Columbia Sportswear Company
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Greetings, and welcome to the Columbia Sportswear Fourth Quarter 2020 Financial Results Conference 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, Mr. Burns, you may begin.

[Andrew Burns:]

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, explaining our results. The CFO commentary is also available on our Investor Relations website investor.columbia.com. With me on the call today here 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.

[Tim Boyle:]

Thanks, Andrew, and good afternoon. I hope everyone is well and your families are all safe and healthy. I'm pleased to report above planned fourth quarter results with broad based outperformance across our brand portfolio and regions. These results are particularly impressive with the backdrop of a global pandemic and demonstrate the dedication and commitment of our global workforce of employees who overcame enormous pandemic related disruptions. While consolidated net sales and earnings remain below prior year levels, trends sequentially improved compared to third quarter and we remain poised for continued recovery in 2021. 2020 was an unprecedented year of adversity by almost any measure. Our team swift cost containment and capital preservation actions along with disciplined working capital management enabled free cash flow of nearly $250 million and cash and short-term investments of over $790 million and no borrowings exiting the year. Our profitable growth trajectory and fortress balance sheet have given our Board of Directors the confidence to approve a quarterly cash dividend, increase our stock repurchase authorization and return to our pre-pandemic capital allocation strategy. Fourth quarter net sales declined 4% and diluted earnings per share declined 14% year-over-year, primarily reflecting the ongoing negative effects of the COVID-19 pandemic partially offset by the benefit of later timing of fall 2020 shipments that we referenced in our third quarter earnings release. Promotional pricing activity in the quarter was less than expected, resulting in gross margin expansion of 50 basis points compared to fourth quarter in 2019. I'd note that fourth quarter 2020 operating income includes $18.1 million in retail impairments and store closure charges and $17.5 million in prAna trademark impairment.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question here comes from Bob Drbul with Guggenheim Securities. Please proceed with your question.

[Bob Drbul:]

Hi guys, good evening. Couple of questions actually. I think, well, first of all, congratulations on a strong finish to the year and on a very solid outlook for 21 and I guess I'd like to ask a couple of questions on 21, if I could just sort of unpack it a little bit on. So on the order books for fall and for the spring. Where are you like how much of it is completed and I think you've got some pretty good visibility. It sounds like in the fall with the new technology. Can you just give us any numbers around that aspect of it. And I guess the second question I have related to the 21 outlook is just, what's the e-commerce penetration that you contemplate or is there a range for the full year. Just a little bit more color in some of the buckets would be pretty helpful to us. Thanks.

[Tim Boyle:]

Certainly. Well, as you know Springs order book for 21 is essentially in the bag. We get orders and cancels every day on both seasons, but for -- spring has done and in the books fall, I would say by March will be over 90% done today, it's probably in that in the '80s maybe higher than 80% so we have a high degree of confidence in the -- in what we're talking about today in terms of what 21 is going to look like. In addition, we talked about the launch of Omni-Heat Infinity which is a dramatically improved transformational product for Omni-Heat and we're very excited about the opportunity that's going to bring and it gives us a lot of confidence in our view of 21, especially in the back half. The e-com percentages that we're talking about really will depend on the length and transparent -- length and direction of closure store closures around the world and I think our best view today is that it will mirror last year's penetration in that range and that could be increased I suppose, if we don't have openings as expected across the globe or contract a bit but for all just purposes I think consumers are getting very comfortable with buying online. And I think our, the penetration of that business will be about the same as it was in ' 20 in 20. Now that when -- so we just have to remind investors that the company does have a significant amount of business with wholesale partners who run e-com businesses and those are growing nicely. So it may be that the combined wholesale digital and Columbia DTC digital businesses may take us slightly larger portion for next year.

[Bob Drbul:]

Great. Thank you very much, Tim.

[Tim Boyle:]

Thanks, Bob.

[Operator:]

Thank you. Our next question comes from Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question.

[Laurent Vasilescu:]

Good afternoon. And thank you very much for taking my question, and congrats on the momentum Jim, I'd like to ask about the One H guidance, I thought that you upped it up a little bit from last quarter was high teams to now this kind of percent range. Is it fair to assume, as we think about 1Q 2Q dynamics then maybe 1Q is probably in the mid-single digit range or potentially higher?

[Tim Boyle:]

Well, I think the, as we commented and make in the commentary that we provided Laurent you can dig in the details there given some of the delays that we're seeing an inventory receipts for the spring, 21 season that may have some impact on the deliveries for our wholesale business, as well as our direct to consumer business we believe today that the growth that we've got projected for the first half is going to be very heavily weighted to the second quarter. So, I think I'd factor that in, in terms of how you look at Q1 in Q2 and then in terms of the improvement we've seen from our prior guidance we provided from high teens. And then we've shown a little bit upside relative to that. I think that's just demonstrating the continued steady recovery that we've seen in the business, including our brick and mortar albeit it's still got a ways to go. We're seeing nice trends with regard to the improvement in traffic and sales levels.

[Laurent Vasilescu:]

Very helpful. As a follow-up question. I appreciate that you give us, giving us full year guidance in a very uncertain environment, it looks like for 2H, 21, the implied guide is up mid-teens. Yeah, I'm trying to reconcile the comment about just notable strength in the order book for Fall 2021. And then secondly, how do we think about the gross margin evolution over the course of the year, high level.

[Tim Boyle:]

As it as it relates to the second half. I don't think there is a no noticeable difference between the growth rates that we would project for the second half and what we're seeing for the first half. While the first half is high teens to low 20%. The vast majority of our business is more significantly weighted towards the second half. I would expect that growth rate to remain at that level. And it would be consistent with Tim's comments with regard to how encouraged. We are in the order book, it's come through from our wholesale business. And then, as it relates to gross margin; I don't want to get into parsing that up by quarter. At this stage. We're pleased with the progress of the company has made with regard to how we're managing the margin, I think if you look at it relative to 2020 were up 110 basis points projected and were up over 2019 as well. And so I think that's on the back of a lot of hard work that our product creation teams and whatnot have done there is some favorable product costing in there and some benefits from more full price and some shift in channel mix.

[Laurent Vasilescu:]

Okay, very helpful. Congrats on the momentum.

[Operator:]

Thank you. Our next question comes from Alex Perry with Bank of America. Please proceed with your question.

[Alex Perry:]

Hi, thanks for taking my question. Congrats on a strong quarter. Just first on the fourth quarter, do you think you're able to take market share during the quarter, given lower competitor inventories versus your ability to service reorders. And is that something you're seeing here as we move in the first quarter as well.

[Tim Boyle:]

Yeah, I think we had a bit of improvement in our market share view against what we would consider typically our branded competitors. We did see a better of slip against our customers private label businesses, because if you remember, they were not really able to cancel any of their own private label merchandise coming in, but they were able to reduce the brands that they had coming in. So we felt like we had a great year. And we finished up strong and especially against our typical competitors, but there was a bit of movement I guess retailers private label.

[Jim Swanson:]

Yeah. And Alex, I'll just add. I mean our reorders trend throughout the fourth quarter was pretty solid all the way through, and I think that part and demonstration of the sell through rates. And just a cleanliness of the overall channel inventories.

[Alex Perry:]

That's really helpful. And then I just wanted to follow up on a few of the prior questions and maybe can you just help us parse out exactly what is driving the strength in the fall 2021 order book is that been helped by the Omni-Heat INFINITY launch, is there, can you just help us think through, what's driving the particular strength you're seeing there.

[Tim Boyle:]

Certainly. Well, the strong performance for the brand across the fourth quarter was certainly helpful because we took the bulk of our orders from the period forward 1st December through today. So certainly the performance at retail of the brands. Gave us a lot of strength again Omni-Heat Infinity is a unique product not available anywhere else from any other brands. So we had the distinct points of differentiation that we talk about so much specifically in that area. And then the great weather for outerwear and winter footwear, which is basically been present across the northern hemisphere for much of December and certainly almost all of January. So there is really clean inventories the channel is very receptive to winter merchandise and that's I think was those things were strong indicators and improves our solid backlog.

[Jim Swanson:]

Yeah, I would just add, it's very broad-based growth when will we look across each of each of the brands and certainly Columbia lead the way given pure size and whatnot. But we're very encouraged, particularly in emerging brand space and had a strong track record and has momentum, but also in the case of the growth that we anticipate from Mountain Hardware and for and prAna and order book, we've taken from them and then from a categorical standpoint footwear has been a strong category for us. But the apparel growth rates will be every bit every bit as much as, or a strong as what we're anticipating from a footwear standpoint. So all in all, I'd say pretty broad based growth across brands, categories and regions for that matter.

[Alex Perry:]

That's really helpful. And can I just sneak a really quick follow up here. Just on the category growth between footwear and apparel. I think traditionally footwear is been a relative outperformance. But it sounds like this year it's going to be pretty balanced and I think you mentioned footwear manufacturing capacity constraints as being one of the limiting factors there, should we think about that categories, potentially, how much is that limiting the footwear growth in 2021 and would that be growing faster if it wasn't for some of the constraints you're seeing there.

[Tim Boyle:]

Yeah, we think we would have some faster growth, but really this we believe is a fairly short-term constraint we've got lots of great products in the pipeline and really, this is a bit of a function of the impact of the pandemic on these very large factories that are making footwear for the company and for others. So we believe is a short-term impact, but over the long term that we still believe that, but where should be the largest product category for the company.

[Alex Perry:]

Perfect, helpful. Thanks again and good luck as you finish up season here.

[Tim Boyle:]

Thank you.

[Operator:]

Thank you. Our next question comes from Camilo Lyon with BTIG. Please proceed with your question.

[Unidentified Analyst:]

Great, thanks for taking our question. This is MacKenzie Boydston on for Camilo. My first question is just about performance by geography any detail you can provide especially they really impressive growth in Canada. Given the lock down and then any detail in Europe as well and how those geographies are performing into Q1. Thanks.

[Tim Boyle:]

Yeah, I think as it relates to the quarter one thing you have to keep in mind, and Tim touched on it. There are some shifts regarding the delivery of our wholesale shipments out of the third quarter and into the fourth quarter. So when you look at Canada as an example, with the 36% or 37% growth, a lot of that was aided by some later shipments, and then e-commerce I would say across the board, geographically was a -- solid growth from that channel. And then, aside from that I think that timing shift in addition to impact in Canada. I think the US was the other geography that was the most impacted by that. Aside from that I don't think there's any other significant call-outs that I would make with regard regional changes.

[Unidentified Analyst:]

Very thanks. And then, just a follow-up on the prior e-com question on very strong this quarter, obviously, but did monitoring slightly from last quarter. So I'm trying to understand as stores reopen, have you seen any digital -- sales slow at all and how do you think about it heading into up '21, especially with the vaccine rollout in stores reopening and consumer feeling more comfortable shopping. Thanks.

[Tim Boyle:]

Yeah, I think it's got is yet to be determined. I mean our invest the largest investments the company has made in 20 from a capital perspective, we're in our digital space and so we've become much more adept at interacting with consumers digitally people obviously feel more comfortable shopping digitally today and I think they get a better experience as it relates to our products, we're able to much better explain them and some of that were quite complicated. So our expectation is that over time, we're still going to have a very large digital business and the pace -- of our brick and mortar sales as well as our sales to retailers who have primarily brick and mortar stores. It's really going to be determined by -- how open they are, which means how broadly disbursed a vaccine distribution is.

[Unidentified Analyst:]

Thank you. Best of luck in 2021.

[Tim Boyle:]

Thanks.

[Operator:]

Thank you. Our next question comes from John Kernan with Cowen. Please proceed with your question.

[John Kernan:]

Hey, good afternoon, guys and congrats on a nice end of the year and certainly the confidence you're showing in the outlook for 2021. So much appreciated. Maybe we could talk to the digital business within DTC. I know that pre-COVID whether it was project the X1 initiative you were making a lot of investments in digital and DTC in general. I'm just curious where we are in the evolution of the digital platform and where you think the long-term economics of the digital business can sit.

[Tim Boyle:]

Well, you know, it's, we still consider ourselves at, at our at our core to be a wholesale company. So our focus always is going to be on how our products show up at retail or -- in a set environment -- that our wholesale partners might provide so that having been said, our clearest view and our the brands -- most important visibility to consumers is going to be on the digital space that we're able -- to craft ourselves. And so that's why we've made such heavy investments in the digital space. I would say that I would give ourselves perhaps maybe a B-minus in terms of what we can do with our digital communications with customers and so there's lots of plus runway for us to get better. We will continue to make investments in that area and some of it's going to be content related, some of it's going to be performance across the social space and getting more integrated into the -- between the Company's brand messages and they and the digital messages there contained in our site and email messages. All those things really will give us a real additional leg up. It's going to be interesting with Skip partners experience to help us craft Positive growing and go-forward basis on that and really how we look -- at the web investments we have basically industry average conversion rates, which means many millions of people come and visit our site to with a great marketing message. So I mean there is lots of great things about the digital business, -- which are going to be really supportive of the brick and mortar business as well.

[Jim Swanson:]

And John, I mean looking just strictly the economics of it. The operating margins that we generate out of our e-commerce business. Even with the significant investments that we've made in the last couple of years are still highly accretive much better than the overall corporate operating margin and they rival where we are from the wholesale margin standpoint and so we'll continue investing where we believe there is strong returns to the business.

[John Kernan:]

That's helpful, thanks. And then just maybe one final question on PFG and SOREL to the growth year smaller brands relative to Columbia any comments on PFG and the growth potential where you want to take this brand long term outdoor certainly seems like it has a lot of tailwinds along with him fishing in general.

[Tim Boyle:]

Yeah well PFG is really a Columbia brand, it's a sub-brand of the business. But Fishing is the largest single category of participation in the United States and so, an area where we have a significant lead on many competitors are relates -- to innovative apparel, whether it's sun protection or just performance apparel for fishing. It's also got a very strong opportunity for lifestyle and so there's lots of lots of runway -- on that product category. And -- it's extremely popular in the Southeast, the that those areas where the weather is conducive and where we've had population growth -- in that area, so very excited about it and we're just barely touching the surface of the opportunity in PFG footwear, if we can sell as many shoes as we said fishing shirts, we would be a very big business. So that's the plan. And as it relates to SOREL the really encouraging thing about SOREL was the popularity of the sneaker category for them this year, which really shows us the brand strength beyond winter footwear so lots of good stuff going on.

[John Kernan:]

Got it. Thanks, guys, and best of luck again, and congrats on the strong finish to the year.

[Tim Boyle:]

Thanks, John.

[Operator:]

Thank you. Our final question comes from Paul Lejuez with Citigroup. Please proceed with your question.

[Tracy Kogan:]

Thank you. It's Tracy Kogan filling in for Paul. I had two questions. And the first is, I think over the last couple of quarters, you've mentioned the lack of innovation by your competitors, and I'm wondering what your view of the competition or the competitive landscape is currently. And then secondly, I was just hoping you could give a little more, a detail on your inventory composition and how much of the reduction in inventory this quarter was due to the timing shift and then on the aged inventory is up , I'm just wondering if that level improved versus last quarter. Thanks.

[Tim Boyle:]

Yeah, so well I prefer not to give specifics about our competitors' innovation but I can tell you more about ours were, and this is an area where we've invested very heavily and we consider to be the key point of differentiation against others. So I mean it's quite common for commodity brands like Cortex and other commodities that are used to produce Apparel, especially performance apparel that we used. We really have taken the approach that we want to have unique ownable innovations and that's where we spent the bulk of our time and so we have the Omni-Heat Infinity that we talk so much about on today's call, as well as items to keep people cool when it's warm and as we know it's the climate is an important topic. That's why we think wearing apparel it can keep you cool it can help us rely less on artificial air conditioning. so Omni-Freeze ICE, which is a new product that we launched in spring these kinds of commodities going to allow us to be very significantly different. I'll ask Jim to try and get in.

[Jim Swanson:]

Yeah, I think, I think as it relates to inventory and the down 8% year-over-year. So if you adjust for the later receipt of our spring inventory related production of our spring inventory, we still would have been up. It would have been up of low single digit to mid-single digit percent. So I, there's still obviously plenty of room for us to improve our operating efficiency and our inventory turns as it specifically relates to the position of our aged inventory versus last quarter, we've seen, steady improvement of exact figures, but steady improvement in terms of our aged inventory levels and remain comfortable with those and we're repositioning our outlets in part in terms of that being a more meaningful vehicle for us to close out or to sell that inventory, and then in addition, as we've talked about in the past. There's a fair amount of our inventory that carries over season to season as well, so we've pulled back on some of our spring '21 production this last year, knowing that we're carrying forward and over-inventory from spring '20.

[Tracy Kogan:]

All right, thank you.

[Operator:]

Thank you. There are no further questions at this time, I'd like to turn the floor back over to management for any closing remarks.

[Tim Boyle:]

Well, we thank you for listening in today. We're very excited about the potential for fall and spring 2021 we're well positioned and we're anxious to see a rollout of the vaccine getting us back to normal times and look forward to talking to you about it at the end of Q1. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.