Columbia Sportswear Company (NASDAQ:COLM) Q2 2023 Earnings Call Transcript

Columbia Sportswear Company (NASDAQ:COLM) Q2 2023 Earnings Call Transcript August 1, 2023

Columbia Sportswear Company beats earnings expectations. Reported EPS is $0.11, expectations were $0.03.

Operator: Greetings, and welcome to the Columbia Sportswear Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Burns, Vice President of Investor Relations. You may begin.

Andrew Burns: Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company’s second 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 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 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’s question by the end of the hour. Now I’ll turn the call over to Tim.

Tim Boyle: Thanks, Andrew, and good afternoon. Second quarter financial results reflect a dynamic environment, with varying trends across our global omnichannel business. Overall, we were able to generate 7% net sales growth in the quarter. This was ahead of our prior outlook due to earlier-than-planned fall ’23 shipments, which more than offset slower growth in our U.S. DTC business. International net sales increased 34%, fueled by earlier international distributor shipments and continued recovery in China. In the U.S., sell-through trends softened, reflecting cautious consumer behavior. Additionally, elevated inventory levels, particularly in footwear, have contributed to heavier clearance and promotional activity. As I mentioned on the last call, reducing inventory is our top priority.

Inventory exiting the quarter was up 21% year-over-year. As we progress through the second half of the year, the combination of lower inventory buys, shipment of fall ’23 orders and increased excess inventory sales in our outlet stores will reduce our inventory position. We expect inventory to be down year-over-year exiting the third quarter, and we remain on track to reduce year-end inventory by over $200 million compared to last year. Returning inventory to a healthy position is a vital step to improving our financial performance. Given our year-to-date performance and current trends we see across the business, we’re taking a more conservative approach to planning the balance of the year. I’ll provide more details on key drivers and assumptions influencing our updated financial outlook later in the call.

I remain confident in our strategies and our ability to achieve the significant long-term growth opportunities we see across the business. With that being said, our brands are not immune to macroeconomic pressures and headwinds. In this environment, we’re focused on what we can control, including expense discipline and executing our inventory reduction plan. We’re also continuing to invest in the business to drive long-term profitable growth. In challenging times, our strong financial position is a strategic advantage. We exited the second quarter with over $300 million in cash and short-term investments and no bank borrowings. This position will strengthen further as we are on track to generate $550 million to $600 million of operating cash flow this year.

I believe our diversified business model, financial strength and operating discipline will enable us to navigate near-term challenges and emerge in a stronger position. I’ll now review our second quarter financial performance. I’d like to remind everyone that the second quarter is our lowest sales volume quarter. Year-over-year changes in the timing of wholesale shipments can have a material impact on reported results. When reviewing second quarter results, it’s important to note that on time 2023 shipments resulted in sales shifting into the first quarter compared to last year when we delivered products late. This presented a headwind to second quarter. Conversely, we are shipping fall ’23 orders earlier this year, which created a tailwind to second quarter growth.

These timing movements create a pronounced impact in regional and brand net sales results. Net sales of $621 million were up 7% year-over-year and up 9% on a constant currency basis. Gross margin expanded 140 basis points and was roughly in line with our outlook. As expected, the largest driver of expansion was lower inbound freight costs. This was partially offset by higher clearance and promotional activity as well as higher distributor shipments which generally carries lower gross margins. Overall, promotional activity is elevated compared to 2022 when promotions were exceptionally low. Within our DTC business, we have increased planned clearance activity as we focused our efforts on reducing inventories. SG&A expenses increased 11% and primarily driven by increased expenses across our DTC business, supply chain and enterprise technology.

Diluted earnings per share increased 27% to $0.14. I will now review second quarter year-over-year net sales growth by region and brand. For this regional view, I will reference constant currency net sales growth rates. U.S. net sales decreased 3%. U.S. wholesale decreased high single-digit percent, driven in large part by on-time spring ’23 shipments, which shifted sales into the first quarter. In the U.S., the Columbia brand’s spring selling season performance is down slightly compared to last year. After a stronger start to the season, driven in part by better inventory availability, sell-through trends slowed in the second quarter. U.S. DTC net sales increased low single-digit percent. Brick-and-mortar was up mid-single-digit percent driven by the contribution from new stores opened last year as well as incremental sales from temporary outlet stores.

U.S. e-commerce net sales were down mid-single digit percent. The online environment has become more competitive and promotional as consumers seek out value in the marketplace. In the first half of this year, our U.S. DTC business grew low single-digit percent, reflecting a challenging environment. While wholesale shipments remain the priority for the Company, I believe there are long-term opportunities to accelerate our DTC growth and improve efficiency and profitability. Under the leadership of our new SVP of North America DTC, David Theiss, we are actively identifying growth opportunities and operational improvements that can further elevate the Columbia brand. David has experienced building a balanced store fleet that’s profitable and elevates brand performance across all channels.

Turning back to the second quarter financial performance, I’ll now review our international business. Latin America Asia Pacific region, or LAAP, net sales increased 35%. China net sales increased over 140%, reflecting strong consumer demand compared to last year, which included the impact of pandemic restrictions. Improved store productivity and enhanced marketing are among the key drivers enabling us to capitalize on growing consumer interest in outdoor activities in this important market. Our new premium China-specific collection named Transit is attracting new, younger consumers to the Columbia brand. Sell-through has been exceptional. We’re building on the success of our initial launch with new styles for fall. Another bright spot is e-commerce where we drove strong results during the 6/18 event, across all our key platforms, including Tmall, JD and TikTok.

E-commerce has continued to perform very well as physical traffic returns and is indicative of the team’s ongoing efforts to better serve consumers through digital channels. We continue to anticipate that China will be one of our fastest-growing markets in 2023. Japan net sales increased mid-single digit percent led by healthy growth in our DTC brick-and-mortar stores. We continue to see encouraging traffic trends in our branded stores as the tourism industry recovers. In April, we opened a store in Kamikochi National Park. This top hiking destination in the Japanese Alps attracts over 1 million visitors per year. The store features unique Columbia products with designs from local artists. Korea net sales declined double-digit percent. As we mentioned last quarter, we are in the early phases of resetting our business in Korea.

Copyright: halfpoint / 123RF Stock Photo

Management is focused on several initiatives across talent, distribution, marketing and product. We’ve closed unprofitable doors in the first half of the year and are focused on improving the productivity of the remaining fleet. We believe these efforts to reposition the brand and elevate distribution will drive a deeper connection with the next generation of consumers and fuel long-term sustainable growth. LAAP distributor markets were up low 80%. This growth primarily reflects earlier shipments of fall ’23 orders. Europe, Middle East and Africa region, or EMEA, net sales increased 75%. Europe direct net sales declined mid-single digit percent as spring ’23 shipments shifted to the first quarter. This was partially offset by healthy DTC growth which was strong across both e-commerce and brick-and-mortar.

This quarter, Columbia Hike Society U.K. hosted several successful events, including special hikes led by Columbia brand ambassadors. These grassroots clubs help promote spending more time outside and attracting a younger generation of hikers. We believe these unique brand experiences as well as our exclusive partnerships with Mega Marsh hiking events that take place across Europe will help drive momentum in the important hike category. Our EMEA distributor business increased approximately 310% reflecting earlier fall ’23 shipments. Canada net sales were down 16% as spring ’23 shipments shifted into the first quarter. This was partially offset by healthy DTC growth, which was strong across both e-commerce and brick-and-mortar. Columbia was recently voted the number one trusted sportswear brand and number three trusted brand overall in Canada for the eighth consecutive year in the University of Victoria Brand Index.

The survey included over 400 brands in 33 categories. Our high brand awareness and consumer trust provide a healthy foundation for growth in this market. Looking at performance by brand, Columbia brand net sales increased 11% during the quarter, including the benefit of earlier fall ’23 shipments. The Columbia brand’s differentiated cooling technologies and sun protection products have never been more important. We have a broad range of innovation in our product line, built from a platform of sun protection and cooling technologies, including Omni-Freeze Zero, Omni-Shade Sun Reflector, and our most recent addition, Omni-Shade Glove Spectrum. These innovations differentiate the Columbia brand in the marketplace and position us as a leader in sun protection.

As we look forward to fall, we’re building on the success of Omni-Heat Infinity with an expanded assortment of styles. This differentiated visible technology remains one of the fastest-growing parts of our product line and will be our top marketing story this fall. Another innovation story for fall is Omni-Heat Helix, our disruptive poly fleece visible digital technology. We’re excited to build on this unique technology in fall ’23 and beyond. We will also continue to invest in footwear, including the launch of the Facet 75 Alpha. Despite near-term category headwinds, footwear remains a key growth accelerator for the Columbia brand. Shifting to our emerging brands. SOREL brand net sales increased 32%, primarily driven by earlier fall ’23 shipments and increased wholesale closeout sales.

Overall, SOREL spring sell-through is up versus last year, largely reflecting higher clearance and promotional activity in a challenging footwear environment. Sandals has been a top-performing category this spring, led by popular styles like the Kinetic Impact Sandal. During the quarter, we announced Mark stepped down from his role as Brand President to focus on his health. Mark oversaw SOREL during a period of tremendous growth and he helped transform the brand into a women’s function-first fashion footwear brand. We thank Mark for his outstanding contribution to the Columbia and SOREL brands during his long tenure. Senior Vice President of Emerging Brands, Craig Zanon, will lead the brand until a new precedent is appointed. Mountain Hard Wear net sales decreased 19% driven in large part by on-time spring ’23 shipments, which resulted in sales shifting into the first quarter.

prAna net sales decreased 32% in the quarter with a decline in wholesale driven in part due to on-time spring ’23 shipments, which resulted in sales shifting to the first quarter as well as a decline in DTC. We are excited to announce the appointment of Tricia Shumavon as the President of the prAna brand starting in September. Tricia brings vast experience in the apparel industry, having served in leadership roles for several global brands, including most recently as the Global VP of Sportswear for adidas. Tricia will be able to leverage her deep roots in design, product management and merchandising to position the prAna brand for growth in future seasons. 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 these statements. The current environment is making it difficult to achieve the long-term growth algorithm that I believe we’re capable of. Given current trends we’re seeing in the business, we are taking a more conservative approach to how we plan the second half of the year. We now expect full year net sales to grow 2% to 3.5% year-over-year. Gross margin is expected to expand by 40 basis points to approximately 49.8%. Marketplace promotional activity continues to normalize, and we are anticipating a higher level of clearance activity as we opportunistically work down inventory levels. We expect operating margin to be in the range of 9.8% to 10.3%.

Operating margin performance will not be linear year-to-year, and we remain firmly committed to improving operating margin over time. This operating performance leads to a diluted earnings per share range of $4.40 to $4.65. We anticipate strong operating cash flows of $550 million to $600 million in 2023 as our inventory levels normalize. Before my closing remarks, I’d like to note that later this month we will be releasing our 2022 impact report, highlighting our efforts across environmental, social and governance matters. I’d encourage you to review the report, which will be available on our website, to learn more about the progress and accomplishments we’ve made empowering people, sustaining places and promoting responsible practices. As we’ve previously said, we’ve been working to eliminate PFAS chemicals across our global product line.

Our intent is to stop manufacturing any apparel or footwear with PFAS prior to our fall ’24 season. New manufacturers with fall ’24 are designed to be PFAS-free. We have been working on our alternate chemistries for some time and are making these changes in advance of regulatory restrictions in a small number of jurisdictions. We’re very pleased with the technical performance of the new chemistry that recognize that the transition has the potential to impact the floor of our wholesale business in 2024 and how we and others manage through existing inventory. In summary, I’m confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. We’re 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 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?

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Q&A Session

Operator: [Operator Instructions] And the first question today is coming from Bob Drbul from Guggenheim. Bob, your line is live.

Bob Drbul: A couple of questions for me. I guess just on the outlook, can you just talk through, I guess, your updated visibility, I think, on the lowered sales, if you could just talk through a little bit more how you’re planning the wholesale business for the back half of the year. Like, are your orders all firmed up now? And I think you made some adjustments to your buys as well. If you could talk through that, I think that would be pretty helpful to us. And then I guess, just with some of the early shipments, is that just a function of you had the inventory and your partners wanted the product? So maybe you could just talk a little bit about sort of where you think things sit with the wholesale guys as you think about your business.

Tim Boyle: Yes. No problem, Bob. Well, yes, as you know, we have a firm order book and it’s strong with fall product. Our partners are selling off the balance of their spring merchandise and looking forward to receiving spring, which some of them have already done so. We’re planning for a normal winter. So, the variability of winter is impactful on our business, especially when we’re selling outerwear and winter boots. And as it relates to the early shipments, I mean, frankly, as we’ve noted, we have too much inventory. A large portion of our SG&A spend this year was a result of having too much inventory, having merchandise stored in off-site locations, et cetera. So, it was great that we could both move the merchandise out to retailers and wholesale partners and distributors earlier than last year in order to free up some space and give us some relief on our extra spend for locations.

But our retailers and partners were happy to receive the merchandise, especially knowing that in prior years, we’ve been late on this merchandise.

Jim Swanson: And Bob, and just to add a little bit more color in terms of the change in the outlook. The lion’s share of the change is due to the softness we’ve seen in the U.S. business. And that’s been essentially across our U.S. wholesale business, which is roughly half of the overall change in our outlook and then, to a slightly lesser degree, U.S. e-commerce and then, to an even lesser extent, Korea. So those are the major moves. As Tim touched on, as it relates to the wholesale business, we haven’t so much seen any significant changes, so to speak, as it relates to the fall order book, but what’s led us to the change in the outlook is what we’re seeing in terms of replenishment and reorder as there’s been some softness in the market. So, that’s contributed to that overall changing our outlook.

Operator: Thank you. The next question is coming from Laurent Vasilescu from BNP Paribas. Laurent, your line is live.

Laurent Vasilescu: Jim, I want to follow up on your CFO slides. They’re always super helpful. I think one of the pages notes that wholesale is expected to grow low single digits for the year, which implies that wholesale in the second half should be down low single digits to mid-single digits. Just curious to know how do we think about that. I know you don’t guide explicitly by quarter, but just any dynamics as we think about 3Q, 4Q and especially how you’re lapping the Russian distributor sales in the third quarter.

Jim Swanson: Yes, that’s a good point. I would keep in mind, looking at the flow of our business even from a first half, second half perspective, the impact of the shifts in the timing of deliveries, because we’re much earlier this year for both the spring and fall season, does create challenges in terms of the comparative differences year-over-year. As you pointed out, we do plan on the business being at a lower rate of growth on the wholesale side in the back half of the year. Keep in mind, there is a very material component of shipments from the fall ’23 season, particularly for our distributor business, that shipped in the second quarter. That’s to the tune of, across our global wholesale and distributor business, roughly $70 million.