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.

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.

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…

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

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.

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.

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.

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

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.

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. So if you adjust for that timing difference, coupled with, Laurent, you also mentioned the shipments that we made in the latter part of last year for Russia, which were orders we took pre-invasion, those equated about $45 million. So if you adjust for each of those two items, the rate of growth that we'd be seeing in our wholesale business would be in the mid-single-digit percent range. But from an overall standpoint, when you look at the full year, which I think is much more indicative of the trends we're seeing across the business, at least for the wholesale side, we're up a low single-digit percent on the year.

Very, very helpful. And then I wanted to follow up on margins. I think in your 10-K, you noted that inbound freight was 180 basis point impact to FY '22 gross margins. Just curious to know how much -- it looks, from your CFO slide deck today, that you recaptured about 200 basis points in this quarter. Just curious to know how much freight is going to be a benefit for your full year gross margin. And then clicking down to the SG&A, last 10-Q, you had about $18.8 million of logistics cost in your SG&A. Just curious to know how much that was impact for 2Q in dollar terms and how much do you think it could impact for the full year.

Yes. As it relates first to the gross margin and the inbound freight headwind that we had last year of 180 basis points, we continue to anticipate greater than 200 basis points of favorable gross margin impact this year as those imbalance freight costs have come down materially for us. And then as it pertains to SG&A, we've continued to see -- you'll see in the same CFO commentary document, among the higher rates of growth, that SG&A continues to be operations. And that encompasses our warehousing, distribution, fulfillment cost. That's still a meaningful part of what's driving SG&A up in the quarter. We'd anticipate those costs continuing through the balance of this year. And then, of course, we do believe those to be transitory. As we get our inventories back down to more normalized levels going into next year, that should become more of a headwind. In terms of quantifying that, Laurent, it's going to be -- in or around the $30 million range would be a ballpark estimate of the impact in that area of our business.

Thank you. And the next question is coming from Mitch Kummetz from Seaport Research. Mitch, your line is live.

Jim, if I heard you correctly, it sounds like the biggest part of the change in the sales guide is replenishment, your thoughts around replenishment in the back half. I mean how do you guys come up with that? Are you just looking at kind of trends over the last month or two and extrapolating that? I'm just trying to get a sense as to how conservative you might be without an assumption.

Yes. The replenishment business for us is very helpful, and we are in the process of automating that process today. I just left a meeting where we talked about the increased accuracy around the replenishment business. So it's going to be important for us in the future, and it's something that we're getting much better at. But it is impactful this year, especially when you consider the potential impact of the PFAS product change. So it's going to be the Board part of our business, and we're getting much better at it all the time.

Yes. I think just further to that, Mitch, it's based on the statistical forecast and looking back at what we've seen in trends over the last several weeks. And I would say that's the case in terms of our wholesale replenishment business. That's also the case in terms of how we're thinking about D2C growth in the back half of the year. And so our outlook would contemplate D2C growth rates being similar to what our experience has been when you look at the first half of the year.

Okay. And then I also had a question on the margins. I haven't fully penciled out your revised guidance yet. But if I'm not mistaken, it looks like your sales are coming down, your gross margins coming down. I think from an SG&A dollar standpoint, that really hasn't changed or maybe it's up a tick from where it was before. I may have done my math wrong. But if that's the case, I would have thought that you guys would have been -- with the revised sales guidance, you would be sort of turning over every rock, looking for cost savings. I assume you're doing that. But are there other expenses that are going up in the process? How should I think about that SG&A dollar number, which is leading to a fair amount of deleverage on the year?

Yes. I mean we're certainly, to your point, turning over every rock that we can in terms of executing on cost containment; in certain cases, even cost reduction actions internally as well. So, that's top of mind. I would agree, ordinarily you would expect a little bit more pass-through of variable-based expenses given the reduction in the top line. There are investments we're making along the way here to ensure, though, that as we look at the distribution and the third-party logistics side of our business, there are some professional fees and other costs that we're incurring that are incremental investments to ensure that we set those operations up going forward to be more streamlined and productive. So, there are certain onetime costs in there, Mitch. I won't get down into specifics in terms of each one individually. But they're offsetting some of what you otherwise believe to be a greater degree of variable-based expense savings.

Thank you. The next question is coming from John Kernan from TD Cowen. John, your line is live.

Just given some of the macro headwinds out there in your clearance, I'm just curious if you've seen any major reactions in the actual competitive environment? I know the Columbia brand has always really held more of an entry-level price point in the wholesale channel and versus some of your peers. Is there any change in the competitive environment? Or is it really just the difficult period being driven by a broader macro environment? Curious about some of your high-level thoughts there?

Yes, I want to -- we ran in a little bit of trouble with the audio here, so I want to make sure I got your question, but I think you're asking about whether our position as a value brand is impacted. And we believe that over time, this is going to be a real strength for the Company. We talked about the impact on the SG&A, of the carrying cost of inventories. We were able to keep a high gross margin based on the Company's strength and sourcing, but we do have too much inventory. So that's going to be impactful for the balance of the year on the SG&A line. We're finding great strength and comfort in the fact that we have the balance sheet that can help us to hang on to this inventory and sell it profitably during a period like this.

Yes, I know I have some background noise, if you can hear me, any thoughts on SOREL. Obviously, there's going to be new management is coming in, any thoughts about how to position SOREL specifically in the U.S.?

Yes, I'm sorry. I'm having a real difficult time understanding the question. We'll be happy to capture that, if we can, at a later time if you're able to call in.

Thank you. And the next question is coming from Jonathan Komp from Baird. Jonathan, your line is live.

Jim, I just want to follow up a question on the updated guidance. It sounded like at least through June, the message was you really weren't assuming any improvement in the sales environment or the promotional cadence for the year. So I'm just wondering, should we assume that the environment has shifted pretty meaningfully over the last couple of months or any other color just going back to the change in the full year guidance and the drivers?

I think that's fair, Jon. When we had our earnings call in April, up to about that time, we were continuing to see the same trends that we saw in Q1, in which we reiterated the top line guidance we provided earlier in the year. The month of May was, I would describe it, exceptionally challenging. And things improved a little bit in June, and they've been better here in July. But in light of what we saw during the quarter, and particularly as we got into the mid- to latter part of the quarter, things were a bit more challenging, and that's led to the revision we made both on the wholesale side in terms of how we're thinking about reorder replenishment and then also in terms of e-commerce. And you'll recall, e-commerce was a channel of our business that we thought would be the highest rate of growth business coming into the year. And as we sit here through the first half, it's been the slowest growing part of our business at a low single digit. So we thought it was appropriate, prudent, to realign our outlook and derisk some of the trends that we're seeing in the business through the quarter.

And do you have any ability to tell if those risks or the adjustments to the business will be concentrated in the second half of '23? Or any perspective on when you might get some color on how wholesale trends and any destocking might carry into 2024?

Yes. The biggest variable for the back half of the year is going to be the weather globally. So our retailers will be -- they have relatively low inventory levels of which are merchandise carried over to the prior period. So, they'll be starting the year with brand-new merchandise and full stocks really the balance of the year in terms of whether it will be much more a factor, frankly, than the economy.

I think Jon retailers are generally being more cautious. As we sit here today with where spring sell-through and Tim touched on it, spring sell-through has been a bit slower. I described inventory levels in the marketplace as being moderately elevated. So when you look at some slowdown in higher inventories, naturally, they're going to be a bit more cautious. So that's what we're reflecting in terms of the change in how we're seeing the revenue forecast for the balance of the year. And then I think in terms of getting a better read on that, the third quarter is typically the point in time where we're shipping an initial floor set, so it doesn't become until we get into the early fall where we start to see that sell-through through back-to-school and some of the early fall sales to get a better read on how things are progressing.

Okay. Great. And just last one for me, Jim. It looks like the guidance is assuming operating profit below 2019 levels through the third quarter followed by a pretty significant shift to positive in the teens in the fourth quarter comparing against the 2019 base. I don't know if that's the right comparison to think about, but just any more color on factors that would drive that profitability flip by the fourth quarter.

Yes. Trying to go back to fourth quarter and comparing it to a prior period like that, I would have difficulty doing it. What I would say, Jon, though, is certainly being at a 10%-ish operating margin this year, that's a disappointment from our perspective. We've got much higher expectations in terms of driving the right profitability and expanding operating margins over time. I think bear in mind, as Tim touched on, certainly, the most significant item that's impacting, and having a deleveraging effect on our operating profits, is the elevated inventories that we're carrying. We're not ready to provide an outlook as we think out to 2024 here today. Having said that, if you look at the pressure that that's putting on P&L and '23 across SG&A that we've touched on as well as the clearance type activity and lower margins as we move through certain of this inventory through our outlets, it's north of 200 basis points. So as we get that inventory back down into a more tolerable level and think about the potential to expand operating margin, all subject to how the top line plays out next year that should be a tailwind for us.

Thank you. The next question is coming from Jim Duffy from Stifel. Jim, your line is live.

I want to ask pricing in general, just given the pressures to consumer spending, what do you feel about your MSRP in the marketplace? Are you revisiting pricing at all, looking at making adjustments there? I recognize you have promotion as a tool, but how do you feel about your go in pricing and the price value equation?

Yes, Jim, I think we're in good shape actually. I don't believe that the reduction in our guidance is a function of our products being overpriced. I think we're in the right spot. And frankly, as the business normalizes from an inventory perspective, we intend to increase our marketing spend over time to give us a larger voice to the consumers. So no, I think we're in great shape. We've had a very efficient sourcing operation, and we expect to be able to continue to use that as a lever together with our balance sheet to make a better organized approach to the marketplace.

Okay. And I also thought I'd ask just about inventory composition. And in the past, you've spoken about footwear versus apparel. How does that split? Are you heavier in footwear than you are in apparel? Or is it relatively balanced?

Yes, we're slightly heavier in footwear than we are in apparel. But we're pretty good at estimating the values we're going to be garnering a lot of this inventory. So, we're generally pretty accurate on the inventory -- on gross margin guidance. So, I think we've built in the right approach to how we plan to liquidate this ourselves.

Yes. And then just looking at the composition of the inventory, Jim, at a high level, call it, around 50% of the inventories current season, 20% of it's aged and then the balance would be the carryover of the evergreen-type styles. That 20% that's aged, that's not too far off. It's more elevated than what we would like. But in light of the outlet stores that we have the leverage, we've opened up some temporary stores, we feel perfectly comfortable working that inventory down in the latter part of this year.

Thank you. The next question is coming from Abbie Zvejnieks from Piper Sandler. Abbie, your line is live.

I know it's a smaller piece of business, but can you just talk about kind of how you're thinking about the go-forward growth trajectory of both prAna and Mountain Hard Wear?

Yes. Mountain Hard Wear, as you know, is a high-end Alpinist brand, and we believe that we've got the right team managing that business today. It's been challenged in the past. Frankly, I think we're in the right spot with that brand, and there's a large opportunity for us, especially in the U.S., as we approach some specialized an area where we're sort of a smaller niche consumer. And I believe that's going to be -- we'll be successful with that brand, and we have the right people in place to manage it.

Thank you. The question is coming from Mauricio Serna from UBS. Mauricio, your line is live.

I wanted to ask about the sales guidance. Just if I look at the 3Q outlook you provided, I think it implies sales will be down 2% to 8% in 4Q. Just want to understand if that's all related to shift in wholesale shipments, like, between the quarters? And from a regional perspective, how should we think about that? Just wanted to confirm, like, I would think that a lot of that maybe is coming from us. And then maybe you talked about -- you commented about some challenges in the footwear category. I just want to make sure like if those challenges that you're talking about, is that like related specifically to outdoor? Or would you say it's more like throughout overall sportswear?

Tim, do you want to touch on the footwear one, then I'll come back around the sales?

Yes. I can talk about the footwear. The outdoor category has been softening a bit. And that's where the primary business for the Columbia brand is. The SOREL brand, on the other hand, is primarily women's fashion brand. We've seen great successes in the sandal category with that brand. And the expectation for the balance of the year is solid growth in women's protective footwear as well as fashionable products. So, we're excited about that, but there is some softness in the outdoor category as it relates to the Columbia brand.

And, then Mauricio, as it relates to the sales guidance, so we've provided third quarter revenue growth of 4% to 6%. And then if you engineer that back to what would be contemplated in the fourth quarter, it'd be down a mid-single-digit percent. And to your question, there are still a lot of timing shifts each quarter. Last year, for the fall '22 season, we were awfully late getting inventory to the market. And so there was a higher proportion of our fall '22 wholesale orders that shipped in the fourth quarter. So, we're contemplating being much earlier, and we would expect our wholesale direct business being up quite substantially in the third quarter. However, there's going to be an offset as we ship the international distributor fall '23 orders in the second quarter. So there is an awful lot of noise when you get into the overall timing impacts of our wholesale and distributor business. So keep that in mind when you look at quarterly flows. And then as it relates to the direct-to-consumer side of the business, I think we've planned it relatively stable in Q3, Q4, a mid-single-digit percent of growth.

Can you repeat that number, mid-single digit for DTC? Is that right?

Yes. That's right.

Thank you. And the next question is coming from Alex Perry from Bank of America. Alex, your line is live.

I just have one here. I just wanted to ask, can you talk about how you're thinking about gross margins in the third quarter? Should they be up year-over-year? And do you still expect a fairly promotional environment as we enter the back half? Like, I guess within the full year gross margin guide, what is sort of the expectation for promos in the back half? And any color on sort of 3Q versus 4Q gross margin would be super helpful.

Yes. As it relates to Q3 gross margin, we've not gotten down into specifics from our guidance standpoint, aside from providing revenue and operating income outlook. Having said that, we would expect gross margin to be up in the third quarter, we'll continue to benefit from the lower inbound freight costs. That should be a 300 basis point benefit in the third quarter. There's going to be some favorability as it relates to the region and channel mix as well with lower sales from our distributor business, which carries a lower gross margin. And so, there is an offset, however, and that's, to your point, in terms of what we're expecting from a promotional and clearance standpoint. So that's, by and large, offsetting a lot of that in the third quarter. And that's effectively as we move through this inventory through our outlets, we're more or less holding the promotions that you would see marketed. But as it relates to in-store and the aged or the excess inventory move through there from a clearance standpoint, those are marked down a bit more. And so that's essentially the offset that you see in the margin. And then the fourth quarter, we anticipate being up as well. It's really those same drivers that are going to be in play.

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

Thank you. There were no other questions at this time. I would now like to hand the call back to Tim Boyle for closing remarks.

Thank you very much. Thanks for listening in. Look forward to talking to you at the end of Q3.

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