Columbia Sportswear Company
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

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

[Ronald A. Parham:]

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

[Gertrude Boyle:]

Good afternoon. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to the many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K for the year ending December 31, 2012, and subsequent filing with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statement to actual results or to change in our expectations.

[Ronald A. Parham:]

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

[Timothy P. Boyle:]

Thanks, Ron. Welcome, everybody, and thanks for joining us this afternoon. As detailed in our press release and CFO commentary, third quarter sales and profits exceeded our July outlook, primarily due to better-than-expected sales and margins from our U.S. direct-to-consumer and wholesale channels, combined with continued focus on controlling SG&A spending. Inventory at September 30 was down $66 million, or 14% from last year at this time, the second consecutive quarter of double-digit improvement, following a 19% reduction at June 30. We also raised our operating income outlook for the full year by approximately 8% compared with our July outlook, based on results through the first 9 months and the continued strength we have seen in our U.S. direct-to-consumer and wholesale channels in the early weeks of Q4. Although there have been plenty of reports recently about the generally soft U.S. retail environment, all 3 formats of our U.S. direct-to-consumer platform

[Operator:]

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

[Lindsay Drucker Mann:]

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

[Timothy P. Boyle:]

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

[Lindsay Drucker Mann:]

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

[Thomas B. Cusick:]

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

[Lindsay Drucker Mann:]

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

[Thomas B. Cusick:]

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

[Lindsay Drucker Mann:]

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

[Thomas B. Cusick:]

Yes, we did.

[Lindsay Drucker Mann:]

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

[Timothy P. Boyle:]

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

[Lindsay Drucker Mann:]

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

[Timothy P. Boyle:]

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

[Thomas B. Cusick:]

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

[Operator:]

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

[Kate McShane:]

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

[Timothy P. Boyle:]

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

[Kate McShane:]

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

[Timothy P. Boyle:]

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

[Operator:]

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

[Laurent Vasilescu:]

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

[Timothy P. Boyle:]

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

[Laurent Vasilescu:]

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

[Thomas B. Cusick:]

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

[Laurent Vasilescu:]

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

[Timothy P. Boyle:]

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

[Operator:]

Our next question comes from the line of Corbin Weyer with Robert W. Baird.

[Corbin N. Weyer:]

Tim, you touched upon a bit, that if weather plays through in the fourth quarter here, we'd see gross margin versus top line being the bigger beneficiary. Could you just maybe talk about what kind of weather assumptions are baked into the fourth quarter guidance you laid out today? And are you assuming similar weather to what we saw over the past 2 years, or normalized weather? Any commentary on that will be very helpful.

[Timothy P. Boyle:]

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

[Operator:]

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

[Timothy P. Boyle:]

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

[Operator:]

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