Greetings. Welcome to Columbia Sportswear Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Andrew Burns. You may begin.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth 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 any 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 for management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in earnings release and appendix of our CFO commentary and financial review. Following our prepared remarks, we will host a Q&A period, during which we limit each caller two questions, so we you can get to everyone by the end of the hour. Now, I'll call the call over to Tim.

Thanks, Andrew, and good afternoon, everyone. I'm incredibly proud of the financial performance and accomplishments that our global workforce delivered in 2022. For the year, net sales grew 11% to a record $3.5 billion. On a constant currency basis, net sales increased 14%. I'd like to thank our dedicated employees whose tremendous efforts enabled these results. We achieved these results, while navigating numerous supply chain challenges. We know there's a strong demand for our products, and our recent financial performance could have even been higher absent the product delivery delays we experienced. Columbia and SOREL had to charge with both brands generating record net sales and double-digit constant currency growth in 2022. Geographically, we have broad-based momentum. Our largest market, the US, grew 12%. On a constant currency basis, International growth highlights include Europe Direct surging 31% on the year and Canada growing 19%. By channel, our growth in 2022 is relatively balanced with both our wholesale and DTC business generating double-digit constant currency growth. Our global DTC e-commerce business grew 10% constant currency and represented 18% of total net sales. I believe these results are proof that our strategies are working. Looking at the current environment, the threat of a recession is weighing on the market. In these times, our strong financial position is a strategic advantage. We exited year with over $400 million in cash and no bank borrowings. We're entering 2023 in a position of strength with positive momentum in many markets around the world. The Columbia brand's iconic innovation, value proposition and democratic product offering are enabling us to capitalize on the popularity of outdoor activities. Differentiated innovations like Omni-Heat Infinity and the recently introduced Omni-Heat Helix are separating Colombia from the competition and fueling its growth trajectory. SOREL's function first fashion footwear is resonating with…

Absolutely. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bob Drbul with Guggenheim. Bob, please proceed.

Thank you. Good afternoon, guys.

Good afternoon.

Two questions. I'll stick to the request, Andrew. On 2023, Tim, can you talk more about your order book visibility, the cancellations that you had in the spring, just sort of how much of the book is termed up for sort of Fall of 2023. So that's my first question. And then the second question is just could you spend a little more time on China. Curious in terms of monthly trends or the reopening trends and how you feel like category inventories are overall and sort of how you think about 2023 in aggregate within the guidance that you gave us today. Thanks.

Certainly, yeah. Thanks Bob. Well, as it relates to the order book, as you know, we concluded our spring much earlier in the year, and we're in the process of shipping it now. In fact, we're in great shape. We've brought our service levels nearly back to pre-pandemic levels, and we're shipping like crazy right now. We've had no substantial cancels and don't expect any, the spring book. As it relates to the fall book, that's also nearly complete, and we're buying -- well, we're matching the fall order book against our inventory levels that exist today, style-by-style, color-by-color, and we've done some purchasing to map to balance the book and our inventory so that they're in sync. And we don't expect fall cancels. Frankly, the only reason we receive such significant cancels this year versus prior periods is because our deliveries from Asia were significantly later than they had been in past periods. So we're expecting great things. We're approaching the business appropriately from an investment standpoint and we're excited about the possibilities that are before us. As it relates to China, if you remember, we've been pretty open that we've underperformed there historically. We've come from a great position and we lost our way a bit. The team that we have there today is exceptional in building a great business. And so we expect that, that business will -- once we get fully opened here, and that's where we're headed, certainly, that the business is going to really, really grow. And I'm convinced it's going to be, if not the greatest geographic sales area we have certainly among the best. So in general, as it relates to 2023, I'm bullish. We've always said that we expect high levels of growth. We're a growth company. And I think this gives us the opportunity with our balance sheet and weakness of certain of our competitors that will have a great opportunity to grow in 2023 and beyond.

Great. Thanks, Tim.

The next question comes from Laurent Vasilescu with BNP Paribas. Please proceed.

Good afternoon. Thank you very much for taking my question. Tim, it's great to hear that you're bullish for 2023. In the CFO commentary, it talks about Colombia, the brand itself being up high-single-digits for the year as part of the guidance. And then you have some other commentary saying that footwear is going to grow faster than apparel, excuse me. Within Colombia, the brand growing high-single-digits, can you maybe parse out how much do you think apparel is going to grow this year versus footwear overall?

Laurent, this is Jim. We do anticipate that footwear as a category is going to outpace the growth of apparel. And that would be inclusive of both the SOREL brand and Colombia. And then when you think about the high single-digit rate of growth for the Columbia brand, by and large, is that -- that’s the case across all markets except the EMEA distributor market, which, of course, we'll be lapping the Russia shipments that we had in 2022 that we did not have contemplated in our outlook for 2023.

Okay. Very helpful. And then -- it's good to see, Jim, that you have first half commentary, your top-line is expected to be mid-single-digits. So in line with the full year, any puts and takes we should we think about first quarter, second quarter is like any shifts there that we should think about? Because, I think, you're calling out gross margins to be down in the first quarter. Just curious to know -- sorry, Andrew, it's three questions now. But how do we think about gross margins being down in the first quarter? Can it be in the magnitude of 100 basis points to 200 basis points?

Yes. I think the way I would think about Q1, Q2, the key call out is what we've included in the CFO commentary, and that's that we would expect gross margin to be down in Q1, that in part being reflective of the fact that we're lapping the exceptionally low promotional levels from a D2C perspective last year. Aside from that, Laurent, I would expect that the first quarter from a growth standpoint should outpace the second quarter related to what Tim was describing earlier the fact that our spring inventory receipts for 2023 are much more timely than they were a year ago. And so we're getting those wholesale shipments out sooner as well. So that will drive a little bit of a timing variance on the top-line. But those should be the biggest variables. And then also included in the CFO commentary, we did make a comment that Q2 is typically our lowest volume quarter. And given that being a low volume quarter, we do anticipate Q2 being roughly breakeven. So that will -- if you do the math, you kind of back into what that would imply in terms of Q1 earnings.

It was helpful. Thank you so much, gents.

Yes. Thanks, Laurent.

Up next we have Mitch Kummetz with Seaport Research. Please proceed.

Yes. Thanks for taking my questions. Maybe just a continuation on the gross margin discussion. So you expect it to be up 60 bps for the year. I would imagine that better freight has a big impact on that. So is there any way, Jim, you could just kind of walk us through the year-over-year impact in timing of the freight improvement that you expect to see over the course of 2023?

Yes. We -- just big picture, Mitch. We've been looking back at 2022, inbound freight had nearly a 200 basis point -- 170, 180 basis point impact unfavorably to our gross margin. Part of 2021, the tail end of 2021 was also impactful from an unfavorable standpoint. So the weight of the inbound freight is probably a little bit more heavily weighted Q1, Q2, Q3, and then it will start to abate a bit in Q4 and normalize. So that's the way I would think about that. I think the offsets to keep in mind why you're only seeing 60 basis points of gross margin improvement relative to what those inbound freight benefits are, are the fact that we are continuing to lap the early part of last year in which the promotional environment was extremely low. And so we anticipate that normalization. And then with the elevated inventory levels that we have and as we work through that inventory through the combination of our outlet channels and from a wholesale closeout perspective, that will have some impact on margin as well. So those are effectively the two major offsets to the inbound freight benefit.

Okay. And then secondly, on the late deliveries, the delays -- delivery delays and order cancellations that kind of became of that. Is there any way to either kind of quantify the impact that, that had on the fourth quarter or maybe back half combined? Or maybe better yet, I mean, as you lap that, and I think, Tim, you said that you’re not expecting any order delays or any real cancellations for Fall 2023 as you lap those delays with an order book that doesn't have cancellations to it. Is there any way to kind of quantify kind of what you pick up as you lap that kind of easy comparison?

Well, I think the easiest way to think about it in terms of the incremental cancellations that we incurred above and beyond what we expected. I think if you just look at the high end of the revenue guidance that we provided in October relative to where we landed. The delta there is going to be entirely related to cancellations in North America across our US and Canada business. Aside from that, trying to quantify the full effect of cancellation, it'd be tough to get that into that level of detail, obviously you’re seeing in the inventory balance because by and large, the increase in our inventory is effectively that cancellations plus to some degree, earlier receipt of our spring inventory. And then as we get into this next year, Mitch, we're planning for kind of more of a normalized shipping pattern knowing that from a supply perspective, as Tim touched on, we're in much better shape going into 2023 now.

Okay. Thanks. Good luck.

Okay. The next question is coming from Paul Lejuez with Citigroup. Paul, please proceed.

Hey, thanks. It's Tracy Kogan filling in for Paul. My two questions. I guess the first is on your inventory. If you could just give us a little more detail there on where you think you have too much in terms of brands and categories? And then I guess, secondly, what are you seeing on the AUC side for this year, the product costing side? And are you expecting any additional price increases? Thanks.

Yeah, I'll let Jim talk about the specifics around the inventory, but I can tell you maybe begin with the costing expectations. About half of our inflationary pressure was inbound freight. So we've seen healthy degree of moderation. In fact, even rollbacks costs there. So that's a tailwind for us. Additionally, there appears to be a moderation in these cost increases we were experiencing in raw materials in the components of our products. Labor rates have also increased some substantially, but those are not going to roll back. So, I think our expectations are that the price increases at the higher rate that we saw them in 2021 and 2022 will moderate, and there'll be some opportunity for us to expand our gross margins as we've guided. Jim can talk a little bit about the components of the current inventory.

Yeah. Tracy, to talk through the composition of inventory a bit. And certainly, we're more elevated than where we ordinarily like to be from an inventory perspective. I think when you get under the hood of our inventory and look at the actual composition of the inventory, we're still comfortable with overall quality. There's certainly more of it, but by and large, the predominant side of it, its current future season-based inventory, we're much earlier received on the spring season. We are carrying over a fair amount of inventory as we've previously spoken about. There's a large proportion of our product lineup that is evergreen product that carries over season to season. And much of that has been offered as part of our Fall 2023 product mix that we've sold into our wholesale customers. So we're in good shape as it relates to having sold in a lot of that inventory already. And then to the degree there is aged or excess inventory that's remaining, we've adjusted our inventory buys for our outlets and shifted that back more towards moving through excess and liquidation as opposed to made for product. And then more specifically around composition of inventory, the focal point in terms of where we're seeing the growth in that is predominantly in North America. And I think that's a good thing in that we've got -- that's where we've got the greatest ability from an outlet perspective to be able to move through that inventory profitably.

Great. Thanks very much.

The next question is coming from Mauricio Serna with UBS. Please proceed.

Hi. Good afternoon. Thanks for taking my questions. I just wanted to ask if we could get maybe a little bit more detail on the US growth expectation for the first quarter, maybe in terms of the wholesale versus D2C. What are you seeing also like in the D2C trends of your business so far? And maybe you could provide a little bit more detail on the rationale of what cost you guys to take that impairment charge on the prAna business? Just a little more detail on that would be very helpful. Thank you.

Yes, certainly. Well, when I think about the first half of 2023, I'm mindful that we had some of our largest customers had almost no Columbia inventory in their stores during the first several months of 2022. Our deliveries were that impacted. So the expectations are that we'll have a nice solid Q1 few of these stores up to where they should be, and we'll have a good start up to Q3. Our DTC growth should be solid as well. Although if you remember, we're really focused on being a wholesale company. So we don't give a lot of detail around a normal retailer would give. It's just not as much a focus for the company as the wholesale portion of the business. And then as it relates to the rationale of the prAna business, we're very bullish on the prAna brand. And as you know, we talked a lot about the reset going on in their product. We just believe it's taking longer than we anticipated and wanted to make sure that we were prepared to give ourselves the time to turn that brand around.

Yes. And I'd just add, there's a lot of factors that go into the impairment. Some of it is what Tim is describing in the form of the brand's underperformance in our minds relative to the plan that we set upon acquisition. And then to a degree, looking at market multiples, looking at interest rates, certain of those factors have also influenced the impairment charge that we took in the quarter.

Got it. Thank you very much.

Okay. The next question is coming from Alex Perry with Bank of America. Please proceed.

Hi. Thanks for taking my questions here. Just first, can you maybe talk through what is embedded in your guidance in terms of wholesale versus D2C? I think at the Investor Day, you talked about modest 1H wholesale growth. Is that sort of the case and how you're thinking about the full year? Thanks.

Yeah. I think to the degree we provided detail from a channel perspective, it's a little bit higher level, Alex, but we are anticipating after an incredibly solid year from a wholesale perspective in 2022 that the D2C business would outpace wholesale growth in 2023. So, a couple of factors there. One, continued investment in what we're making in from a digital and e-commerce perspective. And then as you think about the brick-and-mortar side of our business, we did add a fair amount of new stores in 2022. So we'll be lapping the opening and the annualization of those stores in 2023 plus we've got a handful of new stores also planned from a growth standpoint.

That's really helpful. And then I think a lot of people have asked about your sort of balance sheet inventory, but I wanted to ask sort of about your -- how you're thinking about channel inventories. How are you sort of viewing that both for you and others that you compete with? Do you feel like channel inventories are in a good place? Or do you think that retailers will be carrying over inventory into sort of Fall 2023? Thanks.

Yeah. So we monitor something in the range of 85% of our North American retail customers' inventories, so we can gauge how we're doing there from a sell-through perspective on our brands. And what we're seeing is generally average to slightly better than average sell-through performance when you compare with prior periods, including pre-pandemic prior periods. So we can't see visibility on other brands, but as it relates to ours, we're in a good position and when that would be approximately where we've been in the past. So weather plays a big portion in the second half business and the residual inventories. So, as you can see in the great cold weather that's going through North America today, it's making up a very big impact on the liquidation for our retailers. So our expectation is once the winter is done, that will be a good, solid, clean position with our merchandise.

Perfect. That’s very helpful. Best of luck going forward.

Next question is coming from Alex Douglas with Cowen. Alex, excuse me. Please proceed.

So I just wanted to go back to the question on Fiscal 2023 gross margins and maybe how that's broken down. Is there any more detail that you could provide on maybe specifically the impacts from freight and promotions and maybe kind of cadence throughout the year would be very helpful? Thank you.

Yeah. And if you reference the CFO commentary we provided, there's a bullet point list there, but I can speak a little bit in terms of the relative weighting of these. So, lower inbound freight costs, that will be a -- we anticipate, we've built into our guidance a very significant element of benefit there. And in 2022, I mentioned it was about 180 basis point headwind to us in gross margin. And that was also a headwind to us in the latter part of 2021. And with freight rates being down basically where they were in advance of the escalation we saw in those costs, we should be getting most of that back in 2023, and that's built into the outlook that we've provided. To a lesser degree, there is some favorable channel mix shift as our D2C business is anticipated to outpace growth across the rest of the business. And then the big offset in here is going to be the expectation around promotional levels coming back down to more normalized levels and is also working through getting our inventory clean. So, there's a sizable benefit from an inbound freight standpoint it's going to be offset to a pretty good degree given promotion levels and clearing through the inventory.

That’s helpful. Thank you.

We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

Great. Thank you very much for listening in. We're looking forward to a great 2023 and being able to update you as we go along during our next quarterly call. So thanks for listening. We'll talk to you soon.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.