tim, on my two questions, the first one is inventory is down, was it 37%? Is this the leanest that you've run inventories heading into a fall season? You just talked about sort of your comfort level with the composition and sort of how you're positioned for the rest of the year. I guess the second piece is, can you talk a little bit more around the European business, the order book, the trends, just the health of the business in Europe and what you're seeing and expect in that region specifically? Thanks.

Tim Boyle (Chairman, President and CEO)

Yeah, I think the 37% reduction, we're very proud of that, especially in relation to the gross margin we were able to achieve. And that was a function of really utilizing our outlet store fleet to help us get the inventories down in the right area. We think, frankly, there's still more room for us to improve on our inventory utilizations. We'd like to get our inventory turns up to about three, and we've seen great opportunities with, frankly, the automation we have in place now around estimating our demand and actualizing the demand according to the plan. More to come. Again, we think there's way more opportunity for us to be better at inventory management.

This is close to the best we've done, but there's still more room to improve. European business has been good. I'm headed over there at the end of June to celebrate the company's 30th anniversary of doing business in Europe. We occasionally hear from our partners and from our team members in Europe that the brand is not well known in Europe. But frankly, I'm just thrilled with the exposure we're getting as it relates to some of these global marketing efforts, including Hike Society and the lunar lander. And I think there's great opportunity for us in Europe, and we'll continue to grow there, I think, rapidly.

Bob Drbul (Senior Managing Director)

Great. Thank you very much, Tim.

Operator (participant)

Okay, the next question comes from Laurent Vasilescu with BNP. Please proceed.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Oh, good afternoon. Thank you very much for taking my question. I wanted to ask about the Q1, the top line beat. January, I think on the last call, you commented, right? January, you had good favorable weather, but I think then the weather kind of got very challenging for the outdoor category in February and March. So I'm just curious to know, was there maybe what was the upside surprise versus your guide when you guided in February? Was there something on the international side that we should consider? Was there a pull forward from Q2 into Q1? Anything that you can share on that front that'd be very helpful.

Tim Boyle (Chairman, President and CEO)

Thank you. Yeah, the improvement, and frankly, a bit of a surprise, was the January winter weather in North America. We had just come off a very warm winter in the Q3 and Q4 of last year. And the fact that the weather was nicely appropriate in the Q4, excuse me, in the Q1 January was, I don't want to say a surprise, but we were very glad to see it. Our business is much more weather-dependent than it is economically dependent. So when the weather's appropriate, our business is exceptional, and it's vastly impacting. So that's where the numbers really were a bit of a surprise in January.

Jim Swanson (EVP and CFO)

Yeah. And Laurent, I might add. When we had our earnings call in February, we'd indicated that the upside that we were seeing from a weather standpoint through the month of January, that was reflected in our Q1 outlook. So when you look at the quarter, we're about $17 million better, I think, on the top line relative to the high end of our outlook. You can attribute most of that to slightly earlier shipments in the US business. We don't see that being an upside. Most of the quarter, I think, was right in line with where we thought it would be in either shifts of just days, not anything of any meaningful nature, at least at this stage.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Okay, Tim and Jim, that's super helpful. Then, as you'd mentioned, Tim, that it is weather-dependent because there was better weather. It came late, but it did arrive. How do we think about that in the context of the US business guided down mid-single digits? I don't know if you have any comment about what your order book on the US wholesale side, how it's shaping up in terms of maybe reorders, cancellations. I mean, it looks like you're calling for the US business to be kind of flattish on the back half. Any comment there would be super helpful.

Tim Boyle (Chairman, President and CEO)

Yeah, well, remember, we take our order book primarily in November, December, and to a certain extent in January. So it reflects the mood of our retail partners in that period. We'll have some additional inventory in the event that the weather is much colder than a normal early winter. But for all intents and purposes, we've based this on an average winter weather year.

Jim Swanson (EVP and CFO)

Yeah, Laurent, maybe just to add in a couple extra points. Our US business, we contemplate that being down a mid-single-digit percent year-over-year for the full year. That's not different than where we thought we would be 90 days ago. When you look at the wholesale business, the wholesale business will still be down in the H2 of the year. That's more than, by and large or partially offset, I should say, by the direct-to-consumer business through a combination and really led by our brick-and-mortar business as we continue to annualize new stores that have opened coupled with these temporary clearance stores that have been operating.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Excellent. That's very clear. Then maybe my last question is a kind of two-part question, sorry. But Jim, can you comment about I know you kind of tweaked down the gross margin for the year, but can you kind of give us a kind of a range on where the Q2 gross margin should shake out? And then on the $75 to 90 million of savings, how do we think about that over the course of the quarters? I don't know if you recognized anything in the Q1, but kind of could it be equal tranches across the next three quarters on that savings?

Jim Swanson (EVP and CFO)

Yeah, Laurent, in the CFO commentary that we published, we did provide some detail on our Q2 outlook. So we do contemplate our Q2 gross margin being down 190 to 230 basis points. That's, by and large, a reflection of a year-over-year comparative difference. We had some sales and inventory-related provisions that were one-time in nature and favorable last year that we're anniversary against. If you set those aside, our gross margins in the Q2 are going to be essentially even to where we were last year. And then as it pertains to our profit improvement program, from an overarching standpoint, we're making great progress on that.

And first and foremost, I'd say with the great work that our operations and supply chain team and just collectively across the business that we've had in terms of getting our inventories back down into a more normalized level, that's certainly going to benefit the elevated carrying costs that we incurred a year ago. In fact, our US distribution third-party logistics costs the next quarter, Q1, were down $10 million. We took some actions that Tim had referred to in the prepared remarks with regard to a reduction in force. That was executed late in the quarter, late March. So we wouldn't anticipate beginning to see the benefits of that until Q2. But we're very much on track in terms of being able to achieve that $75 to 90 million that's built into our outlook.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Very clear. Thank you very much, Jim, for all the color.

Jim Swanson (EVP and CFO)

Thanks, Laurent.

Operator (participant)

The next question comes from Jim Duffy with Stifel. Please proceed.

Jim Duffy (Managing Director)

Thank you for taking my questions. I wanted to start on the US market. Your comments on the US remain quite sober. Can you speak to what you're seeing from the US consumer activity early in the spring season? As you see spring begin in earnest in certain US regions, are there any signs of life to be hopeful? And then I'm curious how all this kind of relates to the outdoor category as a whole in the US Are we getting any indications that the COVID hangover is lessening?

Tim Boyle (Chairman, President and CEO)

Yeah, I think there's a number of brands in the marketplace today, and we're competing with many of those. I think there may have been just too exuberant an expansion of the business. Frankly, with our balance sheet as strong as it is, we're obviously going to be here when the dust settles. I think that the consumers today are hopeless to get back outdoors. Again, as I said, the weather is impactful on how our business is functional. We do a significant amount of our business in Mother's Day, Father's Day, gifts. So there's all the expectation in the world that those kinds of activities will continue and be more robust as well.

Jim Duffy (Managing Director)

Then, Tim, I'm interested in your efforts to bring new and younger consumers to the brand. The Hike Society initiative in Europe seems like something you're really pleased with, getting good traction with. Can you comment on evidence of progress with bringing a younger consumer to the brand in the United States?

Tim Boyle (Chairman, President and CEO)

Certainly. Well, it's interesting. Our PFG styles, which are by far the youngest part of our business, have traditionally been quite generous in their sizing. And we add some of these new components to our PFG line, which are much more active fits. The uptake there has been, quite frankly, surprising. And so it looks like we've got younger people certainly approaching the PFG styles in a better way and in a more robust way. And then our footwear, as we begin to have styles which are trail running and really designed for a more active person, that we're getting a very good lift on that stuff.

So I think the opportunity's there, and the expectations are that we'll continue to define and design styles in that area. And should we expect Hike Society to come to the US? I think it's definitely likely. I mean, it's been really sort of a global uptake. We have Hike Society across Asia, and the European uptake was super. And it's certainly a candidate for inclusion in our marketing efforts.

Jim Duffy (Managing Director)

Great. Thank you, guys, for your perspective.

Tim Boyle (Chairman, President and CEO)

Thank you, Tim.

Operator (participant)

The next question comes from Jonathan Komp with Baird. Please proceed.

Jonathan Komp (Senior Research Analyst)

Yeah, good afternoon. Thank you. Can I just follow up on the gross margin? I want to ask about the competitive environment. And I may have missed the reasons to take down the gross margin guide slightly for the year, just given the progress you've made on inventory. Could you share a little more perspective there? And just related to that, can you comment on the temporary stores? I think you're up to 44 in the US. Any way to size up how much volume that's driving this year or last year, just to give more perspective there?

Jim Swanson (EVP and CFO)

Yeah, I can start and then let Tim jump in and add some color. As it relates to our full-year outlook and the revision we've made to the gross margin, there are some puts and takes in terms of our revenue. We've held the revenue constant with our prior outlook. But when you get into the underlying composition of it, there's been some shifts in parts of the business. We took down our SOREL outlook slightly. We took down our e-commerce business down slightly. The area of our business that we took up was in the case of our brick-and-mortar with our outlet and clearance stores. We continue to operate those through the balance of the year.

And so as a result of that change in the mix of our business and with an increased dependence on that outlet and clearance locations, that's effectively what's driving a portion of the margin coming down. And then as it relates to the temp stores, you saw in the quarter, we're operating about 44 stores. We're operating at just under 2% of sales, I think, in the quarter. And then for the year, it'll be a like amount. It'll be slightly above that, 2% of sales. And from an overall profitability standpoint, these stores are contributing very little to the overall operating margins. But they're obviously a great vehicle for us to liquidate inventory in a much more profitable vehicle and less disruptive than going through the wholesale closeout or value channel.

Tim Boyle (Chairman, President and CEO)

Yeah, our typical method of selling off-price merchandise would be to sell to T.J. Maxx or Marshalls. And those channels were, frankly, flooded with inventory. And so the best approach for us was to take it and sell it ourselves in these temporary stores. So as that inventory has come down at decent margins, certainly by comparison to what the other liquidation methods were, we will begin to close those temporary stores up and go back to our standard method of operating those stores. So I think it really gave us an opportunity to flush the inventory. And it didn't have the kind of broad impact on the marketplace that something with a big discount in our e-comm business would have done.

Jonathan Komp (Senior Research Analyst)

Makes sense. Looks like a good brand move there. Just one follow-up on the year. Columbia brand for the year, the revenue of about flat globally. Could you just comment? It looks like you're assuming something positive, maybe mid-single digits in the back half. So I'm hoping you could maybe share the visibility that you see and maybe the key drivers as we think about Columbia and whether you're baking in benefits from some of the newer growth initiatives or if those have a longer tail. Thank you.

Jim Swanson (EVP and CFO)

Yeah, as it relates to the outlook itself, on a full-year basis, Jon, that's right. We're about flat. Looking at the H2 in particular, we do contemplate growth in the brand. I would say that that leans more towards the apparel category footwear. I think, as Tim touched on, the outdoor footwear trends remain challenged. So I'd expect to continue to see some challenges there, at least in the near term. But longer term, we've got a lot of confidence in the direction we're taking from a footwear standpoint. And then that growth that we're planning for in the back half of the year, some of that's based on our wholesale order book.

And for Columbia Apparel, the wholesale order book for the fall 2024 season, we're anticipating modest growth out of the wholesale business. So that's encouraging. And I think there is the benefit of the brand continues to perform well from an international standpoint. And certainly, that'll be the brand when we look at the brick-and-mortar side of the business with our store fleet and additional stores that'll see the most benefit from that part of the business.

Jonathan Komp (Senior Research Analyst)

Okay, great. Thanks again.

Operator (participant)

Okay, the next question comes from Mitch Kummetz with Seaport Research Partners. Please proceed.

Mitch Kummetz (Senior Consumer Analyst)

Yeah, thanks for taking my questions. I guess my first question, just on the order book, I think when you guys reported Q4, you mentioned that fall orders were down low mid-single digits. I'm wondering if there's any change in that now that we're a little bit further into that process. And then also on the SOREL guidance change, I'm just wondering if that's order book related or are you changing other assumptions around SOREL? I have a follow-up.

Jim Swanson (EVP and CFO)

Yeah, the biggest change in the case of SOREL is more a reflection of what we saw in the e-commerce business in the Q1, in which the business has been down a bit more sharply than we had anticipated. And so with that in mind, it's been a tough environment. We revised the outlook down to reflecting down mid-20s. Obviously, we've got order book in hand for fall 2024 that would also be indicative of those declines. We've got new leadership in place and looking forward to the updates that they make to the brand, the product line, and really looking forward to reinvigorating growth. It's going to take some time and obviously challenging in the near term.

Mitch Kummetz (Senior Consumer Analyst)

Then is the consolidated order book still in that down low mid-single-digit range? Does that change at all?

Jim Swanson (EVP and CFO)

On a global basis, our order book for the fall 2024 season is contemplated to be down a low single-digit percent. I call it the 1% to 2% range.

Mitch Kummetz (Senior Consumer Analyst)

Okay. Then just a second question on the gross margin. You guys showed nice gross margin in the Q1, but you expect to be down pretty substantially in Q2. From a kind of puts-and-takes standpoint, what's the main reason for that big swing?

Jim Swanson (EVP and CFO)

The biggest one is what I was referring to. I can't remember if I asked the question a little bit earlier, but Q2 of last year, we had some exceptional provisions related to sales and inventory that benefited the gross margin. So there were one-time adjustments last year that were favorable. We don't have those same things this year. If you take those aside, we're basically neutral on margin in Q2. And then, Mitch, as you think about the back half of the year, we've planned our gross margin up. And by far, in a way, the thing that's going to drive gross margin in the latter part of the year is the healthier inventory position that we have.

Even though we continue to operate the additional outlet and clearance locations, the assortment of merchandise that we'll have available within those stores to sell is a better assortment that we expect to drive a better margin that's applied in that outlook.

Mitch Kummetz (Senior Consumer Analyst)

Okay, understood. Thanks.

Operator (participant)

Okay, the next question comes from John Kernan with TD Cowen. Please proceed.

Alex Douglas (Equity Research Analyst)

Hi, this is Alex Douglas on for John. Thank you for taking our questions. So my first one was on some of the fiscal 2024 gross margin puts and takes, specifically the lower inbound freight costs. I know that's something you guys have commented on the last couple earnings calls. So I was just wondering, what's the timing for when you guys will start lapping those lower freight costs? Would it maybe be fair to assume that by the end of the year, that impacts either are flatter and flex to a headwind? Thank you.

Jim Swanson (EVP and CFO)

Well, yeah, the more meaningful impact that we've experienced each of the last several quarters as it relates to inbound freight is coming off the highs in terms of what we were seeing in inbound ocean freight charges from over a year ago. As you look back on our last four quarters, our gross margin has benefited in the tune of, on average, 300 basis points per quarter. Q1 was +200 basis points. As we move forward from here, beginning in the Q2, we would expect that to be far less of a benefit.

Having said that, just given lower overall demand and supply being built, overall, the freight negotiations that we're in currently would indicate to us that there's continued opportunity where we've seen those freight rates come down a bit more, but certainly not on the order of magnitude of what we've seen over the course of the last year.

Alex Douglas (Equity Research Analyst)

That's very helpful. Thank you. And then my next question was on one of your comments on inventory turns, just more of a clarifying question. You mentioned a goal of three times. Is that more of a long-term goal or end-of-fiscal 2024 goal? If you could help clarify that for modeling purposes, it'd be very helpful. Thank you.

Tim Boyle (Chairman, President and CEO)

Yeah, no, we'll improve our inventory turns over prior periods. But to get to three, which is a good goal for the company and other companies achieve this, we believe is attainable, but it would be more of a long-term goal.

Jim Swanson (EVP and CFO)

Yeah, certainly not 2024. Our expectation, though, would be that and while we don't want to give a specific inventory forecast at the end of the year, there's a lot of complexities to that. Our expectation would be that we're able to manage inventory down year-over-year relative to where we exited out of 2023. So we'll see that inventory efficiency and that improvement in the turns.

Alex Douglas (Equity Research Analyst)

Okay. Yeah, that's very helpful. Thank you.

Operator (participant)

Okay, the next question comes from Paul Lejuez with Citigroup. Paul, please proceed.

Paul Lejuez (Managing Director)

Hey, thanks, guys. Curious, within the US DTC brick-and-mortar business, can you maybe talk about how much of that business is being driven by traffic versus ticket? I don't know if you could share what comps were, excluding the additional temporary clearance locations? Just one point of clarification on those. Did you say 2% of total sales in the Q2? That's what those represented. Then how many do you plan to have in the back half? Thanks.

Tim Boyle (Chairman, President and CEO)

Yeah, we consider ourselves really to be a wholesale company. So we really don't release a lot of information on the KPIs around our retail business. But I can tell you, generally, the traffic numbers have been good in those markets where we're operating outlet stores, and the conversion rates have been exceptional. So the brand is in high demand. Really, the focus for us is on these temporary stores to get our inventories down with high gross margins for the company overall and then to operate this suite of stores really in line with what we believe our long-term inventory liquidation plans should be as we begin and continue to operate at an efficient turn level for our inventories.

Jim Swanson (EVP and CFO)

Yeah, and then just a follow-up point on there. You'd asked about the comps. As Tim touched on, we don't provide specific retail KPIs of our business. Having said that, in Tim's prepared remarks, we did indicate that the growth from a direct-to-consumer brick-and-mortar perspective was a combination of the temporary new stores but also included productivity gains. You can take away from that that it's a positive comp. Some of Tim's comments with regard to traffic and conversion helped contribute towards that. Yeah, my prior comment was with regard to our temporary clearance stores, that those represented just slightly less than 2% of consolidated net sales for the Q1. On a full-year basis, we plan for that to be slightly greater than 2%.

But again, back to my point, these are modestly profitable. And if we think out to 2025, we'd begin to ramp down and exit out of the lion's share of these.

Paul Lejuez (Managing Director)

Got it. Thanks. And then just one follow-up. Could you just give us an update on clearing through the PFAS product, where you are in that process?

Tim Boyle (Chairman, President and CEO)

Yeah, we believe that by the end of this year, we will be virtually out of PFAS products. And it will hopefully be a topic that's in our rearview mirror.

Jim Swanson (EVP and CFO)

Yeah, we've made great progress. We feel good about being able to work through the balance of what inventory we do have, most of which is already sold and allocated to a customer that we intend to sell through our own direct-to-consumer business. And to the degree there's excess that remains there, certainly when you look at the clearance capability we have from an outlet standpoint, and this is perfectly saleable, high-quality inventory, we don't envision that being a challenge and be able to move through that profitably.

Paul Lejuez (Managing Director)

Got it. Thank you. Good luck.

Jim Swanson (EVP and CFO)

Thanks, Paul.

Operator (participant)

Once again, if you have a question or a comment, please press star one on your touch-tone phone. The next question comes from Alex Perry with Bank of America. Please proceed.

Alex Perry (VP of Equity Research)

Hi. Yes, thanks for taking my questions. I wanted to ask about China, actually. Can you talk about what's driving the outperformance there versus a lot of your peers? Is it strong new product reception? Are you doing any distribution expansion there? And then maybe just remind us on how the margins of the China business compared to the other regions. Thank you.

Tim Boyle (Chairman, President and CEO)

Sure. Well, just as a reminder, we've been doing business in China for about 20 years and operating the business directly ourselves for [inaudible] five to six years. And we underperformed there for many years. Even though we were first in the marketplace, we were underperforming. So when you look at our business by comparison to others, we're smaller. And the fact that we've turned the business around maybe has some outsized results when you compare it with the rest of the business. I would say that the bulk of the improvement is a function of just cleaning up our operations and making them much more relevant for the local market.

We haven't really expanded our distribution in a great way, but we've been focusing on improving our monthly performance and store productivity utilizing a number of different ways, including key retail operations as well as directly designing merchandise, which has been improved for the local market, more focused on the local market's requirements. Lastly, the management team that we have is exceptional and has been really instrumental in making the business much better.

Jim Swanson (EVP and CFO)

Yeah, I'd just double down on Tim's talking points there. From a distribution standpoint, we're operating no less. In fact, we may be operating a door or two less than we were a year ago. So this is all coming through productivity gains within our existing store fleet and online dealers that we work with. And then one other follow-up point to your question, Alex, with regard to the margins in China, we don't provide specifics on it, but I can share that it's among the most profitable parts of our business from an overall contribution perspective, certainly far above the overall corporate operating margin.

Alex Perry (VP of Equity Research)

Perfect. That's really helpful. And then I just wanted to parse out the DTC guide a bit more. I think sort of the implied guide for DTC brick-and-mortar is for it to be up quite a bit. I guess what's the driver there? Is that just year-over-year door count? And then I think it implies some acceleration in dtc.com as you move through the year. Can you maybe talk about what would be driving that?

Jim Swanson (EVP and CFO)

Yeah, good question. As it relates to the brick-and-mortar side of the business, the combination of the new stores we opened last year, our plans for this year combined with those temporary clearance stores, and we ramped up those temporary clearance stores throughout last year. You're going to see the annualized benefit of them being open throughout this year. Case in point, we had 44 that we operated in Q1 of this year versus eight last year. We'll continue to see the annualization benefit associated with that. To a lesser degree, we are contemplating some improvement from a productivity standpoint. Keep in mind, given the excess inventory that we were flushing through the outlets for most of last year, the assortment, size, runs, color that we had available to the consumer in those stores was pretty weak for different points in time throughout last year.

And as we've got a better assortment in the stores this year, we believe there's opportunity where we left revenue on the table last year, and we can recapture that this year. So that's, by and large, the brick-and-mortar side of things, not to mention the brick-and-mortar business we have internationally, particularly in Asia and our China business, that that'll drive growth as well. And then with respect to the e-commerce business, we do contemplate some degree of improvement of that in the back half of the year. And as Tim touched on, late last year, mid last year, we began making changes, particularly on Columbia.com in the US with regard to the degree of promotions. And so in the earlier part of the year, we were highly promotional and discounted.

As you get into the latter part of the year, we essentially backed off of that so we had a better representation of the brand online. So as we get into the latter part of this year, Alex, we'll be comping against that. So it's an easier comp, if you will. And some of that's also reflected in our outlook. I think the other thing I would mention as well, we have been, over the course of the past few years, making strategic digital-based investments. So we've made enhancements to our membership program. And our digital teams are working on efforts to better personalize the site for the consumer and how we market to the consumer. So I think increasingly, as we get into the back half of this year, we're able to begin leveraging and seeing some of the returns on some of those investments.

Alex Perry (VP of Equity Research)

Perfect. That's all incredibly helpful. Best of luck going forward.

Jim Swanson (EVP and CFO)

Thanks.

Operator (participant)

The next question is from Mauricio Serna with UBS. Please proceed. Mauricio, your line is live.

Mauricio Serna (Executive Director)

Hello. Sorry about that. I was in mute. Thank you for taking our questions. I guess the first question, maybe could you talk about the sell-through that you've seen in the US and European businesses? That would be super interesting to hear. And then on the sales guidance, just wanted to reconcile. I think you beat the midpoint of the guidance for Q1 by about $30 million, but then you're keeping it pretty much stable. So I wanted to just be sure to understand what drove that outperformance and where is that being offset in the upcoming quarters.

And then just lastly, I think if you do the math on the SG&A, inside SG&A, relative to the previous guide, it's a decline of about $10 million or something like that. I just wanted to understand what are the changes in the SG&A versus the previous guide as you're keeping the savings plan. So thank you.

Tim Boyle (Chairman, President and CEO)

Yeah, Mauricio, I can tell you that in the North America market, our sell-through is about on average with where it is on average here. So we're pleased with that. Looks like the liquidations through our stores and our retail partner stores are about on average. In Europe, they're slightly ahead of where they would typically be. So we're pleased with how that's performing. And looks like it's going to be a positive for us. You want to, Jim?

Jim Swanson (EVP and CFO)

Yeah, I can jump in on the other couple of questions. So first, as it relates to the Q1 revenue beat that Mauricio's, by and large, earlier wholesale shipments that can be days or within a couple of weeks different. So that's just a timing difference between Q1 and Q2. And hence, you're not seeing any changes to our full-year outlook. So that came out of Q2. And then with regard to SG&A, there are slight adjustments that we're making in fine-tuning the SG&A forecast where we've brought that down slightly. I think that's going to be a reflection of the efficiency of what we're capturing from a cost reduction standpoint and just be able to manage the business with discipline. So nothing of a specific note outside of that.

Mauricio Serna (Executive Director)

Got it. And then just very quick follow-up on the temporary outlet stores. Essentially, you're using them this year to clear out a lot of merchandise. How is it going to be the approach next year as you wind them down? Is it going to be gradual or just, I don't know, all out in Q1? Just wanted to understand because I guess from a consumer standpoint, I don't know if that would affect how the consumers perceive the pricing of the company's stores.

Tim Boyle (Chairman, President and CEO)

Yeah, the temporary locations are really going to be timed as a function of how effective we are at liquidating the inventory. So they're month to month. So I would expect that we'll be gradually closing these stores over the next really year to the point where they'll virtually all be gone. Or there may, in fact, be one or two, some small number that are converted to permanent stores if we like their performance. But basically, these are established to help us liquidate that glut of inventory that we had around 18 months ago.

Mauricio Serna (Executive Director)

Got it. Very helpful. Thank you so much.

Operator (participant)

Okay. We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.

Tim Boyle (Chairman, President and CEO)

Well, thank you all for listening in. We're excited about the potential for the business and the future looks very bright. We will talk to you next quarter.

Operator (participant)

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