Columbia Sportswear Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 12 speakers on the call.

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. Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Burns, Vice President of Investor Relations.

Operator

You may begin.

Speaker 1

Good afternoon and thanks for joining us to discuss Columbia Sportswear Company's 2nd 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, Chief Administrative Officer and General Counsel, Peter Braggen. This conference call will contain forward looking statements regarding Columbia's expectations, anticipations or beliefs about the future.

Speaker 1

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 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 we inform 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.

Speaker 1

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 and A period during which we will limit each caller to 2 questions, so we can get to everyone's question by the end of the hour. Now I'll turn the call over to Tim.

Speaker 2

Thanks, Andrew, and good afternoon. 2nd quarter financial results reflect a dynamic environment with varying trends across our global omni channel 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 2023 shipments, which more than offsets lower growth in our U. S. DTC business, international net sales increased 34%, fueled by earlier international distributor shipments and continued recovery in China.

Speaker 2

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.

Speaker 2

As we progress through the second half of the year, the combination of lower inventory buys, shipment of fall 2023 orders and increased excess inventory sales in our outlet stores we'll reduce our inventory position. We expect inventory to be down year over year exiting the 3rd quarter we remain on track to reduce year end inventory by over $200,000,000 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.

Speaker 2

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.

Speaker 2

We exited the 2nd quarter with over $300,000,000 in cash and short term investments and no bank borrowings. This position will strengthen further as we are on track to generate 550 the $600,000,000 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 Q2 financial performance. I'd like to remind everyone that the Q2 is our lowest sales volume quarter.

Speaker 2

Year over year changes in the timing of wholesale shipments can have a material impact on reported results. When reviewing Q2 results, it's important to note that on time spring 'twenty three shipments resulted in sales shifting into the Q1 compared to last year, when we delivered products late, this presented a headwind to 2nd quarter growth. Conversely, we are shipping fall 'twenty three orders earlier this year, which created a tailwind to 2nd quarter growth. These timing movements create a pronounced impact in regional and brand net sales results. Net sales of $621,000,000 were up 7% year over year and up 9% on a constant currency basis.

Speaker 2

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 carry lower gross margins. Overall, promotional activity is elevated compared to 2022 loan promotions were exceptionally low. Within our DTC business, we have increased planned clearance activity as we focused our efforts on reducing inventories.

Speaker 2

SG and A expenses increased 11%, 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 2nd 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.

Speaker 2

Net sales decreased 3%. U. S. Wholesale decreased high single digit percent, driven in large part by on time spring 'twenty three shipments, which shifted sales into the Q1. In the U.

Speaker 2

S, the Columbia brand 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 2nd quarter. U. S. DTC net sales increased low single digit percent.

Speaker 2

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.

Speaker 2

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 improved 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.

Speaker 2

David has experienced building a balanced store fleet that's profitable and elevates brand performance across all channels. Turning back to the 2nd 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.

Speaker 2

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 spring 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.

Speaker 2

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 1,000,000 visitors per year.

Speaker 2

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, management is focused on several initiatives across talent, distribution, marketing and product. We've closed our profitable 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 we can fuel long term sustainable growth.

Speaker 2

LAAP distributor markets were up low 80%. This growth primarily reflects earlier shipments of fall 2023 orders. Europe, Middle East and Africa region or EAA net sales increased 75%. Europe Direct net sales declined mid single digit percent as spring 2023 shipments shifted to the Q1. This was partially offset by healthy DTC growth, which was strong across both e commerce and brick and mortar.

Speaker 2

This quarter, Columbia Heights Society UK hosted several successful events, including special hikes led by Columbia Brand Ambassadors, these grassroots clubs help promote spending more time outside I'm 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 2023 shipments. Canada net sales were down 16% as spring 2023 shipments shifted into the Q1. This was partially offset by healthy DTC growth, which was strong across both e commerce and brick and mortar.

Speaker 2

Columbia was recently voted the number 1 trusted sportswear brand and number 3 most trusted brand overall in Canada we're the 8th 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 'twenty three shipments, the Columbia brand's differentiated cooling technologies and sun protection products have never been more important.

Speaker 2

We have a broad range of innovation in our product line built from a platform of sun protection and cooling technologies, including Omni 3 0, Omni Shade Sun Deflector in our most recent addition, Omni Shade Broad 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 it will be our top marketing story this fall. Another innovation story for fall is Omni Helix, our disruptive polyfilse visible technology. We're excited to build on this unique technology in fall 2023 and beyond.

Speaker 2

We will also continue to invest in footwear, including the launch of the FASET 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 2023 shipments and increased wholesale closeout sales. Overall SOREL's spring sell through is up versus last year, largely reflecting higher clearance and promotional activity in a challenging footwear environment.

Speaker 2

Sandals has been a top performing category this spring, led by popular styles like the kinetic impacts on the line. During the quarter, we announced Mark Minao 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 Intuit 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 Zannen, will lead the brand until a new President is appointed. Mountain Hardwear net sales decreased 19%, driven in large part by on time spring 2023 shipments, which resulted in sales shifting to the Q1.

Speaker 2

Cronin net sales decreased 32% in the quarter with a decline in wholesale, driven in part due to on time spring 2023 shipments, which resulted in sales shifting to the Q1 as well as the decline in DTC, we are excited to announce the appointment of Tricia Chamblar 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 Sports Work 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.

Speaker 2

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.

Speaker 2

This operating performance leads to a diluted earnings per share range of $4.40 to $4.65 we anticipate strong operating cash flows of $550,000,000 to $600,000,000 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 new products manufactured for fall 24 are designed to be PFAS pre.

Speaker 2

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 the impact of flow 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 omni channel and global and empowered talent that is driven by our core values. That concludes my prepared remarks.

Speaker 2

We welcome your questions for the remainder of the hour. Operator, could you help us with that?

Operator

A confirmation tone will indicate your line is in the question And the first question today is coming from Bob Drbul from Guggenheim, Bob, your line is live.

Speaker 3

Thank you. Good afternoon.

Speaker 4

Bob. Hello.

Speaker 3

Hi, guys. 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've made some adjustments to your buys as well.

Speaker 3

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 one of the product, 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. Thanks.

Speaker 2

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 their 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.

Speaker 2

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 I mean frankly, as we've noted, we have too much inventory. A large portion of our SG and A spend this year was a result of having too much inventory, having merchandise stored at offset locations, etcetera. 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 No, our retailers and partners were happy to receive the merchandise, especially knowing that in prior years we've been late on this merchandise.

Speaker 4

Hey, 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.

Speaker 4

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 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.

Speaker 4

So that's contributed to that overall change in our outlook.

Speaker 3

Great. Thank you.

Operator

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

Speaker 5

Thank you and good afternoon. Thank you very much for taking my question. Jim, I want to follow-up on your CFO slides. They're always super helpful. I think one on the pages that notes that wholesale is anticipated to grow low single digits for the year, which implies that wholesale in the second half it should be down low single digits to mid single digits.

Speaker 5

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 Russian distributor sales in the 3rd quarter.

Speaker 4

Yes, that's a good point. I would keep in mind, compared to looking at the flow of our business even from a first half, second half perspective, the impact of the shifts and 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 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 'twenty three 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 $70,000,000 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 45,000,000. 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.

Speaker 5

Very, very helpful. Thank you, Jim. And then I want to follow-up on margins. I think in your 10 ks, it notes that freight inbound freight was 180 basis point impact to FY 'twenty two gross margins. Just curious to know how much I look from your CFO slide deck today that you recaptured about 200 basis points in this quarter.

Speaker 5

Just curious to know how much freight is going to be a benefit for your full year gross margin? And then just clicking down to the SG and A, last 10 Q, you had about $18,800,000 of logistics costs in your SG and A. Just curious to know how much that was impact for 2Q in dollar terms and how much do you think it can impact for the full year? Thank you.

Speaker 4

Yes. As it relates first of the gross margin and the inbound freight headwinds that we had last year of 180 basis points. We continue to anticipate greater than 200 basis points of gross margin favorable gross margin impact this year as those inbound freight costs have come down Materially for us. And then as it pertains to SG and A, we've continued to see you'll see in the same CFO commentary document among the higher rates of growth in SG and A It continues to be operations, and that encompasses our warehousing, distribution, fulfillment costs. That's still a meaningful part of what's driving our SG and A up in the quarter, we'd anticipate those costs continuing through the balance of this year.

Speaker 4

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 $30,000,000 range would be a ballpark estimate of the impact in that area of our business.

Speaker 5

Very helpful as we think about the next fiscal year. Thank you very much, Jim.

Operator

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

Speaker 6

Yes. Thanks for taking my questions. 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. How do you I mean, how do you guys come up with that? Are you just looking at kind of trends over the last month or 2 and extrapolating that.

Speaker 6

I'm just trying to get a sense as to how conservative you might be with that assumption.

Speaker 2

Yes. The replenishment business for us is very helpful and we are in the process of automating That process today 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 an important part of our business and we're getting much better at it all the time.

Speaker 4

Yes. I think just to further to that Mitch, It's based on a statistical forecast. Again, looking back at what we've seen in trends over the last several weeks, 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 the 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.

Speaker 6

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 margin is coming down. I think from an SG and A Dollar standpoint, that really hasn't changed or maybe is up a tick from where it was before.

Speaker 6

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 and A dollar number, which is leading to a fair amount of deleverage on the year?

Speaker 4

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 as we look at the distribution and the 3rd party logistics side of our business, there are some professional fees 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 one time 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'd otherwise believe to be a greater degree of variable based expense savings.

Speaker 6

Okay, that's helpful. All right, thanks. Good luck.

Operator

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

Speaker 7

Excellent. Thanks for taking my question. Just given some of the macro headwinds out there that are clear, I'm just curious if you see any changes in the actual competitive environment. I know the formula brand is only really held to get 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?

Speaker 7

Is really the This difficult period being driven by a broader macro environment. Curious about some of your high level thoughts there.

Speaker 2

Yes, I want to you're having 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 and A of the carry cost of inventories, and we're able to keep high gross margin based on the company's strength in sourcing, we do have too much inventory. So that's going to be impactful for the balance of the year on the SG and A line.

Speaker 2

We're finding great strength and comfort in the fact that we have a balance sheet that can help us to hang on to this inventory and sell it profitably During a period like this.

Speaker 7

I know I have some background noise right now, if you can hear me.

Speaker 8

Thank you.

Speaker 2

Yes, I'm sorry. I'm having a real difficult time understanding the question. We'll be happy

Operator

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

Speaker 9

Yes. Hi, thank you. Good afternoon. 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.

Speaker 9

So I'm just wondering, should we assume that the environment's Shifted pretty meaningfully in the last couple of months or any other color just going back to the change in the full year guidance and the drivers?

Speaker 4

I think that's fair, John. When we had our earnings call in April up to about that time, we were we're 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 being a bit, it was exceptionally challenging, and things improved a little bit in June And they've been a bit 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 quarter, Thanks for 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 and prudent to realign our outlook and derisk some of the trends that we're seeing in the business through the quarter.

Speaker 9

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

Speaker 2

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

Speaker 4

And I think, John, retailers are generally being more cautious. As we sit here today with where spring sell through and Tim touched on spring sell through has been a bit slower. I described inventory levels in the marketplace as being moderately elevated. 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.

Speaker 4

And then I think in terms of getting a better read on that, The Q3 is typically the point in time where we're shipping an initial floor set, so it doesn't come until we get into the early fall where we start to see that sell through back to we'll look into the early fall sales to get a better read on how things are progressing.

Speaker 9

Okay, great. And just last one for me, Jim. It looks like the guidance is assuming operating profit below 2019 levels through the Q3 followed by a pretty significant shift 2 positive in the teens in the 4th quarter compared 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 4th quarter?

Speaker 4

Yes. Trying to go back to Q4 and comparing it to a prior period like that, I would have difficulty doing it. What I would say, John, though is certainly being at a 10% -ish operating margin this year, that's a disappointment from our perspective. We got much higher expectations in terms of driving the right profitability and expanding operating margins over time, I think bear in mind, as Tim's 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've we're not ready to provide an outlook as we think out to 2024 here today.

Speaker 4

Having said that, if you look at the pressure that that's putting on the P and L in 2023 across SG and 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 potential to expand operating margin all subject to how the top line plays out next year, that should be a tailwind for us.

Speaker 9

That's very helpful. Thanks again for all the color.

Operator

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

Speaker 8

Thank you. Good afternoon. I wanted to ask on pricing in general, just given the pressures to consumer spending, how 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, how do you feel about your go in pricing and the price value equation?

Speaker 2

Yes, Jim, I think we're in good shape actually. I don't believe that these 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 tend 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.

Speaker 2

We've got 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.

Speaker 8

Okay. Thank you. And I also thought I'd ask just about inventory composition. And In the past, you'd spoken about footwear versus apparel. How does that split?

Speaker 8

Are you heavier in footwear than you are in apparel or is it relatively balanced?

Speaker 2

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 out 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.

Speaker 4

Yes. And then just looking at Composition of the inventory, Jim, at a high level, call it around 50% of the inventory is current season, 20% of it's aged and then the balance would be the carryover, the evergreen type styles. That 20% that's aged, That's not too far off of it. It's more elevated than where we would like. But in light of the outlet Stores that we have to leverage, we've opened up some temporary stores.

Speaker 4

We feel perfectly comfortable working that inventory down in the latter part of this year.

Speaker 6

Very well. Thank you.

Operator

Thank you. The next question is coming from Abi Syvejniks from Piper Sandler. Abi, your line is live.

Speaker 7

Hi. Thanks for taking my question. I know a smaller piece of the business, But can you just talk about kind of how you're thinking about the go forward growth trajectory of both Prana and Mountain Hardware? Thanks.

Speaker 2

Yes, Mountain Hardwear as you know is a high end Alpinist brand. 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 large opportunity for us, especially in the U. S. As we approach some specialized retail.

Speaker 2

It's an area where it's 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.

Operator

Okay. Thank you. The next question is coming from Mauricio Serna from UBS, Mauricio, your line is open.

Speaker 10

Great. Thanks for taking my question. 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 U.

Speaker 10

S. And then maybe if you could talk about you commented about some challenges in the footwear category, just want to make sure like if those challenges that you're talking about, are that like related specifically to outdoor or would you say it's more like throughout overall sportswear? Thank you.

Speaker 6

Tim, do you want to

Speaker 4

touch on footwear 1, then I'll come back around the sales?

Speaker 2

Yes, I can talk about the footwear that the outdoor category has been softening a bit. That's where the primary business for the Columbia brand is. The SOREL brand on the other hand is it's primarily women's fashion brand. We've seen great successes in the sand will 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.

Speaker 4

And then Mauricio, as it relates to the sales guidance, so we've provided 3rd quarter revenue growth of 4% to 6%. And then, if you engineer that back to what would be contemplated in the Q4, it'd be down a mid single digit percent. To your question, there are still a lot of timing shifts each quarter, last year for the fall 2022 season, we were awfully late getting inventory to the market. And so there was a higher proportion of our fall 2022 wholesale orders that shipped in the 4th quarter. So we're contemplating being much earlier and we would expect our wholesale direct business being up quite substantially in the Q3 however, there's going to be an offset as we shift the international distributor fall 2023 orders in the 2nd quarter.

Speaker 4

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, mid single digit percent of growth.

Speaker 10

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

Speaker 4

Yes. That's right.

Speaker 10

Okay. Thank you very much.

Operator

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

Speaker 11

Hi, thanks for taking my question. I just have one here. I just wanted to ask, can you talk about how you're thinking about gross Margins in the Q3, 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 expectations for promos in the back half and any color on sort of 3Q versus 4Q gross margin would be super helpful.

Speaker 11

Thank you.

Speaker 4

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 3rd quarter. We'll continue to benefit from the lower inbound freight costs. Those that should be a 300 basis point benefit in the Q3, 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 Q3 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 age or the excess inventory moving through there from a clearance standpoint, those are marked down a bit more.

Speaker 4

And so that's essentially the offset that you see In the margin. And then the Q4, we anticipate being up as well and it's really those same drivers That are going to be at play.

Speaker 9

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

Speaker 4

Yes. Thanks, Tom.

Operator

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

Speaker 2

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

Operator

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

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Earnings Conference Call
Columbia Sportswear Q2 2023
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