Greetings and welcome to Columbia Sportswear Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow today's presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Andrew Burns, Vice President of Investor Relations and Strategic Planning. Thank you. You may begin.

Good afternoon and thanks for joining us to discuss Columbia Sportswear Company's third 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 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 statements to actual results or 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 more 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 third quarter 2021 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 that we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.

Thanks Andrew and good afternoon. I hope everyone is well and vaccinated. Our third quarter results reflect the unique operating environment in which we find ourselves characterized by high consumer demand for our products and an unprecedented supply chain disruption. During the quarter, delayed inventory receipts impacted US wholesale shipments and resulted in a net sales shortfall compared to our internal plan. I'd emphasize that our net sales shortfall was not a function of consumer demand, which remains robust. Early fall 2021 sell-through at our North American wholesale customers stores, as well as our own DTC business has been very encouraging. The retail environment is healthy with low promotional activity, contributing to higher than planned gross margin. When combined with lower than planned SG&A spend, we were able to exceed our operating income forecast. Our fortress balance sheet is intact with cash and short term investments of over $600 million and no bank borrowing. We had several brand highlights during the quarter. Columbia introduced Omni-Heat Infinity, the largest innovation launch in our company's history. This next evolution of the thermal reflective warmth further strengthens our portfolio of differentiated innovations while providing exceptional warmth and value to customers. SOREL's bold collection of sneakers, sandals and wedges drove meaningful growth on SOREL.com with e-commerce sales more than doubling compared to third quarter 2019 pre-pandemic levels. Mountain Hardware's energized fall '21 product line fueled outstanding growth, including expanded distribution at new retail doors and prompt delivered healthy growth led by broad-based recovery in its wholesale business. As we enter the important holiday sales season, we're acutely focused on navigating supply chain disruptions and maximizing sales potential. Our revised net sales outlook reflects the reality that we will not be able to entirely offset this headwind. Given our improved outlook for gross margin and…

[Operator instructions] Our first question comes from the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.

Tim, just for the record I am vaccinated. So we're doing well here. So a couple questions just if, if you could I guess on the, the supply chain challenges in terms of the inventory, the receipts, in terms of, you said minimal cancellations, what are you seeing, like in terms of where in transit, like the arrival times of what you're getting and when you talk about the spring product, think you said spring now looking up 30%, like just the ability to actually get that product and, and make those numbers. Could you just give us a little bit more insight in terms of how it's running operationally for you guys today?

Yeah, certainly. And I would point out that the bulk of these supply chain logistics related issues are in the us. It seems like Canada, and in Europe, the deliveries have been much more timely. And just as a reminder, we, we have product entering the us in many different ports, including Seattle, Portland, long beach, Los Angeles, Savannah, and, and others. So it's a, it's a of delays at all of these ports. And so by far, the bulk of our fall merchandise has been shipped from the factory and much of it has been received. Although we did have at quarter end, we had a fairly significant increase in our, in transit inventory and Jim may have the specific numbers, but it's fairly significant and it's, it's unfortunately happening at a time when the brand is incredibly popular and selling very well. So we are turning around this merchandise as it gets into our distribution centers as fast as possible. And the constraints are not necessarily in our DCS, but rather in, in, in waiting for the merchandise to arrive from the ships

And, Bob, just to add a little bit of color here and foremost, obviously we're, we're seeing significant consumer demand. So some of our challenges it is, is a bit more on the supply chain, as you're pointing out some of the specific data to share with you, we've produced well over 90% of our total production for the fall 21 season. And we received right around 70% of that. So there's still amount that's on the water or coming through a port in order for this to get it out. And then earlier this year, we were experiencing in transit times from a logistic standpoint that were about three weeks longer than they ordinarily been. And with the port situation and availability of trucks and drivers and so forth worsening as we came through the quarter, that's basically doubled. So three weeks has become six weeks and that's effectively, what's leading to one the miss on the quarter and in part the reduction of revenue outlook for the year.

Okay, great. And I guess just as you think about, I think you said 90%, the remainder of the 10%, and as you think about your spring orders and the orders that you have placed with the, the factories how will you guys address, either canceling the orders or will you just take everything and then, sit on it and work it through the factory outlets. Just maybe if you could talk about how you're philosophically thinking about that over or the coming weeks and months would be helpful as well.

Yeah, certainly, well, as Bob, we have a high percentage of our merchandise is carry over year after year. It's a, it's a glacial change in our styles. Not necessarily changing all the time. So much of this merchandise is going to be in line merchandise that we would sell in the springtime throughout, and maybe even in the south part of the United States, we'd sell year round. So we're, we're in a position, frankly with the company's balance sheet that we can utilize it to, to buy and hold this merchandise. And especially when we're talking about an inflationary environment that we're seeing on the sourcing we, we're going to be keeping this merchandise and, and generally selling it to our inline wholesale customers in a, a proper time, proper season.

Great. Okay. And then I guess just one last question then I'll, and I'll turn it over, sorry. The, in terms of the way price increases that you have planned, can you just talk us through how you're thinking about that with, with many of these higher costs in, in, in season merchandise?

Certainly. We'll the costs associated with ocean freight shipping were relatively unseen and a surprise. So we we're going to be including those prices as well as increased costs from the manufacturing side in our Cal calculations and in our pricing for future seasons. So our expectations are that they'll be minimal impact. And as I said, the brand is selling incredibly well. Now there's a shortage of product. And our expectations are that we'll be a able to fully pass on these, these price increases to consumers. And retailers. Yeah, Bob and I just, know we did provide some preliminary remarks regarding our 22 outlook and in light of the inflationary headwinds and to Tim's point, we've increased price where we've got purchasing or, or pricing power rather. We, we do anticipate some degree of margin pressure. We'll have to come back in and fine tune that as we come to our yearend earnings call and provide more specific full year '22 guidance.

Next question comes from the line of Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question.

Thank you for taking my questions and congrats on solid results in this environment, for sure. I, I wanted to ask could, did you parse that? I apologize for not knowing this, but did you parse out, was there a shift from 3Q and the 4Q and then, obviously you lowered your overall revenues by 80 90 million. Is that, is that lost revenues or is that potential slippage into next year? And hence why you raised your spring order book from effectively around 20% to now over 30%.

Yeah. Laurent it's incredibly difficult to measure timing effects between the third and fourth quarter. You have to keep in mind, we're, we're comping against a very, a difficult environment last year in light of order cancellations that we placed from a production standpoint with that said, as you'll look at the myth on the, on the quarter of $50 million. So, there's at least that that's shifting out and we, we were already aware of certain of the in transit times being longer in production delays. If you were to use Q3 of '19 as a bit of an, of the degree of timing shift, that's going to be in the a hundred million plus range, which if you look at our wholesale business Q3 of this year, over Q3 of '19 it's in that order of magnitude, in terms of how you'd think about the relative shift between the two quarters, and then as it relates to your ladder question regarding slippage it's, it's difficult to tell as Tim touched on, we've not seen significant wholesale order cancellations to date, there's a need that inventories lean in the market. And as soon as we can get things shipped and we're working closely with our logistics per partners and our customers to expedite freight each to the degree possible. So I think it remains to be seen, but we're planning to ship through the quarter and, and hopeful that we can continue to convert those orders in the first part of Q1.

That's very helpful. Thank you very much. And sorry. I was

I was going to say it's probably, it's probably important to note that for many of our retailers and including our own stores, the month of January for selling winter merchandise is about the same size as the month of November.

Okay. Thank you for that. And then impressive. I mean, 30% potentially growth for spring spring orders. Can you unpack that a little bit? Is it across footwear apparel? Is it the emerging brands or is it the Columbia brand? Like any, any color on that would be very helpful for the audience?

Yeah, it it's pretty broad based growth Loran. It's growth across the entire brand portfolio, I think with a particular focus on Columbia sore and, and mountain hardware, but all four brands growing and then geographically speaking nearly all geographies up. I think at the region level, all regions are up led by the us Europe's up to a lesser degree, but still meaningful is up a mid-teens percent. The only geography where we be down a little bit is Japan which should come is no surprise, just given state of emergency and just inventory that many of our wholesale customers continue to carry. And then with respect to apparel, footwear, I don't have the specifics, but I believe we footwear category outpacing apparel. And I can confirm that while we're on the call here,

That's very helpful. And maybe in the meantime, just my last question on China, I was pleasantly pleased to see that it was up mid-teens on a constant currency basis. Can you just maybe give us a little bit more or color just what you're seeing out there, is it just order book ahead of the Beijing 2022 games or anything else that you might want to share with us?

Certainly, well, as we've been quite open about the fact that China has been an underperforming geography for the company for a few years now, and we made sign it and changes in management over there. Not only the senior leadership, but midlevel managers of various specific activities also changed. And I believe that we, we we're well on our way to, to being a much improved business over there, as we've said many times, it's the largest single opportunity from a, for us from a geographic standpoint. And it's good to know that the brand resonates and the consumers have are embracing brand. And then when you add in the, the importance of newness and the, the impact of on the heat Infini in that market, I think we're really looking at an opportunity to, to change and, and get back to growth in that market. Thank you so much for,

Our next question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.

Great. Thank you. This is Mackenzie boy for Camil. First question is just on gross margin next year. When you say you expect to see pressure, is there any quantification you can, you can give us in terms of know, do you think it'll be down versus F 21 or F 20 20, just any commentary you can give us on kind of the puts and takes to gross margin next year would be really helpful.

Nothing that we would be able to quantify at this stage. We plan to come around as part of our February call and provide a more comprehensive update on our full year out outlook, by pressure, at this stage, we've contemplate some degree of gross margin contraction as we look at '22, that's the reason for some of the signaling there and the pressure points are going to be a combination of some of these ongoing supply chain effects, namely on the O on the ocean freight and being able to absorb that into our pricing as much as possible. So that's, that's going to be the more significant component. And then we've been operating in a very favorable, full price environment from a consumer perspective here in 21. And so to the degree, there's a normalization is inventory settles out in the marketplace. That that would be another potential pressure point, but we'll look forward to coming back in February, providing more color.

Okay, thanks. And I'm just curious during the quarter, did you see any impact in the US from the Delta variant surging there's any callouts specifically by geography and the impact in store traffic? And if so, are you seeing the, you come back in October and in the geographies where they may have pulled back,

On the whole, I'd say it was modest, our D to C business and looking at just store traffic throughout the quarter, there was steady progress. I mean, there's certainly some effects that you're going to have in a -- but it's come back pretty quickly. So I don't think anything noteworthy to speak up from that standpoint, we we've seen more of an effect internationally. So we did indicate that, Japan's been under a continued state of emergency for most of the quarter. We saw some similar experiences with government restrictions in China that we noted, those are probably the more meaningful components.

Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.

Thanks. It's Tracy Kogan filling in for Paul. I was wondering if you could talk in more detail about what, what factors benefited your SG a, this quarter? I think you mentioned some expense reductions and just wondering what, what buckets those were in. And then I think you mentioned a least term benefit, so was just hoping you could quantify that. And then secondly, I, I think there's some implied SGNA leverage next year. I was wondering what, what the driver was in that. Thank you.

Yeah. Look at, look at the quarter in particular and where we came in favorable relative to our outlook a couple different things come to mind on this one being, it's been a tight labor market. And so our distribution centers and our retail stores we've, we've been light from that standpoint despite incentives that we've put in place. So that drove probably the more significant component of SG, a being down on the corridor. And then to a lesser degree, there's going to be some, some reductions in discretionary spend and variable spend on the top line, on the top line mess, and then looking out to next year, we provided any specific color as it relates to SG&A leverage aside from, we've provided that in our operating would approximate this year with the range of 12.6 to 13.2, it's too preliminary here today to get inside the puts the puts and takes there's some strategic investments that we're looking out next year that we would seek to make in the way of demand creation as we have this year looking at digital capability in the business and from a supply chain standpoint and how do you, or how long do you forecast currently that these positions will remain open and benefit your SG&A, is that as you see it now, a, a couple quarters or, or more than that? Well, it's going to be challenging, I think at least through the fourth quarter here that now that we're into it, in terms of having the level of staff that we'd like to within our DCS to process orders within our stores within our call center. So I, think that that issue is something we're going to need to work with for at least through the fourth quarter, which is where our peak volume is. And then resettle and plan ahead for 2022.

Our next question comes from the line of Alex Perry with Bank of America Securities. Please proceed with your question.

Hi, thanks for taking my question. I was wondering if maybe you could talk a bit about, more about CLL and how much of the decline was due to production issues and overall supply chain headwinds. And maybe, could you talk about the outlook for secure additional production capacity for CLL and also the broader footwear business? Thank you. A - Tim Boyle Yeah, so CRE is an incredibly rapidly growing brand, and it's very disappointing that we have the supply chain disruptions in, in this quarter. The brand has historically been known almost exclusively as a winter brand, but the real growth has been in the sneaker categories, the wedge categories and, and its expansion beyond just winter. So I would say 100% of our myth in that brand was function of either supply chain disruptions at the factory or inbound logistics issues. We're working with, with large fast factory groups for future production where we want to be able to fulfil the promise of, of Cyril's growth. But it's likely going to be at least one more season before we're completely capable of getting all the product that the, the brand demands. It's, it's really been an enormous success and, and one that's quite disappointing from the, from the supply side.

Yeah. Alex, maybe just add just a little more color there attempts absolutely spot on with regard to the business being down on the quarter. It's, it's entirely wholesale based with just what the effects of later production that have, that have been later or longer in transit times and supply chain disruptions, coupled with the production capacity constraints that we've had. I think what's most indicative in terms of where the brand is, is if you look at the e-commerce business. So the e-commerce business, we still grew well over 30% on the quarter. And when you look at it on a two year stack basis, the brand has grown over a hundred percent in comparison to the third quarter of 2019. So, we're, despite the lower revenue in the quarter, the underlying thing fundamentals are quite strong and we're, we're encouraged looking out to next year with the brand. A - Tim Boyle Yeah. And as it relates to the Columbia brand, cuz you asked about the footwear business in general, we we're operating under constrained environment there with factory closures and many parts of, of Asia. The brands footwear business is finally hit. And as we've talked about for years, it has the capacity to be the largest product category for the business. So it's, it's disappointing that we're having these supply side issues because the demand is certainly there.

That's incredibly helpful. Thank you. And then just my follow up is could you maybe help us parse out the mid-teens revenue growth outlook for 2022 a bit more, I guess how much of that is are you seeing benefits from channel fill from some of the, other of your large or competitors consolidating their wholesale presence? And then just off of that, supply constraints that you're seeing does that affect your ability to serve sort of late season reorders as we work our way into one Q 22? Thank you A - Tim Boyle Certainly. Well, there certainly has been an advance bandage for us as some, some brands have abandoned certain parts of the retail universe and that's, that's been helpful, but it hasn't been the entire reason for the, the brands growth of popularity. It's been a function of the increased marketing spend product innovations that we've shown. And so the expectations are as we've talked about a, a function of how much product we think we can get to supply the demand for next year because the gross demand would be larger than what we're able to fulfil.

And Alex, the underlying assumptions of the 22 revenue plan were still very early. Obviously we've got a, we've got the spring order book in hand, and I think Laron had asked a question earlier in terms of, is some of that 30 plus percent growth due to fall shipments shifting in the first half of next year, the vast majority of this is reflective of the spring order book that, that we've taken. And so aside from the spring order book, we're just wrapping up sales meetings and going to market for the fall season right now. So there's not a lot of visibility that we have in terms of fall orders. We'll take those over the course of the next couple months. And then beside, other than that, it's just the strength that we see in the brand, the product, the innovation that we've got coming into the marketplace that gives us the confidence in the ability to drive that level of growth next year.

That is all the time we have for questions. I'd like to hand it back over to management for closing remarks.

I want to thank everybody for joining in today. We're, we're anxious to fulfil the promise of our order book and get our merchandise ship to customers and consumers. And we look forward to following, following up with you on four fourth quarter results. So thanks for listing in, and don't forget to get vaccinated,

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.