Columbia Sportswear Co (COLM) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Columbia Sportswear first-quarter 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.

It is now my pleasure to introduce your host Ron Parham, who is the Senior Director of Investor Relations and Corporate Communications for Columbia Sportswear.

Thank you, Mr. Parham, you may begin.

All right, thanks Bob, good afternoon and thanks for joining us today.

Earlier this afternoon we announced first-quarter financial results, and our revised outlook for 2013.

In keeping with our standard practice, we also furnished an 8-K, containing a detailed CFO commentary on the results, and posted that commentary on our investor relations website for listeners to review prior to this conference call.

With me today are our 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 our Chairman, Gert Boyle, to cover the Safe Harbor language.

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 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 SEC.

Forward-looking statement in this conference calls are based on our current expectation 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 changes in our expectations.

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

Thanks, Ron.

Welcome, everyone and thanks for joining us this afternoon.

Our better than expected first-quarter results, including a 5% increase in net sales, operating margin expansion of 210 basis points, and a 159% increase in net income to $10.1 million, from $3.9 million in last year's first quarter, may appear on the surface contradictory to the slight downward revision to our full-year outlook we announced today.

In fact, these results are consistent in illustrating the weather-driven volatility of our current businesses.

While the recent cold weather clearly benefited our first-quarter results, our full-year outlook reflects the caution exhibited by our North American wholesale partners, as they placed fall 2013 advance orders, following two consecutively warm fourth quarters.

We expect the wholesale portion of our North American and European direct business to contract in 2013, partially offset by continued growth in our North American direct-to-consumer business, and our EMEA distributor business, led by Russia.

We expect declines in the Latin America/Asia Pacific region, following two years of rapid growth, driven by a decline in Japan, resulting primarily from a significantly weaker yen, the effects of transitioning to a joint venture in China, and the transition to a new distributor in Australia.

From a brand perspective, we expect full-year 2013 Columbia and Mountain Hardwear sales to be comparable to 2012, while Sorel, our most weather-sensitive brand, is expected to decline modestly.

We are proud of the brand positions we've established and have every intention of utilizing those brands to remain a global leader in cold weather apparel, footwear and accessories.

However, at the same time, our vision is to become better recognized as a provider of market-leading products that help consumers manage all of the climactic elements they encounter whenever and wherever they go outside, anytime of the year.

We made an important step towards that vision earlier this month with the April 5 global launch of Omni-Freeze ZERO and Cool.

Q ZERO, our innovative sweat-activated cooling technology, deployed in the Columbia and Mountain Hardwear brands, and supported by the largest spring marketing campaign in our history.

We are encouraged by the responses we're seeing from consumers who have experienced Omni-Freeze ZERO, particularly in the southern US, where our Omni-Freeze tour trucks have provided live demonstrations of its cooling properties.

Additionally, thousands of our retail partners around the world have been supplied with a total of nearly 2 million Omni-Freeze ZERO demonstration sleeves, allowing dealers to perform the same demonstration at the point-of-sale.

We've seen the best early sell-throughs in specialty outdoor channels that cater to our loyal PFG, which is performance fishing gear, consumers especially in Gulf markets where the weather has been warm.

Although it is still very early, we expect demand for Omni-Freeze and Cool.

Q ZERO to increase as summer spreads to more parts of the northern hemisphere.

Over the next several years, our goal is to establish ZERO as a new franchise to add to our existing portfolio of franchise collections by like Omni-Heat, PFG and OutDry.

We will continue to focus our seasonal marketing efforts around these differentiating innovative technologies.

During our fourth quarter conference call in February, I spoke about the renewed efforts to drive demand for our innovations, by designing our products at more accessible price points, where the Columbia brand excels, while maintaining distribution discipline and channel segmentation.

While we don't expect to see significant benefits until spring '14, and further in fall '14, we are encouraged by the steady progress we're making on this initiative.

We also remain focused on improving our inventory planning and purchasing processes in order to reduce the level of promotional activity necessary to liquidate end-of-season goods.

We're forecasting inventory levels to remain below last year's level throughout 2013, as evidenced by the 11% decline at the end of the first quarter.

In Europe, we have taken several steps, during the first quarter, to address our persistent under-performance in Europe direct markets.

First, we moved Doug Morse, long time Columbia employee and most recently General Manager of our Canadian region, to serve as interim General Manager of our Europe direct operations.

We also took the difficult, but necessary, step of downsizing the European staff, and we recently closed our branded retail store in Munich, Germany.

These actions were the primary components of the $2.4 million restructuring charge we recorded in the first quarter, and an additional $1.7 million that we will recognize in the second quarter.

While some of our under-performance in Europe is a function of the difficult macroeconomic environment, there are many areas within our control that we are determined to improve.

I am confident in Doug's ability to work closely with me and the rest of the European leadership team, to continue making those improvements, and to continue evaluating the cost structure of the business, while we strive to improve our results.

I will conclude my prepared remarks with a few comments about our plans to transition to a 60/40 joint venture in China with Swire Resources, beginning January 1, 2014.

When we announced these plans in August 2012, we noted that Swire has done a spectacular job establishing Columbia as a leading outdoor brand during the 10 years that they have been our exclusive distributor in China.

Since then, they have concluded another successful year, growing sales at a rate of more than 20%, to more than $150 million in 2012, and generating double-digit EBITDA.

We're looking forward to partnering with the Swire team and adding this new growth engine to our business, beginning in 2014.

As we've begun transitioning to the joint venture, we have started to defer income, and incur certain costs.

The CFO commentary that we published before today's call contains an explanation of how we expect pre-operating costs and the deferral of income to affect our 2013 financial results.

If you have not already done so, I strongly encourage you to read the entire commentary, paying special attention to China Joint Venture section beginning on page 4. You'll find the commentary on our investor relations website at columbia.com/investor.

That concludes my prepared remarks.

Operator could you please help us with Q&A?

(Operator Instructions) Bob Drbul, Barclays.

The first question is, I'm not sure if I saw it, but can you give us an idea how much of the -- there was this shift from Q2 into Q1, and on the revenue side?

In terms of the distributor shift, Bob?

Yes.

It was in the mid- to high-single-digit millions of dollars from Q4 to Q1.

All right.

And, overall, Tim, when you look at the outlook from where it was three months ago to where we are today, did you receive more cancellations from the time that you gave us the last update?

And can you just talk a little bit about the overall outerwear market, and where you see the market numbers shaking out this year, in terms of the declines in market share positioning for Columbia right now?

Sure.

Well, we have not received cancellations, in any amount, of any subsequent amount in the last four months.

We have seen, we are talking about for fall '13 now, right?

Yes.

The outlook that we gave you today really predicated on the conservative future view our customers have as it relates to weather.

I think there's no question that our customers, for the most part, are suggesting that they are going to be declining their outerwear open-to-buys and weather-sensitive product open-to-buys by 10% to 15% for fall '13, with the expectation that they will be able to chase the business if the weather arrives.

So, that is what we're looking at from a North America standpoint.

In terms of market share, I think even though our bookings would show that we have a high percentage of more moderate-temperature apparel, meaning outerwear that is designed for more moderate temperatures rather than extreme temperatures, the percentage there has declined in the extreme weather-sensitive apparel.

But it has never been more than about 20% historically, so it has declined from that percentage.

As it relates to market share, I think we have been close to holding market share, but it is possible that we have lost some to other makers of lighter weight apparel.

Does that answer your question, Bob?

Yes.

Just one correction.

I think I said mid-single digit, I meant mid-teen millions of dollars shift from Q4 to Q1.

Okay.

And Tim, could you talk a little bit about a lot of the change going on at J.C. Penney, and any discussions that you've had with J.C. Penney, and the Columbia brand.

And any different outlook from that perspective from Columbia business?

Well, we try to avoid any specific conversations that we have about particular customers, but I can tell you, in general, our expectations are that our business with that customer will be more challenging for the foreseeable future.

Right.

Thank you very much, good luck.

Christian Buss, Credit Suisse.

Hello, this is Darla Shay on for Christian.

Thank you for taking my call.

You've talked about a strong early reception to the Omni-Freeze ZERO.

I was just wondering how many doors is it in now, and how should we think about the product rollout going forward?

Well, Darla, I don't have for you the number of doors globally, but it should be approaching 10,000, in that range or maybe even slightly larger.

The rollout has been as planned.

We have activations planned in many of the doors, all the important ones really, where we actually have consumers experiencing, through these Omni-Freeze ZERO sleeves, the cooling effects of the product and it's demonstrated by a human being.

We've got the most intelligence about the USA market where we have started earlier than the rest of the world on the demonstration and the rollout, and we have seen successes in the Gulf states, primarily where our PFG, our performance fishing gear, penetration is the highest.

The expectations are quite high, and we have plans for a broader, more democratically priced version of this innovation for spring '14, so we're excited about the potential.

All right, great, thank you, that's helpful.

And then, I understand the revenue side of your guidance coming down slightly.

But the new guidance assumes a flat gross margin from your preliminary outlook for slightly up.

Could you just walk us through the changes in that assumption, and maybe through -- is it product cost or potentially markdowns?

No, it is really function of the full-price wholesale business coming down slightly relative to the prior guidance, predominantly related to the North American and European wholesale business.

Yes, and to some degree, further weakening in the Japanese yen.

I would say that, in and of itself, is really the biggest driver of the year-over-year change in the guidance, is the further weakening of the yen.

All right, thank you, that's very helpful.

Best of luck.

Lizabeth Dunn, Macquarie.

The first question is just a follow-up to an earlier question.

So, there is no shift, per se, impacting the second quarter.

And, then as we look out to the third and fourth quarter, it seems like fourth quarter might be a little bit lower because of the loss of the China, or how the China revenues are flowing.

Is that the right way to think about it?

Or could you just help us with quarterly flow of revenue?

Yes, as it relates to Q4 you are correct with regard the China deferral negatively impacting the top line there.

And then, there is a shift between Q2 and Q3 with more of our EMEA distributor business shifting from the second to the third quarter, so I would say that is the biggest driver in the decline in year-over-year Q2 revenue.

Okay.

And how much is that?

I would say that is in the low $20 millions range.

Okay.

Great.

In terms of the business, the health of the footwear business, can you just provide an update on how you're feeling?

Obviously, weather has been a major impact, but how are you feeling about where the business is positioned, putting weather side?

Based on my high expectations for this category of merchandise, which are quite high, we think we are moving along the right path as it relates to merchandise which is less weather sensitive.

However, the combination of the Sorel business, which is almost exclusively weather-dependent, and the heavy dependence and success in the Columbia brand on winter footwear, it is depressing those otherwise improving results.

So I think we're on the right track.

I think we've got the right team there.

And, the expectations, for me, are high.

But, we are not able to circumvent this weather issue.

All right.

And then just one more if I may.

In terms of expense control, you touched on it in your prepared comments, but can you just give a more robust explanation of where things stand?

How much more expense reduction is there to be had, if any, and what are some areas for future opportunity, if any?

I would say SG&A is an area that we've -- all forms of discretionary spend, we've managed diligently on an ongoing basis.

There is always room for improvement there, but we feel we have done a pretty good job over the last year, particularly last year.

We felt it was important this year to reinstate our compensation and benefit programs after not having increases last year.

I would say the biggest driver of what's driving the expense growth, excluding the pre-operating costs for China, the restructuring charges, are the increase in the direct-to-consumer business.

So that is the biggest component of the increase.

But the increase is relatively minimal.

So, are there other things that are down year over year, I would imagine?

Well, obviously we're getting some benefit from translation of currency.

So, I would say that is the biggest offset, in addition to the cost reductions that we put in place last year that we realized, and you could see in the year-over-year comps in Q1.

Okay, great.

Thank you, good luck.

Hey Liz, just one further comment.

I think we've all realized that the business is operating and, frankly, not performing as well as it needs to on the top line.

Now that we've concluded the SG&A reductions that we felt were appropriate, the focus for the management team here has been on growing the business from the top line.

We don't have much to show for it now, but that is where we are focusing our time and effort.

At the end of the day, that is going to reflect much better on the business than further cost cutting.

Lindsay Drucker Mann, Goldman Sachs.

Just to go back to Bob's original question, when we look at the delta in your revenue guidance now versus last quarter, you had always been expecting a cautious order pattern from your wholesale partners, and the text in the CFO comments really didn't change much.

So, if you could rank order what the big drivers of your slightly lower view on revenues versus when you initially gave guidance, between US wholesaler patterns; you mentioned Europe and LAAP as drivers in this text and you hadn't last time around; and I guess maybe currency.

What is the biggest delta versus what you had thought last quarter?

Yes, I would say number one would be Europe.

Number two, we're in the midst of transitioning our Australian distributor business that wasn't fully contemplated 90 days ago.

And then, also, as well is the further weakening of the yen.

So, those are really the main drivers.

Okay.

And, as you think about really your wholesale partners being cautious, that really hasn't changed versus where we were a quarter ago?

No, but they --

I mean, are they incrementally more cautious, or they're still as cautious as you thought?

No, I think we expected caution from them and we got it.

Okay.

And then, on the European business, do you have a preliminary plan on the path to recovery in that market?

I know you talked about some of the restructuring initiatives.

But, how do we see ultimate improvement off of the depressed revenue and margin levels we're at?

Well, I would say, at a very high level, we need to get an improved offering of merchandise there that can be more relevant to that marketplace.

And that is the primary goal.

We continue to monitor the situation as it relates to our investment there, both from fixed assets and variable costs.

And our expectation is that we will be able to put together a compelling product offering which will get us back to growth again.

Our focus has been on getting the business to the size we believe is appropriate from a cost standpoint, and then focus heavily on improving the top line.

And so, that will be a combination of product offering modifications, which are well underway, and people improvements.

As we said, we sent one of our best managers, a long-time employee, there to help us get that business turned around.

And our expectation is that we will be able to do that.

Okay, thanks.

And then just lastly, can you give us, if we were to pull spot rates forward, or whatever is embedded in your guidance, what the FX drag is on revenue and profit?

In terms of rates or overall impact?

So, the year-over-year impact of currency is about $0.12, of which $0.08 would be the back half, $0.04 would be the front half.

Okay.

And then in terms of (technical difficulties) on revenue the rate, the percentage --

It is about 1.5%, call it $25 million.

Okay.

Thanks, thanks very much.

(Operator Instructions) Kate McShane, Citigroup.

Hi, I just had two questions with regards to the winter business and the cold weather apparel business.

I think, Tim, if I heard you correctly, you had highlighted that maybe you had lost some share.

Is that because you didn't have as much lighter-weight outerwear product?

And if that is the case, how are you addressing that for this upcoming winter?

No, I think we had the right, the appropriate amount of lightweight product.

The fleece business, which for all intents and purposes is lightweight outerwear, is probably the Company's largest category from a unit standpoint by far and away.

I think what we saw was just a reduction in purchases of heavyweight apparel where the Company has had, call it 20% of its business historically.

I think market shares in this business is so hard to calculate, just based on the data that is available, it could be that we had some market share loss.

But, at the end of the day, we think we had the appropriate merchandise offering.

Our customers pick the appropriate kinds of inventory from our collections, but they just picked a lot less of it.

Because their open-to-buys for these weather-sensitive categories, including cold weather apparel, and especially cold weather boots, really depressed the results for us for this year and '13.

Are we going to improve for '14?

I think absolutely.

But this weather impact is still significant.

Okay.

Thanks.

And then one question on Europe.

I know the focus of the turnaround is on your direct business, but can you update us at all about what you are thinking with your distributors in Europe?

It sounds like they might be outperforming the direct business.

And what do you think is the main differences between the two businesses?

Well, our biggest business in Europe, on a distributor basis, is in Russia, and our Russian distributor has a significant component of their own retail business, as well as a Columbia franchise business where they can direct the offering much more focused way.

And the Russian weather was, frankly, spectacular for our kinds of business last year.

So, those two things really, in combination, made the business better in Russia than we otherwise would have had.

Will there be any change to the product offering that the distributors are selling currently, like you will do in the direct business?

No, the process is we prepare a global line.

We have an offering that is filtered by numerous merchants that work the lines here, and our Russian distributor is able to pick from that selection of product.

But, they have been much more focused on the moderate price points, as opposed to where we've been operating globally when we've been directing our salespeople at a higher level.

Okay, thank you.

Corbin Weyer, Robert W Baird.

I just wanted to dig a little bit more into the second-quarter revenue guidance, and seeing that you guys are talking about US wholesale down.

With that in mind, what is incorporated into that guidance in terms of at-once order perspective?

Is there opportunity there?

Given the late surge of spring that we have seen here, I would imagine there is probably some pent-up demand out there for some of the product.

Yes, as we talked about the weather greatly this quarter, it has been colder and it has been helping our winter product business, not necessarily from an expanded margin standpoint for our retailers, but they certainly have been able to liquidate more inventory there.

We think that we're in the right positions, as it relates to our spring product for the balance of the year, and our customers typically --

For us, spring is like a net zero reorder business.

So, the expectation for us, regardless of this particular spring's temperatures, is net for the US business to provide just about a zero reorder basis.

Yes, the biggest creator of volatility in Q2 is the timing of our distributor shipments that really straddle Q2 and Q3, so they can shift into either quarters, in a given year, and that is what is really driving the downward comp in year-over-year Q2 sales this year.

And again, that is that EMEA distributorship in the low $20 million range that I alluded to earlier.

Sure, that's helpful.

Thank you.

That's all I had.

(Operator Instructions) Andrew Burns, DA Davidson.

I wanted to follow up on a comment which I think I heard earlier about retailers wanting to take pre-book down.

I think there was a 10% to 15% number; I think that was maybe an industry or something like that.

But wanting to chase business as the cold weather arrives.

I'm sure your average outdoor retailer would love outerwear to be more of an at-once business.

Obviously, that is tough to do from your standpoint.

So, given the two consecutive winters, is the business changing at all more towards at-once?

Is there any potential competitive advantage to take a little bit of inventory risk to try to capture sales upside in those cold weather years?

Thanks.

Certainly.

Well, Andrew, I've been around this business for a long time, I hate to even think about how long.

But, with these kinds of weather abnormalities -- I remember back when the dinosaurs were still here, but these kinds of weather abnormalities, if they happen a couple years in a row, tend to become fact in retailers' minds.

So, it is not unusual for them to take a broad view of categories of merchandise and reduce the open-to-buy for those.

That is what we have seen is that the retailers have basically said, okay we're not going to invest as heavily in cold-weather footwear and in outerwear as we have in the past, and we will chase that.

Because the outerwear and cold-weather footwear businesses require long lead times from our Asian sourcing, we have to take a position and that is what we have got.

We've reflected on where we believe the business will go this year and what the open-to-buys will be for the balance of this year, and we've taken what we think is the appropriate position on inventories.

Yes, retailers would love to have an at-once business as it relates to outerwear, but it is just one of those kinds of categories that is not available.

If we have a spectacular weather year for the Company, which would be cold weather early, we won't have a significant increase in the top line, but we will have an improvement in our gross margins.

That is how we have run the business historically, and that is how we expect this year will play out, depending on the weather.

Great, thanks.

And during the call you mentioned some shifting of management around and a focus on some improvements there.

Are there any plans to increase hiring of additional senior executives?

Perhaps, I've missed it but since Mick's departure there was talk of maybe a couple of new positions being created, and then I just didn't see that occur.

Just looking for an update there, thanks.

Certainly, well, yes, as we said when Mick departed, we weren't going to replace his positions directly.

So, we're going to be adding people, over time, to help us improve the business.

And, we are taking some time to make sure that we have the right candidates identified, and there will be more news on that happening as we make additions.

Great, thanks.

(Operator Instructions) Mark DeVaul, The London Company.

I was wondering if you could talk about your longer-term capital allocation decisions.

You have a strong balance sheet, you are generating cash, so just curious how open you are to share repurchase, or maybe bumping up the dividend yield over time.

March 31 is typically, the March/April time frame is typically the peak of our annual operating cash as we collect our wholesale receivables from the winter months.

So, we would expect cash to decline seasonally, like it has historically, from March forward.

With that being said, we intend to generate roughly $85 million in free cash flow this year, and will begin to fund our China JV beginning this quarter through the first quarter of next year with that funding comprising about $50 million.

And most of that will come from cash domiciled offshore.

With that being said, at any given time, 30% to 40% of our cash is held offshore, so if we were to repatriate that would cost us significantly from a tax perspective.

We have got the buyback, we have got $58 million available under that, we've got the dividend program, and we've got M&A opportunity.

Okay, thank you very much.

Robbie Ohmes, Bank of America.

Hey, could you remind us, once you take over the China JV, just what the multi-year ramp-up could look like in 2014 and beyond?

How many full-line stores could you be doing?

Are you going to be doing a lot of outlet stores in China?

If you could just walk us through what the three-year plan, 2014 through 2016 looks like.

We really haven't talked at all about '14.

We've walked through what the plan is as it relates to '13 for China.

And, the expectation is that we will continue to grow on the same cadence.

It won't change the nature of the operations there.

In other words, we don't have very many outlet stores, it is almost all full-priced stores.

So, the expectations are for continued expansion in that market even though there has been some slowing.

But, maybe I might just ask Tom to --

That business did just over $150 million last year, grew over 20%, generated low double-digit EBITDA margin.

We expect healthy growth in 2013.

It is about 75% wholesale, 25% retail.

Currently, we don't anticipate that changing dramatically.

There are roughly 80 Company-owned stores, and several hundred, 500-plus dealer-operated rooftops, in that marketplace today.

Thanks.

That is very helpful.

Thank you.

There are no further questions at this time.

I'd like to turn the call back over to management for closing comments.

Well, we thank you all for listening in, and we appreciate your attention.

We will be back to you in about three months.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.