Columbia Sportswear Company (COLM) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Columbia Sportswear Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ron Parham, Senior Director of Investor Relations and Corporate Communications with Columbia Sportswear. Thank you. Mr. Parham, you may begin.

Thanks, Bob. Good afternoon, and thanks for joining us. Earlier this afternoon, we issued a press release announcing third quarter financial results and raising our full year 2013 operating income outlook. In keeping with our standard practice, we also furnished an 8-K and posted to our Investor Relations website a detailed commentary by Chief Financial Officer, Tom Cusick, analyzing third quarter results and our revised outlook. We hope you've taken the opportunity to review the CFO commentary prior to this conference call. With me today on the call are President and CEO, Tim Boyle; Senior Vice President and Chief Financial Officer, Tom Cusick; Executive Vice President and Chief Operating Officer, Bryan Timm; and Senior Vice President and General Counsel, Peter Bragdon. I'll ask Chairman, Gert Boyle, to cover the Safe Harbor language.

Good afternoon. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to the 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 annual report on Form 10-K for the year ending December 31, 2012, and subsequent filing with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and 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 statement to actual results or to change in our expectations.

Thank you, Gert. I'll turn the call over to Tim.

Thanks, Ron. Welcome, everybody, and thanks for joining us this afternoon. As detailed in our press release and CFO commentary, third quarter sales and profits exceeded our July outlook, primarily due to better-than-expected sales and margins from our U.S. direct-to-consumer and wholesale channels, combined with continued focus on controlling SG&A spending. Inventory at September 30 was down $66 million, or 14% from last year at this time, the second consecutive quarter of double-digit improvement, following a 19% reduction at June 30. We also raised our operating income outlook for the full year by approximately 8% compared with our July outlook, based on results through the first 9 months and the continued strength we have seen in our U.S. direct-to-consumer and wholesale channels in the early weeks of Q4. Although there have been plenty of reports recently about the generally soft U.S. retail environment, all 3 formats of our U.S. direct-to-consumer platform: branded stores, outlet stores and e-commerce produced better-than-expected results during the third quarter, and we've seen that continue into October. The most encouraging aspects of our direct-to-consumer business is the strength we're seeing in our branded stores and e-commerce. Both formats have stronger conversion and higher average dollars per transaction. We're seeing strength across all categories and genders, with many of our pinnacle fresh styles performing well. The Sorel brand is also performing well in our retail stores, at selected wholesale customers and particularly, on our e-commerce site. In addition to strong sales of our established styles, our new fall items have also sold well, suggesting that Sorel has a bright future beyond winter with fashion-forward female consumers as they become more aware of the brand's broader offering. Sorel's fall 2014 product line will offer more back-to-university designs, and our sales force will be working closely with our wholesale customers to place larger broader assortments, so that more consumers can discover them at retail next year. Turning to our EMEA region. Third quarter net sales grew $17.6 million or 29%. This increase was entirely attributable to a timing shift in fall 2013 shipments to our EMEA distributors, more than offsetting a mid-teen percentage decline in our Europe direct markets. We believe our business in key European direct markets is stabilizing as we've met or slightly exceeded our internal wholesale forecasts in each of the past few months. We're focused on returning the sales growth in that region in 2014. As we announced in September, we are looking forward to welcoming Franco Fogliato as our new Senior Vice President of Europe, effective November 4. Franco brings 17 years of European sales and marketing experience in the action sports and outdoor footwear and apparel industries. Having served since 2004 as General Manager of Europe and a member of the Executive Board of Billabong, where he managed the company's portfolio of 8 brands. From 1997 through 2003, Franco held various European leadership roles with the North Face brand, culminating as General Manager of Western Europe. Franco understands the European consumer and has strong relationships with our valued wholesale customers throughout the region. Europe remains a critical region for our company's long-term success. We look forward to Franco's contributions as we seek to drive consumer demand and renewed growth in these markets, and to improve the region's profitability. Looking now towards the LAAP region. Third quarter net sales declined 15%, including a 9% negative effect of changes in currency exchange rates. Our businesses in this region are performing well, with the exception of Argentina and Venezuela and Australia. Venezuela and Argentina have historically been significant markets within our LAAP region. However, this year, sales to our Argentinian distributor have been severely hampered by government trade restrictions. In addition, currency controls in Venezuela have stifled our sales into that market. Both of these situations are purely political in origin. Our brands are strong in this region, however, there's no indication of when these political issues might be resolved. In Australia and New Zealand, the transition to a new distributor caused a temporary sales decline. However, our new distributor is ramping up its operations and we expect them to establish a healthy business for our brands in those key markets. Our Japan and Korea subsidiaries continue to post healthy growth on a local currency basis, although the weaker yen caused Japan's reported sales to show a decline. Also within the LAAP region, we are making final preparations to commence a new joint venture in China on January 1, 2014, with our current distributor, Swire Resources Limited. We expect this joint venture to contribute meaningfully to 2014 sales and earnings growth and will have -- we will have more to share on that subject on our February 18 call, when we plan to announce our fourth quarter and full year 2013 results along with our preliminary financial outlook for 2014. Finally in Canada, third quarter sales fell a bit short of our plan because some shipments moved from the third quarter into October as we transitioned into a new warehouse management system in our Canadian distribution center. Before we open the call for your questions, I want to reiterate our continued progress on inventory managed -- management and discretionary spending. The 14%, $66 million decline in inventory is primarily due to an improved flow of fall inventory, and a response to a cautious approach by our North American and European wholesale customers in placing advanced orders for winter products. The decline also reflects many enhanced processes across our planning and supply chain operations that were implemented to improve inventory utilization and enable us to operate on less inventory relative to sales. One goal of this new process is just to more closely match the flow of our inventory receipts with customers' requested delivery dates, especially during our large fall shipping season. The fact that we improved our order assignment metrics during our largest shipping season suggested these new processes are having the desired effect and making us a more reliable vendor for our customers. Continually improving inventory turns and gross margins remain key priorities for us. We expect consolidated inventory levels at December 31 to be lower than last December, including the approximate $25 million of incremental inventory attributable to the new China joint venture. We're prioritizing spending towards the key initiatives that we believe will drive future growth and profitability, including the expansion of our direct-to-consumer platform, the launch of our China joint venture in January of 2014, and our U.S. ERP implementation, which continues to be targeted for April of 2014. While I'm pleased with the team's ability to manage inventory and costs, we are far more focused on reigniting sales growth in each of our brands and geographies. We've structured our fall 2014 product lines to offer a greater percentage of high-performance styles at more accessible prices, to drive volume and profitable growth for us and for our retail partners. As we look ahead to 2014, we see several factors that we expect to drive renewed sales and earnings growth: improve product assortments that are better positioned and segmented across channels to drive volume and profitable growth; initial reactions from our global wholesale customers to our 2014 product lines are very positive; incremental sales and earnings from the new China joint venture; continued growth and expansion of our global direct-to-consumer platform; we see signs of stabilization and a potential return to growth in North America and European wholesale markets; our improved business processes will allow us to develop innovative products more efficiently; operate on less inventory relative to sales; and develop stronger partnerships with our wholesale customers; and focus on prioritizing and efficiently managing spending. The combination of these and other encouraging factors led us to propose and our board to authorize a 14% increase in the company's quarterly cash dividend, raising it to $0.25 per share from the prior rate of $0.22. If you have not already done so, I strongly encourage you to read the CFO commentary which we furnished to the SEC on Form 8-K earlier this afternoon, and also posted on our Investor Relations website at columbia.com/investor. In addition to the discussion of our Q3 results and the updated outlook, I want to direct your attention to the section beginning at the top of page 8, which explains changes we plan to make to our financial outlook protocol in 2014. That concludes my prepared remarks. Let's open the call to questions. Operator, can you please help us out?

[Operator Instructions] Our first question comes from the line of Lindsay Drucker Mann with Goldman Sachs.

I was hoping you could give a little more detail on the U.S, specifically on the Wholesale side. I know that some shipment timing issues were something that you talked about. Can you give us specifics on how much that impacted your results this quarter?

Certainly. Well, it's -- as we said earlier, our customers were very cautious in approaching their initial buys for fall 2014. So we think that the channel is quite clean right now. There's plenty of inventory obviously there, but we expect it. With any kind of weather, we're going to have a fairly significant growth in our business in the fall, in the back half of the year. So is that the kind of detail you're looking for?

Did you have any negative impact on your -- the revenue you booked in the third quarter based on wholesalers delaying orders out of third into fourth quarter?

No, I would say, Lindsay, actually, our U.S. Wholesale business exceeded our internal forecast and was a major component of our revenue beat in Q3, and we're seeing less shift from Q3 to Q4 than we anticipated back in July.

Okay. And then what did your stores comp? Can you tell us the comp figure?

Our retail business performed in the U.S. exceptionally well, but we don't publish comp stores, same-store sales figures.

Did you see an acceleration in comp versus the second quarter sequentially?

Yes, we did.

So do you -- I guess what I'm trying to get at is, we've seen an overall sort of softer consumer environment. You haven't had necessarily great weather, so what are you attributing the incremental strength for?

Well, frankly, I think our products are under-distributed in the market. I mean, it's -- we've got high demand in our own operations -- direct-to-consumer operations, and that's because I think consumers are looking for our brand and they're not necessarily able to find it everywhere they would like.

Okay. And then so, how do we think about incremental margins on the new sales that come in?

Well, as we said, our lift is not expected to be on the top line. It's more expected to be on margin. And we have a certain amount of merchandise model to be sold at off price. If weather dictates a higher demand for those products, we'll have a higher gross margin on whatever we sell through the balance of the year.

And Lindsay, I think you'll see that reflected in our updated outlook for the rest of the year, given we took that gross margin outlook up, I think, close to 50 basis points, of which we're up over 30 basis points year-to-date.

Our next question comes from the line of Kate McShane with Citi.

I had two questions. The first question is following up on the previous question. Do you think you're -- that there was a similar level of sell-through at your wholesale partners, similar to what you saw in your DTC business? And if not, how can you reconcile that?

Certainly. Yes, I think our sell-through at our wholesale partners was maybe not as extensive as the sell-throughs we've seen in our stores. And I really don't know how to particularly rectify that other than to say there's competitive merchandise in those other stores, in our wholesale partner stores, and we don't have those kind of competitive products in our stores, obviously.

Okay. And I know your new head of Europe is not even there yet. But do you expect to alter your strategy meaningfully in Europe now that things have stabilized a little bit? And on your wish list, what do you think is the first thing that really needs to be addressed as you try to improve this business going forward?

Certainly. Well, yes, Franco has not yet started, but we're anxious for him to do so. But in the last, really, 18 months, I've spent a tremendous amount time in Europe myself working directly with customers. And it's been an easy conclusion that the product missteps that we've had in the U.S. were also similarly -- were similarly impacting our business in Europe. We moved to a higher position in the marketplace too quickly and abandoned basically the company's traditional brand positioning. So I've had an opportunity to show our customers in Europe, the major customers in Europe, our plans for fall '14. They've been embraced. So my expectation is that as we roll out these new products in the U.S. and in Europe, our business should improve. And so, we're not expecting any kind of a major change in the market. If there's anything it's perhaps more focused on a smaller number of markets than we've been attacking in the past. But strategically, we're going to be approaching it with the same kind of rigor and focus on the right brand positioning that we have here in the U.S.

[Operator Instructions] Our next question comes from the line of Laurent Vasilescu with Macquarie.

This is Laurent in for Liz. I know you no longer give backlog, but do you have any -- enough visibility right now to give indication that 2014 will return to growth?

Well, I'd say, we aren't giving backlog guidance, and just to remind everybody, that's because there are so many factors now in the business including our own. The impact of our own direct-to-consumer business, it just was becoming a highly complex exercise to keep everybody focused on what it is we -- how it is we looked at the business. But we've certainly seen enough activity as it relates to orders, and we know enough about what our customers are purchasing from us versus others to expect that we will, in fact, have some growth in '14. I also want to remind you that we have -- China is a big part of our future and that business will be significant to helping us, on a global basis, get bigger in '14. But we're very excited and frankly, our board wouldn't have authorized a further enlargement of our dividend had they not seen these kinds of opportunities and been convinced of them.

Okay. Great. And also, can you provide more color on your goals for China with the Swire JV? Does the China JV of $25 million in inventory suggest the region can do a multiple of that in the first year?

Yes, the $25 million is just the inventory that the JV will acquire, January 1 or December 31, in fact, as part of the go-live. That business did in excess of $150 million in revenue in 2012 and has grown historically at double-digit rates.

Okay. Great. And then lastly, we were curious to know if you have a long-term goal for your direct business as a percentage of revenues longer-term?

Well, I want to remind everyone that our business really is, first and foremost, a wholesale business. That's our primary focus on how we built the infrastructure to provide support to retailers, and so our expectation, selling our products through third-party retailers will continue to be the dominant portion of our business. So we don't have a plan for retail to grow significantly beyond that.

Our next question comes from the line of Corbin Weyer with Robert W. Baird. Corbin N. Weyer - Robert W. Baird & Co. Incorporated, Research Division: Tim, you touched upon a bit, that if weather plays through in the fourth quarter here, we'd see gross margin versus top line being the bigger beneficiary. Could you just maybe talk about what kind of weather assumptions are baked into the fourth quarter guidance you laid out today? And are you assuming similar weather to what we saw over the past 2 years, or normalized weather? Any commentary on that will be very helpful.

Certainly, no. I'm happy to do it. So we've baked in normal weather. So that would include some cold to be starting to accumulate now. We've seen, I think, the last -- this week was colder than normal in most parts of the United States. We've also -- we've already had fairly significant cold weather in Russia, which has impacted our sell-throughs there positively. But today, we're just planning on normal weather and we, as you noticed by the emphasis on our inventory reductions, we have not taken a highly speculative position on inventories. So we feel we're in a terrific position regardless of the weather.

[Operator Instructions] There appear to be no further questions at this time. I'd like to turn the call back over to management for closing comments.

All right. Thank you, everyone, for listening in. We're looking forward to a great cold weather surprising us all. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.