Columbia Sportswear Company (NASDAQ:COLM) Q3 2023 Earnings Call Transcript

Columbia Sportswear Company (NASDAQ:COLM) Q3 2023 Earnings Call Transcript October 26, 2023

Columbia Sportswear Company beats earnings expectations. Reported EPS is $1.7, expectations were $1.68.

Operator: Greetings. Welcome to the Columbia Sportswear Third 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. You may begin.

Andrew Burns: Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company’s third 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 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.

A customer trying on the style and comfort of the outdoor lifestyle brand’s swim trunks and casual shorts.

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 the 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: Thanks, Andrew, and good afternoon. Third quarter results reflect a continuation of the trends we’ve experienced throughout 2023. Our international-direct markets continued to outperform the U.S. Within our DTC business, brick and mortar stores are performing better than the e-commerce channel. Economic and geopolitical uncertainty remains top of mind for consumers and retailers. Overall, we were able to generate 3% net sales growth in the third quarter. Canada, Europe-direct and China all delivered high-teens percent or better year-over-year growth. In the U.S., retailers continue to take a cautious approach to managing inventory levels and placing orders. Consumer demand for soft goods, including apparel, footwear, remains weak.

I’m pleased to report the inventory exiting the quarter was down 16% year-over-year. Throughout the year, we’ve been executing our inventory reduction plan. The combination of lower inventory buys, shipment of Fall ’23 orders, and increased excess inventory sales in our outlet stores has yielded substantial progress towards our goal. We’ve done this while generating healthy gross margins, which is a testament to the evergreen nature of our products. We have a clear path to achieving our goal of reducing year-end inventory by over $200 million compared to last year. As we head into our peak sales period, I’m excited about the brand activations in place for this holiday season. For Columbia, Omni-Heat Infinity continues to be one of the fastest growing parts of our business and is prominently featured in our marketing campaigns this season.

In addition to our innovative warming technologies, the Columbia brand is executing several collabs, including the recently launched 100th anniversary Disney Collection inspired by Disney’s vintage artwork. In the coming days, we will launch our latest Star Wars collection featuring Luke Skywalker’s iconic flight suit reimagined as a fully equipped ski collection. To promote the launch, we will be leveraging Columbia Brand Ambassador Bubba Wallace as well as a top Jedi Master. You’ll be able to find the content on our social media channels. To celebrate the 50th anniversary of the iconic Caribou Boot, SOREL recently opened 20 shop-in-shops at Nordstroms, featuring key fall styles and unique 3D SOREL Polar Bears created by local artists in each market.

SOREL also recently opened a bold new Brooklyn pop-up store, featuring exclusive styles and interactive branded experiences. This fall, Mountain Hardwear launched its Seek Wilder Paths campaign, which reflects a comprehensive brand refresh. mountainhardwear.com has been redesigned and enhanced to bring the brand’s unique identity to life. To celebrate the brand’s 30th anniversary, Mountain Hardwear released the Heritage Collection, celebrating its most iconic styles. Mountain Hardwear also released a highly sought after collab with the iconic streetwear brand Stussy. As you can see, we have a great line-up of brand and marketing activations planned to engage consumers and drive sales this season. We now await the arrival of cold weather. The last several weeks have been unseasonably warm, resulting in a slower start to the fall selling season.

Based on third quarter performance and a more cautious forecast for the remainder of the year, we are lowering our net sales outlook. Despite this net sales reduction, our diluted earnings per share range is moving slightly higher, reflecting a relatively unchanged margin outlook and a lower effective tax rate. I’ll provide more details on our 2023 financial outlook and initial 2024 commentary later in the call. I’ll now review our third quarter financial performance. Net sales of $986 million were up 3% year-over-year. Net sales growth was balanced across our direct-to-consumer and wholesale businesses. Within wholesale, the approximate impact of timing shifts resulted in a $30 million benefit to net sales when compared to the third quarter of last year.

This was relatively in line with our expectations heading into the quarter. Gross margin expanded 70 basis points as lower inbound freight costs and favorable channel mix more than offset our inventory reductions across both wholesale and DTC. SG&A expenses increased 10%, primarily driven by expense growth across our DTC business, demand creation investments, and supply chain. Diluted earnings per share decreased 6% to $1.70. I’ll now review third quarter year-over-year net sales growth by region. For this review, I’ll reference constant currency growth rates. U.S. net sales increased 5%. U.S. wholesale increased mid-single-digit percent driven in large part by on-time Fall ’23 shipments relative to late deliveries last year. 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 over the last year as well as incremental sales from temporary outlet stores. The U.S. e-commerce net sales were down high-single-digit percent. The online environment remains competitive and promotional. Latin America-Asia Pacific region, or LAAP, net sales increased 4%. China net sales increased mid-20%, reflecting strong consumer demand across all channels. Our team in China has done an excellent job of driving engagement with consumers in new ways that are authentic to Columbia. During the quarter, we introduced new fall styles to our popular Transit product line, our premium China-specific product collection. The Transit line was prominently featured in our latest brand campaign in China, which included a new brand ambassador and in-person and online brand experiences.

In October, we built an entire Columbia brand nature exploration experience at Shanghai’s Grand Gateway mall. The installation featured four specific sectors, beach, cloud, glacier, and jungle. Within each of these micro climates, consumers were able to learn about Columbia’s warmth, dry, cool, and protected innovations and experienced them in action. Our digital team brought the outdoors to consumers digitally by launching a Columbia brand virtual reality homepage on Tmall. This immersive outdoor visual experience drove great traffic and consumer brand engagement on the site. I believe the investments we’ve made in China to elevate talent and drive operational improvements are yielding results. China is expected to be one of our fastest growing markets this year, and we’re well positioned looking into the future.

Japan net sales increased low-teens percent, aided by earlier shipments of Fall ’23 orders and DTC growth. This fall, our team in Japan is [connected] (ph) to consumers to reinforce our heritage through right collections and events. They’re also driving energy through locally relevant partnerships, like to recently launch collab with Tokyo-based clothing brand BEAMS. Inspired by one of PFG’s first products, the iconic multi-pocketed fishing vest, the collection fuses technical fishing aesthetics with BEAMS style. The launch has garnered promising pre-order results and is generating extensive media coverage. Korea net sales declined low 30% as we continue to reset the business for long-term growth in challenging market conditions. As we outlined on the last call, management is focused on several multi-year initiatives across talent, distribution, marketing and product.

This process includes closing unprofitable doors and non-brand enhancing wholesale accounts as we work to elevate distribution. We believe these efforts will drive a deeper connection with consumers and fuel sustainable growth. LAAP distributor markets were down mid-teens percent reflecting on-time Fall ’23 orders, which shifted the timing of sales into the second quarter. Europe, Middle East and Africa, or EMEA, net sales decreased 21%. Europe-direct net sales increased 20%, benefiting from earlier shipment of Fall ’23 product and robust DTC growth. Direct-to-consumer performance was driven by the addition of seven new brick-and-mortar doors over the past year as well as strong e-commerce performance. As part of our strategy to elevate the Columbia brand experience at retail, we’ve opened 10 new shop-in-shops with Intersport in France and Germany this year.

These enhanced in-store displays secure space for the brand at an important strategic retail partner while elevating the assortment presentation. Europe-direct has been one of the top-performing markets throughout 2023. Despite the positive momentum we’re saying, we anticipate external headwinds will be more impactful to growth in the quarters ahead. Our EMEA distributor business declined high 80%, reflecting the anniversary of shipments to Russia, as well as a greater portion of Fall ’23 orders shipping in the second quarter. Canada net sales were up 38%, driven by earlier shipment of Fall ’23 orders as well as strong DTC brick and mortar performance. Looking at performance by brand, Columbia brand net sales increased 4% during the quarter, including the benefit of earlier Fall ’23 shipments.

This fall, Columbia’s lead innovation story is Omni-Heat Infinity, which remains one of the fastest growing parts of our business. We’re building on last year’s momentum with an expanded assortment, including a new innovative Double Wall Elite construction. Double Wall Elite provides enhanced performance with two layers of Omni-Heat Infinity, which helps block wind and traps warmth. We are also expanding the assortment of Omni-Heat Helix, our disruptive poly fleece technology. Our fall marketing campaign is establishing — excuse me, is highlighting these differentiated innovations and continue to establish Columbia as the leader in keeping people [indiscernible]. The campaign features support across paid media, PR, social, and e-commerce, including spots on Thursday Night’s Football and the first-ever NFL Black Friday game.

On the partnership front, we helped Disney celebrate their 100th anniversary with a new special edition collection featuring Columbia gear inspired by vintage Disney artwork. Sell-through of this collection has been outstanding with key styles quickly selling out. In the coming days, we’ll launch our latest Star Wars collection, which I believe will be our most exciting yet. Columbia and Lucasfilm’s creative teams work closely together to reimagine Luke Skywalker’s iconic flight suit as a fully equipped ski collection. The styles incorporate our proprietary technologies, so you can withstand the elements in this galaxy or one far, far away. The promote our collection, we’re leveraging our sponsorship of NASCAR team 23XI and driver Bubba Wallace.

Bubba has had a career year in ’23 advancing to the round of 12 in the playoffs and generating significant coverage for the Columbia brand. Fans of Bubba, NASCAR, and Star Wars will be particularly interested to tune into the NASCAR Cup Series Championship on November 5. In preparation for the race, Bubba had listed the help of the top Jedi master who will make a surprise appearance in advance of the race. In footwear, we launched the Facet 75 Alpha this fall. This modern waterproof hiker with trail running DNA received a Men’s Health 2023 sneaker award along with a PFG pro sports shoe. Footwear remains the largest category opportunity for the Columbia brand and I’m excited about the product pipeline we have heading into next year. Before moving to our emerging brands portfolio, I’d like to welcome Woody Blackford back to the Columbia brand team as our Chief Product Officer.

Woody previously spent almost 14 years at Columbia. Woody spearheaded teams that brought to market some of Columbia’s most innovative products and technologies. He invented Omni-Heat Reflective in 2010, which has been the foundation for billions in sales across the Omni-Heat collection. I believe his comprehensive understanding of Columbia and our consumers as well as his passion for product creation can help accelerate Columbia’s growth around the globe. Welcome back, Woody. Drifting to our emerging brands. SOREL brand net sales increased 9%, primarily driven by earlier Fall ’23 shipments and higher wholesale closeout sales. This fall, the SOREL team is engaging with consumers and bringing products to life in new ways. The brand recently opened 20 shop-in-shops at Nordstrom to celebrate 50 years of the iconic Caribou Boot and the launch of new Caribou X collection.

Early season sell-through at these shop-in-shops has been very encouraging. SOREL’s new pop-up shop in Brooklyn includes an augmented reality experience where consumers can stand in front of a special mirror and see how they look in SOREL’s unique styles. The brand also collaborated with the singer Chloe Bailey on an exclusive Caribou X that was only available for purchase at the [indiscernible]. Mountain Hardwear net sales decreased 9% driven by Fall ’23 wholesale shipments partially offset by DTC growth. This fall, Mountain Hardwear is celebrating its 30th anniversary. As part of the celebration, Mountain Hardwear launched its Seek Wilder Paths campaign, which reflects a comprehensive brand refresh. mountainhardwear.com has been redesigned and enhanced to bring the brand’s unique identity, purpose, and tone of voice to life.

Mountain Hardwear also released a heritage collection celebrating its most iconic styles, including the Exposure Parka, Windstopper Tech Jacket, and Sub-Zero Down Jacket. These products pay homage to the brand’s early style, updated with today’s fit and fabric technology. Mountain Hardwear’s collab with iconic streetwear brand Stussy featured several co-branded products, including jackets, trousers, and beanies, as well as sleeping bags. The collection quickly sold out and immediately boosted traffic to Mountain Hardwear’s website. prAna net sales decreased 18% in the quarter. The prAna team remains focused on re-positioning the brand for growth in future seasons. Our new brand President, Tricia Shumavon, is quickly assessing promise opportunities and charting a path to unlock the brand’s growth potential.

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. For the fourth quarter, we expect sales to decline 5% to 10%, reflecting the wholesale sales shift into the third quarter compared to last year, partially offset by modest DTC growth. Our fourth quarter net sales outlook incorporates a slow start to the fall selling season we have experienced and a more cautious view on sales trends for the balance of the year. We’re forecasting fourth quarter diluted earnings per share to be in the range of $1.93 to $2.18. For the full year, we now expect net sales growth to be in the range of 1.5% to 2%.

Inclusive of a lower tax rate assumption, we forecast diluted earnings per share to be in the range of $4.45 to $4.70. We anticipate strong operating cash flow of approximately $500 million in 2023 as our inventory levels normalize. While it’s early in our 2024 planning process, I’d like to provide some commentary on how we’re thinking about the year ahead. I’m excited about the product pipeline and growth initiatives we have planned to fuel demand in 2024. For Spring 2024, we launched Omni-Max, our latest performance innovation in footwear. This new platform provides versatile cushioning, enhanced stability, and increased traction for hikers, trail runners, and explorers. In apparel, we continue to build out an industry-leading portfolio of cooling and sun protection technologies.

This spring, we’ll introduce Omni-Shade Broad Spectrum Airflow, offering exceptionally breathable sun protection with Omni-Wick Evaporation for fast drying next-to-skin comfort. We will continue to invest in Omni-Freeze Zero Ice, our industry-leading cooling and moisture management technology. The sweat-activated cooling technology is featured in a number of styles and activity categories helping to keep our consumers outdoor longer for all their pursuits. In our quest to find better ways to help humans enjoy the outdoors, we look to nature to discover new innovations. For Fall ’24, we’re launching an exciting new warming technology, Omni-Heat Arctic. This new biomimicry insulation system is inspired by how polar bears keep warm in extreme conditions.

Omni-Heat Arctic starts with a translucent outer layer that lets solar energy in. Heat is then transmitted to an insulation layer close to the body for maximum warmth, mimicking the polar bear’s warmth protection system. The result is lightweight, high-efficient warmth boosted by solar power. We’re also investing in key franchises like PFG, which pioneered the fishing apparel category and remains the leader today. Through product enhancements, marketing investments, and reaching new consumers, we’re focusing on expanding our leading role — leading market share in the fishing category. To drive e-commerce growth and enhance the consumer experience, we’re investing in capabilities to enrich content, increase personalization, and optimize our membership program.

We can make these types of investments during turbulent periods because of the strength of our diversified global business model and fortress balance sheet. We can invest in long-term growth opportunities at a time when financially-constrained competitors cannot do so. Even with all the exciting product and growth initiatives planned for ’24, we know there will be challenges, particularly in the first half of the year. Retailers continue to take a cautious approach to managing inventory levels and placing orders. Fears of slowing consumer demand as well as the persistence of higher interest rates create lingering economic uncertainty. The effect of these headwinds is most pronounced in the U.S., and we’re starting to see similar conditions emerge in our Europe-direct markets and Canada.

Geopolitical unrest is adding to this uncertainty. As previously communicated, we’re phasing out products designed with PFAS chemicals across our global product line in 2024. Our intent is to stop manufacturing any apparel or footwear with PFAS prior to our Fall ’24 season. In the U.S., we anticipate some retailers will choose to de-stock PFAS styles in the first half of the year before loading in the new styles designed with PFAS-free chemistry in Fall ’24. This transition is expected to impact the flow of our wholesale business and how we and others manage through existing inventory. We also expect our footwear business to remain challenged through the first half of 2024. Outdoor footwear category trends remain soft and inventories remain high.

Our Spring ’24 order book reflects the culmination of these challenges. As a result, we expect our global wholesale business to be down by a low-double-digit percent in the first half of the year. We expect this wholesale decline will be partially offset by continued growth in our global DTC businesses, resulting in total first half net sales declining a mid-single-digit percent. For the full year, we believe generating net sales growth is achievable as retail inventory levels normalize and retailers seek to restock products designed with PFAS-free chemistry. In the environment — excuse me, in this environment, our objective is to modestly improve full year operating margin in ’24. We plan to provide more detail on the ’24 outlook when we announce fourth quarter results next February.

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’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, and investments; enhance consumer experiences by investing in capabilities to delight and entertain 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?

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Q&A Session

Operator: Absolutely. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Bob Drbul with Guggenheim. Bob, please proceed.

Bob Drbul: Thank you. Good afternoon, Tim and guys.

Tim Boyle: Hey, Bob.

Bob Drbul: I guess, Tim, I have two questions that I have for you. I think the first one is, so when you think about the next few months of this — the holiday season and sort of what’s upon us, can you just like — with the order book where it is, your sell-ins where it is, can you elaborate a bit in terms of how you see inventories at wholesale — I mean, at retail, your wholesale partners? And then I guess the second piece of this is when you think about your DTC business sort of in the fourth quarter but also sort of in the ’24, just how you’re approaching it given a lot of the headwinds that are out there and sort of some of the uncertainty? Thanks.

Tim Boyle: Yeah, thanks, Bob. Well, as you know, this year has been really about inventory management for the company, but that’s been the focus for us. And so, we’re prepared to have a great fourth quarter. As usual, with Columbia, it’s going to be a weather story. So, we’re expecting weather to be normal, and frankly, that’s a global norm. So, we’ve got places in the world where it will likely be colder than normal and some places where it may be warmer. But I would expect them to — we’ve planned the business for basically an average year. Our partners — our retail partners are well set up. We delivered earlier this year than we did last year, so our expectations are that we’re going to have a solid sell-through [winter] (ph) products for ’23.

As it relates to ’24, we’ve basically been operating a business that we grew nicely with local talent or talent that spent with the company for quite some time. We’ve added a professional to help us run the business in a better way, David Theiss, who we talked about last quarter. And our expectations are that as we continue to improve the way we operate DTC stores for the balance of ’23 and into ’24, we’re going to see some quite outstanding results. Frankly, we’re doing quite well with the existing fleet. We know we can only improve.

Bob Drbul: And Tim, as you think about this the early spring order book, just any more color in terms of — is pricing or anything in terms of, is it all just sort of macro do you think that’s impacting what you’ve seen from your wholesale partners at this point?

Tim Boyle: Yeah. Well I think there’s some for larger operations, more Pan-American operations, there are concerns that they want to manage their inventory levels that contain PFAS out of their business inventories and we want to do the same thing. So, there’s a certain cautiousness there. And the expectations I think are going to be quite good for the rest of the year. Our expectations are that as we continue to roll out these innovations and excel on these marketing activities that we talked about earlier today, that we’re going to have a solid year.

Jim Swanson: Hey, Bob, and I might add, a couple of the factors that are contributing to that order book being down, certainly the outdoor footwear trend that we’ve seen this year, and our business has been a little bit soft in the footwear category, that’s holding back the order book. Tim touched on the PFAS transition, that’s having an impact. And then, to a degree, particularly with smaller customers that may have more liquidity constraints, given the environment that we’re operating in, that part of our business has been more impacted than when we look at certain of our larger strategic accounts.

Bob Drbul: Great. Thank you very much.

Operator: Okay. The next question comes from Mauricio Serna with UBS. Please proceed.

Mauricio Serna: Yeah. Thanks so much for taking my questions. I guess I wanted to ask, I think you mentioned at the end of your remarks, you saw some signs of headwinds emerging in Europe-direct and Canada. I just want to — maybe you could provide more details into that. And then, talking about the PFAS impact on the wholesale order book, is there any way you can explain a little bit more like which regions should be more impacted? Maybe as I think about like maybe some regions have retailers who are farther along in that road into transitioning out of PFAS, that would be very helpful to understand as well. Thank you.

Tim Boyle: Certainly. Well, yeah, we’re seeing — as it relates to Europe and Canada, we’re seeing similar constraints that Jim mentioned on the capital — the lower capitalized retailers that we have in those two markets. And again, the geopolitical disruption, including the war in Ukraine, specifically as it relates to Europe are having an impact. As it relates to PFAS, there’s really only two geographies in the world that have a prohibition beginning in 2025 on PFAS. So, it’s possible to navigate these and sell product where these two — where the products are prohibited. But large multi-state USA operations that want to have a common inventory across their entire fleet, those are the areas where they’re being quite cautious on building inventories.

Jim Swanson: Yeah. And then just to double back, Mauricio, as it relates to Europe and Canada, I’d also note when you look at our third quarter results, consumer demand within our direct-to-consumer businesses in each of those geographies is still plus 20% local currency terms. So, from a consumer and demand standpoint, still very healthy in most, if not all — or close to all of our international regions, where we’re beginning to see some of that softness is looking out into the order book and just given the overall conservative nature of how retailers are placing orders at this stage.

Mauricio Serna: Got it. That’s super helpful. And I guess just very quickly, when you talk about the — in your presentation about the number of stores, just want to make sure, does that number include the temporary stores that you’re opening? And also, how long are these temporary stores will be operational? Just I guess, I mean, the purpose of it is to get rid of excess inventory, so I just want to make sure like how should we think about those stores once — now that the team have [pursued a good place] (ph)?

Jim Swanson: Yeah, the temporary stores are not reflected in the store counts that we provided. And we haven’t provided those for a variety of reasons. These come in all different forms and shapes and sizes. And so, they’re really not comparable to looking at the existing store fleets. That’s why the store count is not included. We’ve begun to extend certain of those leases through much of next year, knowing that — we still have work to do in terms of getting our inventory cleaned up. As much progress as we anticipate making by the end of this year, there’s still continued efforts next year coupled with, I think, the point around some of the PFAS inventory. Certainly to the degree we have remaining unsold PFAS inventory, we would look to move that through our outlook in a profitable manner similar to what we’re doing this year.