Columbia Sportswear Co (COLM) 2011 Q2 法說會逐字稿

Greetings and welcome to the Columbia Sportswear second quarter earnings 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. It is my pleasure to introduce your host, Ron Parham, Senior Director of Investor Relations and Corporate Communications for Columbia Sportswear.

Thanks Bob. Good afternoon everyone. Thank you for joining us on today's call. Earlier this afternoon, we announced our second quarter financial results and reaffirmed our outlook for the remainder of 2011. with me today to discuss those results and answer your questions are President and CEO, Tom Boyle, Senior Vice President of Finance, Chief Financial Officer and Treasurer, Tom Cusick, and Senior Vice President and General Counsel, Peter Bragdon. Before we start, the Columbia Chairman, Gert Boyle, has an important reminder

Good afternoon. This conference call will contain forward-looking statements regarding Columbia Sportswear's business opportunities and anticipated results of operation. Please bear in mind that 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 ending December 31 2010, and subsequent filings with the SEC. Forward-looking statements in these conference calls 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 inform the forward-looking statements to actual results or to change in our expectation.

Thank you Gert, and now we will turn the call over to Tim.

Thanks, Ron. Welcome everyone, and thanks for joining us this afternoon. By now, we hope that you have had a chance to read the press release as well as the more detailed CFO commentary that was posted to our Investor Relations website. As a reminder, the second quarter is the Company's smallest revenue quarter, and accounting for historically only 15% of annual net sales. As a result, year-over-year brand, regional and category net sales and earnings comparisons often produce large percentage variances.

We are pleased with our second quarter results, and remain on pace towards achieving the full year outlook that we shared in April and reaffirm today . During the quarter, each of our major brands posted strong growth, and we posted double-digit gains in each of our international regions and product categories. We have begun to deliver against our strong fall 2011 backlog, and believe we will be able to meet this increased demand with significantly less reliance on-air freight when compared to last year.

As Tom's CFO commentary noted, the significant anticipated growth of our Sorel and Columbia winter footwear business, coupled with the continued growth of our direct to consumer operations, is altering the mix of our sales between the third and fourth quarters, making these quarters nearly equal contributors to our expected second half net sales and profitability.

Our international regions are each contradicting more sales growth than in recent years. The EMEA region has begin to deliver against a strong fall backlog, reflecting a positive response to our innovations across western Europe and our direct markets, as well as in Russia. In our LAAP region, Korea continues to generate exceptional growth, Japan appears to have regained momentum following the tragedy of March 11th. Our business is also very strong in China, driven primarily by the Columbia brand.

Around the world we are advancing the Columbia brand's position as a leading innovator in the outdoor industry, with the introduction of ultra breathable waterproof Omni-Dry Evap, and sweat activated Omni-Freeze ice cooling apparel for spring 2011. In addition, our PFG line performed exceptionally well at retail in the US this spring. These are important spring and summer season compliments to our fall season technology portfolio, which is led by Omni-Heat.

The response from retailers to Columbia's innovations, most recently at the Outdoor Show held earlier this month in Friedrichshafen, Germany, continues to be very encouraging, and gives us confidence that we are succeeding in elevating our flagship brand with retailers who carry significant influence among core outdoor consumers. Our Mountain Hardware brand is also being recognized for innovation, at the Friedrichshafen Outdoor Show, the Mountain Hardware brand walked away with four industry awards for innovation and design, including the Spinoza jacket that features DryQ waterproof breathable technology.

Finally, our Sorel brand is poised for another year of outstanding growth with our fall backlog up more than 80% that is expected to add significantly to our fourth quarter sales growth in 2011, and we believe it holds a great deal of growth potential for the years ahead. Our US direct to consumer business continues to generate strong growth and profitability. Beginning this fall, we will expose millions more consumers to our brands and our innovations with the launch of E-commerce sites in Canada and eight European countries, including the UK, Germany, France, Italy, Belgium, Austria, Spain and the Netherlands.

These successes and the resulting growth, have increased the complexity of our business, and are the motivation behind the investments we are making in our Information Technology initiatives, including a multiyear ERP implementation. Like others in our industry, we have experienced erosion in product margins as a result of the inflationary sourcing environment, and we are planning our business under the assumption that this inflationary environment will continue.

We remain strongly committed to the notion that authentic innovation and great design will improve our pricing power, and we need to constantly remind ourselves, our employees, our customers and our investors, that we are relatively early in the process of driving broad global consumer awareness, and increased demand for our innovative products. While we have made great progress in elevating our brands, our brand portfolio has tremendous hold tremendous untapped potential. Our team is encouraged by the position we have in the marketplace, and we Are working hard together to improve our profitability.

That concludes my prepared remarks, now I would like to open the call to questions. Operator, can you help us?

(Operator Instructions). Our first question comes from the line of Robert Drbul with Barclays Capital.

Thanks, good afternoon.

Hi, Bob.

Hi, guys. Hi, Gert.

Hi there.

A couple of questions for you. First, on the second quarter, the cancellations that you had, can you give us any color on channel geography or products for the cancellations that you have? And sort of tying that together, in the inventory discussion and the comments that you put out at 4.15, can you just maybe quantify sort of how much on that inventory increase, how much of it was in fall 2010 excess versus spring 2011 excess?

Sure, Bob, the bulk of the cancels were really in North America as a result of the unusually wet cold spring. The resulting excess inventory is not concerning us at all. We have got our normal liquidation processes through our own outlet stores as well as through our regular retailers, and some with the value chains as well. And I think that Tom is prepared to answer the other question that you had.

Yes, Bob, on the inventory, to start with currency contributed about 6 percentage points of the 36% growth. So setting that aside, and talking to the 30% growth in constant dollars, it is pretty equally split between fall 2011, spring 2011 and fall 2010, at a little bit over $30 million for each of those seasons, and as we mentioned, the fall 2010 inventory cleared through our outlet channel in the second half of this year, the fall 2011 growth is really a function of earlier receipt of inventory this year as compared to last. and then the spring 2011 is a function of the cancels, and that will clear through both our in-line customer base, our value channel and the outlets, primarily in the second half of this year.

Okay, great. and then my next question, Tim on the guidance in the third quarter and the fourth quarter, can you talk around the visibility and/or confidence around that split and your windows for delivery and the orders, et cetera? Is there a lot of risk on those revenues at this point, in your opinion?

No, not really, I think we are look at the same shorts of risk base that we have had in the past. this is the way our customers laid out their order requirements, their demands, and it is skewed more heavily now that we have got a larger direct to consumer business, and also a larger winter boot business, which drives the revenues in Q4 higher. But no I have done review, and I feel comfortable that we're about in the same position risk-wise as we have been historically.

Great. Thanks very much.

Thank you, our next question comes from the line of Kate McShane with Citi Investment Research.

Hi, Kate.

I was wondering if you could walk us through the SG&A dollar growth commitment for the back half of the year, if you could put that into a couple of buckets for us, as to where that dollar growth is being spent?

Maybe stepping back, Kate, and looking at it from a full year perspective, and then I can provide a little bit of color on the back half. When we look at roughly just over $90 million in SG&A growth for the year, over half of that growth will come in dollar terms from the retail business, and the IT and supply chain areas of the business. Another not insignificant component would be currency. That is roughly 15% to 16% of the growth year-over-year, and just given the growth in our European business, it is driving SG&A growth in that region as well. As we look between Q3 and Q4, I would say that the biggest contributor to the increase in SG&A between the third and the fourth quarters, is the absolute dollar amount of advertising spend between Q3 and Q4, is about $7 million of the $9 million in the total increase in advertising for the full year.

Okay, that is really helpful. And then my second question is on Ecommerce. There are a lot of Ecommerce launches it sounds like during the quarter. Was that for all the country launches, was that for all brands? And what can we expect to see in the back half of the year in terms of further site launches?

Yes, so the launch that we talk about in Canada and Europe are for the Columbia brand, and we have been able to leverage our existing format that we are using, and platform that we are using on our USA Ecommerce business, which you are right has four brands in Ecommerce, and that is the primary reason we believe we have relatively low risk in terms of accomplishing this. I said August, I meant September, I think we have a September launch on that. But one of the primary reasons for us adding this Ecommerce business in those markets was obviously for some revenue, but what we found when we started actually doing commerce on our marketing site in the US, we were able to nearly double the visitors to the site, and we have about an industry average conversion rate. so that means something is in the mid-90% of visitors to our site, get a chance to get our view of our technologies, our innovations, and leave with a much richer concept of the brand than they otherwise would get. We will have revenue, but at the end of the day, the real return for the Company is going to be on a much richer brand vision by consumers of what we have to offer.

Okay, thanks, and my very last question if I can, something I haven't heard you talk about in a while, and maybe I missed it, but Pacific Trail and that business, what is the status of that acquisition from a couple of years ago?

That was several years ago. It was actually in 2006 if I am not mistaken, and we have since taken the charge for that business, and we weren't able to convert it into as large an opportunity as we saw initially when we purchased the brand portfolio out of bankruptcy. However, we do have a revenue stream driven under a license basis from that by a firm, actually a couple of firms that are selling apparel products in North America. So the products are actually in the market. but our intended use of those marks just didn't pan out for the Company.

Thank you.

Thank you. Our next question comes from the line of Reed Anderson with DA Davidson, please proceed with your question.

Hello, a couple of questions, first one, when I'm looking at Tom's detailed commentary. on the outlook, you give some good detail on growth expectations by product. and obviously footwear is going to be very strong in the second half, its over 50% of the sales growth. so by implication then I just want to make sure that I have got this right, does that then imply that the non-footwear piece, whether it is outerwear or sportswear, would be growing at that low double digit sort of level in the second half? Is that the right way to read that?

That is in the ballpark, Reed, yes.

Okay, and a couple of questions with that. One is so you're seeing the mix of footwear go up pretty dramatically, I guess a couple of hundred basis points perhaps this year, yet margins still improve. So just reconcile that thought for me, I am sure that you are selling the product at full price, but intuitively that wouldn't be what I would expect?

So just a couple of comments on the overall of the year. So to begin with, air freight was a big drag on gross margin for us in 2010, so based on our current visibility that should be a benefit, and more than offset the increase in input costs for the year. And then please remember that our Sorel footwear carries a higher gross margin than the Columbia footwear. The margins on Sorel are quite good, so that helps to drive the margin up for the year as well.

Good, that is helpful. And then another question is, you it talked about the shift of advanced orders to distributors, that impacted, favorably impacted 2Q versus 3Q. Any chance you could quantify that, or give us more color there?

Maybe just to look at the backlog growth of 19% versus the second half growth of roughly, on the high-end of the range, implied at maybe 16.5%. Just stepping back and looking at that, when you look at the backlog of growth of roughly $136 million year-over-year for fall. and then you add the global retail business to that, and you back away the distributor shift from Q3 to Q2 for the fall business, that puts us in line with that second half growth.

That is perfect. Thank you.

Maybe just one other point, Reed, the distributor business shifts around. We shipped the spring 2011 business, a much greater percentage of that in Q4, so that obviously impacted the first half of the year.

Two more quick ones, first off on the direct business, I am just curious, does the mix of your direct business, does it look similar to kind of the corporate mix of apparel versus footwear, or would it be skewed more apparel?

No, actually I think it is slightly higher footwear.

It is.

You are talking about in Europe, right?

I am just talking in general?

I think our European footwear business is a bigger percentage of the total European business than in the US or Canada. So Tom, do you have a comment on our direct business? Because we included Korea and Japan in that business, and I don't know that we have it on the tip of our tongue.

The distributor business, is that what you're getting at, Reed?

No, my questions was just your direct to consumer business. my apologies, I should have clarified that. The direct to consumer business, if you look at the mix of that business, is that similar to your overall mix, or I was just presuming it is skewed a little more non-footwear apparel.

Actually, it is a little bit higher because if you remember, the direct to consumer business on Sorel is only footwear.

Yes, that is true, okay. And then last one, Tim I was struck by your comments on PFG. It was a terrible fishing year, the weather was bad. and yet that product sounds like it had a really good, I am just suspecting that it had to do with geography. Just some color on why that might have been doing so well?

Sure. PFG has been a real strong part of our base, certainly in the USA, but it has historically it has really been a southern business. The Gulf Coast all of the way up clear up into Maryland is where the bulk of our business in PFG really resides from a historical basis. That part of the world had terrific weather, and it is really, that brand down there, the sub brand of PFG has just been so embraced by outdoors people of all ilk, including lots of women. They had great weather and the sales were great there.

Super. Thank you very much, and best of luck.

Yes.

Thank you, our next question comes from the line of Ken Stumphauzer, Sterne, Agee. Please proceed with your question.

Thank you. Good afternoon guys, and thank you for taking my questions. A couple of quick ones for you. Specifically on the gross margin guidance for 3Q. You were guiding for a 25 basis point increase, and if I recall correctly, a year ago, you guys had implied that operating margins would have been up X the air freight costs, in other words implying it was a 150 basis point headwind, and I am curious to know, is there something else going on in the quarter that is depressing gross margins which would not make them increase by more than 25 basis points?

Yes, Ken this is Tom. The main drivers of the 25 basis points improvement in Q3 are, obviously leading with air freight. but a lot of the air freight benefit in the third quarter is absorbed by increased input costs, and to a small degree, the mix between full price and closeout. We have got a slightly higher mix of closeout product sales in the third quarter of this year as compared to last.

And that is related to the excess fall product from 2010?

That is probably more spring 2011 than fall 2010. Because the fall 2010 will go through the outlet channel.

Okay. And then secondly, I guess one can infer from your comments that you guys didn't try to push through the entirety of the cost pressures that you were feeling, what was the strategic rational behind it? Just given the momentum behind the brand?

We were able to raise prices for most of our products in the back half of 2011, but the inflationary pressures caught us a little bit, so we weren't able to pass through all of them, but the intention is obviously to grow the innovative parts of the business faster, and have the opportunity to raise our gross profit margins.

So just to clarify that, you guys didn't anticipate the magnitude of it when you originally discussed pricing with the retailers? Or it was a willful decision not to push through the entirety of the increase?

Inflation kept going past our initial pricing dates. and we weren't able to capture all of those things. We were able to capture it on the initial purchases for the season, but not on the subsequent purchases.

And Ken, maybe just one other clarifying point. Currency is a benefit to us in the back half and the full year, but the European region is a drag from a currency perspective, so given the growth, there is a channel component that is flushing through the gross margin in the third quarter as well, that is dampening the gross margin expansion that we would have otherwise seen.

Okay. And then one last follow-up on the gross margin, and I will let it go. Just given what you are saying about Q3 being up 25 basis points, and retaining your full year guidance for 100 basis points of expansion, that implies a pretty big fourth quarter from an expansion standpoint. Is there some kind of shift going on in the quarter, is it that more of the air freight was weighted to 4Q than 3Q? Any color you can give in that regard?

So the applied guidance for the fourth quarter would be gross margin expanding a little over 2 points, and roughly half of that benefit would be air freight, coupled with the higher direct to the consumer portion of revenue, and then significant growth in the Sorel footwear business in the fourth quarter of 2011 versus 2010. All of those contribute to the expanded margin, along with currency in the fourth quarter.

Okay. And one last question, finally, as far as the EMEA region, there has been a lot of volatility in the growth rat there, and I presume that some of that is ultimately related to distributor shipments, but how should that trend for the duration of the year, and will we see similar volatility in the upcoming quarter?

You are talking about our EMEA region?

Yes.

So that is divided between distributor businesses, which are led really by Russia, and then the Company's direct business. if you remember from a historical perspective, we had an enormously strong business there going back three or four years, which we have been underperforming and in fact gave back a lot of top line revenue. So the focus has been on growing the European direct business, as well as our business in Russia, so I think that the volatility you have seen has been the improvements there, based on the focus by the Company. So we hope that you will continue to see growth in that region as we have got verify heavy investments there, both in the infrastructure, and the people.

And then just as relates to the volatility point, if that distributor ship ships between December and January for spring, and June and July for fall. Those are factory direct shipments that we don't control the timing of, so that volatility will likely continue into the future.

Thank you, guys, best of luck.

Thank you. (Operator Instructions). Our next question comes from the line of Michelle Tan with Goldman Sachs.

Great. Thanks, hey guys.

Hi, Michelle.

I was just wondering, going back to Bob's question about some of the cancellations that you saw is in the quarter and some of the disruption from the weather issues, how much comfort do you have that was a broad-based problem, or what kind of indications do you have that was a broad-based problem, and not specific to the spring product that you guys had out there?

Well, we can quantify the consolations fairly with a lot of granularity, so we know where they came from, and what caused them. We had an enormously popular and strong southern part of the United States business growing, and we have a high degree of visibility, a high degree of understanding on those cancels, where they come from, and why they happen.

Great, so it's a sector-wide thing, you don't think it was anything specific to your product?

I can't really comment on the entire sector, but I can comment on our cancellations, and my strong belief that they are as a result of the weather that we all had the good fortune to spend time in the first half. Our rainwear business was phenomenal, but we just don't have that big of a rainwear business when you compare it to the shorts and T-shirts and sandals that the Company sells.

Got it, perfect. Secondly, just looking at your backlog for fall, I think you were up 19%, I think your full year guidance implies something less than that, in terms of sales growth for the second half. Can you help us think about what is creating that delta? Am I doing the math right on that?

Yes, Michelle, this is Tom. So I think I tried to address this with Reed's question. but let me take another crack at it, and if I'm not clear here, please come back at me. but the 19% backlog growth equates to roughly $136 million. When we add the global retail business to that, that is not included in our backlog, and we account for the shift of the distributor business from the third quarter to the second, you get to that say 16.5% revenue growth for the back half.

Okay, so the wholesale growth will be closer to the fall backlog?

Correct.

Okay. Got it. And then I guess this is sort of another crack at the question that you guys why just asked about margin expansion in the fourth quarter. but it is the highest level of operating margin expansion I think you guys were going to put up on a quarter since 2007. So I guess help us think about, is this more related to the unusual aspects of timing, or is it the start of actually seeing some of that leverage that we have been looking for a while starting to kick in?

Yes, so Michelle, this is Tom. I would say, the greater proportion of direct to consumer business with Ecommerce in the US, and to a much lesser degree now in Europe, which is the first Q4 that we have had in Ecommerce in Canada and Europe, along with just the excellent growth we are seeing in our direct to consumer brick and mortar retail, are really helping push that gross margin, along with less air freight in Q4 this year as compared to last, are all helping push that gross margin up.

Right. And I don't want to get ahead ourselves, but the underlying question is, as we start thinking about operating margin opportunities off of what still seems like a very low base for you guys, is what we are seeing in fourth quarter in terms of expansion, representative of how we can think about 2012 and 2013? Is more of that Q4 the air freight comparison?

I think that a relatively good share of that expansion is air freight. And we are not providing our outlook for 2012 today, as we are early in our spring order taking, but we are keenly focused on improving our operating margin in 2012. Input costs, we expect will continue to pressure gross margins, and with reasonable revenue growth, we expect to leverage our SG&A in 2012.

Okay, perfect. And if I can sneak in one last one, as you look at the spring business this year, obviously, it is unfortunate that there were weather impacts that hurt sell through, created cancellations, how do you think that affects the retailers psyche as they place orders for next spring, are you hearing any kind of impact to how they are thinking about the next season?

Well, we are in the middle, as Tom said, of taking orders for spring 2012. We really want to avoid any kind of discussion on that, but I am pleased with our progress. I would suggest that retailers look at it as an aberration, and we are going to be excited with what we see. We are going to know a lot more here in the next few weeks when we conclude the spring selling season. I did want to make a comment on the profitability and leverage. for me personally, having been here for a long period of time, and having frankly industry-leading profitability for a lengthy period of time, we are keenly focused on the embarrassment that we have as it relates to sub-average profitability. It is a keen focus for the Company. We spend a lot of time on that issue, and my expectation is that we are going to be looking at a period of time when we are getting back to at least average and beyond.

Great, thank you so much for the color, guys.

Yes.

Thank you. (Operator Instructions). We do have a follow-up coming from Ken Stumphauzer. Please proceed with your followup.

I just wanted to get kind of a long-range historical perspective from you guys, just given the last question to your last question about long-run potential operating margins. When you look add the profitability of the business, I guess gross margins weren't as much of the adverse effect as much as the SG&A leverage was. Historically, was the problem that essentially you were investing and you weren't receiving the type of sales return that you expected with the incremental SG&A expense, or what precisely do you attribute the decline in profitability to?

When we look back at the Company and we had 20%, sometimes plus but in that range of operating margins, the Company was smaller and had less infrastructure investments. We had a high amount of leverage on the infrastructure investments that the Company had previously made. We are now in a position where frankly, we have begun to make investments in the Company's infrastructure, at a time when our revenues flagged. So we were investing in a period of time when the Company's products had gotten a bit stale, and the business in total was weaker, and then the impact of the reduction in our volumes in Europe, all of those things contributed. Now we have been making significant investments in innovation and products which are highly differentiated, which are producing terrific top line. We just have to be able to get ourselves around the corner here, to where we can start leveraging these investments that we have made over the last four or five years. Frankly, average industry margins are not going to be satisfactory for us. We want to be above average in every measurement, and we are clearly not there, but we are definitely going there.

Ultimately, your return to those kind of operating margins are probably going to be a function of significant sales growth over the next two or three years, I presume. and more modest SG&A reinvestment associated with that growth, correct?

It is very likely.

Thank you.

Thank you, we do have another question coming from Corbin Weyer, Robert Baird. Please proceed with your question.

Yes, good afternoon, this is Corbin Weyer calling, and can you guys just remind us what your store opening plan is for the back half of the year? How many stores you ended up with at the end of the second quarter?

Yes, we had 48 stores in the US at the end of Q2, the same as last year at the end of June. and we have got three new outlets planned in the US in the third quarter, and none currently in the fourth quarter.

Great. Thanks. And just one more. with the amount of sales that got shifted from the third quarter into the second quarter, the distributor basis abroad, do you think, is there an opportunity that you could get some stronger reorder activity in the back half, possibly in the fourth quarter with that shift?

There is very little opportunity there, because those shifted shipments were toward distributors, there is a relatively long lead time, and they will be focusing on liquidating those inventories that they have purchased from us. There is a greater opportunity for reorders in the US, Canada, and in Europe and we have a number that we expect, and that is how we calculate that.

Sure. That is all I have got. I appreciate it.

Thank you.

Thank you, there are no further questions at this point in time, and I would like to turn the floor back over to manager for closing comments.

Thank you all for listening, we look forward to talking with you at the next conference call, and giving you the information on our spring 2012 bookings at that time. Thank you.

Thank you. This does conclude today's teleconference, you may disconnect your lines at this time. Thank you for your participation.