Columbia Sportswear Company (COLM) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings. Welcome to Columbia Sportswear First Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time I'll turn the conference over to Andrew Burns. Please go ahead Andrew. 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 in our Investor Relations website investor.columbia.com. Tim Boyle: Thanks Andrew and good afternoon. I hope everyone is well. I'm pleased to report the pace of fundamental recovery exceeded our expectations in the first quarter resulting in a return to net sales growth and financial results that were stronger than we anticipated at the time of our last call. Based on first quarter results favorable early season spring sell-through, visibility provided by our fall order book and an improvement in business fundamentals we are increasing our full year financial outlook. Our fortress balance sheet remains strong with cash and short-term investments totaling $875 million with no bank borrowings at quarter end. It's hard to believe how much difference a year makes. Just over one year ago, we were securing additional liquidity, curtailing factory orders, reducing capital outflows, and cutting costs to prepare for an unprecedented global health and economic crisis of unknown duration. Operator: Yes. Thank you. We’ll now be conducting a question-and-answer session. Thank you. Our first question is coming from the line of Bob Drbul with Guggenheim. Please proceed with your question. Bob Drbul: Hi, guys. Good afternoon Tim. Tim Boyle: Hey Bob. Bob Drbul: I guess, I'll stick to the two-question rule. And the first one, can you just talk a little bit more about like the fall order book, is it totally complete? I think you were well along the last time we spoke, and if you could just give us sort of an update? The second part of this would be when you are planning your inventories for the back half of the year -- second quarter, but also just the back half of the year, how are you planning your bricks-and-mortar DTC business on the inventory side? Thanks very much. Tim Boyle: Yes. Well, thanks Bob. So our order book is strong and it's basically a component of early orders from our customers. As you know the big -- largest single component of that order book is fall outerwear and fall footwear, both of which have incredibly long lead times. So we're basically done with the book although throughout the whole season, we'll get orders and cancellations. But for all intents and purposes we're a very high percentage over 90% probably in the 95% range book. That's what gives us the confidence to talk about the balance of the year in such glowing terms. And then as it relates to the inventories for the back half of the year on DTC, we have the opportunity to load the stores with some merchandise, which is going to be relatively new for that channel, purchased strictly specifically for that channel, as well as some inventory that's going to be liquidated from prior periods at a high-margin in the stores. So we're basically very comfortable with how we're looking at the balance of the year and we're excited about it. The channel is incredibly clean and there's great things happening on it. Bob Drbul: Great. Thanks very much Tim. Tim Boyle: Thanks Bob. Operator: The next question comes from the line of Jim Duffy with Stifel. Please proceed with your question. Jim Duffy: Thanks. Good afternoon, everyone. Tim Boyle : Good afternoon, Jim. Jim Duffy: Tim, I want to start talking on the DTC brick-and-mortar store traffic. In the quarter it seems it exceeded your expectations seemingly came back across the quarter. Commentary for the full year suggests you still expect it subdued. Maybe riffing off Bob's question here, what's assumed in the guidance for brick-and-mortar productivity? Can you characterize how you're assuming that falls relative to maybe where it was in 2019? Tim Boyle : Yes, certainly. Well, I think we were all frankly surprised at the level of comfort that consumers have going into a store. We had assumed that there would be some reluctance in there. The traffic patterns have not yet returned to the pre-pandemic levels, but the conversion rates have been really encouraging. So people are coming into the stores. You have to remember some of our largest stores were in markets where we had very heavy consumers from outside the US whether that be South American tourists in Florida or Chinese tourists either in Japan or in Canada. So those are -- just continue to be depressed. But in general, they're stronger performance than what we thought we were going to see. Jim Swanson: And Jim, I might add, we've seen steady improvement in our brick-and-mortar traffic trends and KPIs over the course of the last few quarters including here in the first quarter. I'd note that there's a more significant pickup in traffic levels and sales levels in March. I think on the back end part to some of the economic stimulus and we've seen that carry into the month of April. And then specifically as it relates to how we're thinking about the balance of the year, it'd be continued improvement in that traffic and revenue. But we don't -- we're still contemplating that getting to full recovery is probably extended out to 2022. So we're -- from a productivity standpoint, we contemplate the business still being down a bit exiting the year. And of course, to Tim's point, that's partially dependent upon traffic and tourism resuming. Jim Duffy: Makes sense. Thanks for that. And then one area of the commentary, I'm still scratching my head on some. Tim, you mentioned footwear that grows outpacing production capacity. What's the challenge to scaling production capacity? Is it just so competitive out there as volumes come back that you're having difficulty with your partners getting additional capacity? Tim Boyle : Yes. I mean, the general footwear business, I think has been fairly strong especially in the casual, athletic and outdoor categories. And what we're finding is that the importance of scale in footwear continues to be a challenge for us. Our business is growing incredibly well, but we're still not able to get the kind of scale on a unit basis that we need -- actually I should say on a style basis that we need. We have a number of styles, which are incredibly popular with large volumes, but we also have a growing list of footwear styles that are just emerging where we're really small. And so a large buyer in a factory can take precedents over our smaller runs. Jim Duffy: Understood. Thanks for that. Tim Boyle : Thanks, Jim. Operator: The next question is from the line of Laurent Vasilescu with Exane. Please proceed with your question. Laurent Vasilescu: Good afternoon. Thanks for taking my question. Jim, I think it's slide 7 and 10 of the CFO commentary you talked about later timing of spring inventory receipts. Could you potentially parse that out? And then I think in the prepared remarks you guys called out that second quarter profitability is generally in a loss. But if I look back in my model 2Q 2018 and 2Q 2019 delivered positive EPS. Just try to parse out that a little bit more on that commentary. And then I have a follow-up question on footwear. Jim Swanson: Yes, you bet. As it relates to the spring receipts, we've seen with the challenges from a supply chain predominantly due to port congestions, vessels and containers by and large our inventories coming into the US market about three weeks later than anticipated. That was factored into our outlook. And so we'll see some of that inventory shift into the second quarter, albeit most of this effect was early in January, February. By the time we exited the quarter we were pretty well caught up. And certainly by the early part of Q2, we'll be more fully caught up on spring. What I would note we do anticipate seeing light effects just as it relates to the supply chain disruption and likely late receipts for our fall product. That's also incorporated into our outlook. It's a bit difficult Laurent to parse what degree of shift that is in the inventory moving between quarters. I won't get down into the granularity of that. As it relates specifically to Q2 and the guidance that we've updated, we provided top line guidance, haven't gotten down into earnings. I don't want to parse that too much. But to your point, historically, speaking Q2 is a very small quarter for us and it could be very volatile from a profitability standpoint. For many years, we've incurred operating losses in the second quarter. Directionally, I would anticipate an operating loss in the second quarter. Getting down into any more specifics than that would be difficult at this stage. Laurent Vasilescu: Okay. Helpful. Thank you very much, Jim. And then as a follow-up question on footwear. To Jim's question, I think you guys are talking about manufacturing capacity constraints. But I'm just curious to see why did footwear grow 35% in the first quarter? Just trying to understand that like when does the capacity constraint get resolved? And then where – Tim, where do you think -- again where do you think footwear can go as a percentage of your overall revenues over time? Tim Boyle : Certainly. Well remember that many of these footwear factories were shutdown during the pandemic raging in China. So the capacity that they have is being rebuilt and so we -- even though we had significant sales growth in the first quarter they were -- it was still constrained by availability. We could have grown faster and the business would be bigger with more capacity. So as the footwear factories become more online there's likely to be increasing opportunity for us. And when you're an emerging footwear business, which despite the fact that we're -- a significant component of our volume as a company is in Footwear we're still not of the scale we need to be. This is where we're going to get very, very focused on Footwear revenues because we believe that footwear can be the largest single product category for the company. It's about building garment -- by building items in the white space where we can be differentiated from the other players there. And that will include I'm sure a big component of PFG footwear. Jim Swanson: And Laurent keep in mind from a supply standpoint in terms of being able to support that level of revenue growth in the first quarter there's a fair amount of inventory that we were carrying forward from the spring season last year just in light of the wholesale order cancellations. So that's helping supply, the demand that Tim is speaking of. Laurent Vasilescu: Very helpful. Thank you very much. Operator: Our next question is from the line of Jonathan Komp with Baird. Please proceed with your question. Jonathan Komp: Hi. Thank you. First question just the comments around the spring sell-throughs I think they were US-focused. But maybe sticking with the US, can you comment where you're seeing relative strength within the channel? And then just given the positive comments on the sell-throughs do you see any inventory risk from the three-week delay and shorter selling season, or do you think that's mitigated by the strong sell-throughs? Tim Boyle: Certainly. Well I can tell you that the sporting goods and outdoor store channel has been by far the best channel for us. And that's where we see the biggest sales growth. And it's been incredible frankly the revenues and volumes that are going through there with relatively lower inventories. And then as it relates to the delivery impact by far the largest sales periods for us meaning the highest revenue periods for us are around Memorial Day and Father's Day. And those are obviously yet to come and we expect that almost all of our spring merchandise will have been shipped by that time and in the stores and available for sale in those really important sales periods. Jonathan Komp: Okay. Great. That's helpful. And then maybe Jim a broader question on the operating margin and really the path back to 13% and then growing from there. When you think about some of the factors you outlined this year store traffic being lower that should recover in 2022. Pandemic-related expenses should theoretically go away. And then you have channel mix going forward. How do you think about that path to 13% beyond this? And the likelihood that you get there after 2021 here? Jim Swanson: Well our aspiration certainly our expectation would be that the 13% operating margin that we achieved in 2019 is not the ceiling. But there's opportunity for us to expand as we look forward. And, of course, we're not providing outlook beyond 2021 today. But obviously we've got to get through some of the current issues that we have as it relates to incremental costs associated with the pandemic. I think one of the more significant hurdles we got to work through as well is the recovery of the brick-and-mortar business because certainly having the fixed costs associated with operating a store fleet and the lower revenue that will be a key to unlocking and continuing that margin expansion over time as well. Jonathan Komp: Very good. Thank you. Jim Swanson: Yes, thanks. Operator: Our next question is coming from the line of Alex Perry with Bank of America. Please proceed with your question. Alex Perry: Hi. Thanks for taking my question. Congrats on a great quarter. Just first I wanted to ask are there opportunities for channel fill and market share gains in the US given some of your large competitors have decided to consolidate the wholesale channel and exit a pretty significant amount of accounts? Tim Boyle: Yes. I think there is definitely opportunities and we've been having lengthy conversations with some of those retailers who've had certain brands removed from their shelves with the opportunity to purchase some. We're not squarely in the athletic channel. But certainly casual footwear, outdoor footwear has been a big growth area and one that -- where we can compete as an authentic supplier. And so yes there is significant opportunity for us to fill those shelves. Alex Perry: That's really helpful. And then just a second question. I think LAAP revenue was down 16% versus 2019 despite earlier shipping of China wholesale. Can you maybe help us parse out the region? And then I think you've said in the past that China is Columbia's most significant geographic opportunity. Just maybe remind us on, sort of, how you're positioning yourself for the longer-term opportunity in China? Tim Boyle: Certainly. Well, Japan is by far the most challenged geography for us with its shutdowns et cetera, freezes and an area where we have significant business. Korea has been a growing market for us as the market -- as the consumers there are embracing the outdoor business again. And many of the competitors that were -- that flooded into the market have now left leaving us in a good position from a competitive standpoint. But clearly as we've said many times China is the big opportunity geographically. And we have a very well-known brand there. Columbia is known and has been in the market for 15 years. But we've just been underperforming there for a number of reasons. And that's why we made the change in our in our leadership there with Pierre Lion moving to head the business. We think there's a huge opportunity for us to be much better and operate a better business and become stronger and grow faster. It's one of the company's most profitable geographies. So there's really no reason why we can't be successful. We just have to focus on it and really start to perform. Jim Swanson: And Alex looking at the rest of the LAAP region and from an outlook perspective looking at full year 2021. Tim touched on the prepared remarks there's a couple of areas of that business that are a little more challenged, Japan being one just given the low rate of vaccination and just ongoing state of emergency and the effects of the pandemic. And I would say likewise, as it relates to our distributors in the LAAP market that have had an outsized impact particularly in Central and South America on their businesses. Alex Perry: That’s very helpful. Jim Swanson: Thanks. Operator: Our next question is coming from the line of John Kernan with Cowen. Please proceed with your question. John Kernan: Hi, good afternoon guys and congrats on the guidance increase and the detailed guidance really for the rest of the year. Maybe just one short-term and one long-term question. Short term, we can back into your top line growth in the back half of the year that you're implying. It is nice growth off the back half of 2019. You have a history of being fairly conservative with your guidance, Tim and Jim. So I'm just curious where you think you've left yourselves room this year in terms of guidance? And can you elaborate on the expectations for wholesale and retail for the remainder of the year? Jim Swanson: Yes. Well the approach that we've taken is consistent with our track record. We're seeking to provide based on the best estimate we can based on the current trends that we see in the business, the fall order book that we have in hand, the trends that we're seeing in our direct-to-consumer business. That's essentially what's reflected in the outlook for the balance of the year. And of course as much as we're seeing nice trends from a consumer demand perspective currently, I think keep in mind the environment that we continue to operate in here as well. There's a lot of risk associated with pandemic. We've got store closures off and on in various of our international markets that have been impactful. So there's still a lot of year left here for us to be able to manage. Tim Boyle: Yes I'd also point out that the areas that we cannot control obviously the virus, the vaccine uptake, and really most importantly the weather in terms of how we look at the balance of the year. So we're confident in the numbers we've given you and maybe that's our best view. John Kernan: Understood. Maybe a longer-term question. You talked about the spend to enhance digital and supply chain capabilities. I think there should be some long-term benefits to gross margin in there both from the mix to digital but also on the planning and allocation side and supply chain and sourcing side. You're going to be at your all-time peak gross margin this year. I'm curious as to where you think long-term the gross margin can get to and where you see low-hanging fruit to produce more gross margin expansion? Tim Boyle: Well I can tell you where I think we're underperforming and where I think that will ultimately yield margin is, in the operation of our retail stores. Frankly we consider ourselves to be a wholesale supplier and we have operated retail stores relatively recently in the kind of scale that we have. And obviously the digital business is also relatively new for the company. And so we have systems in place that can be improved and are in the process of being improved in terms of inventory yield, inventory carrying costs and in stock positions etcetera. That's where we think that the business improvements will come. What the ultimate yield is in terms of gross margin improvement, we haven't really spent time on. But we know that there are multiple areas where we can improve the business operations which will ultimately provide us with better gross profit margin. John Kernan: All right. Sounds good. Operator: Our next question is from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question. Mitch Kummetz: Yes, thanks for taking my questions. Europe that was better than what I was expecting. And in the in your slide deck you mentioned that Europe-direct was up high single-digits constant currency which I guess was in line with the overall business. And you call out wholesale as being strong. Can you elaborate on that? I just would have thought with COVID and the slow rollout of vaccines in Europe that that business would have been weaker. And I'm kind of curious what you're seeing if that's market share gain or something else? Tim Boyle: Well there's some market share gain there as well but we have in Europe I don't want to say as opposed to the U.S. but there are multiple digital retailers that we've been very successful with. So I would say that the biggest impact there has been the fact that these multiple digital retailers have been very successful with the brand. And I would say that's driving the bulk of our improvements there. Jim Swanson: Yes. A couple of other comments I'd make too Mitch. We had a nice cold stretch in the month of January and February. And so that aided some of the reorder business of cold weather product during that stretch. So I'd keep that in mind. And then as it relates to the spring season I think a bit better of an order conversion or ability to ship more timely relative to the experience we've had in the US. So those two factors combined with what Tim has described. Mitch Kummetz: Got it. And then second question just on margins. Looking at your gross margin bridge, you call out as a headwind channel profitability. And you mentioned a higher proportion of wholesale closeout. That surprises me too. I would have thought just with really clean channel inventory that wouldn't have been the case. Could you maybe just explain that? And how do you think channel profitability in terms of closeouts and promotions things like that how does that go moving forward? Jim Swanson: Yes. Mitch sorry about that. I think maybe there's a little bit of confusion just the interpretation there. From an overarching standpoint channel profitability was in our favor during the quarter. And a couple of different things are going on there. One, as clean as the inventory channel is, promotional levels have been far lower than they have been historically or in comparison to last year. So DTC margins were much better. And then when we look at the overall mix from a channel regional perspective and knowing that there's a bit more of a concentration on the DTC side both between e-com and brick-and-mortar relative to wholesale that was in our favor as well. And there's a partial offset to each of those items, as it relates specifically to a higher proportion of wholesale product sales as we were continuing to clean up some of the excess inventory. And as Tim noted, our excess inventory exiting the quarter was in pretty healthy shape and a pretty significant reduction year-on-year. Mitch Kummetz: Okay. That's helpful. Thanks. Operator: Our next question is from the line of Camilo Lyon with BTIG. Please proceed with your question. Camilo Lyon: Hi. Thanks for taking my questions. I think just a quick couple of questions. Tim, could you just help us understand the mix between unit and price in the order book? Is this – and specifically referencing the composition of – or the benefit of the Omni-Heat Infinity product, and if you're generally taking price on your products heading into the fall season? Tim Boyle: Yeah. I think I have – I want to make sure, I understood your question. I think you were talking about the average selling price in the order book – Jim Swanson: Omni-Heat Infinity. Tim Boyle: Yeah. And with the invention of Omni-Heat Infinity and the significant component of that category of merchandise in the fall order book, which has higher margins for us and higher margins for our retailers, it's really – the opportunity for us to improve our average selling price at both retail and our own businesses. So we would expect that the unit – units will be equal with gross margin and revenue will be higher. Camilo Lyon: Got it. And then I'm curious you talked about, investing in data analytics and understanding more about those consumers of yours that are coming to you from direct channels. Are you seeing a new consumer come to the Columbia brand through your direct channels? And if so what are the characteristics of that? Is it a younger consumer? I'm curious to see, if your demographics are at all changing with this new – with this more accelerated digital strategy? Tim Boyle: Yeah. We – I would say that, we're not – under the category of areas where we can improve and continue – we will continue to improve its data analytics to help us to make better decisions on the company's products. We know that the PFG product has the youngest consumer in our entire portfolio. So that's something that we need to understand more and how to sell more to that particular group of individuals. But the consumers coming to the brand are a function of the demand creation that, we've invested in and we believe we're moving in the right direction to get the right age consumer into the brand. Jim Swanson: And Camilo, some of what was referred to in the prepared remarks, there are some investments we're making in, how we capitalize on that consumer data to more segment and target our marketing communications, whether that be e-mail or certain of the mid-funnel investments in making sure that we've got more targeted messaging to the consumer. Camilo Lyon: Okay. Great. And then just one final housekeeping question for me. Can you quantify the benefit of the bad debt reversals to gross margin and SG&A in the quarter? Jim Swanson: Yeah. On a year-on-year basis, we booked a pretty significant provision as you recall in the first quarter last year. That reserve provision was about $21 million and if you look at it this year given just the health of the retailer, which has improved quite significantly relative to the same time last year, we unwound a portion of those reserves to the tune of around $8 million. So, on a year-on-year basis about a $29 million change between Q1 of last year and Q1 of this year. Camilo Lyon: Perfect. Thanks so much. Good luck for the rest of the season. Operator: The next question is from the line of Paul Lejuez with Citi. Please proceed with your questions. Paul Lejuez: Hey, thanks guys. I think you mentioned you're growing your points of distribution for some of the smaller brands. Wondering if you could quantify for us? Also curious what's happening in terms of the points of distribution with the Columbia brand? And then just also curious the mix of business between men's and women's, how has that changed over this past year? How do you think that looks going forward? Thanks. Tim Boyle: Certainly. Well, I think, it's safe to say that, the emerging brands of prAna Mountain Hardwear and SOREL have the narrowest distribution certainly geographically of our portfolio. So the discussion around increasing distribution is twofold, obviously geographic expansion. But in the case of Mountain Hardwear, specifically their channel of distribution, which is primarily high-quality sporting goods stores, high-quality outdoor stores has improved. And that's where we're going to be seeing the bulk of the growth for Mountain Hardwear. The other brands SOREL, additional distribution in Europe and with prAna additional distribution really across the South and Southwest. That will be areas where we're going to be focusing on. As it relates to the Columbia distribution, we're currently everywhere we want to be, in terms of selling tickets to wholesale customers. We're just -- we just need to expand each of those retailer's purchases from the company. And we'll do that by building more gross margin for the retailer and as we discussed on the Omni-Heat Infinity strategy as well as better and more specific footwear to fill some of the voids that we talked about in terms of other brands vacating markets. So that's where we'd expect some small changes in the Columbia brand, mostly around just filling customers', retailers', shelves better. Paul Lejuez: Got it and men versus women? Tim Boyle: Oh, men versus women, I think it's about 50-50. Now that would be across all the brands. Of course, the SOREL business is probably our most heavily women's-oriented, it's about 70% to 75% women's. Paul Lejuez: And have you seen a big change in that percentage, this past year? Tim Boyle: Not in the past year -- well, no, not in the past year. I would say the percentages haven't changed. Obviously the SOREL business is much larger, but I would say the percentages are about the same. Paul Lejuez: Okay. Great. Thanks and good luck. Tim Boyle: Thank you. Jim Swanson: Thank you, Paul. Operator: The next question is from the line of Jay Sole with UBS. Please proceed with your question. Jay Sole: Great. Thank you so much for taking my question. My question is just on the impact from supply chain constraints on gross margin, whether its shipping or freight, are you seeing an impact there? And can you quantify what that impact is? Jim Swanson: Yeah. We have to a degree here in the first quarter. And predominantly, related to ocean freight and some of the peak season surcharges, that ocean carriers are passing along to us. And so our outlook would contemplate a continuation of that, effectively through our fall 2021 season. So we're anticipating, incurring additional ocean freight charges here in the second quarter. And we really get underway with a lot of our fall production and deliveries here. In the month of May, June, we're starting to see inventory receipts. So we do anticipate continuing to incur those costs. That's all embedded in our outlook. So to get down into any more granularity than that, I really can't here today. Jay Sole: Okay. And then one more, just on, the DTC business being up 20% in the quarter, I think can you help us understand what maybe the impact of stimulus was on March, which maybe possibly drove some of that DTC growth versus what you've seen in April to give you that confidence that really -- the momentum you've seen in the business is about people returning to outdoor activities and the brand getting momentum with consumers. If you can give us a sense of what you grew in March versus what you've grown in April that would be helpful. Tim Boyle: Yeah. I think there's no question that, we saw sequential improvement in the business. We definitely saw a bump from the stimulus. But frankly, we believe the bulk of the growth is really a function of people recognizing that the outdoors is an area where they can be relatively safe with their families, and an area where they can enjoy themselves. And we believe, frankly it's a long-term change, in terms of how people are spending time and enjoying themselves. So... Jim Swanson: Yeah. The step-up function that we saw in the DTC business from February to March when stimulus checks were issued, we saw that both across our direct-to-consumer business -- frankly, we could see that also in the case of our rate of wholesale sell-through. And as we've continued to monitor sell-through and DTC performance here in the month of April, we really have seen those trends dissipate. It's been pretty healthy, over the course of the last several weeks here. Jay Sole: Got it. Okay. Thank you so much. Operator: Thank you. At this time, we've reached the end of our question-and-answer session. Now I'll turn the floor back to management, for closing remarks. Tim Boyle: Well, thank you all for listening in. We're very excited about the opportunities in all of our brands. And look forward to giving you more information, at our next quarterly conference call. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.COLM Ratings Summary
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UBS Expresses Skepticism on Columbia Sportswear's Long-Term Growth Prospects
UBS analysts maintained a Neutral rating on Columbia Sportswear (NASDAQ:COLM), setting a $76 price target. The analysts' skepticism about Columbia's long-term growth stems from a recent global sportswear survey by UBS, which showed the brand lagging behind peers in awareness, purchase intent, and loyalty.
While acknowledging Columbia as a leading outdoor brand, the analysts doubt significant sales growth, predicting only a 5% 5-year EPS Compound Annual Growth Rate (CAGR).
