Columbia Sportswear Company
Q4 2013 Earnings Call Transcript

Published: 19 Feb 2014

[Operator:]

Greetings, and welcome to the Columbia Sportswear Fourth Quarter and Full Year 2013 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. (Operator Instructions) As a reminder, this conference is being recorded. I’d now like to turn the conference over to your speaker, Ron Parham, Senior Director of Investor Relations. Thank you, Ron. You may begin.

[Ron Parham:]

Alright, thanks, Bob. Good afternoon and thanks for joining us everyone. Earlier this afternoon, we announced fourth quarter and full year 2013 financial results and provided our initial financial outlook for 2014. In keeping with our standard practice shortly after the press release crossed the wire, we filed an 8-K containing a detailed CFO commentary on the results and outlook, which can also be found on our Investor Relations website at www.investor.columbia.com/results.cfm. With me today to discuss the results and answer your questions are President and CEO, Tim Boyle; Senior Vice President and Chief Financial Officer, Tom Cusick; Executive Vice President and Chief Operating Officer, Brian Timm; and Senior Vice President and General Counsel, Peter Bragdon. Columbia’s Chairman, Gert Boyle is traveling and unable to be on the call today. So I will remind listeners that this conference call will contain forward-looking statements regarding Columbia’s business opportunities and anticipated results of operations. Forward-looking information 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 Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent filings 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 statements to actual results or to changes in our expectations. Now, I will turn the call over to Tim.

[Tim Boyle:]

Thanks, Ron. Welcome, everyone and thanks for joining us this afternoon. Our fourth quarter and full year results were significantly stronger than we anticipated in our previous outlook last October. At that time, we noted that we have begun to see positive signs of stabilization in our North American and European wholesale channels and solid momentum in our U.S. direct-to-consumer channels. Clearly, both of these dynamics strengthened further with the onset of winter weather. Globally, fourth quarter direct-to-consumer sales grew 26% and were up 20% for the full year accounting for approximately 34% of full year consolidated net sales. We are obviously very pleased with the results of our direct-to-consumer business during 2013. However, the ultimate objective of our direct-to-consumer strategy is to strengthen our brands in key markets to enable our wholesale customers to grow their business with our brands. After two challenging years in our North America wholesale markets due to a combination of weather and product positioning, channel inventories ended 2013 very clean creating demand for a broad assortment of our fall 2014 products, which feature our newest technologies and our best styles at more accessible price points. We are working closely with our wholesale customers to broaden their assortments and to encourage your views of in-store merchandising and marketing assets to accelerate consumer demand for our brands. As we have demonstrated at our branded stores and e-commerce sites, when those elements are brought together at point-of-sale, consumers embrace the innovation and enhanced design of our products. Our North American wholesale customers are demonstrating renewed confidence with advance orders for fall 2014 up double-digits reflecting strength across both the Columbia and the Sorel brands. We expect 2014 sales and profitability growth to be affected by the following major factors

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Bob Drbul with Nomura Securities International. Please proceed with your question.

[Bob Drbul:]

Hi, good evening.

[Tim Boyle:]

Hey Bob.

[Bob Drbul:]

Tim, I actually have a couple of questions. I think the first one is in the fourth quarter in your direct-to-consumer can you give us an estimate on how your own stores, full price stores and your outlet stores comped?

[Tim Boyle:]

Yes Bob, we emphasized that we are not a retail operation. In fact, the retail stores are really designed not only to help us manage our inventory levels, but also to really showcase the brand for consumers and other wholesale partners. So, we don’t release that comp store data, but I can tell you we would be proud to do so if we decided to do so.

[Bob Drbul:]

Alright. Can I have two questions on the ‘14 outlook? The first one is I think you talked about double-digit increases for fall ‘14, how much of the order book visibility do you have done at this point? And is it still in the March 31 deadline that you typically have?

[Tim Boyle:]

Yes, Bob. We have a very significant order book at this time and enough to give us comfort to be able to give the kind of guidance we gave today. So, we are confident in our ability to hit those numbers that we talked about. We are gratified to be able to have enough information about really all the geographic regions to be able to provide that kind of guidance. So, it’s good and we expect more orders for sure, but we have enough to grow to give us that comfort.

[Bob Drbul:]

Okay. And then I guess the last question that I have is on the – I guess if you look at fall ‘13 versus your expectation for fall ‘14, can you put any numbers on like average price for your outerwear, what’s really happening with your – this more accessible price point strategy? How big is the change that you are undertaking here?

[Tim Boyle:]

Yes, the change is not dramatically different. It’s really where we are focusing our time and effort. So if we go back to these more strategic good, better, best approach to merchandising, we have emphasized the better components much more than the best. And that’s really where our customers expect us to be. We had one significant customer who told us that we are always the best and better and that’s really where we want to maintain our position and focus our merchandising. So as an example, TurboDown, which we expect to be a very significant contributor over the years is a product that has high performance in fact industry leading performance, but has a very sort of moderate price point. So true to other Columbia examples of really significant products we have great performance at really reasonable prices. So that’s – that would be an example of how we are approaching the merchandising strategy.

[Bob Drbul:]

Great, thank you very much. Good luck with everything?

[Operator:]

Thank you. Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question. Camilo your line is live for question.

[Camilo Lyon:]

Hi, can you hear me?

[Tim Boyle:]

Yes.

[Camilo Lyon:]

Great, thanks and congrats on a great quarter.

[Tim Boyle:]

Thanks.

[Camilo Lyon:]

I want to just follow-up on Bob’s question about the order book for ’14, so just to make sure I am understanding it correctly, the 15 to 17 even though you don’t have the full order book and that is what you projected to be given the strong built in orders to-date right, it my understanding that correctly or is there opportunity for that number to increase as the final orders trickle in?

[Tim Boyle:]

What we – as you may guess we spent a tremendous amount of time and effort on analyzing the order book and the future plans for the business. So we have become pretty good at analyzing it. We don’t have the full order book we will get orders all the way through the season as we did in ’13 all the way through to the end of the year. But based on what we know we currently have good handle on the order book and we are far enough along in the order taking that we will likely end up so we have a high degree of confidence in the number we gave you.

[Camilo Lyon:]

Okay. So then secondly just driven on to inventory, in the release you said that momentum for the fourth quarter has continued into the first quarter, you also talked about your inventory numbers being down 15%, how are you able to meet that continued demand it sounds like you have you done a really good job of (transferring) that excess carryover inventory from last year, do you have enough and where do you think that you are really going to focus on in building out some of that inventory for the back half of ’14, is it going to be more on the Sorel brand or on the Columbia brand and I would be more on the (floor) is that the right way of thinking about the dynamics?

[Tim Boyle:]

Well, as you remember we had two really tough winter years prior to fall ’13 and so we as well as our customers were conservative in terms of how we approach to the future. As the weather played out certainly in North America, our customers liquidated inventories at a high margin level and as we told investors all the time our fourth quarter is really driven by not necessarily a top line so much as the ability to convert inventory at closer to full price versus soft price. So that’s what we ended up – what ended up happening for us for ‘13. Now as we approach ‘14, when we get closer to the end of our booking season which would be end of March beginning of April we will make a decision on how much speculative inventory we want to – which I would argue unless things change dramatically we are going to see something along the lines of what we have guided here to today in terms of a rather conservative approach to residual inventories. I think Tom might have some information.

[Tom Cusick:]

Yes, and Camilo, this is Tom. As it relates to inventory turns, our turns were about 2.5 times exiting 2013 and we will continue to focus on improving that metric. So our intent would be to grow our inventory in 2014 at a slower pace than revenue growth.

[Camilo Lyon:]

Great. And then if I could just squeeze in one more, the commentary on the China JV accretion of $0.13, I wonder that being a little bit lower than we had initially planned, could you just talk a little bit more about the driver of that accretion coming in a little bit below panned, is it more the macro or is it something that you really discovered with selling into that market?

[Tom Cusick:]

I would say it’s predominantly it’s the macro effects of the China market and just the level of revenue that we have originally planned for ‘14 versus what we are currently planned.

[Camilo Lyon:]

That’s really the promotion environment across the landscape that’s…?

[Tom Cusick:]

That’s the major driver, yes, yes.

[Camilo Lyon:]

Okay, great. Thanks a lot.

[Tim Boyle:]

Thanks, thanks.

[Operator:]

Thank you. Our next question comes from the line of Kate McShane with Citi. Please proceed with your question.

[Kate McShane:]

Thanks. Good afternoon.

[Tim Boyle:]

Hey, Kate.

[Kate McShane:]

I was wondering if we could hear a little bit more detail behind the opening of the six new branded stores and can you repeat how many will be focused on PFG and just as a tack on that, it seems like some of the outdoor retailers, Field & Stream by Dick’s and Cabela’s and Bass Pro seemed to expanding more aggressively, is that further opportunities, retailers and how do you think about merchandizing in Shop n Shop with them?

[Tim Boyle:]

Certainly. Well, we have a solid group of what we call branded stores as opposed to outlet stores where we have display of our products and that have done well, but generally, they are too large. And so this is an approach to get ourselves a branded position in major markets in North America at a size that’s frankly more profitable, more profitable period. As it relates to the quantity of those stores that might be PFG, we have our best performing PFG products are in the southern part of the United States. So we are looking at a few different markets and it really depends on where the right locations come up as to where, how many are PFG, how many are more standard Columbia stores. As it relates to the wholesale customers, the Dick’s Sporting Goods, Field & Stream, Cabela’s, Bass Pro, those are all great customers for us and we have continuing in-store investments in all those operations and we would expect that we would have continuing and perhaps even a larger presentation in those stores over time. So as I said in my comments, the company really considers itself to be a wholesale company and providing products that retailers do well with. And it’s helpful for us to have these branded stores to allow us to really experiment with presentations that can enhance the visibility of the company’s products and sales that really is designed to focus on our wholesale partners and helping them.

[Kate McShane:]

Okay. And if I could just ask a second question on the supply chain, if you could highlight maybe where you are seeing some pressure in the supply chain this year? What your anticipation is with regards to higher labor cost or higher raw materials in your guidance for 2014?

[Brian Timm:]

Yes, this is Brian, Kate. As we look to this year both for spring and fall, I would say, prices were moderating. And we did see some increases as it relates to following our down prices and whatnot, but all of that would have been priced accordingly and baked into the guidance that you got today.

[Kate McShane:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Andrew Burns with D.A. Davidson. Please proceed with your question.

[Andrew Burns:]

Thanks and congratulations on great results.

[Tim Boyle:]

Thanks.

[Andrew Burns:]

I was hoping we could spend a little more time on Swire in the Chinese market, it sounded like there was some inventory in that channel we have seen this in other categories, but just wondering your view on the amount of time it will take for sort of normal secular growth to reemerge in China? Is it a one season or perhaps two season phenomenon?

[Tim Boyle:]

Well, I would just emphasize that our joint venture partner, the Swire group, has been doing business in China since the 1700. So we are with a very experienced partner there. So our expectation is that this inventory overhang, which is prevalent on a macro-scale across China and not necessarily in our business specifically. It’s just dampened the results that we would have otherwise expected from the JV. I think we are looking at probably a one season to maybe at the very most two seasons overhang with this kind of enthusiastic expansion. So it’s really I think going to be a bit more short-term. And frankly, with our balance sheet and the Swire company’s balance sheet and experience levels, our expectation is we will be one of the firms that is able to take advantage of these kinds of tumultuous markets.

[Andrew Burns:]

Great, thanks. And with the second half guidance or commentary taking shape, it certainly seems like you are gaining some share in the marketplace. How do you view the competitive landscape could you speak to maybe some particular areas of strength whether by category or by channel? Thank you.

[Tim Boyle:]

Certainly, well, categorically we have had really good growth in outerwear. As you remember and we haven’t spent a lot of time on this perhaps with the investor community, but our TurboDown product is really a hybrid garment that contains both down and synthetic, so it allows us to be competitive with a high quality product containing down. It’s not as impacted as other down jackets just because of the leverage of the synthetics. So that’s been good from the outerwear category. It’s new, it’s different, it’s exciting and it’s got a lot of features including Omni Heat that supported. We have also had great growth and we expect further growth of Sorel whereas it’s well known as a winter boot, but the growth of that brand and its products in the fall season has really been rewarding. So we expect good growth from the Columbia brand specifically related to outerwear and then in the Sorel branded footwear and also the Columbia winter footwear brand is also (indiscernible).

[Andrew Burns:]

Okay, thanks and good luck?

[Tim Boyle:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Lindsay Drucker Mann with Goldman Sachs. Please proceed with your question.

[Lindsay Drucker Mann:]

Thanks, good afternoon everyone. I was hoping you could give a little bit more detail, I know you have some of the numbers spelled out in the CFO commentary, but just on the incremental investments in 2014, maybe just starting on the marketing side, the demand creation expense, it sounds like I just wanted to make sure that if you talk about 10% of the Swire JV sales being reinvested in marketing, is that subsequently all of the operating profit from that entity that you are going to be reinvesting back in marketing and if that’s the case how do you think about when you will able to deliver incremental sales on that?

[Tom Cusick:]

Yes, Lindsay, this is Tom. As it relates to China, the $0.13 contribution to Columbia is after all costs including marketing, including interest, including income tax. So that’s a net, net number. So we expect the China JV to generate high-single digit operating income. So it’s not that we are investing all the profits from that business back into that market in the form of advertising.

[Lindsay Drucker Mann:]

Maybe then, could you clarify the big bucket, because it is a pretty significant – the 5.1% of sales is pretty significant step up especially considering how much revenue growth you are looking for in 2014, so what are the big areas where you are looking to deploy that?

[Tim Boyle:]

The marketing spend itself or the SG&A taken as a whole or the marketing specifically?

[Lindsay Drucker Mann:]

The demand creation expense that you called out in the release the 5.1% in sales versus 4.6%?

[Tim Boyle:]

Okay, we are going to have nominal increase across every market where we will spend it in North America and Europe primarily will be a combination of TV, radio, out of home and digital, so that’s where the bulk of the marketing spend will be.

[Lindsay Drucker Mann:]

And the magnitude of increase, a larger magnitude of increase, is that a function of feeling really great about the products you have to invest behind or may be a catch up of some underinvestment of sales that slowed in recent years?

[Tim Boyle:]

Well, I think we have been clear that we haven’t spent enough on marketing for the company. Those are the areas where we think we can continue to increase our spend and frankly with TurboDown we think we really have a potential product that when marketed properly can be a significant growth channel for the company. So we have got an opportunity today to have something unique and different to talk about and so we are going to take advantage of that.

[Lindsay Drucker Mann:]

Got it. And then on the ERP side, $20 million of incremental expenses, can you just talk specifically about what that initiative will cover and how we should think about the opportunity to generate returns on those investments, timing wise and magnitude?

[Brian Timm:]

Sure. This is Brian. So in terms of what it covers that it covers our ERP system and then a host of other ancillary systems to help us communicate better with our vendors from a status perspective, our customers, etcetera. So it is a pretty good sized project that as Tim mentioned, we continue to believe that April will be our U.S. go-live. In terms of returns to the business, we foresee those being really around inventory utilization and affecting the gross margins of the business.

[Lindsay Drucker Mann:]

And as far as the timeline to generating those benefits, is that a synergy go-live, I mean, should we I guess that I am asking is does your guidance contemplate any reward from those investments as you go live and have a more efficient supply chain?

[Tom Cusick:]

Yes, Lindsay, this is Tom. I would say that we begin to see leverage from those investments, return on that investments much more in 2015 than we have contemplated here in 2014.

[Lindsay Drucker Mann:]

Okay, thanks very much.

[Operator:]

Thank you. Our next question comes from the line of Laurent Vasilescu with Macquarie Capital. Please proceed with your question.

[Laurent Vasilescu:]

Sure, good afternoon. Thank you very much for taking my question and congrats on the quarter. As mentioned in your prepared remarks, direct-to-consumer representative up 34% of total 2013 revenues, how should we think about DTC’s percent contribution for 2014 revenues? And if you could provide some color on the operating margin structures to both wholesale and DTC, that will be great?

[Tim Boyle:]

Yes. We are expecting a small increase of perhaps up to 36% contribution from DTC in 2014. And when we look at the net returns from that business today in 2013 and plans for 2014, I would say that the DTC business is slightly above the average in terms of operating income for the company on a standalone basis.

[Laurent Vasilescu:]

Okay, great. Thank you. And if I may on Swire, last quarter, it was mentioned that China did about $150 million in 2012, I am assuming 2013 was essentially same and 2014 is at $155 million, can you provide some color on how China revenues look like by quarter?

[Tom Cusick:]

Yes, so maybe just one point of clarification, so Swire did about $152 million in 2012. In 2013, the increase was low single-digits. And in 2014 that $155 million of growth is on top of what we Columbia recognized in selling into the distributor in 2013. So the revenue for China is more in the mid $160 million range for 2014, $155 million is the incremental component.

[Laurent Vasilescu:]

Okay, great. And then by quarter, if you can give some color on that?

[Tim Boyle:]

I would say that China business follows largely the same seasonal pattern as the consolidated Columbia business, a little over one-third first half, two-thirds back half.

[Laurent Vasilescu:]

Okay, great. Thank you very much.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Chris Svezia with Susquehanna Financial Group. Please proceed with your question.

[Chris Svezia:]

Good afternoon everyone and nice job on the quarter. Couple of questions. I guess first, I was curious on the backlog comments up double-digits, I guess the JV from China is in that and if so is there anyway to maybe extrapolate what the North American or the European wholesale or distributor businesses in terms of backlog growth was or what was doing? I think you made a reference that U.S. you expect on the wholesale side to be up high singles, I am just trying to extrapolate the backlog by region if possible?

[Tim Boyle:]

So Chris, the double-digit comment includes or excludes China, it really doesn’t – it doesn’t really have an impact as it relates to fall ‘14. So we are planning the fall business up double-digits whether or not you include or exclude China just to be clear on that. And then as it relates to that by region, I think we gave a fair amount of color in the CFO commentary and in Tim’s script, I think we are talking double-digits in most regions globally and in local currency terms with the exception of the European direct business and the LAAP distributor business and currency is negatively affecting out of Canadian and Japanese businesses in 2014 in U.S. dollar terms.

[Chris Svezia:]

Okay, that’s helpful. And on gross margins just you did a great job obviously in the fourth quarter inventories are clean including the inventory management, just curious why DTC is growing, why not – what’s the opportunity for us to be potentially stronger just of kind of maybe walk though some of the offsets from the CFO commentary, but I am just curious what’s your thoughts about the opportunities there?

[Tom Cusick:]

Yes, on the gross margin we are planning around 50 basis points for the year and there is reclassification component as we move the China former licensing income that was recorded in 2013 and prior years up in the gross margin. As we operate the JV we expect a slightly higher proportion of direct consumer and full price versus off price sales those are really the drivers of the expansion. And then obviously our hedge rates given the weakness in the Canadian dollar and the Japanese yens are a headwind for us in 2014. And then we had a little bit of tough comparison where when we look at our sales and inventory positions in ’13 they were actually a benefit as we had very nice sell through and those reserves actually declined in ’13 creating gross margin expansion. And we don’t expect that to repeat in ’14, so that’s about 40 to 50 basis points going against us as well.

[Chris Svezia:]

Okay, that’s helpful. And then just lastly just on SG&A $100 million increase is that – I assume that’s off a GAAP $625 million you did in 2013 and I know you don’t want to give quarter but I am just curious first half, second half that would prevent you from growing earnings in the first half, is it just really all the growth is really more second half versus first half is due to seasonality of the business?

[Tim Boyle:]

Yes. As it relates to SG&A we would expect SG&A to grow at faster rate in the first half than in the second half as we comp against the impairment charge and higher incentive comp in the second half of 2013. As it relates to Q2 specifically, this year we anticipate higher operating loss this year compared to ’13 as we will begin to see the higher operating costs from the ERP implementation come online beginning in Q2.

[Chris Svezia:]

Okay, thank you very much. I appreciate and all the best. Thanks.

[Tim Boyle:]

Thank you.

[Operator:]

Thank you. Our next question comes from Molly Iarocci with Stifel. Please proceed with your question.

[Molly Iarocci:]

Hi guys. This is Molly in for Jim. Just wondering if you could speak to the trends that you are seeing in the EMEA region direct versus distributor and what makes you optimistic about your direct growth in fiscal ’14?

[Tim Boyle:]

Certainly, well over the last 18 months I have spent a tremendous amount of time in Europe working directly with customers and analyzing their requirements and expectations from us as a brand. So it’s taken us a bit of time to get that merchandise the way they want it and are positioning in the places they wanted. That plus the new leadership that we have we talked about Franco Fogliato joining the company, his extensive experience and financial acumen is going to help us over time to get our positioning there in the right spot. We have also seen what we expect to be growth in that market from a direct basis and the expectation is that both into the guidance we have given you today that we will have a soft – a solidly growing business there for 2014. So on the direct basis, it’s all about focusing on a small, very narrow band of customers that can specifically give us the kind of growth that we need as well as a more-narrow band of geographic customer base. So it’s all about focus in a direct business, in our distributor business we have just had a tremendous growth and adoption from especially our Russian business together with the exposure we have received there during the games. And if they were rewarded, additionally our footwear business seems to be really meeting the growth area for Russia, especially in this coming year.

[Molly Iarocci:]

Great, thank you. And then curious on the Mountain Hardwear brand noted declines in fourth quarter, what’s going on there and any color that you could provide us going into fiscal ‘14 would be helpful?

[Tim Boyle:]

Certainly. Well, I guess the expectations for Hardwear that built into the guidance we have given you today. It’s a product focus for the company. We need to be having the Mountain Hardwear product needs to be closer to what consumers expect from that brand. We probably got ourselves in a position of lofty expectations for the adoption of very expensive product. And the focus there is to getting ourselves compelling high-quality, high-end product as well as what we are calling Gateway price points to allow consumers to enter that brand at a more reasonable price. So the focus there is again on product and the expectations that we will have good growth on that brand, but in ‘15, beginning ‘15.

[Molly Iarocci:]

Great, thanks guys. Good luck in the next quarter.

[Tim Boyle:]

Thank you.

[Tom Cusick:]

Thank you.

[Operator:]

(Operator Instructions) There are no further questions at this time. I would like to turn the floor back to management for closing comments.

[Tim Boyle:]

Alright, well thank you all for listening in today. We are obviously thrilled with the results and we appreciate your continued support. We look forward to talking to you in April.

[Operator:]

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