Columbia Sportswear Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 11 speakers on the call.

Operator

Greetings. Welcome to Columbia Sportswear's Third Quarter 2024 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.

Operator

I will now turn the conference over to your host, Andrew Burns, VP of Investor Relations and Strategic Planning at Columbia Sportswear. You may begin.

Speaker 1

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's 3rd quarter results. In addition to the earnings release, we furnished an 8 ks 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.

Speaker 1

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.

Speaker 1

We do not undertake any duty to update any of the forward looking statements after the date of this conference call to conform the forward looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non GAAP financial measures, including constant currency net sales. For further information about non GAAP financial measures and results, including a reconciliation of GAAP to non GAAP measures and an explanation of management's rationale for referencing these non GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and the appendix of our CFO commentary and financial review. Following our prepared remarks, we'll host a Q and A period during which we will limit each caller to 2 questions, so we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.

Speaker 2

Thanks, Andrew, and good afternoon. Overall, Q3 financial results reflect a continuation of the trends we've experienced all year. The North American outdoor marketplace remains challenged and we are working to maximize sales in a soft consumer demand environment. Outside of North America, we continue to experience positive momentum in most direct and distributor businesses led by our China and Europe direct business. 3rd quarter net sales declined 5% year over year and came in at the low end of our guidance range.

Speaker 2

Despite this, we were able to exceed our diluted earnings per share guidance range through a better than planned gross margin and disciplined expense management. Our financial position remains strong. We exited the quarter with cash and short term investments of over $370,000,000 and no debt. We are on track to generate over $300,000,000 in operating cash flow this year. In addition to investing in our business to drive long term profitable growth, we are returning free cash flow to shareholders via dividends and share repurchases.

Speaker 2

Through the 1st 3 quarters of the year, our share repurchases totaled $231,000,000 highlighting our continued commitment to our capital allocation strategy, the Board of Directors has approved a new $600,000,000 buyback authorization. As we enter our peak sales season, there's no shortage of uncertainty. We await the arrival of colder weather in many regions of the world. With this in mind, we are taking a more cautious net sales outlook for the remainder of the year. Despite the top line pressure, we are slightly raising the bottom end of our diluted earnings per share guidance.

Speaker 2

Before reviewing our results and outlook in more detail, I'd like to discuss Columbia's new growth strategy named Accelerate. In recent months, the Columbia brand initiated Accelerate, a growth strategy intended to elevate the brand and attract younger and more active consumers. Over the past 86 years, we've built an extraordinary company and one of the largest outdoor brands in the world. Our top strategic priority is to accelerate profitable growth and I know our company is capable of growing rapidly. The accelerate growth strategy is centered around several consumer centric shifts and enhanced ways of working.

Speaker 2

First, we have strengthened our consumer segmentation framework to clearly define the growth opportunities ahead of us. We will continue to serve our existing consumers with accessible outdoor essentials, while also focusing on bringing new younger active consumers into the brand. We know that this consumer segment is the largest and fastest growing part of the outdoor market. We already successfully serve this consumer outside the U. S.

Speaker 2

Where we are seeing strong growth in markets like China and Europe. In the coming seasons, our brand, product and marketplace strategies in the U. S. Will focus on reaching younger, more active consumers. We know that when we deliver the right product to the right consumers at the right time, we win in the marketplace.

Speaker 2

The second shift is elevating consumers perception of the brand. We're doing this with a refreshed creative strategy that brings Columbia's unique brand personality to life. We're embracing the spirit of the brand that our one tough mother, Gert Boyle made famous. We engineer exceptional products for whatever life throws at you, helping to keep consumers warm, dry, cool and protected. And at the same time, we don't take ourselves too seriously.

Speaker 2

The Columbia brand is fun, irreverent and authentic and this will become increasingly evident in our marketing. To lead this new marketing direction, we recently hired Matt Sutton as the Columbia Brand Head of Marketing. Matt has extensive experience in brand and digital marketing and will be leading the strategic integration of the Columbia global marketing efforts. We've also announced a new global ad agency of record, Adam and Eve to help us bring our vision to life. The 3rd shift is around product.

Speaker 2

The foundation of our success is creating iconic products that are differentiated, functional and innovative. Under the leadership of Woody Blackford, our product teams have a new product construct to drive growth with targeted consumer segments. Consumers already trust the Columbia brand for its quality, value and reliability. In the coming seasons, we will be emphasizing innovation and style with new products as well as updates to our most iconic styles. We're reducing our assortment to focus our efforts on fewer, more powerful collections with clear purpose.

Speaker 2

The 4th shift in Accelerate is elevating the position of the Columbia brand in the U. S. Marketplace. To activate our brand and product strategies, we will invest alongside our best in class strategic retail partners to elevate in store presentations and bring our unique brand and products to life. In our direct to consumer e commerce business, we've already begun to evolve columbia.com to be the best expression of the brand.

Speaker 2

We want visitors that come to the site to see our latest products and innovations with enriched brand storytelling. In our brick and mortar stores, we're focusing on enhancing our assortments and in store presentations to tell better brand stories and drive sales. The next shift in Accelerate is our integrated full funnel marketing strategy. We will have a greater emphasis on the consistent year round share of voice in the market. Not only are we planning to invest more into marketing, but we're also going to be more efficient with how and where we activate these demand creation investments.

Speaker 2

We will be more differentiated with creative marketing activations and immersive ways to experience the brand. Combined, our accelerate product, marketing and marketplace strategies are engineered to get the right product to the right consumers at the right place and time. This will enable us not only to meet our consumers where they are, but inspire them to go further with us. We're excited to bring Accelerate to life. This will be a multiyear strategy that steadily builds momentum in the seasons ahead.

Speaker 2

As 2025 progresses, the changes we're making will be increasingly evident to consumers. While we are not prepared to provide financial metrics for the Accelerate Growth strategy at this point, I firmly believe these actions will drive brand right profitable growth. We will seek to balance brand investments with disciplined expense management to achieve our goal of profitable growth with operating margin expansion over time. I will now review our Q3 financial performance. Net sales of $932,000,000 declined 5% year over year driven by a 9% decline in global wholesale net sales, partially offset by 2% direct to consumer growth.

Speaker 2

Gross margin expanded 150 basis points to 50.2%. This was ahead of plan driven by favorable international gross margin performance, lower than expected promotional activity in the U. S. And lower freight expenses. SG and A expenses increased 3%, primarily reflecting higher DTC expenses, partially offset by lower supply chain expenses.

Speaker 2

Favorable gross margin and SG and A underspend resulted in operating income and diluted earnings per share coming in at above our guidance range. Looking at our net sales by geography, U. S. Net sales decreased 10%, primarily driven by mid teens percent decrease in U. S.

Speaker 2

Wholesale. As a reminder, our fall 24 order book in the U. S. Was down a mid single digit percent. While still very early in the season, wholesale sell through has gotten off to a slow start.

Speaker 2

We expect sell through to pick up with the arrival of cold weather. U. S. DTC net sales were relatively flat. Brick and mortar was up mid single digits percent driven by a contribution from the temporary clearance locations, increased store productivity and new stores opened over the last year.

Speaker 2

U. S. E Commerce net sales were down high teens percent reflecting challenging outdoor market conditions as well as a shift in columbia.com digital marketing strategies. For my review of Q3 year over year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying growth in each market. Latin America, Asia Pacific region or LAAP net sales increased 18%.

Speaker 2

China net sales increased low 20% with healthy growth across wholesale and DTC. Despite broader economic headwinds in China, the outdoor category continues to grow. Colombia is capitalizing on this trend with localized product lines like transit and unique brand activations that highlight Columbia's heritage and innovation. During the quarter, Columbia hosted a hiking event in Shangri La National Park. The well attended event featured music and hiking in the first of its kind event at this premier hiking destination.

Speaker 2

The event was amplified by celebrity brand ambassadors whose online content generated millions of impressions. China's e commerce business continues to build momentum with several highlights in the quarter. Columbia had an incredibly successful Super Brand Day on Tmall ranking 3rd in sales volume across all outdoor brands. On TikTok, Columbia's 1st footwear store launched and is off to a strong start. It's exciting to see the Columbia brand realize its full growth potential in this important region and it remains on track to be one of our fastest growing markets this year.

Speaker 2

Japan net sales increased double digit percent aided by continued strength in international tourism. Korea net sales increased mid single digit percent. During the quarter, we appointed Jeff McPike as the new General Manager of Columbia Sportswear Korea. Jeff is a 25 year industry veteran with a passion for building innovative omnichannel consumer experiences. His marketplace expertise will be instrumental in building the right strategy to drive our business forward in Korea.

Speaker 2

LAAP distributor markets were up mid-20s percent, primarily reflecting robust fall 2024 orders. Europe, Middle East and Africa region or EMEA net sales increased 10%. Europe direct net sales increased low single digit percent led by a robust DTC growth. The European team is doing an exceptional job of creating brand visibility and relevance with unique marketing activations like the Hike Society. This season, we hosted 90 Hike Society events, creating grassroots connections with young hikers and introducing them to Columbia Technologies.

Speaker 2

Our Europe direct business remains on track to be one of our fastest growing markets this year. Our EMEA distributor business increased by approximately 130%, driven by a shift in timing of shipments as well as higher fall 24 orders on the strength of the Columbia brand in many distributor markets. Canada net sales decreased 19% driven by lower wholesale sales. The Columbia brand remains well positioned in Canada with high brand awareness and consumer trust. Looking at performance by brand, Columbia brand net sales decreased 1%, primarily reflecting a challenging marketplace in the U.

Speaker 2

S. And Canada, partially offset by a continuation of healthy trends in most international markets. This fall, we have several innovations that are integral to our product and marketing strategies. Omni Heat Infinity remains our largest innovation platform and one of the fastest growing parts of our business. Our newest cold weather innovation Omni Heat Arctic will be prominently featured in our DTC channels.

Speaker 2

As a reminder, Omni Heat Arctic starts with a translucent outer layer that lets solar energy in. Heat is then transmitted to an insulation layer close to the body for maximum warmth, mimicking the polar bears warmth protection system. I'd like to congratulate our Chief Product Officer, Woody Blackford and our Vice President of Innovation, Haskell Beckham, who were honored by the American Association of Textile Chemists and Colorists for their significant contributions in developing new fabrications and technologies in the apparel industry. Thank you for everything you do to make Columbia a leader in the outdoor space. Great work team.

Speaker 2

On the collaboration front, this fall we partnered with Disney on Mickey's Outdoor Club collection. Inspired by the iconic artwork from the Mickey Mouse comic strip, this collection featured beloved Disney characters on a camping trip. Top styles quickly sold out and the line was featured in numerous Disney focused and outdoor media outlets. This holiday season, Columbia will launch our 9th annual Star Wars collection. The first content promoting the collaboration will go live tomorrow and will feature a surprise appearance from a Star Wars special guest.

Speaker 2

Fans of Star Wars and NASCAR are going to want to see this. Shifting to our emerging brands. Mountain Hardwear net sales increased 2% driven by DTC growth. The brand has several exciting brand and product activations for the balance of the year, including an expanded Ghost Whisperer collection, new snow sports offerings and a soon to be announced product collab. Mountain Hardwear's product line and brand positioning are on track and the team is focused on accelerating growth.

Speaker 2

Prana net sales decreased 7% in the quarter. I'm encouraged by the progress that Prana leadership team has made in recent months, activating wholesale distribution, refreshing marketing and recruiting new talent to the team. I'm confident these actions position the brand for growth starting with a positive order book for spring 2025. SOREL brand net sales decreased 39% driven by lower fall 24 orders and elevated clearance and promotional sales activity in the prior year. The SOREL team is focused on building brand, product and marketplace strategies to drive the long term growth potential that I know the brand is capable of.

Speaker 2

This process will take time and I expect sales trends will remain under pressure in the spring 2025 season. I will now discuss our 2024 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. Looking across the global marketplace, there are many external risks and uncertainties, outdoor industry and U.

Speaker 2

S. Consumer headwinds, weather, geopolitical conflicts, supply chain disruptions and the upcoming U. S. Elections. These factors among others have the potential to impact consumer demand and our operations.

Speaker 2

With this uncertainty in mind, we are reducing our net sales outlook to reflect a 3% to 5% decline this year. Gross margin is now expected to expand 40 to 90 basis points. SG and A is expected to be 42.8% to 43% of sales, leading to an operating margin of 7.7% to 8.4%. The profit improvement program is on track to deliver approximately 90,000,000 dollars in cost savings this year. We are slightly raising the low end of our diluted EPS guidance range, which is now $3.70 to $4.05 As we noted on the last call, our spring 2025 order book reflects a return to growth in our wholesale business in the first half of the year.

Speaker 2

This order book reflects growth across Columbia, Prana and Mountain Hardware and growth in the U. S. And international markets. Based on the spring 2025 orders, we anticipate first half wholesale net sales to increase mid single digit percent. While we are not providing any full year 2025 guidance at this time, Our objective is to deliver net sales growth and operating margin expansion.

Speaker 2

We will provide our next update on 2025 when we report in February. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. The Accelerate Growth strategy provides clear strategic shifts that will unlock brand right profitable growth for years to come. We are investing in our strategic priorities with renewed emphasis to accelerate profitable growth, create iconic products that are differentiated, functional and innovative, drive brand engagement with increased focused demand creation investments, enhance consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that is digitally led, omnichannel and global and empower talent that is driven by our core values. That concludes my prepared remarks.

Speaker 2

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

Operator

Certainly. At this time, we will be conducting a question and answer And the first question today is coming from Bob Drbul from Guggenheim. Bob, your line is live.

Speaker 3

Hi, good afternoon. Hi, Tim. Hi, Bob. I guess I have two questions for you. The first one is just on the Accelerate growth strategy.

Speaker 3

You talk about bringing newer, younger active consumers into the brand. Do you believe those consumers are already in the channels that you're competing in? I'm just trying to understand sort of how do you get after that segment of the consumer base? And the second question I have for you Tim is you said that obviously weather 75 or 80 today in New York, but like warmer weather, slow start to the season. How do you feel like the channel is out there with many of your wholesale partners?

Speaker 2

Great. Yes, I can help you with both of those, Bob. As it relates to the younger consumers, we believe that they're already in the brand. We know they're in the brand internationally. We just need them to be more involved in the brand domestically.

Speaker 2

And our expectation is that with the new marketing leadership and help from a creative agency that we announced in the script today that we're going to be again returning to a more differentiated approach to a humorous, irreverent brand personality where we can be really quite different and be more important to these consumers that we're trying to attract. We believe that they're already in the brand and they know the brand well. It's just a question that we don't have enough of them. So that's the plan is to spend more to get those folks to spend it more efficiently and to get the messaging properly, so we get consideration improved. And then as it relates to the channel, I believe the channel is in the proper position now.

Speaker 2

Our customers have spent a lot of time cleaning up inventories the old chemistry that was a problem for a few different geographies. But right now, the channel appears to be in good shape and we're just waiting for great weather to supercharge things.

Speaker 3

Great. Can I just follow-up Tim?

Speaker 4

Sure.

Speaker 3

So just in terms of the marketing, is the plan to create like a one tough father strategy with you and Joe? Are you guys going to get back into the acting business or what are we looking for here?

Speaker 2

No, my SAG card is expiring and I think I'm done with that. No, this is going to be an approach that is going to be frankly quite interesting and different. We've pretty good with a few customers. We're going to be chilling into a few more here in the next several days. And the reaction, frankly, is quite interesting and good.

Speaker 2

And we'll have to get in front of our investor groups here soon. But suffice it to say that we're pretty excited about the opportunities they're going to give us.

Speaker 3

All right. We'll be watching. Thanks, Tim. Good luck.

Operator

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

Speaker 2

Good afternoon. Thank you very much for taking my question. Tim, I wanted to follow-up on the comment around 1H-twenty five wholesale growth of mid single digits. Maybe can you unpack that a little bit more for the audience? Like what's driving that growth?

Speaker 2

Is it just easy year over year compares? Is it driven by pricing, restocking? And I noticed you mentioned that growth will be coming from all regions, but are all regions equal in that nature? Or should we think about just more growth coming from international as at least for spring 2025? Yes, that's right.

Speaker 2

The business is going to be more balanced in the first half of twenty twenty five and we'll have strong improvement in our U. S. Business as well as retailers who were cautious about placing orders in the prior periods for again chemistry that was going to be fragile from a selling perspective. So there will be improvements really in almost every market, not all to the same extent, but I just might point out that our international business has performed much better than our domestic business and our expectations are that those markets will continue to improve maybe more rapidly than the U. S.

Speaker 5

And then, Ram, maybe just a couple added comments to that. In terms of pricing versus destocking is as it relates to the spring 2025 season, by and large, we've held price for the season aside from whatever mix shifts there might be with what sold in. And I think to Tim's point, Joseph, as you think about regional growth opportunities and don't recall it for a mid single digit rate of growth, a reasonable chunk of that just given the sheer reliance on the U. S. Business and the Columbia brand, you can assume that the U.

Speaker 5

S. Columbia is generally following suit with that overarching first half expectation.

Speaker 2

Okay. Very helpful, Tim and Jim. And then just sort of follow-up on more maybe more on margins. With regards to the Accelerate plan, I think, Tim, you mentioned higher and more efficient demand creation. I know demand creation last year was 6%.

Speaker 2

Where do you want it to go through this Accelerate program? And then Jim for you on the cost savings program with the $90,000,000 for 2024, just curious to know how much you've realized so far the few quarters and how should we think about for the Q4? And then for 2026, I know you're not commenting about 2025 financial targets, but like should we think about that 125 to 150 kind of balance between the 2 years that remain for this profit

Speaker 5

improvement plan?

Speaker 2

Yes. Let me make sure I get my questions out of the way and then I'll turn it over to Jim here. The margins are planned to be quite strong, certainly in comparison to last year. The marketing rates will be established as we go into the year, but suffice it to say there there would be increasing amount of spend in marketing as well as a more efficient use of the market. So we haven't settled on a firm number yet, but we know we need to spend more and we're building those additional costs into other parts of the business so that we can offer growth and an expanding operating margin as well.

Speaker 5

And then, Laurent, as it relates to the profit improvement program, we're well along this year in achieving the targets that we've set. In fact, earlier in the year, we said that'd be $75,000,000 to 90,000,000 dollars With the revisions and updates we're making today, we believe that we're tracking to the high end of that. We're really pleased with the performance across the business in that regard. Certainly, a component of that is attributable to getting our inventories clean and less supply chain and inventory carrying costs. But broader than that, a lot of optimization efforts going on across our supply chain and just a focus on disciplined cost management.

Speaker 5

So happy to see that we're progressing in that regard. And then as it relates to that out years, I think it'd be premature in terms of kind of breaking down detail. I think when we come around to our call in February, I'll provide a bit more detail on what our expectations are for 2025.

Speaker 2

Okay. Very helpful and best of luck with the holiday season.

Speaker 5

Thank you, Laurent.

Operator

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

Speaker 6

Hey, good afternoon guys. Thanks for taking the questions.

Speaker 5

Tim, what do you think

Speaker 6

the catalyst is for improved spending on outdoor categories? The competition seems fairly high, the macro seems somewhat depressed, but what do you think gets us out of this slump? You are calling for mid single digit wholesale growth next year, which is a nice uplift.

Speaker 2

What do

Speaker 6

you think sustainable growth looks like and what's the catalyst for it in the outdoor industry?

Speaker 2

Well, frankly, I'm always disappointed when we are growing in high teens, because I think the company with its balance sheet and the infrastructure that we have built around the company, we should be building and growing in rates much stronger than that. Frankly, our rates of growth outside the U. S. Are much we would point to a much bigger opportunity. I think much of our malaise in the U.

Speaker 2

S. Is a function of how we've been marketing our products. Our products are clearly superior in our opinion to many of our competitors. We're just not talking about it enough. We're not giving it enough emphasis and we're not talking about it in a differentiating enough way.

Speaker 2

And that for me will be the key in terms of making us a bigger business in the U. S. Just overall. Secondarily, we've talked for a long time about the opportunities categories where we're underperforming, specifically footwear and those areas are going to get much greater emphasis from a product standpoint and a marketing standpoint.

Speaker 6

Understood. That's helpful. Maybe just a follow-up question on the margin structure of the business. The SG and A rate is going to sit somewhere in the low 40s gross margins now above 50%. You look back at the business versus its own history, the SG and A rate is really the reason for the margin deleverage over the last for the last 5 years.

Speaker 6

How do we think about SG and A rate going into fiscal 2025 and fiscal 2020 6? There's obviously been some cost savings programs announced, but how do you, I guess, stop the deleverage of sales and SG and A?

Speaker 2

Well, the first order of business is going to be growing the top line, which is a focus of the company. But there are other levers we have available to us and maybe I'll ask Jim to just talk about a few of them because many of them

Speaker 5

are underway. Yes. We do have this profit improvement program that we've initiated. And some of the efforts that we have ongoing into 2025 and 2026 is how do we reduce our total cost of our supply chain that had gone up by several points over this 5 year timeframe that we're talking about. And certainly, we believe there's efficiency in how we streamline our operations, our processes, our product flow and there ought to be savings attributable to that.

Speaker 5

And so we're I think as a management team, we're focused on the discipline that we need to have to get that SG and A back down to more appropriate levels, while at the same time there needs to be some balance in it because as Tim's touched on, we want to make sure that we're also fueling growth and making right investments along the way from a demand creation perspective and putting the energy behind our brands.

Speaker 2

Yes. So I think at the end of the day, this is by growing the business. We think control costs as well as anybody, but we have to have growth and we will we intend to have growth.

Speaker 6

Understood. Maybe just one final question on the wholesale channel commentary. How would you describe the U. S. Wholesale channel?

Speaker 6

International trends are above domestic. Just curious as you look into fiscal 2025, the order books and maybe even some of the near term sell through dynamics that are going on, how would you characterize the North American wholesale channel?

Speaker 2

Well, clearly, in North America, there have been significant consolidation at the retail market for many, many years. And that puts more leverage in the hands of the retailer. So we have to be better. We have to be a preferred supplier and we have to have greater sell through, which is going to be driven by great product and supercharged by great marketing.

Speaker 6

Got it. Best of luck into the Q4 guys. Thank you.

Speaker 5

Thanks, Doug.

Operator

Thank you. The next question will be from Paul Lejuez from Citigroup. Paul, your line is live.

Speaker 7

Thanks. It's Tracy Kogan filling in for Paul. I had a question about your gross margin. It came in better than planned in Q3. And I think you mentioned that there were lower promotions in the U.

Speaker 7

S. Market. So I was just wondering if you could characterize the current promotional environment. And then secondly, I was wondering what was built into your guidance for 4Q in terms of promotions? Thank you.

Speaker 2

Yes. We would expect promotions to be stronger, frankly, as we approach the holiday season. And the gross margin improvement was due to a number of certain areas, including freight charges, etcetera, and then first cost on the goods coming into the country. So our expectations are for further promotions, but we built those expectations into our guidance today. Yes, Tracy, maybe

Speaker 5

just a couple of added comments I would make. You'll recall in July, we lowered our full year gross margin forecast in light of some of the promotions that we were seeing during the Q2 just in anticipation of a more promotional environment. That didn't play out quite to the degree that we had anticipated in Q3. So things were a bit better. With that said, and as Tim touched on, it's still very promotional environment.

Speaker 5

And so as we've provided an update to our outlook, we've not increased the bottom end of our range with the expectation that there are going to be promotions out in the marketplace and we're going to need to react in order to spur the demand. And so that's essentially what's baked into our Q4 guidance. As you think about the year on year change, of course, we're going to get much easier comps just given how warm it was through the entirety of the Q4 last year. The world where we see the benefit in the gross margin expansion in Q4 is going to come through cleaner inventories with less wholesale closeout sales in the Q4 this year. When we think about our own direct to consumer business and margins, they're really on par with where they were a year ago from a promotion and from an overall margin standpoint.

Speaker 7

That's very helpful. Thank you.

Operator

Thank you. The next question will be from Alex Perry from Bank of America. Alex, your line is live.

Speaker 8

Hi, thanks for taking my questions here. I wanted to ask about your exposure to potential China tariffs. Can you just remind us what percent of U. S. Goods are sourced in China?

Speaker 8

Do you have any initiatives in place to mitigate any potential impact? And would you consider price as a lever as well? Thanks.

Speaker 2

Yes. We strategically began our move out of China several years ago, even prior to the Trump administration 4 years ago. And we have a very small percentage of merchandise that's brought into the U. S. From China.

Speaker 2

So exposure there is not great. We're obviously very concerned about the imposition of tariffs. The products that we make, the commodities that we engage in both footwear and apparel are among the most highly tariffed in the United States. Some of the product carrying as much as nearly 40% duties. And that has not translated into increased investment in domestic production.

Speaker 2

So we believe the argument about tariffs improving the domestic production items, especially footwear and apparel are fallacious. Additionally, the expectations around our international business and the impacts of a trade war beginning are concerning. But we consider ourselves to be very adept at managing tariffs and duty rates globally, shown we're very successful with that international business. But the trade wars are not good and not easy to win.

Speaker 5

And then Alex just to elaborate on our sourcing exposure that China, our footwear category is about 20% and apparel is a low single digit percent. So it's in the grand scheme of things, it's quite small as Tim described.

Speaker 8

Really helpful. Then I just wanted to follow-up to the prior question actually on the gross margin. So I think at the high end implies roughly 150 basis points of expansion in the 4th quarter. Can you just it sounds like lower closeout sales is part of that. Can you maybe just talk about other pieces in there that would be driving the expansion?

Speaker 8

And then do you expect those tailwinds that you're seeing in the Q4 and the Q3 here to continue as we move in through the first half of next year? Thanks.

Speaker 5

Yes, Alex. I'd just reiterate, by far and away the single most meaningful impact to why we would anticipate 4th quarter gross margin expansion is going to be a function of having much cleaner inventory than we did a year ago. And where we see the biggest benefit of that is in our wholesale business where we anticipate a much lower percentage of our total business is being done through closeout sales. And then as I touched on, as it relates to our outlet business, we do have a much better assortment of inventory in the outlets in terms of the composition between what's special makeup and what is true excess inventory going through there. But we do to the point made earlier, we do anticipate that promotions are going to remain and Marchion will remain a bit higher.

Speaker 5

And so we've taken a I think the best approach or most reasonable approach we get to the margin outlook that we're providing here today.

Speaker 8

Perfect. Very helpful. Best of luck going forward.

Speaker 2

Thank you.

Operator

Thank you. The next question will be from Mitch Kummetz from Seaport Research Partners. Mitch, your line is live.

Speaker 4

Yes. Thanks for taking my questions. Tim, we've talked about the weather on this call and how it's been a warm start to the season. I'm just curious, the assumptions that are embedded in your outlook, are you essentially assuming normal weather for November December? Or are you expecting it to continue to be warm?

Speaker 4

What's sort of the underlying assumption that gets you to your guidance?

Speaker 5

Well, certainly through the month of October, as we've seen, it's been quite warm and that's had a dampening effect on sell through across both our wholesale and our D2C business. And that's certainly been picked up in the updated outlook that we're providing here today. As we get into the latter part of the year going up against the warm weather we had last year, we are anticipating some improvement such that things moderate a bit, Mitch, but we're certainly not expecting a polar freeze that amplifies demand in any meaningful way. So, we've taken as close to a middle of the road approach as we can. Now, we all know that there is a weather and a seasonal component to our business that we're dependent upon.

Speaker 4

And Tim, you've been doing this for a long time. When do you really need the weather to turn? Was get the impression that it's better for the cold weather to come before maybe Black Friday and things get too promotional. The best bet for full price sell through is before the market turns promotional going into the holiday. So is there sort of like a line in the sand where like you think like that's where you need the weather to come before retailers kind of hit the panic button and start putting everything on sale that's somewhat seasonal in nature?

Speaker 2

Yes. I mean, this is these are difficult to read, frankly, but it's in my opinion, it's never too early to start snowing. Labor Day would be okay. But what the expectations are that the severity of the weather and where the weather occurs, as an example, we've had really pretty good weather in Europe, our business in Europe is quite good based on the fact that we had more normalized weather there as well as in China. But yes, so the weather is going to have to get here eventually and it's our expectations are that we built the proper focus on the quantity of inventory that we need to move and at the promotional cadences that we think are embedded in our goals.

Speaker 2

And so, yes, it's hard to give you

Speaker 5

a date. That's part of the reason why we've widened the guidance range to and if or kept that wide, not narrowed that in as we've got into the latter part of the year just given the degree of uncertainty around that aspect of our business.

Speaker 4

And then maybe a last one on SOREL. Tim, you've kind of talked about that being a having sort of $1,000,000,000 sales potential when it's trending more towards probably $250,000,000 this year. Are you seeing I know that and it sounds like the spring order book is down. So at least for the first half of next year, it looks like that business is to continue to kind of get go lower. Are you seeing any green shoots yet?

Speaker 4

I know there's been a management change there and you kind of altered the strategy, but any green shoots that gives you confidence that there's still $1,000,000,000 potential with that brand?

Speaker 2

Yes. I mean, I think it's a very unusual product and brand with a very unusual background and personality. We just have to harvest that. So I mean, I've been looking for green shoots, it's really the men's product that was virtually abandoned in the prior periods. And so I think there's real opportunity there just to take advantage of the popularity of the brand itself with men.

Speaker 2

And then we just have to get our products correct here for the female shopper. And it's going to be important that we have the right approach to marketing that product as well.

Speaker 4

Okay. Thanks. Good luck.

Speaker 2

Thanks,

Operator

Mitch. Thank you. The next question is coming from Jonathan Komp from Baird. Jonathan, your line is live.

Speaker 9

Yes. Hi, good afternoon. I just want to follow-up on the commentary around the wholesale outlook into the first half of twenty twenty five. I know the first half of twenty twenty four was quite weak. So it looks like you'll still be down on a 2 year basis.

Speaker 9

So I guess I'm trying to understand your assessment of the marketplace and how the maybe the multi year performance compares to other REITs across the industry?

Speaker 2

Yes. Again, as I said, there's been a significant amount of consolidation in the retail trade in North America. We have generally fewer large customers because they consolidated. And so the expectation is that as we continue to improve our marketing efforts, improve our spend, improve our performance and appearance in store, which are all parts of Accelerate, that we're going to have a much stronger business and a better performance. We've got unique positioning in our PFG Fishing product, which is one of the few brands that has a really honest business spring business.

Speaker 2

And those are going to be areas where we need to emphasize our points of differentiation against our competitors and that will give us a better business in the wholesale trade in North America.

Speaker 9

Okay, great. And then just one follow-up related to the Accelerate strategy. I'm just curious, you've obviously been in the mode of reducing costs and driving margin expansion through cost cuts. How are you thinking about that balance? Is there any risk that you went too far in some of the cost actions?

Speaker 9

And I guess, why does it make sense to target margin expansion while you're also now putting more effort behind accelerating the growth? Just want to hear the thoughts there. Thank you.

Speaker 2

Yes, I guess I would as it relates to accelerating, it's less a function of reducing spend across all categories as opposed to picking certain initiatives that the company had undertaken and we've got to postpone those or make an adjustment in the company's spend level in certain areas in order to emphasize the marketing and promotional activities that we believe are going to be important to regain the strength of our brands.

Speaker 9

Okay. Much appreciated. Thank you.

Speaker 2

You too. Thanks, John.

Operator

Thank you. The next question today will be from Mauricio Serna from UBS. Mauricio, your line is open.

Speaker 10

Great. Thanks for taking my questions. I wanted to just ask about the Q3 sales figure. Just want to make sure with the puts and takes that you mentioned on the wholesale shipments, was there like a net impact on wholesale shipments? I think there was like a pull forward from EMEA, but then some delays in and the other like Europe Direct.

Speaker 10

So just wanted to make sure there wasn't any impact from that front. And then maybe could you elaborate a little bit more on how you're thinking about the overall outdoor industry demand in the U. S. Going into 2025, just given that we're lapping a couple of years of tough dynamics? Thank you.

Speaker 5

I can hit the first part of that Mauricio with regard to the timing shifts that we saw in the quarter. So this is the fall of 'twenty four season and we had intentionally when you look at the overall season or if you look at the quarter rather the wholesale business was down 9%. Our projection for the full season is to be down 4%. So you can see that some of that shifting into the Q4, some of which was planned, some of which was not in the unplanned components as a result of some of the supply chain disruptions that we had during the quarter. Relative to the plan we had, the guidance we provided in July, that timing shift is in the order of magnitude of about $15,000,000 to $20,000,000 and that would have impacted our North America business and to a degree our European business.

Speaker 5

Those are the 2 that were most impacted.

Speaker 2

Yes. As it relates to the outdoor business in total, we believe that the market is very strong for outdoor apparel products. We see no movement towards more formal apparel either in the office or casually. It's really a function of people being comfortable in the outdoors and comfortable in outdoor apparel. So our expectations are that the business is going to continue to grow.

Speaker 2

We need to be getting a bigger piece of the existing buy.

Speaker 10

All right. And just to be clear that $15,000,000 $20,000,000 that's like shifted out of Q3 into Q4 or the other way around? Just wanted to make sure I understood that. And just also following up on the Q4, just given how the weather has been trending, just curious to hear if you had any sort of cancellations or is this like it's still too early and retailers would probably wait in case

Speaker 5

Yes. The first component of that shift of $15,000,000 to $20,000,000 So if you look at the outlook that we provided in July, on the high end of our revenue outlook, we missed by about $27,000,000 That is $15,000,000 to $20,000,000 of that's shifting from Q3 into Q4 where we've got later shipments as a result of some of the disruptions we've seen supply chain wise. So Bangladesh, the East Coast, pork strike and so forth. And then as it relates to the Q4, we haven't necessarily seen meaningful cancellations as of yet. Certainly, we're a little bit later in our deliveries relative to where we ordinarily would like to be given some of the supply chain impacts that we've seen, but nothing that's been outsized relative to historic levels at this point.

Operator

Understood. Thank you so much. Thank you. And there were 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, Anthony. I want to thank everyone for listening in. We are very excited about the accelerate growth strategy and what it means for our company. We know we're capable of growing rapidly. Now we're just waiting for cold weather and we'll be thrilled once that happens.

Speaker 2

So thanks for listening in. We look forward to talking to you next quarter.

Operator

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

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Earnings Conference Call
Columbia Sportswear Q3 2024
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