Columbia Sportswear Co (COLM) 2013 Q3 法說會逐字稿

Greetings and welcome to the Columbia sportswear third 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)

This conference is being recorded.

It is now my pleasure to introduce your host, Ron Parham, Senior Director of Investor Relations & Corporate Communications with Columbia sportswear.

You may begin.

Thanks and good afternoon and thanks for joining us.

Earlier this afternoon we should 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 the 8K and posted it to our investor relations website and a detailed commentary by Chief Financial Officer, Tom Cusick, analyzing third quarter results and our revised outlook.

We hope you have taken the opportunity to review the CFO commentary prior to this conference call.

With me today on the call are President & CEO, Tim Boyle; Senior Vice President and Chief Financial Officer, Tom Cusick; Executive Vice President & Chief Operating Officer, Bryan Timm and Senior Vice President & General Counsel, Peter Bragdon.

I'll ask Chairman, Gert Boyle, to cover the safe harbor language.

Good afternoon.

This conference call will contain forward-looking statements regarding Colombia's business opportunities and anticipated results of operation.

Please bear in mind that forward-looking information is subject to the many risks and uncertainties and actual results may differ materially from its objective.

Many of these risks and uncertainties are described in Columbia's annual report on form 10K for the year ending December 31, 2012.

And subsequent filing with the FCC.

Forward-looking statements in this conference call are based on our current expectations and belief 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 change in our expectations.

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

Welcome everybody, and thanks for joining us this afternoon.

As detailed in a press release and CFO commentary, third quarter sales and profits exceeded our July outlook primarily due to better than expected sales and margins from the US 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 in June 30.

We also raised our operating income outlook for the full year by approximately 8% compared with the July outlook based on results through the first nine months and the continued strength we have seen in our US direct to consumer and wholesale channels in the early weeks of Q4.

Although there have been plenty of reports about the generally soft US retail environment, all three formats of our US direct to consumer platform, branded stores, outlet stores, and e-commerce produced better than expected results during the third quarter in we have seen that continue into October.

The most encouraging aspects in direct to consumer business is the strength we are seeing in our branded stores and e-commerce.

Both formats saw stronger conversion and higher average dollars per transaction.

We're seeing strength across all categories and genders with many of our pinnacle price styles performing well.

The Sorel brand is also performing well in our retail stores, at selected wholesale customers, and particularly on the e-commerce site.

In addition to strong sales of established styles, new fall items have also sold well, suggesting that Sorel has a bright future beyond winter with fashion forward female consumers as they become more aware of the brands broader offering.

Sorel's fall 2014 product line will offer more back to university designs and our sales force will be working closely with wholesale customers to place larger, broader assortments so more consumers can't discover them at retail next year.

Turning to our EMEA region, third-quarter sales grew $17.6 million or 29%.

This increase was entirely attributable to a timing shift in fall 2013 shipments to our EMEA distributors more than offsetting a midteen percentage decline in the Europe direct markets.

We believe our business in key European direct markets are stabilizing, as we have met or slightly exceeded our internal wholesale forecast in each of the past few months.

We are focused on returning the sales growth in that region in 2014.

As we announced in September, we're looking forward to welcoming Franco Fogliato as our new senior vice president of Europe effective November 4.

Franco brings 17 years of European sales and marketing experience in the action sports and outdoor footwear and apparel industries, having served since 2004 as general manager of Europe and a member of the executive board of Billabong, where he managed the company's portfolio of eight brands.

From 1997 through 2003, Franco held various European leadership roles with the North Face brand culminating as general manager of Western Europe.

Franco understands the European consumer and has strong relationships with valuable wholesale customers throughout the region.

Europe remains a critical region for a company's long-term success.

We look forward to Franco's contributions as we seek to drive consumer demand and renewed growth in these markets and to improve the regions profitability.

Looking now toward the LAP region, third quarter net sales declined 15% including a 9% negative affect of changes in currency exchange rates.

Our businesses in this region are performing well with the exception of Argentina and Venezuela and Australia.

Venezuela and Argentina have historically been significant markets within our LAP region however this year sales to the Argentinian distributor have been severely hampered by government trade restrictions.

In addition, currency controls in Venezuela have stifled sales into that market.

Both of these situations are purely political in origin.

Our brands are strong this region, however, there is no indication of when these political issues might be resolved.

In Australia/New Zealand the transition to a new distributor caused a temporarily sales decline.

However, our new distributor is ramping up its operations and we expect them to establish a healthy business for our brand in those key markets.

Our Japan and Korea subsidiaries continue to post healthy growth on a local currency basis.

Although the weaker yen caused Japan's reported sales to show a decline.

Also within the LAP region we are making final preparations to commence a new venture in China on January 1, 2014 with our current distributors, Swire Resources Limited.

We expect this joint venture to contribute meaningfully to 2014 sales and earnings growth and we will have more to share on that subject on our February 18, call, when we plan to announce our fourth quarter and full year 2013 results, along with our preliminary financial outlook for 2014.

Finally, in Canada, third-quarter sales fell a bit short of our plan because some shipments moved from the third quarter into October as we transitioned into a new warehouse management system in our Canadian distribution center.

Before we open the call for questions I to we reiterate our continued progress on inventory management and discretionary spending.

The 14% $66 million decline in inventory is primarily due to an improved flow of fall inventory and a response to a cautious approach by our North American and European wholesale customers in placing advance orders for winter products.

The decline also reflects many enhanced processes across our planning and supply chain operations that were implemented to improve inventory utilization and enable us to operate on less inventory relative to sales.

One goal of this new process is to more closely match the flow of our inventory receipts with customers requested delivery dates especially during the large fall shipping season.

The fact we improved our order assignment metrics during our largest shipping season suggests that these new processes are having the desired effect in making us a more reliable vendor for our customers.

Continually improving inventory turns and gross margins remain key priorities for us.

We expect consolidated inventory levels at December 31 to be lower than last December including the approximate $25 million of incremental inventory attributable to the new China joint venture.

We're prioritizing spending toward the key initiatives that we believe will drive future growth and profitability including the expansion of our direct to consumer platform, the launch of our China joint venture in January of 2014, and our US ERP implementation, which continues to be targeted for April 2014.

While I'm pleased with the team's ability to manage inventory and costs, we are far more focused on reigniting sales growth in each of our brands and geographies.

We have structured our fall 2014 product lines to offer a greater percentage of high-performance styles and more accessible prices to drive volume and profitable growth for us and retail partners.

As we look ahead to 2014, we see several factors that we expect to drive renewed sales and earnings growth.

Improved product assortments that are better positioned and segmented across channels to drive volume and profitable growth, initial reactions from global sales customers to the 2014 profit lines are very positive; incremental sales and earnings from the new China joint venture, continued growth and expansion of our global direct to consumer platform.

We see signs of stabilization and a potential return to growth in North America and European wholesale markets.

Our improved business processes will allow us to develop innovative products more efficiently, operate at less inventory relative to sales, and develop stronger partnerships with wholesale customers and focus on prioritizing and efficiently managing spending.

The combination of these and other encouraging factors led us to propose and our board to authorize a 14% increase in the company's quarterly cash dividend, raising it to $0.25 per share from the prior rate of $0.22.

If you have not already done so, I strongly encourage you to read the CFO commentary which we furnished to the SEC on form 8K earlier this afternoon and also posted on our investor relations website at Columbia.com/investor.

In addition to the discussion of the Q3 results in the updated Outlook, I want to direct your attention to the section beginning at the top of page 8, which explains changes we plan to make to our financial outlook protocol in 2014.

That concludes my prepared remarks.

Let's open the call to questions.

We will now conduct a question and answer session.

Thank you.

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

Good afternoon.

I was hoping you could give a little more detail on the US.

Specifically on the wholesale side.

I know some shipment timing issues were something that you talked about, do you have specifics on how much that impacted your results this quarter?

Certainly, as we said earlier, our customers were very cautious in approaching their initial buys for fall 2014.

We think that the channel is quite clean right now.

There is plenty of inventory obviously there, but we expect with any kind of weather we are going to have a fairly significant growth in our business in the fall, in the back half of the year.

Is that the kind of detail you're looking for?

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

No, I would say, Lindsay, actually our US wholesale business exceeded our internal forecasts and was a major component of our revenue beat in Q3 and we are seeing less shift from Q3 to Q4 then we anticipated back in July.

Okay.

And then, what did your stores comp?

Can you tell us the comp figure?

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

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

Yes we did.

I guess what I'm trying to get at is we've seen an overall softer consumer environment.

You haven't had necessarily great weather, so what are you attributing incremental strength to?

Frankly, I think our products are under distributed in the market.

We have got high demand in our own operations, direct to consumer operations and that is because -- the consumers are looking for our brand and not necessarily able to find it everywhere they would like.

Okay.

How do we think about incremental margins on the new sales that come in?

As we said, our lift is not expected to be on the top line; it's more expected to be on margin.

We have a certain amount of merchandise model to be sold at off price.

If weather dictates a higher demand for those products, we will have a higher gross margin on whatever we sell through the balance of the year.

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

Great.

Thank you, everyone.

Kate McShane with Citi.

Thanks, good afternoon.

I had two questions, the first question is following up on the previous question, do you think your -- 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?

Certainly.

I think our sell through and our wholesale partners was maybe not as extensive as the sell through we've seen in our stores.

I really don't know how to particularly rectify that other than to say there is competitive merchandise in those other stores, and our wholesale partner's stores, and we don't have those kind of competitive products in our stores.

Okay.

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?

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?

Certainly.

Franco has not yet started, but we are anxious for him to do so.

In the last 18 months I have spent a tremendous amount of time in Europe myself, working directly with customers.

It has been an easy conclusion that the product miss steps that we have had in the US were also -- 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 2014.

They have been embraced.

My expectation is that as we roll out these new products in the US and in Europe, our business should improve.

We're not expecting any kind of a major change in the market.

If there's anything it is perhaps more focused on a smaller number of markets than we have been attacking in the past.

But strategically were going to be approaching it the same kind of rigor and focus on the right brand positioning we have here in the US

(Operator Instructions) Laurent Vasilescu with McQuarrie.

Good afternoon.

This is Laurent in for Liz.

I know you no longer give backlog, but do you have -- enough visibility right now to give indication that 2014 will return to growth?

Well, we aren't giving backlog guidance, just to remind everybody, that's because there so many factors now in the business, including our own.

The impact of our own direct to consumer business -- it was becoming a highly complex exercise to keep everybody focused on what -- how it is we looked at the business.

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 2014.

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 2014.

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.

Okay, great.

Thank you.

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?

Yeah, 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.

Okay, great.

Thank you.

And then lastly, we're curious to know if you have a long term goal for your direct business as a percentage of revenues longer term?

Well, I want to remind everyone that our business is really first and foremost a wholesale business, that is our primary focus and how we built the infrastructure to provide support to retailers.

Our expectation and selling our products through third-party retailers will continue to be the dominant portion of our business.

We don't have a plan for retail to grow significantly beyond that.

Okay, thank you very much.

Best of luck.

Corbin Weyer with Robert W. Baird.

Good afternoon.

Tim, you touched upon a bit if weather plays through in the fourth quarter we would 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 laid out today?

And are you assuming -- similar weather to what we saw the past two years, more normalized weather; any commentary around that would be very helpful.

Certainly.

No, I'm happy to do it.

We have baked in normal weather.

That would include some cold to be starting to accumulate now.

We've seen the last -- this week was colder than normal in most parts of the United States.

We have already had fairly significant cold weather in Russia which has impacted our sell throughs very positively, but today we are just planning on normal weather.

As you notice by the emphasis on our inventory reductions, we have not taken a highly speculative position on inventories.

We feel we're in a terrific position regardless of the weather.

That's helpful.

Thanks a lot guys.

Good luck.

(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.

Thank you, everyone for listening in.

We're looking forward to great cold-weather surprising us all.

Thank you very much.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.