Columbia Sportswear Company (COLM) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to Columbia Sportswear Second Quarter 2021 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Andrew Burns. Thank you, Andrew, you may begin. Andrew Burns: Good afternoon and thanks for joining us to discuss Columbia Sportswear Company's second 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 and Chief Administrative Officer, 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 second quarter 2021 earnings release. Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions, so that 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 hope everyone is well. I'm thrilled to report second quarter financial performance that exceeded our expectations. The robust recovery in our business fueled record setting second quarter and first half net sales, gross margin, operating income and diluted earnings per share. We eclipsed pre-pandemic first half 2019 financial results which represented record performance at that time. This marked an important milestone in our recovery. Operator: Thank you. Thank you. Our first question comes from Bob Drbul with Guggenheim Securities. Please proceed with your questions. Robert Drbul: Thank you. Good afternoon, guys, congratulations. Tim Boyle: Thanks, Bob. Jim Swanson: Hi Bob. Robert Drbul: Great quarter. I guess the first question that I have is, Tim when you look at the competitive landscape, I guess the comments you made about market share opportunities, can you just talk a little bit more in terms of like, where you see the opportunities that you're pursuing, either by category or by region? Just what you see happening on the competitive front, that you're going to be a little bit more aggressive and go after it from that perspective? And I think the second question that I have, maybe for Jim is the price increases, can you give us a little bit of flavor, sort of how much you're taking price up or the inflationary pressures that you're seeing in the business if you could just help us quantify that, that would be helpful? Thanks. Tim Boyle: Sure. Well, I think Bob, probably the number one area we're taking share would be in smaller brands that may not have the capital, the balance sheet to be able to provide them the solace to pay these exorbitant prices that we're all facing in terms of our freight rates coming in. So that would be an area where we would be able to point quickly to where we can take share. Additionally, we've got a number of businesses where we have a unique position that would include specifically PFG in North America where the business is incredibly strong and geographically that would be focused on the south and southeast. But across the business and across the globe frankly, the business has been very strong, very low inventories. And I think we've all been surprised at the brick-and-mortar traffic levels and just the extraordinary consumer demand for outdoor products. And those are the first things that come to mind when I think about where we're growing so much so rapidly. Jim Swanson: And then Bob, as it relates to your question on price increases and specific to spring 22, the price increases we're contemplating are low single-digit percent. So when you look at the order book that Tim commented on with low 20 to high-teen growth, most of that's unit volume. We do expect to continue to see costing pressure up to the fall 2022 season and of course, we'll be looking further into price increases to help mitigate and offset those, that inflationary pressure. Robert Drbul: Got it great, thank you very much. Operator: Thank you. Our next question comes from Jonathan Komp with Robert W. Baird. Please proceed with your question. Jonathan Komp: Yes, thank you. Maybe a broader question on the earnings outlook, it looks like the first half of the year your earnings were above 2019. For the full year, that's not what you're assuming. So maybe just wondering as you look to the back half, how we should think about the earnings potential especially in light of the 2019 numbers that you delivered? Jim Swanson: Yes, good question, John. If it hadn't been for when Tim commented on that, and then for the ocean freight costs, and the vast majority of the $4 million of incremental ocean freight costs that we anticipate incurring this year will be in the latter part of the year. So absent that, the $0.70 beat that we delivered for the quarter, we would have delivered for the full-year. If you do the math on that, the earnings recovery, I think we'd be looking at an overall earnings at or better than where we were in 2019. So, we're awfully encouraged with the momentum and the business. Obviously the supply chain challenges we'll deal with those and manage what we can and I think that pretty well covers it. Jonathan Komp: And maybe as a follow up, how do you think about the recoverability of some of those margin pressures, especially since you're taking some pricing next year? Theoretically the freight issue should be temporary at some stage once you get past them, so any thoughts on the margin recoverability? And then even as you look to fall 2022 orders any high level thoughts on some of the swing factors as you lookout to fall 2022? Tim Boyle: I think that the brand, what we're realizing as the brand really has the power to price appropriately. We're also very mindful of, our business. This industry has been incredibly deflationary over the last 20 years, merchandise becoming less and less expensive. So this is an area where we've been very focused on managing our ability to raise prices, and to be mindful of what the cost portions of the business are going to be, as well as continuing to invest in innovations which will separate us and allow us to differentiate ourselves. And lastly, our investment in brand building and brand awareness, I think will really speak to evidence in the future. Jim Swanson: And Jon, absent ocean freight costs that we're incurring, and based on everything that we're learning from the logistics partners that we work with, and various other advisors, we anticipate continuing to see these elevated freight charges through the first half of next year. Absent those charges, and we're not providing specific gross margin guidance today, but absent those charges, we would have expected our spring 2022 product margins to be better than spring 2021 based on where we've priced and how the order books come in. Jonathan Komp: That's helpful. And just lastly, if I could, could you come in any on any direct shipping delays you are baking into third quarter and is that impacting the Omni-Heat Infinity launch plans at all? Thank you. Tim Boyle: No, we've really prioritized Omni-Heat Infinity because it's so important for the company in total and for the investments that we've made. We want to make sure we have the product in the stores, so we prioritize shipping of that merchandise. We expect that there will be delays on other categories and other items, but all of those delays have been built into the guidance we've given you today. Jim Swanson: Yes, and we're continuing to experience that three to four week delay generally speaking, as relates to tying up our inventory receipts and our wholesale shipments. And so what we will see some push out, out of the third quarter into the fourth quarter. And as Tim touched on, there's some commentary related to our second half growth rates including Q3 and Q4 and that's all baked into that outlook. Jonathan Komp: Okay, thanks again. Operator: Thank you. Our next question comes from John Kernan with Cowen. Please proceed with your question. John Kernan: Yes, excellent. Thanks for taking my question. Nice job on the quarter. I just wanted to talk to the SG&A rate as well as the low end of the guidance on a rate basis, it's still above 2019. You're guiding to the high end of sales to be above that fiscal 19 days, so just curious the kick up in the SG&A relative to 2019, if there's any costs related to supply chain in that or how we should think about the SG&A rate? Jim Swanson: Yes, a couple comments in there Jon. I guess first and foremost would be demand creation. We did plan to make incremental investments in demand creation this year, you'll recall 2019 our demand creation spend was 5.5% of sales. In our outlook we're currently contemplating 6%. So that's a pretty meaningful component to that, as relates specifically the supply chain, the one item or two items that would be in here specific to the supply chain is there's a fair amount of labor pressure in the market right now and so we have made wage rate adjustments for our distribution centers. We've also done likewise, with regard to our retail store associates in order to attract talent, as we go into full steam of the season that lies ahead. So those are the predominant drivers, when you think about SG&A de-leverage over 2019. There's some incentive comp, I believe, as well as it relates to just the strong year that we've had thus far. That would be really the recap. John Kernan: Got it. That makes sense. Just to go back to supply chain, it sounds like there's going to be some headwinds into fall 2022. Now what -- when you take a look at all the inflation here, whether it's shipping, ocean air, some of the headwinds regarding production in Vietnam and other places. When looking into a crystal ball, how do you think this unwinds? I mean, at what point do we start to see what seems like cyclical inflation come down -- sense, particularly with some of the freight rates? It doesn't sound like you're assuming that they're going to get much better into 2020. I'm just curious if there's anything you see, it could alleviate some of these cost pressures and when we will see that? Tim Boyle: Yes, I think actually the only thing that will significantly impact the ocean freight rates will be government intervention, whether that's European Government or U.S. Government acting to break up some of these monopolistic organizations that are really causing the bulk of the problems. I mean, there's one thing that -- to deal with delays which we all understand that's possible due to the container dislocation, but the freight rates are clearly monopolistic in my opinion. So when will that happen? That's anybody's guess, but I think, in general, as I said earlier, we are entering a period of inflation, when in fact the industry as a whole has been in a deflationary spiral for many, many years. So it's going to be incumbent upon companies that are well organized like ourselves to be able to have brands with pricing power that can continue to grow and grow sales and have strong margins. John Kernan: Got it. And then just a follow-up on the comment, earlier comment on product margin in 2022 for the fall versus 2021, I know we're ways out but, can you confirm that fall 2000 -- spring 2022 product margin would be up versus 2021 even with the inflation? Tim Boyle: Yes, with strong margins is frankly, correct me if I misstate this Jim, but we had a strong increase in gross margins for spring 2021. They did not offset the freight costs, which have been going higher, and we have not yet set prices for fall 2022, although we expect that we'll be able to cover known cost increases in a better way certainly for fall 2022. Jim Swanson: Yes, I think John, the comment I made is, if you would set aside the ocean freight costs that we're currently seeing in the business, we'll just look at the product margin before that. Our spring 2022 margins are more healthy than they would have been for spring 2021. Now, obviously, we're looking at those -- these ocean freight costs, and there's a lot of estimation in terms of what lies ahead as we think about the first half of next year, but that will put some pressure in there as Tim touched on. We're a bit early as it relates to fall 2022 as we're finalizing the line and our pricing before we go-to-market. John Kernan: Understood, thanks for all the information. Jim Swanson: Thank you. Operator: Thank you. Our next question comes from Jim Duffy with Stifel. Please proceed with your question. Jim Duffy: Thank you. Good afternoon. Few questions from me guys around the trends you see and how that's translated to the guidance change. Did I hear you correctly the U.S. direct-to-consumer brick-and-mortar was up in the 2Q versus 2019? And if so, I'm curious has that -- was that consistent across the quarter and into the third quarter? Jim Swanson: Yes, that's correct, Jim. So our brick-and-mortar business was up a low single digit percent through Q2. We saw a nice pickup in that DTC business data back to March, around the time that we saw some of the U.S. stimulus and we've really been able to sustain that level. Having said that, consumer traffic levels still remain down quite significantly relative to pre-pandemic, but we've been making up for it with improvement in all other operating metrics in the stores, including conversion. So it held, as we look at the quarter, month-by-month, it held steady through the month of June and we've continued to see nice trends as we sit here in the month of July. And then it relates to how we factor that into our outlook. We've taken a prudent approach in terms of not expecting that traffic would get back up to pre-pandemic levels exiting this year and that revenue would be at or slightly down. So I gave you a little backdrop on that. Jim Duffy: Okay, helpful, thanks. And you've mentioned, inventories tied retailers anxious to get product, were you able to make any adjustments to fall orders to upsize those to capture some of that demand in the second half of the year? Tim Boyle: Well, we have as we've said we have logistics issues we're dealing with for the merchandise that we've already sold for fall 2021 and we have inventory available. And we believe that we're obviously in a much lower inventory position than we were exiting the quarter last year. So to the extent we can fulfill orders we'll be there and provide that merchandise. Jim Duffy: Okay, thanks, guys. I'll leave it at that. Tim Boyle: Thank you. Jim Swanson: Thanks, Jim. Operator: Thank you. Our next question comes from Alex Perry with Bank of America. Please proceed with your question. Alex Perry: Thanks for taking my question and congrats on a great quarter. Just wanted to circle back, I think you talked about rising cases in sourcing countries across Southeast Asia impacting the product availability and deliveries. I guess just given the shutdowns you have seen in the last few weeks, are you still on track to hit shipping windows for peak selling periods? I guess another way of asking is, if the upside potential here to have to give in sort of what you're seeing in the supply chain? Jim Swanson: Well we've taken -- we've approached our forecast and the way we have historically, as it relates specifically to some of the closures in Asia, which would include Vietnam. As we sit here today about 70% of our inventory is either been produced or is in transit or we received it. So we're in pretty good position as it relates to having inventory available for the season. Now, we still have some obviously to produce and certain of that inventory is in factories in Vietnam that are experiencing closures. So there'll be some risk associated with that, but by and large those impacts to our business including the supply chain disruptions are reflected in the revenue outlook that we've provided today. Alex Perry: Perfect, that's really helpful. And then I just wanted to touch on it a bit more Tim, some of the comments you made about the approach your competitors are taking to the wholesale marketplace in North America. Can you just comment on sort of the whitespace opportunity you sort of see there from what your, the position your competitors are taking, and what you're sort of doing to capitalize on that? Tim Boyle: Certainly, well, it's been well publicized the reduction in major brands, distributions, partners is in the billions of dollars, and that's just in North America. So there's lots of opportunity for our brand which is high demand to fill portions of that. So, I mean, it’s a significant amount. It eclipses our current footwear business, just the footwear portion eclipses our current footwear volume. So I mean it could be very significant if we're able to capture a good portion of that business. Alex Perry: Perfect, that's really helpful. Best of luck. Tim Boyle: Thank you. Operator: Thank you. Our next question comes from Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question. Laurent Vasilescu: Good afternoon. Thanks for taking my question. Jim, I think in the CFO commentary, it says that there has been a shift in Canadian and European direct sales from 1Q, to 2Q. Can you possibly quantify those shifts? And then if I look at the third quarter, fourth quarter implied guidance with regards to on a two-year stock basis, it looks like 3Q had been down mid-single-digits, but then 4Q will be up mid teens? Is it the right way to think about it, if you didn't have the delays would third quarter and fourth quarter be more normalized on a two-year stock basis across both quarters? Tim Boyle: Well, as it relates to your first question on Europe and Canada from a wholesale perspective, and I might approach that just kind of looking at it from more of a global standpoint, because certainly, we've had a fairly significant shift in our inventory receipts for spring 2021 that have shifted out of Q1 and Q2, and hence, had an impact on our ability to deliver and ship those in Q1. The impact of that, our spring 2021 order book ex-timing, we're up about 20% from a global standpoint, that will be both Canada and Europe, I can't recall specifics, but they're going to be in around that level of growth. So certainly the outside growth you're seeing in the quarter is largely related to the later inventory receipts and shipments. And then as it relates to Q3, Q4 Laurent, I think the -- the only detail I can share with you is that what you're seeing in the CFO commentary and that's the fact that we see relatively balanced growth in Q3 and Q4, it's a low 20%. There is a fairly significant shift out of the third quarter into the fourth quarter just in light of the fall 2021 later inventory receipts and just impact that that's having on the wholesale business. Laurent Vasilescu: Okay, very helpful. And then drilling down on footwear, I think your full-year revenue guide at the company level implies low single digit growth on a two-year stack. I think in the CFO commentary it says that apparel will grow faster than footwear. So far, your footwear has grown 20% year-to-date on a two-year stack. So if footwear is supposed to grow slower than apparel, does that mean we should think that footwear actually declines in the second half on a two-year stack basis? And if you can help us kind of put the puzzle together it would be really helpful? Jim Swanson: Yes, I don't think it's declining in the second half. But it will certainly decelerate from a growth standpoint might have some of the manufacturing capacity constraints that we anticipate on the year, but we're still seeing footwear growth in the low 20% level, so not quite to the level that we are from an apparel standpoint. Laurent Vasilescu: Okay, and maybe if I can squeeze one more in on the gross margins, the reversal provisions, you've had two quarters in a row, do we expect any more reversals or maybe asked another way, how much is your gross margin guide of about 100, but how much does that embedding reversals for the full year? Jim Swanson: What we've realized today is essentially are aren't I wouldn't anticipate given how clean our inventories are at this point in time relative to where they were at the same point in time last year. Last year, the economy had shut down with both fairly significant reserves in light of our unfilled positions. And as we sit here today, the aging and the unfilled positions we have in our inventory is quite healthy. And so we brought our reserves down on a more normalized basis. I wouldn't assume that there's any further benefit as we look at the balance of the year. Laurent Vasilescu: Okay, very helpful. Thank you very much and best of luck. Jim Swanson: Yes. Thank you. Operator: Thank you. Our next question comes from Camilo Lyon with BTIG. Please proceed with your question. Camilo Lyon: Thanks very much. Good afternoon, everyone. I just want to clarify on the $40 million of incremental supply chain expense for the back half. Can you help us think about the weighting of when that $40 million is going to hit more Q3 versus Q4, or is it, should we think about it as evenly split? Jim Swanson: I would look at it just in terms of, if you look at the relative revenue volume that we do in each of the two quarters, I'd weight it against that, because we're essentially realizing those costs in line with the rate of sale . Camilo Lyon: Perfect. And is that the right amount of cost, incremental costs that we should think about for spring 2021 as well, -- spring 2022, pardon me. Jim Swanson: Tough to call right now. We're certainly going to see that pressure out next year. I mean all indications, as Tim touched on, absent government intervention here. We would expect that we'll continue to see elevated freight charges through the Chinese New Year. And so by then we will have effectively received all of our spring 2022 inventory. So the first half of the year would be impacted by what we're currently seeing based on everything that we know today. And obviously, there's a ton of volatility in these, the rates have skyrocketed in last 60 days, and if we have had this conversation 60 days ago, we wouldn't be having this. We saw a fourfold increase in ocean freight from June 1 through call it the middle part of July. Camilo Lyon: Yes, it's pretty pervasive everywhere. Okay, perfect. And then if we could just step back for a second, and maybe if you could detail and peel back the layers on what you see in Europe seems like they're a little bit behind us in terms of behind the U.S. in terms of vaccination rates. And I'm just curious to see how that region has been pursuing your brands and driving that growth, relative to what you've seen, that's been a much faster kind of recovery here in the U.S.? And maybe, if there's a timeline that we can put around, time differential that we can put around Europe versus the U.S., are they a quarter behind us in terms of that recovery curve really starting to ramp up and look more like the U.S. or is there a further out period, before they start to really embrace the recovery, the way that we have here? Tim Boyle: Our European business is still recovering and it is behind the U.S. in terms of vaccination uptake. And so we have less visibility on that, because it's a country-by-country. Obviously, vaccination mandates. But our inventories in Europe are less than the U.S., so there's a less of an opportunity to capture any particular uptrend that we might have. It's more difficult and more challenging there for us, versus the U.S. Camilo Lyon: Got it? And if I could squeeze one more in, for the back half of this year, would you be able to parse out how we should think about wholesale versus your DTC assumptions within the context of that 20% back half revenue growth projection? Jim Swanson: I don't think we've broken that detail out. But I would just comment, our fall 2021 wholesale order book was quite robust coming off of retailers being exceptionally clean, coming out of the fall 2020 season. So we'll see outsized growth in the wholesale business. Keep in mind, e-commerce is going to be going up against some fairly significant comps that we delivered last year. We did provide commentary that we anticipate the e-commerce business from an overall penetration perspective. And we were 19% of sales in 2020 that we would see that come down ever so slightly, and then you'll have the recovery pickup of the brick-and-mortar business. Camilo Lyon: Very helpful. Thanks very much, guys and good luck. Operator: Thank you. Our next question comes from Jay Sole with UBS. Please proceed with your question. Jay Sole: Great, thank you so much. Tim, I just want to ask about your thoughts about the underlying growth rate in your categories, because you mentioned the spring, summer 2022 order book of high teens or low 20s. You mentioned the sell-through in this quarter was up, strong double digits versus 2019. Just between the different moving pieces of restocking versus price increases and, some of the things that are changing, what do you see the category growing as you get into 2022 just because of the increased consumer trend toward outdoor activities that's been in play now for the last few quarters? Tim Boyle: I think the smallest impact is going to be price increases, frankly. The underlying business is incredibly strong. Sell-through rates have been among the best that the company has ever seen and the brands are really writing an incredible wave of demand, being the strength of the brands, as well as the strength of the industry in general. And then again, as I mentioned earlier, that smaller brands that would be delivering a portion of products that a store might get, are just going to be under incredible pressure. And so, I think it's really and sort of a great opportunity for the company at a time when the brands are strong, and we were investing heavily in demand creation. Jay Sole: Understood. So may be one more from me, just in terms of the guidance that you've given for the full-year. If we think about the supply chain and all the impacts that's having on the ability to chase into, possible upside to orders or just to manage your direct consumer channel, is the ability of the company to sort of beat the guidance different this year, just because of all the complications that have happened to the supply chain, how should we think about that? Tim Boyle: Well, we've really given you the best -- the best view we have of a highly complicated business, which is global in nature and spread across multiple brands. So we've really given you our best shot at what we think will turn out. Jay Sole: Got it. Okay, thank you so much. Operator: Thank you. Our next question comes from Paul Lejuez with Citigroup. Please proceed with your question. Paul Lejuez: Thanks guys. Can you just talk about the second quarter D to C business, I'm kind of curious about the drivers of the sales improvement as of 2019 in terms of units versus price? And related to that, can you talk about merchant margin by channel? Sorry if you did and I missed it, but curious how retail works compared to your retail business in 2019 and same question for wholesale? Thanks. Jim Swanson: Hey, Paul, sorry. The sound quality is pretty poor. We didn't catch that. I heard something with regard to D to C revenue and ASPs and gross margin, but maybe can you repeat if it's any clear? Unidentified Analyst: Hey, it's Tracy calling in for Paul. I think he was asking, what the drivers were in the U.S. DTC channel, the drivers of the improvement this quarter versus last quarter in terms of price and traffic? Jim Swanson: Yes and we saw a significant uptick in our traffic relative to where we had been the last few quarters. We're still quite a ways under where we were from a pre pandemic standpoint, but there's been a nice flow of traffic. I think consumers are generally with vaccination rates in the U.S. in particular, gotten to the level they are. I mean, consumers are showing signs of getting back out physical retail, which is great to see and then our in-store operating metric as I touched on earlier, our in-store operating metrics, between conversion and just getting the metrics we monitor with the consumer were all quite good as it relates to price itself. You can see in our gross margin, our gross margins up several points on the quarter, most of that students back that were less promotional. And so to the degree we're less promotional, there's some price, there's a price benefit. We're picking up from that vantage point. Unidentified Analyst: Great. And then the second part of his question, I believe was merchandise margin performance within channels, so wholesale merchandise margin, versus 2019 and then DTC merchandise margin? Tim Boyle: I think we had strong margins across all of our channels and the way we analyze the business. We -- because of this shortfall and the amount of inventory available to retailers, we had strong margins across the business. Unidentified Analyst: Great, thank you, guys. Tim Boyle: Thank you. Jim Swanson: Thank you. Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments. Tim Boyle: Well, thank you very much for listening in. We're looking forward to great results when we talk to you at the end of Q3 and please stay healthy. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.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).
