Greetings, ladies and gentlemen and welcome to Columbia Sportswear Third Quarter 2022 Financial Results Conference Call. [Operator instructions]. It is now my pleasure to turn the floor over to your host, Andrew Burns. The floor is yours.

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. 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 further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and the appendix of our CFO commentary and financial review. Following prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.

Thanks, Andrew and good afternoon. I hope everybody is well. I am pleased to report the third quarter net sales and earnings growth were very strong considering the economic, geopolitical and supply chain headwinds that we're navigating. Net sales grew 19% and diluted earnings per share grew 18% broadly in line with our expectations. Bright spots in the quarter included SOREL, which grew 28% year-over-year. The SOREL brand continues to outperform, fueled by function first fashion footwear. We believe fashion SOREL is well on its way to $1 billion in sales and becoming the next global footwear force. Columbia also had a fantastic quarter growing 19%. The brand's iconic innovation, value proposition and democratic distribution uniquely position the brand to capitalize on the popularity of outdoor activities. Innovations like Omni-Heat Infinity and the newly introduced Omni-Heat Helix are solving problems for consumers and are key differentiators for the brand. So looking at the current environment, it's increasingly evident that the threat of recession is weighing on the market. Despite this challenging background, our DTC business was up 8% year-over-year in the quarter with balanced growth across brick and mortar and e-commerce. On our last call, we updated our outlook to contemplate higher order cancellation risk and a more promotional environment compared to the exceptionally favorable environment in the prior year. We experience both these trends in the third quarter and anticipate similar headwinds in the fourth quarter as the marketplace seeks to rationalize inventory levels. Exiting the third quarter, our inventories were up 47%. As we look to align our inventory position with anticipated demand, it's important to remember that our business model and strategies are well suited to manage this process effectively and profitably. Our inventory includes a high percentage of evergreen styles that do not change season to…

[Operator Instruction] And the first question is coming from Bob Drbul with Guggenheim. Bob, your line is live.

A couple of questions for you. The first 1 is on the cancellations, and I guess, leading into the inventories, can you just elaborate more around the cancellations either by channel, by mix fall '22, spring '23? And just sort of how that's played through. And then I think you talked about the inventories, you've adjusted your purchases going forward to get them in line and it will still take a few quarters. I guess can you just talk through what you see at retail with your wholesale partners and sort of where you think when you get yours aligned versus supply/demand versus the retailers, where you think the retailers are with the trends that you're seeing out there?

Safe. Thanks. Well, as it relates to the cancellation, they were virtually 100% or very close to that, a function of our inability to deliver on time. So the demand is still there for the product. It's just that we missed the windows and therefore, canceled the product. Virtually, all the cancellations have been fall '22. We really don't have any Spring '23 delivery scheduled prior to December. So none of those have had any cancellations. We expect to be much more timely in our deliveries for Spring '23, and frankly, for the balance of fall '22. So this resulted in inventory, which is current inventory being in excess. So as we said in our prepared remarks, our plan is to liquidate that over time in a nonpanic way through sales to regular retailers as a result of demand in the fall as well as our own outlet stores in the future. So we're very comfortable with our position there. As it relates to retailers, I think retailers remember ended up really with very low inventories in -- at the end of fall season '21. So our expectations are that this will be a good season. We have too much -- we have more inventory than we want right now. But I think the market is actually quite good, at least this is how we're seeing it today.

And Bob, with regard to your question on where we've seen cancellations by channel, it's fairly broad-based. As Tim touched on, the cancellations are by and large a factor of being late from a supply standpoint. So that's impacted all retailers relatively equally. So pretty broad-based and balanced in what we've seen from a cancellation perspective.

Alright. Great. And then on SOREL, can you talk a little bit about the strength women's versus men's? And sort of where you see the opportunities in Q4 versus a little bit more on '23, early '23?

Yes, certainly. Well, the SOREL business has really grown tremendously, and it really is a function of the concentration on women's. I think we looked this morning prior to the call, and we talked about something like 80% of the SOREL sales being non-winter and something like 85% being women's. So it's really a function of the efforts that the SOREL team has put into the sneaker business, the wedge business and really getting that unstoppable women product that she needs to be going forward with. And the opportunities are enormous in my opinion.

The next question is coming from Laurent Vasilescu with BNP Paribas. Laurent, your line is live.

I wanted to ask about the CFO commentary. My understanding, if I look -- if I compare the slides from 90 days ago, Jim, you were guiding for footwear to grow high teens, it's now low teens. Just curious what's driving that between Colombia and SOREL? And then I saw the same thing with regards to the wholesale high teens to low teens, if I'm not wrong. Was that just purely due to cancellations? Or is there some shift that we should think about from 4Q into 1Q?

Yes. There's some slight shifts in revenue from Q3 to Q4. We had a slight miss relative to the 20% sales outlook that we provided for the third quarter. And that's effectively just a shift in timing of wholesale shipments that we now anticipate and have shipped in the early part of fourth quarter as it relates to any changes in relative growth rates between brands and product categories, they would be slight, Laurent. I'm not aware of any meaningful shifts from a product category perspective or from a brand level standpoint. And any change would be more related to wholesale cancellations as opposed to DC performance. D2C performance was fairly consistent throughout the quarter.

All right. Very helpful. And then maybe just some commentary about what you're seeing in Europe. I don't know if you're seeing real time in your direct business, any slowdown. I think winter has -- the fall lease has been somewhat warm in Europe versus in the US It looks like we've had a good start to October. And then China seems to be pretty resilient considering the rolling lockdowns. Anything you want to call out on China that we should consider?

Yes, certainly. Well, I want to point out, we've talked at length about both Europe, the European market and the China market, but let me talk about Europe first. That grew well this year in the quarter. And I think our business there is quite strong. Remember that we've underperformed in that market historically. And so now that we've got an excellent team there that's very focused on the right products and strategies that business is coming along well, and I think that's why you're seeing a growth in that market. Obviously, the headwinds are highly publicized, but we seem to be doing well in that market and no expectations that would change our mind. As it relates to China, again, an area where we've underperformed from recent times. And the expectation is that the team is well underway at the advantage. The advancement of the business, we have a much more robust digital team there. And as you saw in the quarter, we talked about the TikTok store, which performed so well. So those two markets have been under pressure from us have been reconstructed. And I think what you're seeing is the results of those reconstruction.

Up next, we have Paul Loes with Citigroup. Paul, your line is live.

It's Tracy Kogan filling in for Paul. I was wondering, first, if you can tell us on your gross margin change for the year in your guidance, have you actually seen an uptick in promotional levels already quarter-to-date? Or is it something that you expect based on the inventory levels you see across the industry? And then I have another follow-up question.

Yes. Tracy, it's going to be more of the latter in terms of the economic climate, the level of inventories in the operating environment that we're currently operating in. As we look at the third quarter, as an example, our DTC gross margins were down slightly. We cited that, that related to promotional activity. But even with that increased promotional activity. Our overall D2C margins were quite healthy. And so as we look out into the fourth quarter, the biggest change that we've made in our gross margin outlook is related to the expectation that given inventory levels more broadly in the market that there's likely to be more promotional activity. Certainly, we're not leading with that, but we'll be ready to react as appropriate.

Got it. And then I guess just a follow-up. I think this quarter, as you just mentioned, your wholesale margin or your DTC channel was more promotional, but your wholesale margins were better. I think last quarter, it was the opposite. So I was wondering what the dynamics were there and what you're expecting for 4Q and as we enter next year for margins by channel?

Well, as it relates to both the D2C and wholesale margins. Keep in mind that that does not factor in the inbound freight, which we've separately indicated is a significant headwind. So if you look at both channels with inbound freight, the gross margins are going to be down. Now when you look at wholesale being up in the fourth quarter, keep in mind the price increases that we began to implement with our fall season, which were in the high single to low double-digit basis, and we did that in order to mitigate the effects of the inflationary pressures that encompass both product input costs, coupled with inbound freight. So essentially, you're seeing the effects of that here in the third quarter as we ship into fall merchandise. And from a D2C perspective, the third quarter, typically, there'

Up next, we have John Kernan with Cowen. John, your line is live.

This is Krista Zuber on for John. Just first on the earlier shipments. Is there any way you can quantify what that is in dollar terms? And do you also envision earlier shipments of spring goods into Q4 or even Q1 '23? And I have 1 follow-up.

Yes. As it relates to the third quarter, you'll note the rate of growth that we achieved in our wholesale business. Certainly, some of that is related to timing shifts. And as Tim pointed out, there were timing shifts in which typically, we would have seen certain of our EMEA distributor fall '22 shipments haven't been shipped in the second quarter and those shipped in the third quarter. And then likewise, given supply chain constraints, it's hard to quantify some of this because there's -- it's so unique year-to-year right now, just given the delays we've seen. But our wholesale business on the whole has shipped earlier for fall '22 than it did fall '21, yet still far behind where we ideally like it to be, and that's why we've seen the cancellations. I think if you were to adjust for the timing effects both between the quarters that I'm referencing, our growth rate for our wholesale business ex timing would still be in the double-digit level percent growth.

And then just on the gross margin discussion that was in the prepared remarks in terms of the increased inventory provisions. Should we assume they're going to take most of the sort of the clearance pain in Q4? Or will this stretch out into spring or fall 2023 as you -- I believe, Tim said he was not going to pull the panic button on the inventory clearance that you have on hand?

Yes, we -- yes, this is Tim. So we have a strong balance sheet, and we believe the best use of our asset in our balance sheet is to do the right thing with the inventories that we own. We'll be paying more for inventories that we buy to replace the existing inventory. So we're better served to keep the inventory and manage it through over the next several quarters. So that's our plan, and that's how we're going to approach it. We will be more promotional, very likely in Q4 just to react to the market in general. And then as it relates to shipments of Spring '23 merchandise. It's quite common that we would ship a mixture of spring product to our US and North America wholesale partners as well as independent distributor markets in -- at the end of the fourth quarter. But that generally varies from time to time based on the demand and the shipping -- shipment availability.

Up next, we have Mitch Kummetz with Seaport Research. Mitch, your line is live.

Tim, on the spring order book, I know you're lapping some really strong orders a year ago. And if I recall correctly, I think retailers were writing bigger orders pre books last year in order to kind of guarantee product. But as you mentioned, your inventory is flowing better now, you're approaching more normal service levels. So does that Spring '23 order book kind of reflect that retailers are going back to a more normal prebook cadence as they're recognizing you don't have to kind of line up in advance in order to guarantee product, and if that is the case, maybe that provides a better kind of reorder opportunity in the first half of '23 versus maybe what you experienced in the first half of '22?

Yes. I would say that we were a poor performer in terms of delivery on time in Spring '22. And so I think retailers were more circumspect in terms of how they place their orders, assuming that in the very likely effect that we will have more inventory available to them to order during the season. So we will be a better -- so we will have better service levels in Spring '23 by a long shot than we had in Spring '22. And the expectation is that we'll -- those full shelves in the early part of the season will bode well for reorders.

Alright. Got it. And then, Jim, just on the margin guidance, and now you're looking for gross margin this year down 220 to 250 bps. In the CFO commentary, I think the first item that you note is the elevated freight levels. Can you quantify that impact? And can you kind of remind us where sort of like container rates are these days and air freight and kind of how that plays out over the next few quarters and when you might start to see that as a tailwind to the margins?

Yes, you bet Mitchell. As it relates to the impact of inbound freight cost to our gross margin throughout this year, through the first half of the year, it was about 300 basis points of impact, and it was pretty even between Q1 and Q2. And as we sit here in Q3, we've seen that to begin to normalize, but it's still pretty impactful. So Q3, it was over 200 basis points of impact. And I would suspect that we'll continue to see that normalize in the fourth quarter. I don't know that we necessarily get to that becoming a tailwind in the fourth quarter. But certainly, as we look out to 2023, we would expect to see some benefits as we lap this year's high rates that we've been incurring. . I think in terms of the rates themselves, they've come down substantially over the course of the last several months here. At its peak, our inbound freight rates were 6x to 7x what they were before we came through this event. As we sit here today and we project out into next year we should be closer to 2x what we were. So we're not going to get all the way back down at least with what we could see right now, all dependent upon what happens from an overall economic supply and demand perspective and how the ocean carriers manage their business. But it should be a nice benefit to offset other headwinds in our gross margins as we look out to '23.

And Mitch, I just want to make a comment on your question regarding air freight. We avoid that virtually at all costs. So we have a very minimal amount of air freight, certainly this year. And as a historical practice, we really avoid that.

[Operator instructions] Up next, we have Alex Perry with Bank of America. Alex, your line is live.

Just first, could you give us maybe a little more color on sort of the shaping for next year? I think '23 wholesale shipments up modestly. Also just trying to sort of think through the puts and takes on the gross margin cadence here with the elevated inventory levels, and you talked about sort of working that through the outlet stores, maybe partially offset by some of the benefits that you sort of expect to see some freight. Just trying to sort of get some color on sort of how we should think about the business heading into next year?

Yes. Alex, we're -- obviously, we're not prepared to provide an outlook for '23 here today, aside from what we've described with regard to the modest growth in our wholesale business through the first half of next year. And we're looking forward, obviously, to the holiday season seeing how consumers react over the course of the next couple of months here and also being able to secure our fall '23 wholesale order book that will put us in better shape as we come around to our year-end earnings call in February, and I can share more of that with you. Aside from that, as you look at other elements of the P&L gross margin-wise, I touched on, I think, the variables in here are going to be the upside or the tailwind with regard to freight, I think channel mix, the wholesale business has grown substantially in 2022. We'll see how Channel mix works its way out in 2023. And then on the headwind side, I think the biggest variable that we're that we're dependent upon as are others is just what the overall environment -- the operating environment entails with the shape of the consumer and retailer sentiment and what that means in overall promotional cadence. So those are the major variables. I think currency is obviously another challenging headwind, both from a gross margin perspective as we hedge, our inventory production as well as where translation rates are.

Incredibly helpful. And then maybe off of that, you took some pricing above, I think, what you've taken historically this year. As you move into next year, is it sort of pricing to offset cost inflation? Or how do you guys think about sort of pricing on a go-forward basis?

Yes. Well, we are in the process of pricing our fall '23 products today. And we've seen increases in labor, fairly large increases across almost every market that we source in. There have been some moderation of the cost on material just due to the market reduction in demand, and we would see a commensurate reduction in demand on the ocean freight carriers. So we haven't settled on final pricing yet, and we haven't shared that with our wholesale partners. But our expectations are that the dramatic increases we've seen over the last several quarters will moderate.

Yes. I think Tim is referring specifically, we're going to market with fall '23 here pretty quick. As it relates to spring and the order book that we have, certainly, we're continuing to operate in an inflationary based environment. And with inflation, our objective has been to increase prices to offset that, and we continue to do that with a Spring '23 season. So Spring '23 prices, they're up in the same level of magnitude as what we did for Fall '22. So call it, the high single-digit level is the price increases that we've incorporated into there.

The next question is coming from Steve Marotta with CL King Associates. Steve, your line is live.

I know there's been a lot of questions regarding inventory, and I certainly realize that the intent is to piece it out in the channels that are most advantageous over the next three to nine months. Is there a possibility that some of the aspects of the inventory could be packed and held until next holiday specific to either deliver into the wholesale channel or into your DTC?

Yes, I suppose it's possible. But our intention would be to manage the cadence all the way through our business to be liquidated as you said, in the next -- the most current quarters upcoming.

Yes, there's certainly we got the fall merchandise remaining, Steve, and we're carrying some of that for our outlet stores as an example. Certainly, that would be to Tim's point, the there's a good percentage of our inventory and our product lines at our evergreen styles. And we would prefer to hold that merchandise and sell it at a higher margin next year than liquidated at distressed margins in the near term.

Understood. Thank you. That's helpful.

We have a question coming from Jonathan Komp with Baird. Jonathan, your line is live. Jonathan, your line is live. All right. I'd like to turn the call back to management for any closing remarks.

Well, thank you for your attention and time today. We look forward to talking to you in February about the results of Q4. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.