Columbia Sportswear Company (NASDAQ:COLM) Q1 2024 Earnings Call Transcript April 25, 2024

Columbia Sportswear Company beats earnings expectations. Reported EPS is $0.71, expectations were $0.35. Columbia Sportswear Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Columbia Sportswear First 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. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Burns. You may begin.

Andrew Burns: Good afternoon and thanks for joining us to discuss Columbia Sportswear Company’s first 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 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 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 by the end of the hour. Now, I’ll turn the call over to Tim.

Tim Boyle: Thanks Andrew and good afternoon. I'm pleased to report that 2024 has started out broadly in line with our expectations. We are reiterating our full year net sales outlook, while modestly raising our diluted earnings per share range. In this challenging environment, we continue to take a disciplined approach to expense management and our commercial teams are working to maximize sales across all channels. Our fortress balance sheet enables us to take a thoughtful approach to unlocking the long-term growth and profit improvement opportunities we see across the business. During the quarter, we made meaningful progress on our top priorities. Our inventory reduction plan has yielded substantial benefits. Inventory was down 37% year-over-year exiting the quarter.

I'm proud of our team's efforts to navigate the supply chain challenges over the last several years, while generating healthy gross margins. We are now shifting our focus towards longer term supply chain goals, including improving inventory turns and enhancing the speed and efficiency of our operations. Growth is vital for our success. We are implementing strategies across the portfolio to accelerate the business. For Colombia, we're focused on bringing younger active consumers into the brand through a reinvigorated product line that further emphasizes innovation, performance, and style. On the marketing front, we're targeting a more balanced, full funnel approach to drive consideration from new customers. We are also focused on elevating our product assortment and enhancing our in-store retail presentations across all channels.

We have several proof points across the globe that this strategy is successful. We've driven meaningful growth in recent years in China and several markets across our Europe direct and distributor businesses. We know that when we target the right consumers with our innovative products, we win in the marketplace. In our emerging brands, we have new leaders at SOREL and prAna formulating the brand and product strategies that fuel our next phase of growth. Mountain Hardwear has strong momentum from its recent brand refresh and the team is thinking bigger as they map up as to meaningfully scale the business. Turning to our profit improvement program. We're on track to deliver between $125 million and $150 million in savings by 2026, including $75 million to $90 million in cost savings this year.

We are eliminating expenses associated with carrying excess inventory and driving cost efficiencies throughout our supply chain. We've also begun realizing indirect spend savings. During the quarter, we completed a reduction in force. This never need to lose valued members of our team, who have contributed to our company during their tenure. Our teams handled this process with respect in thoughtfulness, consistent with our core values. We remain confident that our fortress balance sheet, differentiated brand portfolio and strategies position us to reaccelerate growth and capture market share over time. I will now review first quarter financial results. Net sales decreased 6% year-over-year to $770 million. This exceeded the high end of our guidance range, primarily driven by earlier timing of spring wholesale shipments.

Direct-to-consumer net sales increased 3%, led by brick-and-mortar growth. E-commerce sales declined as we anniversaried last year's promotional activity. Our wholesale business declined 14% year-over-year, primarily reflecting lower spring 2024 orders. Gross margin expanded 190 basis points as lower inbound freight costs and favorable channel mix more than offset promotional activity. SG&A expenses were essentially flat as higher DTC expenses were offset by lower supply chain and variable demand creation spending. Diluted earnings per share decreased 4% to $0.71. And I'll now review first quarter year-over-year net sales growth by region. With this review, I'll reference constant currency growth rates. Overall, North America remains our most challenging market.

We are facing several headwinds in this market, including consumers continue to grapple with inflationary pressures, which is impacting soft goods demand. Traditional outdoor category trends are weak, particularly in footwear and retailers are taking a cautious approach in placing future season orders. Outside of North America, we have stronger trends in several markets, including China, Japan and our Europe direct businesses. In the US, net sales decreased 8%, driven by mid-teens percent decrease in wholesale sales resulting from lower spring 2024 orders. US DTC net sales were down slightly. Across all channels, we experienced strength in January, fueled by favorable winter weather, followed by softer trends in February and March. US DTC e-commerce net sales were down mid-teens percent.

sorel.com was particularly hard hit in the first quarter, and the overall e-commerce environment remains challenging. Since late last year, we have been proactively managing promotional activity on columbia.com to help establish the site as the best expression of the brand. We know that our site is already an important destination for our younger, active consumers. We want to ensure that when they visit columbia.com, they see our latest products and innovations with enriched brand storytelling. US DTC brick-and-mortar sales increased high single-digit percent driven by the contribution from temporary clearance locations, new stores opened over the last year, and to a lesser extent, improved store productivity. In 2023, we used our fleet of outlet stores and temporary clearance locations to profitably liquidate excess inventory.

This year, we will continue to leverage these stores to manage inventory levels including PFAS inventory and to drive sales as consumers seek out value in the marketplace. Latin America, Asia Pacific region or LAAP, net sales increased 7%. China net sales increased high 20%, led by exceptional e-commerce performance across our platform partners. In fact, the team was proud to receive special recognition from TikTok this quarter as one of the fastest growing outdoor brands on the platform. The spring 2024 transit line, our premium China specific collection is outpacing last year's sell-through and clearly resonating with younger Chinese consumers. We expect China to continue being one of the fastest growing parts of our business in 2024. Japan net sales increased low double-digit percent sales benefit from increasing foreign tourist activity, which is helping to offset softer domestic consumer lending.

Korea net sales declined mid-single digit percent. LAAP distributor markets decreased high 20s percent, reflecting a greater portion of spring 2024 orders, driven in the fourth quarter of last year compared to the first quarter. Excluding the impact of shipment timing, LAAP distributors were historically relatively flat. Europe, Middle East and Africa region, or EMEA, net sales decreased 6%. The Europe direct net sales were essentially flat as healthy DTC growth offset the impact of lower spring 2024 wholesale orders. The Columbia brand continues to perform well in the marketplace measured by healthy DTC and wholesale sell-through despite economic and geopolitical pressures. This quarter, we extended our popular Hike Society program into France, following its successful launch in the UK last year.

As a reminder, we have Columbia Hike society programs across several European and Asian direct markets. This series of events allows young hikers to meet like-minded people to explore the outdoors and learn about the Columbia brand's technologies. To further strengthen Columbia's presence in the important high category, we're continuing our exclusive partnership with Megamarsch. This year, it includes a series of 23 hiking events that take place across Germany, Austria and Switzerland with each of them typically fielding over 1,000 participants. Our EMEA distributor business declined low 40% and reflecting a greater portion of spring '24 orders shipping in the fourth quarter of last year compared to the first quarter. Excluding the impact of shipment timing, E&A distributor sales were down only slightly despite several markets being impacted by geopolitical conflicts.

Canada net sales declined 11% as lower spring 2024 wholesale orders were partially offset by modest DTC growth. Similar to the U.S., Canadian consumers are seeking out value in the marketplace, which is driving healthy performance at our outlook store. Looking at performance by brand. Columbia brand net sales decreased 6%, reflecting lower spring orders, partially offset by DTC brick-and-mortar growth. The delivery of our spring shipments is well underway and we're excited for consumers to gain access to our newest product innovations. Our industry-leading cooling and sun protection innovations like Omni-Freeze and Omni-Shade sun deflector, differentiate Columbia from the competition. This spring, we launched Omni-Shade broad spectrum airflow, offering exceptionally breathable sun protection with omni evaporation for fast-growing next to skin comfort.

We're also focused on reenergizing PFG with new products like the PFG unchartered collection. This new assortment features a younger, more active fit, tech pack performance and new fabric agents. In footwear, we launched the Omni-MAX system which combines versatile cushioning, enhanced stability and increased traction. Omni-MAX is available in a variety of hiking, trailing and fishing steels. In our DTC stores, we supported the launch with in-store and window displays, helping to drive encouraging sell-throughs of higher price point Omni-MAX styles like the currents. I'm encouraged by the consumer response to several of the new footwear offerings that I referenced. These are early indications that the Columbia brand strategies to attract new consumers and drive long-term growth are on the right path.

We look to build on these successes in the coming seasons and years as we expand our consumer base. In February, Columbia's innovative spirit was on full display as our Omni-Heat Infinity technology help protect intuitive machines, lunar lander on the Cisco mission for the Moon. Columbia Sportswear is a proud scientific partner of intuitive machines. Our thermal reflective technology helped protect the Nova-C lander from the extreme temperatures of outer space. This partnership brings Columbia's technology full circle. We're sending a product on the moon that was inspired by NASA's space blankets. The mission was featured in hundreds of media outlets creating billions of impressions worldwide. We are proud to share that we've signed on to Intuitive Machines next mission scheduled for later this year.

In April, we partnered with Academy Sports and Outdoor to host a special Bubble Wallace, meet and greet in Dallas ahead of the NASCAR race at Texas Border Speedway. Both Columbia PFG and Academy have a long history with NASCAR, and this event created a unique opportunity to further connect others energetic and based with our brand. The week was capped off with Bubba driving in Academy and PFG Rap Card on his way to a seventh place finish. As we have mentioned before, the wholesale channel remains a top priority for the Columbia brand and we're excited to leverage our ambassadors to create brand heat with our key strategic partners. This spring, we launched our latest collaboration with New York-based boutique care featuring apparel, accessories and footwear designed for outdoor camping.

The collection blends functionality as style while appealing to a younger audience. Shifting to our emerging brands. As a reminder, our emerging brand portfolio sales mix is predominantly in North America, which is our most challenged market. The headwinds we outlined earlier on the call are evident in our emerging brands performance. SOREL brand net sales decreased 24% with challenging trends across DTC and wholesale. With leadership now in place, the SOREL team is focused on revitalizing the brand, building a compelling product and driving long-term sustainable growth. I remain confident in the future of the SOREL brand. Mountain Hardwear building a momentum from its recent brand refresh. In the quarter, net sales increased 17%, reflecting earlier timing of spring shipments and DTC growth.

The product line and brand positioning are on track, and the team is focused on accelerating growth. prAna's net sales decreased 4% with a decline in wholesale, partially offset by modest DTC growth. The prAna team remains focused on building brand awareness, refining the product assortment and unlocking the brand's growth potential. We're encouraged by fall 2024 orders and the potential to return to growth in the second half of the year. I'll now review our 2024 financial outlook. This outlook and commentary include forward-looking statements, please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. Looking to fall 2024, our teams are continuously working to minimize any shipment delay resulting from disruptions we will see.

At this time, delays appear manageable. The vast majority of our product line is expected to be delivered on time and in full. We are reiterating our net sales outlook of a 2% to 4% decline. While there are modest changes across our portfolio, our overall net sales expectations has not meaningfully changed. Gross margin is now expected to expand approximately 80 to 120 basis points to 50.4% to 50.8%. We were expecting modestly higher clearance and liquidation activity as consumers seek value. We will continue to opportunistically work down inventory levels and maximize sales. The SG&A is expected to be 43% to 43.4% of net sales, leading to an operating margin of 7.7% to 8.5%. Our diluted earnings per share outlook has increased modestly to $3.65 to $4.05, driven by higher interest income, licensing income and a lower share.

We expect strong operating cash flows of at least $350 million in the year. Overall, I'm confident in our team, our strategies and our ability to achieve the significant long-term growth opportunities we see across the business. We are investing in our strategic priorities to accelerate profit and 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; amplified marketplace excellence that is digitally led omni-channel, and global; and empowered talent that's driven by our core values. That concludes my prepared remarks. We welcome your questions for the remainder of the hour.

Operator, could you help us with that?

See also

American Politicians are Buying These 10 AI Stocks and

30 Cities with the Highest Number of Veterans in the US.

To continue reading the Q&A session, please click here.