Greetings and welcome to Columbia Sportswear's First Quarter 2020 Financial Results Conference Call. [Operator Instructions]. Please note that this conference call is being recorded. I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations. Thank you, sir. You may begin.

Good afternoon. And thanks for joining us to discuss Columbia Sportswear Company's first quarter result. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and updates relating to the COVID-19 pandemic. This CFO commentary 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 Operating Officer, Tom Cusick; Senior Vice President and Chief Financial Officer, Jim Swanson; Executive Vice President and Chief Administrative Officer, 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 this date 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 these 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 the explanation of management's rationale for referencing these non-GAAP financial measures. Please refer to the supplemental financial information section and the financial tables included in our first quarter 2020 earnings release. Following the 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.

Thanks, Andrew. Good afternoon, everyone. A lot has changed since our last earnings call on February 6. I hope that everyone is staying safe and healthy. In recent weeks, I've been frequently asked if this is the toughest environment, Columbia Sportswear has ever had to navigate? I can safely say that we've faced bigger challenges when we were less prepared and we persevered. In 1970, following my father's sudden passing, Gert and I were thrust into managing a business we knew nothing about. I was a senior journalism student at the University of Oregon and Gert's previous business to the Columbia Sportswear office had been limited to dropping in to saying hi. It goes without saying that the leadership team left room for improvement in those first few years. We faced insurmountable challenges across all aspects of the business, interest rates were over 20%, and you couldn't buy gasoline at any price. That first year, we managed to take a company with $1 million in annual sales and turn it into a company with $500,000 in annual sales. We eventually found our path and built a global brand portfolio company you see today. Given the COVID-19 pandemic, this call will have a different format than usual. I'd like to provide an update on how the pandemic is impacting our business, the actions we've taken to mitigate the financial impact and our strategy for the balance of the year. We'll then quickly review the quarterly results and open the call for questions. As we dive into the details of this unprecedented global health and economic crisis, it's important to discuss our starting point. We entered into this crisis in a position of strength. Columbia Sportswear has been in business for over 80 years. And during our 20 years as a public…

[Operator Instructions]. Our first question comes from the line of Robert Drbul with Guggenheim Securities.

Tim. I, just a couple of questions. I think the first one is on your order book, your visibility can you just talk us through significant cancellations were, like how firm is your order book at this point? And when you think about your ability to sort of meet the demand. It ties into the second question, which is like on the inventory that you have on the books today, how much of it are you going to carry old Fall inventory of '19 into '20? How much of the new '20 stuff had you gotten in before things locked down? You can start with maybe those two questions?

Sure. Well, as it relates to the first one, the current order book, we believe, is quite solid. We've spent really the last almost 60 days confirming with our retailers, where we believe we have issues as it relates to production and where we have solid deliveries available for the customers. We've done a lot of work on this, and we believe that we're in good shape on our order book and our visibility on that part is quite good. As I said, we want to maximize our inventories, and we're doing that through matching existing demand and also substitutions. As it relates to carryover inventory, as you know, the bulk of our sales are through fairly long historical products and we have good visibility on that merchandise, and we have some carryovers that we'll be selling over the next several years. We're going to be focusing on inventory turns and liquidity, an area where we really never had to manage with the kind of precision we're going to be working with in the future. With the balance sheet we had before, we could make opportunistic buys on certain merchandise and it was very helpful for the company. Now we're going to be focusing very much on inventory turns and utilization of inventory, maximizing that.

Got it. Okay. And then I guess my other question is, as you've focused on your digital capabilities, can you expand upon essentially how you're meeting the demand? Are you being able -- are you shipping from some of your outlet stores? Or are you just shipping from your distribution centers fulfillment from that perspective? Can you just maybe elaborate a little bit in terms of how you've pivoted there?

Certainly. Well, I just want investors to understand that the single biggest investment we're making in 2020 is on improving and enhancing our digital capability, specifically as it relates to e-commerce. So our X1 project, which has been ongoing for several quarters now is the largest capital expenditure we have. We cut others that we thought were less important. This one is critically important. So our digital business is a global digital business, and we're shipping from distribution centers almost exclusively around the globe. Certainly in the U.S. and in Canada, we're shipping merchandise only from our distribution centers. But it's important to remember that the company has a number of both pure play, digital wholesale customers as well as the fact that many of our customers, our historical customers, have big digital businesses, and that would include DICK's Sporting Goods, Kohl's, REI, all of whom are having a significant business digitally on our products.

Our next question comes from the line of Jim Duffy with Stifel.

Thanks for all the thoughts on the business. Clearly, Tim, you've been very thoughtful about the approach to all the uncertainty. I guess my question relates to the extent that you might play offense. You have a fortress balance sheet, a lot of reason to believe outdoor participation will increase and perhaps that becomes sticky. Can you talk about demand creation, budget management in areas where you may lean in and invest to capitalize and try to take share?

Certainly, Jim. Well, as you know, the company, as I said, to answer Bob's question, we're making a significant investment in our X1 platform. We believe that the use of digital marketing, whether it be specific to a particular initiative or program as a complement to our digital platforms where we do commerce. So today, we have industry average conversion rates. That means that over 90% of the people visiting are leaving with a strong marketing message for the company. So I think for the foreseeable future, our emphasis will be on digital, whether it's included in our own commerce or in the typical Facebook, Instagram and other platforms around the world. And obviously, the ones in China and Asia are different and different in terms of their format. But I'm sure that the bulk of our marketing efforts are going to be going to those very focused areas of marketing.

And then a question on the bad debt expense recognized in the quarter. Was that related to tangible risks? Or was that more proactive in anticipation of troubles that may come?

Yes, well, I know Jim is going to explain a little bit more on this, but that's an area that the company has a significant amount of experience we are very proud of the way our company extends credit. We've had incredibly successful years when others have had large write offs. And I might just let Jim explain a little bit about the details there.

Yes. it's Jim. Appreciate the question. There's no kind of discrete customer looming risk that we're reserving against. It's more of -- just with regard to the general uncertainty in the marketplace, the liquidity and pressure that there is on retailers. And just a higher degree of risk associated with our business. And so as you look at the balance sheet, we've got $28 million in total bad debt reserve relative to $8 million last year. This is by far and away, the most significantly that we've reserved from an allowance for doubtful accounts perspective. I mean historically speaking, as Tim touched on in the prepared remarks, if you go back over the course of the last decade plus where we've had some events along there from a crisis standpoint regarding the financial crisis and some of the sporting goods bankruptcies, even during those years, our write-offs of bad debt was in the mid single-digit millions of dollars.

Our next question comes from the line of Jonathan Komp with Baird.

Tim, I wanted to start -- just curious your thoughts more broadly, given the wealth of experience and range of environments you've operated the business. Do you have any broad thoughts on how the consumer might react to all of this? And any differences you're seeing regionally today that would inform your view and just even from a pricing standpoint, given some of the discounting that might be in the marketplace, how that might impact the brand positioning?

Certainly. Well, I don't think you were calling me old, but I have been around a while. So I'm going to call that knowledgeable. So I mean these are clearly times without precedent, and so I just know that the counsel of our Board about having a fortress balance sheet just allows me to sleep at night, and which is terrific. We have used our Korean and China businesses to give us some sense of what it's likely to happen when brick-and-mortar stores reopen. And I would say that as we emerge from the crisis, daily, we're encouraged that we can see the resurgence of in-person shopping and that taken together with the digital shopping, I think is going to -- we're going to see people more anxious to get outside to spend time outdoors more than ever. So it's quite encouraging. We're also mindful that the way we've conservatively run the business, whether that be product line extensions or credit extensions or whatever, are going to allow us to come through at a much stronger position and take advantage of market share opportunities, shelf space opportunities that are going to avail themselves because others who haven't been as careful or have not focused on the right capital structures, have not. So we think we can take advantage of those opportunities.

Okay. And then maybe an add-on or a follow-up question. Just thinking about the back half of the year. Obviously, the third quarter, more of a sell-in period. So I'm assuming in all likelihood, you'll still see some pretty significant top line pressures. And then the fourth quarter, shifting more to D2C. I'm just curious how you're planning inventory strategically for those quarters and even planning for D2C in light of the limited visibility that's out there today?

Certainly. Well, Q3, frankly, is an opportunity for our customers to fill their stores with the Fall and Winter merchandise. So our expectation is that the visibility that we have there, while it's limited, gives us ability to feel comfortable with the fourth -- excuse me, with the third quarter. And I would expect that the orders that we have, and in fact, we're quite confident the orders we have for that period are going to be kept and shouldn't be a problem filling those stores. The fourth quarter, as those who follow the company know, is an important holiday period and is also impacted by weather. And so we're ready for both of those times, and we believe that our supply chain is well in hand and well organized to get us the merchandise that we need and that our customers need to be successful in that in the back half of the year.

Our next question comes from the line of Alex Perry with Bank of America.

I guess just first, just to follow-on the digital thread. You mentioned the first several weeks of April, e-commerce was up over 60%. I guess how sustainable do you think that is? And how much do you think was driven by some sort of the fiscal stimulus or other onetime items? And then can you also just remind us in this environment of the profitability of that channel compared to your store and wholesale business?

Certainly. Well, we may not be able to sustain 60% growth, but I think the world is much more accepting of digital commerce today than they were pre-pandemic. So our expectations are that consumers are going to be much more willing to shop remotely through digital means, and that will continue to be a bigger part of our business. That's why it really is getting the single most significant investment in capital in the company in 2020. As it relates to profitability, it's -- we don't break that out by division, but it's a significant component of our future and is a significant business for us, whether it's our own digital business or through one of our customers, whether they be pure-play or both, a mix of online and off line stores. So we think taken in combination, it will be a significant growth vehicle for the company and quite profitable for us and for our dealers.

Perfect. That's really helpful. And then I guess just my second one. Can you talk through how resilient the Columbia brand has been through prior sessions and whether you expect a potential market share opportunity here from some of your higher-priced competitors as the consumer searches for value?

Certainly. Well, the company has been able to grow through almost every prior economic challenge. And that would include economic challenges that we don't often think about happening outside the U.S., as an example, in Russia, where the company has got a tremendous market position and has grown through many crises. So the brand is quite resilient. So we expect that not only will be taking market share from brands that price above us because of our value proposition, but also when we think about retailers and their allocation of inventory investment into private label, we believe that we can provide a better solution and we'll likely take market share from private label sources as well during this -- during the recovery.

Our next question comes from the line of Chris Svezia with Wedbush.

I'm glad you're all doing well. I guess the first question I have is just regarding the SG&A. Maybe if you can just talk about how we should think about the flow of the roughly $100 million decline year-over-year in SG&A expense. Just how we think about Q2, Q3, Q4? And I guess, the bad debt expense, $21 million that's excluded from that. In other words, right now, we're looking all else equal about an $80 million reduction in that, if I'm thinking about it correctly. So if any color about that would be helpful.

Yes, that's correct. So the $100 million reduction in SG&A is before any exceptional SG&A charges, such as bad debt. As it relates to the cadence inflow of that -- the $100 million, we saw a very small portion of that in the first quarter. And I think that steadily builds through the end of the year. I wouldn't say that it's ratable across each of the 3 quarters. It will build as actions and as we manage the P&L. There's certain of this, I think, that Tim touched on, as it relates to demand creation. And certainly, at the low level of consumer demand that's out there currently. We've pulled back on demand creation quite significantly here in the March, April, May time frame. And then we'll recalibrate as we get into the back half of the year and certainly shifting those investments where we feel like there's the greatest opportunity.

Okay. Got it. And just on the -- I want to go back to the inventory and the wholesale orders. And just some of the comments that you made earlier about so far how you haven't seen cancellations, in particular for Fall/Winter product as of yet and you expect to, I guess, ship the majority of that product. Is it fair to say that at this point, you're potentially anticipating global wholesale to be up in the third quarter? Obviously, DTC could be impacted depending on how stores open, but how do I unpack that thought process for now? Or are you anticipating some cancellations to ensue or maybe that's potentially a risk depending on how long this goes on? Just maybe help me out with that a little bit.

Certainly. No, I'm sorry, I didn't mean to be -- I hope I didn't misstate what I intended to say. We have received fairly significant cancellations since the beginning of the pandemic. So we feel that the residual order book that we have now, which is net of the cancels to be quite solid. So we think that -- that our Q3 shipments will be largely as we plan today, and we believe that our merchandise coming in from China or -- sorry, coming in from Asia will be reasonably on time, and so that we believe our customers -- our wholesale customers will be happy with the deliveries that we've got for them. I just want to make sure that you understood that. We've had cancellations.

Yes. Chris, maybe one other comment just to add to that, to provide some color. As it relates to the inventory production for Fall '20, we were well undertaking our order book for Fall '20 at the point in time where the pandemic had really increased in terms of the pressure. We've placed many of our inventory purchases, but on the same token, we still had -- in the month of March, we've really pulled back on that quite heavily. And so there is a significant level inventory purchases that we've reduced to align with anticipated demand for the Fall 2020 season.

Got it. And lastly, just real quick on that. Just how do we think about where inventory? Any thoughts about that and as we go through? Is Q2 sort of the peak inventory position potentially? And then it begins to slowly go down for Q3? Or how do we think about the inventory increases year-over-year?

I think it's all is going to depend upon the flow of inventory. In terms of X factor and the timing of the manufacturing of the goods. I mean Fall '20 and the timing of those receipts and to what extent those fall into the latter part of the second quarter into the third. So to be able to kind of time that, I think it would be awfully difficult at this stage. We're keenly focused, as Tim touched on, on inventory management, improving our inventory turns and really getting through this year and exiting the year with as clean of an inventory position as we possibly can. And so on that note, to a degree, we do have excess inventory. Certainly, first and foremost, we're seeking to match inventory, the supply with the demand that we've got from our wholesale customers. A lot of our inventory that Tim touched on is a carryover based product that's valuable, and there's no sense in highly promoting that. And then our use of our outlet stores will certainly shift as we use those more for clearance purposes to really make sure that as we get to the end of this year, we're as in cleaner position as we can.

Our next question comes from the line of Mitch Kummetz with Pivotal Research.

Let's start with just a couple of follow-ups from Svezia. So Jim, I was surprised to hear you say that on the $100 million expense reduction that it would kind of build through the year. I would have guessed that you'd see the biggest year-over-year drop in Q2 just based on furloughed employees, particularly in your own retail stores. So I just wanted to clarify that.

Well, there's going to be -- there'll be some benefit related to the furlough. We are -- I think, Mitch, you may be familiar, some of our compensation programs that we've put in place. We had a Catastrophic Pay Program in which we continue to pay our retail associates and our distribution center associates for a period of time well into the month of March. And even since then, we've moved into more of a partial furlough program, which we continue to pay those individuals. The demand creation side of it is probably a bit more accentuated in percentage terms in the second quarter. But it's really hard to cut a pinpoint. And obviously, we're not providing guidance today. And as we kind of move along, we've got a clear path to that $100 million from a cost reduction standpoint. But we'll be able to kind of pinpoint that as it relates to the cadence of it through the year is a bit difficult.

Okay. And then on the orders, Tim, I know you guys gave up the practice of talking about orders a long time ago, but I kind of feel like this is a unique circumstance that you just mentioned that you've seen a substantial reduction in fall orders. I guess I got a couple of questions here. Could you say what percent of Q3 wholesale is driven by the sell-in of your fall order book? And then can you maybe speak a little bit to that order book? I mean, is it down double digits? I mean I'm just looking at consensus. I think consensus sales on Q3 as you guys down 6% year-over-year. I don't know if that's kind of reflective of where you see the order book right now in the selling of those orders.

Yes. Well it was easier for us to be transparent with investors when the business was mostly -- almost exclusively wholesale. The reason we stopped giving order book information was because the retail part of the business became so much bigger, and it was confusing for our investors when we tried to guide against the retail -- I guess, excuse me, our wholesale order book, which was only a portion of the company's business. So I would say that we received significant cancellations. We're in the process of wrapping up of matching of orders with existing inventory, new inventory and potential substitutions to be able to give us a full completion on the wholesale order book. So those mismatched inventory pieces will likely go to our own outlet store business where we had -- we had not yet purchased a significant amount of the Fall merchandise. So it's difficult for me to give you a number on wholesale just because it's less significant a portion of the revenue than it once was.

Okay. Fair enough. And maybe just one last quick one. On gross margin, how are you thinking about gross margin over the balance of the year? I guess, as it relates particularly to promotions? It doesn't sound like your inventory, there's tremendous risk to your inventory, but I imagine channel inventories are high. Other people are going to be promotional, you may have to react to that. I'm just wondering if kind of how much gross margin pressure you anticipate kind of at least over the next couple of quarters, in particular?

Well, let me just -- I know Jim is going to give you some more information on this, but if you've noticed some of the value channel folks who have raised capital over the last 60 to 90 days, have really been focused on their expectations that there's going to be glut of merchandise available or they're picking and choosing. So we would expect that we would avoid or delay offering merchandise to that channel, strictly because the impact on gross margins. So we think we have a solid opportunity with our wholesale business and our own DTC business to manage inventory and gross margin as well. But I don't know Jim has some comments?

Yes. And I'd just add, I think it's going to be a function of the overall environment from an overall standpoint. With as much inventories out in the channel and its promotional as it is, we're going to hold our own with the strength of the brands that we have, but there is going to be margin pressure that's there and trying to measure that at this stage, awfully difficult, but probably leave at that, Mitch.

Our next question comes from the line of Camilo Lyon with BTIG.

Maybe just following up on the last line of questioning. As you think about trying to clear the inventory, you focused -- and Tim, you've said multiple times on the call that you are focused on turning inventory, managing liquidity, which is completely understandable. Can you talk about the promotional strategies that you're talking with your wholesale partners about? What are your preferences in terms of clearing that excess? Are you taking product back? Are you letting them pack it away? Are there levels of pricing discounts that you will not go past, if it means keeping some of the product and margin relatively more stable, but having a longer duration to clearing that inventory? Anything on that kind of front would be interesting and helpful to assess the ability to clear a few of the inventory in the time that you're hoping to clear it.

Certainly. Well, I would say, based on our historical practice, which is to work with retailers, we would expect that we'll have reasonably the same kinds of discussions and really focus heavily on making sure that the retailers are profitable with our brand, which will, in turn, give them a higher -- give us a higher order book next year when they analyze which brands have the highest return for them. As we said, there's -- our brand is primarily a basic business with significant revenue for our retailers in very well-known styles that they've carried for many years. So we would expect that we would balance liquidating inventories at their locations at our locations, together with maximizing gross profit margin. So it's -- it will be a -- it will be the normal negotiations that we have with retailers. But I wouldn't expect that we're going to do any draconian or drastic changes to our standard practices.

Got it. And then as we think about that process unfolding this year, and maybe the pack away component in your discussions. Is that something -- the first part of that question, is it something that's left to the retailer in terms of how much spring product they want to keep for the following season in '21? And are there -- is it premature to have discussions on what that might look like for you guys internally as you start to plan your production processes for spring '21? And if there will be a scenario in which you start to order your business up or have to account for the fact that there's too much pack away goods in the marketplace that will then impact that ordering process?

Right. Well, we will start taking orders within the next few weeks from our retailers and extend the order taking process all the way through into July and possibly even into August, which will give us a good visibility on what spring '21 looks like. There's still lots of time in fall '21 for there to be liquidation of inventory at full price at our retail -- at our wholesale partners, retail stores. So we'll just have to keep close tabs on it. I might remind you, we get sell-through information on our wholesale partners at -- to about 85% of the total wholesale business in the U.S. So we have a good visibility of what's happening there. We'll watch that. And again, as I said, the inventory is comprised primarily of merchandise that's -- that they've carried for many years and is popular and not expected to be obsoleted.

Okay, can I just ask, I guess one more, if I could, on outlets. Could you speak to if there's a change at all with the clearing strategy, maybe even in terms of the composition of the product with respect to -- and if you could just remind us, is there any -- is there any made for product that you make for outlet that you will then turn down and just leave for really to carry the excess product that you have, your excess inventory?

Yes, certainly. Well, as I said, yes, there is made for product, and we have not purchased a heavy percentage of the outlet merchandise when we suspended our purchasing in Asia. So the outlet -- outlets will be primarily a recipient of the unmatched order book once we've concluded all that work. So, yeah, the outlet stores will have merchandise that they may typically not have had, but it won't be a significant component. But it gives us the ability to manage our total inventory and gross margins in a way that's more profitable for the company.

Our final question comes from the line of Paul Lejuez with Citigroup.

It's Tracy Kogan filling in for Paul. I have two questions. The first is, I was hoping you guys could give us a sense of what your trends have been in China since the stores have reopened. I know you said it's still well below pre pandemic levels, but has it improved? Or how has it improved by weeks? And then secondly, just a follow-up on your clearance strategy or the idea that you'll be clearing in the outlets. I wondered if that strategy might change if stores don't reopen as quickly as you expect? And might you shift the strategy and maybe clear more online?

Certainly. Well, the trends in China and Asia in general have sequentially been improving week on week, but they're still below the 2019 traffic numbers and revenue numbers. But they are improving, and we see that consumers are actually going back to stores. And they're managing distance between each other well. And many of the stores, including our own, and the malls themselves are metering employees coming back. And so our expectation is that the trends, the improving trends will continue. We don't know yet when we'll get back to '19 levels, but that's within our -- the visibility that, that can happen. As it relates to clearance, it's important to note that the company runs a seasonal business. So we're right now, today, we have spring and summer products in the stores. And that when fall and winter comes, those things won't sell very well, and we need to have winter products. So there'll be a complete switchover in the inventory of the stores. The residual that the retailers have on hand, they will either determine at that time to pack it away or to liquidate it through sales, et cetera. We don't have any plans today that -- to have significant liquidation at our digital sites. And I don't believe that our retailers have plans -- those that are pure-play or have digital components, I don't believe that they have intention to have high liquidation rates and big promotions as well.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the floor back over to Mr. Tim Boyle for any closing remarks.

Well, thank you very much for listening in. Obviously, this is a challenging time, and we will get through it the company's -- as a significantly experienced management team, and we have the capital and liquidity to provide a great future for the company. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.