Columbia Sportswear Co (COLM) 2014 Q1 法說會逐字稿

Greetings and welcome to the Columbia Sportswear first-quarter 2014 financial results.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your presenter Mr. Ron Parham, Senior Director of Investor Relations for Columbia Sportswear.

Thank you Mr. Parham, you may begin.

Alright, thanks Bob, good afternoon and thanks for joining us.

Earlier today we issued two press releases, the first covered our strong financial results for the first quarter of 2014 and upward revised financial outlook for the full-year.

The second announcement the signing of a definitive agreement to acquire prAna Living, LLC, in a $190 million cash transaction subject to customary conditions, and regulatory approvals.

As is our standard practice, shortly after these press releases crossed the wire, we filed an 8-K, containing a detailed CFO commentary on the Q1 results and revised outlook, as well as additional color on the pending prAna acquisition.

The CFO commentary can be found on our investor relations website at www.investor.columbia.com.

On today's call to discuss these announcements and answer your questions are Columbia Sportswear's President and CEO, Tim Boyle, Senior Vice President, and Chief Financial Officer, Tom Cusick, Executive Vice President and Chief Operating Officer, Bryan Timm, and Senior Vice President and General Counsel, Peter Bragdon.

I'll ask Chairman 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 the many risks and uncertainties, and actual results may differ materially from what is projected.

Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K, for the year ended December 31, 2013, and the 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 change in our expectations.

Thanks Gert, and since we have a lot of information to get through today, I will turn it over to Tim for his prepared remarks, and then we will open up the call for your questions for the remainder of the hour.

Tim.

Thanks Ron, welcome everyone and thanks for joining us this afternoon.

We are very excited about each of the announcements we issued earlier today.

These announcements individually, and together, reflect a company that's re-igniting profitable, sustainable growth, following two consecutive years of flat sales.

I am proud to say that during these two challenging years, we've managed expenses responsibly, executed a massive North American ERP implementation, and strengthened our financial position.

Most of our existing brands are experiencing growth as a result of better aligning their products and marketing communications with consumers' needs and passions.

Additional growth is coming by leveraging our strengthened financial position, and global operating platform to add a new brand to our portfolio, that brings equally passionate consumers, in complementary market segments, representing long-term, profitable, global growth opportunities.

I will take a few minutes to review our strong first quarter results, and elaborate on our pending purchase of prAna before opening the remainder of the call to your questions.

We're very pleased with our first quarter results which were stronger than we anticipated in our mid-February outlook.

First quarter global sales growth of 22%, reflects our strategic emphasis on North American wholesale, and direct-to-consumer channels, and our new joint venture in China.

It also demonstrates how our business is operating graphically by channel, by brand, and by product category.

More than half of the first quarter growth came from the US, with the remainder from our China JV, which is included in our Latin America, Asia-Pacific or LAAP region.

Our US and Canadian businesses were especially strong during the quarter, as cool weather extended consumer demand for cold-weather footwear and apparel, driving strong wholesale reorders.

And enabling our direct-to-consumer business to post another quarter of very strong growth, driven by increased traffic and strong conversion rates.

Our Europe direct business posted modest growth in the quarter, providing further indication that our business in those markets is stabilizing, and positioning us for renewed growth in the second half of 2014.

In China, our new JV turned in a successful first quarter, making the LAAP region to a 41% growth rate, as its incremental sales more than offset macroeconomic, and political challenges that we faced for more than a year in Argentina, and Venezuela.

The Korean market has become more competitive in promotional, resulting in a small decline for the first quarter.

However, we still expect full-year sales to increase in that market.

In Japan, we have been growing consistently on a local currency basis, but the weaker Yen has caused a year-over-year decline in reported US dollar sales.

Now the country is adapting to an increase in the national consumption tax from 5% to 8% coming into effect April 1.

Both Korea and Japan have posted strong growth over the past several years.

Our brands remained strong in both markets, and we continue to view them as vital components of our long-term global growth strategies.

Looking at our business by channel.

Our global wholesale and direct-to-consumer channels, each posted strong growth in the first quarter, driven primarily by North America.

All three of our major brands grew during the first quarter, led by a 25% global increase in net sales of the Columbia brand.

First-quarter sales of Columbia footwear increased at a faster rate than Columbia apparel, on the strength of winter boots and trail footwear.

While Mountain Hardwear and Sorel each posted single-digit growth.

While our first quarter benefited from the extended demand for winter styles, we were also delivering wholesale customers advanced spring orders.

In addition to meeting schedule deliveries, we worked with our North American customers to arrange earlier delivery on nearly $14 million worth of orders originally scheduled for delivery early in the second quarter.

This pull-forward was done to mitigate potential risks associated with our US (inaudible) that began in late March.

On balance, with more (inaudible) price wholesale sales, fewer close-outs, and less promotional activity, gross margins increased 250 basis points to 46.5%, a record level for any first-quarter in our history.

Our focus on inventory reduction, and improved inventory turns continues to free up working capital.

Inventory was down 11% from one year ago, and 17% lower, excluding the incremental inventory held by our new China JV.

During the second half of the year, we expect inventory levels to increase at rates lower than anticipated sales growth.

We continue to manage discretionary expenses very effectively, generating 250 basis points of SG&A leverage in the quarter.

SG&A dollar growth in the quarter was primarily related to incremental expenses of the China JV, and planned investments to expand our direct-to-consumer operations.

Looking ahead, our fall 2014 order book continued to strengthen over the past 60 days, particularly in North America, where channel inventories of Columbia and Sorel products are very clean.

Our upward revised 2014 outlook now anticipates global top-line growth of 16% to 18%, an operating margin of approximately 8.25%, excluding any anticipated financial effects of our pending purchase of prAna.

We continue to expect our North American direct-to-consumer sales to grow at a double-digit pace in 2014, including plans to open an additional 17 stores, comprising 11 outlets, six Columbia branded stores, and two Sorel pop-up stores.

The new outlet stores will help us manage excess inventories more profitably, while protecting brand integrity in our wholesale channels.

We generated $43.5 million in cash from operations during the first quarter, ending with a record $568 million in cash and short-term investments.

We are very excited with the prospects of putting a portion of that cash to work to add product to our brand portfolio.

In product, we see a brand and an organization that has very clear visions and values, and very passionate consumers who share those values, as a foundation of their lifestyles.

In addition, we were attracted the company based on the strength of the management team, and we are confident that they will be great partners to pursuing the brands potential.

The prAna brand was founded in 1992 in Carlsbad, California as a yoga and climbing brand that aspired to reflect the values and lifestyles of people who express themselves through these activities.

Over the past 21 years, the values of social and environmental responsibility, community, service, and optimism have come to resonate with an increasing number of consumers around the world.

And those are the same values upon which the prAna brand is positioned.

The resonance of that positioning is evident in prAna sales growth momentum which has compounded at a rate of more than 30% between 2010 and 2013.

And put it on pace to surpass $100 million in sales in 2014.

The revised 2014 guidance I said earlier, does not include any anticipated effects from the pending acquisition of prAna which we expect to close during the second quarter, subject to customary conditions and regulatory approvals.

You can find more detail on our Q1 results, and our updated outlook, including the anticipated impact of the prAna acquisition, in Tom's CFO commentary available on our website.

Finally, I am very pleased to report that we're three weeks into what has thus far, been a very smooth ERP implementation in the North American -- in North America, following many months of preparation, and testing by a very dedicated, cross functional, global business transformation project team.

We are very proud of the exceptional efforts of the team, which have enabled us to quickly resume receiving and shipping inventory, invoicing customers, collecting receivables, and paying vendors at volumes typical for this time of year.

I am also pleased to note that sell-through of our spring products across North America wholesale and our direct-to-consumer channels, are ahead of where they were at this time last year despite the cooler weather and later Easter.

We are seeing increased sales across the full spectrum of product categories from rain wear to PFG, and from footwear to sportswear to fleece.

In summary, 2014 is off to a strong start.

We intend to build on that momentum as we approach the fall shipping window, and to extend the momentum into 2015 across each of our existing brands, geographies, channels, and product categories.

And we look forward to completing the purchase of prAna and collaborating with their team to unlock prAna's global brand potential as an additional growth engine in 2015 and beyond.

Over the past several years, we have been focused on renewing top-line growth, and improving the profitability of our core business, by fixing our direct business in Europe, improving our North American wholesale business, investing in an expanded direct-to-consumer platform, and establishing a joint venture in China.

We are proud of the results we posted today, which indicate significant progress on those initiatives, while simultaneously enhancing our global infrastructure with a new ERP platform.

We believe we have several profitable growth engines, and loads of opportunity to increase our profitability towards our long-term goal of above industry average operating margins.

That concludes my report -- my prepared remarks.

We want to use the rest of this hour to answer your questions, but we will need to limit the call to that timeframe so I can head down to California to meet with our new teammates at prAna.

Operator, can you help us facilitate the questions?

(Operator Instructions)

Bob Drbul, Nomura

Congratulations on the acquisition.

Thanks Bob.

Did Gert chime in on the prAna brand at all.

Absolutely.

I'm at the top of the hill before you are.

I know you are.

Congratulations.

I have a couple of questions on the Columbia business for a second, Tim.

As you look at the inventory levels, and then the first quarter gross margin performance, when you look at the updated guidance for the full-year, do you expect to have any down quarters in gross margin?

And given the strength you saw right now, and the inventory levels, the 50 basis points for the full-year seems a little conservative.

Can you talk through that a little bit?

Yes, Bob.

This is Tom.

I guess as we look at the second half of the year, we are anticipating gross margin to be roughly flat with last year, and that's predominantly due to the fact that we are comping against more difficult direct-to-consumer and wholesale comps given the phenomenal winter we had last year.

That is really the main driver for the flat gross margin.

And I guess there is one other significant point.

Obviously, we've got some significant headwinds with the yen and the Canadian dollar from a hedge rate perspective.

And on the increased top-line visibility, Tim, you mentioned the order book strengthened a little bit, can you elaborate in terms of the channels or the partners or what happened?

What was the demand that you did see on the increased orders and the timing, in terms of, before October, later in the year?

Just how to think about it from that perspective.

We have been fairly pragmatic about accepting orders beyond October.

So the bulk of our business increase has really been in those key shipping months prior to October.

And it really has been across the board.

We have seen customers converting private label programs over to our branded merchandise.

We have also seen an increased amount of purchasing across the board.

Remember that last year, retailers were so cautious in terms of how they approached weather sensitive merchandise that they were as conservative as we were.

Sorel, by the way, has been an incredibly strong brand for us.

It had very small increases the first quarter, primarily because we ran out of inventory.

We expect all the brands to do quite well in the back half.

My last question is, so with the acquisition of prAna at $190 million and your cash balance is still very heavy, would you anticipate any other shareholder friendly initiatives with that cash for the remainder of 2014?

Bob, as you know, we have been incredibly focused on fixing the issues that we have within the company and the brands.

While we think we have gone a long way towards that, we are nowhere completed that.

We still have sub-par operating margins, and we want to get those things up, and so the focus is going to be on, heavy emphasis on the brands that we already have, and continuing the expansion geographically as we've seen in Europe, so that is going to be the focus.

Although the balance sheet is strong enough that should there be an opportunity that we think fits as nicely in our collection as prAna does with the management team that we think is as strong as prAna, we would look at it.

Thanks very much.

Congratulations.

Christian Buss, Credit Suisse.

Yes, I was wondering if you could provide some color on how you see the mix of your business changing with prAna between spring, summer, fall and winter?

I would love to get some other on the prAna business and how that flows seasonally.

Certainly.

The prAna business itself is very balanced, and much less weather sensitive than any of the Columbia businesses --Columbia brands.

So it is smaller.

So the impact won't be significant right away.

We expect the bulk of that brand will be, more than likely, quite balanced across seasons, as it has already been.

Columbia's focus and efforts on the Columbia brand, Sorel brand are historically very winter focused, but I have to admit, our [fee achieve] business has really been very strong this year, that's primarily a spring business.

That is very helpful.

Could you provide some color on the demographics of the prAna customer relative to the Columbia customer?

And then if you could also provide some color on the distribution network for prAna versus what Columbia has, and if there's opportunities there for synergies from the distribution standpoint.

Certainly.

The primary difference between the prAna customer and the Columbia customer is gender.

I want to say prAna is nearly, if not greater than, 70% female.

That is one of the real keys for us in terms of approaching the brand and why it was so interesting to us, is that the female consumer there.

The distribution of the product is primarily in specialty, and better sporting goods operations.

I would expect that would continue.

Our focus is going to be on expanding our specialty store business, and continue to increase our better sporting goods business.

So those expectations in terms of distribution, are to continue in those areas, although we do think we can add significantly to our international business with prAna.

As Columbia's businesses is over 40% outside of US, and prAna has a small position outside the US.

So we think expanding those customer bases, more sales to women, obviously, women's products and international will be a real strong growth vehicle for prAna.

Thank you very much, and congratulations on a great start to the year.

Thank you.

Lindsay Drucker Mann, Goldman Sachs.

Thanks, good evening guys.

I wanted to first ask on the inventory in the quarter, just to clarify, the big gap you have in sales versus inventory.

Is the vast majority of that stronger sell-through versus what you bought, or is there any operational, how much of that might be operational efficiencies, improvements that we can expect to carry through for the rest of the year?

Lindsay, this is Tom.

I would say it's really driven by two factors, one being that the great sell-through in Q1 of fall 2013 product, and then just better overall management of inventory and better inventory utilization.

So those are really the two main factors from my perspective.

And the better inventory management, is that just execution based, or have you guys implemented -- is it new tools that have allowed you to manage better?

I would say predominantly, at this point, it is better business process.

Now with the ERP implementation, now we'll be able to get better leverage from the system itself.

It has been predominantly a function of business process to date.

That was my next question, on the ERP system.

How should we think about, over a two to three-year horizon, where your inventories versus sales will be going from there, or gross margin opportunity, things like that?

I was just going to say Lindsay, our premise for investing in this ERP was really to get better inventory utilization, higher operating margins from our inventory investment.

So we're literally two or three weeks into the process here in the US, longer in Canada.

But our expectation is that if you look at our inventory turns historically, they have been poor.

And this tool is going to help us to improve that.

We are also going to have better visibility on the operations of the business with these tools, and be able to make better decisions on the inventory which will allow us, we hope, to have higher gross margins.

So that is our premise for investment here.

I can't tell you exactly when it is going to happen, but it can't be too soon for me.

Got it.

And just one last housekeeping piece.

For prAna, should we be thinking about, if the transaction ultimately closes, would you be excluding the purchase accounting amortization from that in your comparable earnings results?

And then also, having read your CFO comments, how do we think about momentum for US sales in the back half based on your fall order books?

If you could give us any better visibility into that guidance.

Thanks.

As it relates to prAna, we will be including, obviously their results and ours from the date of close forward.

And all the purchase accounting amortization will be included in our operating results, but we will comment on, specifically, what that amortization is.

So the investment community can understand the, with and without elements of our results.

And then, as it relates to the US business in the second half, of that approximate $55 million that we plan to recognize the majority of that is US business.

And then, that coupled with the double-digit growth in our fall wholesale business, the second half in the US, wholesale business, including prAna, should be very strong for us.

Thanks, guys.

Mitch Kummetz, Robert W Baird.

Let me just follow up on Lindsay's last question.

I guess, given where your full-year guidance is excluding prAna, you're looking at about 15% to 17% sales growth over the balance of the year.

I'm just hoping to get a little bit more color on the cadence of that growth across the quarters.

We would expect the first half and second half to grow at fairly comparable rates now.

90 days ago we thought the first half was going to grow at a little bit slower pace than the second half.

But the toggle really is the cadence of our international distributor business that shifts between mid-June and mid-July.

And a higher percentage of that business is anticipated to ship in the second quarter.

So that is really what is driving the more balanced growth rate first and second half now, as compared to 90 days ago.

And would you expect to see stronger growth in Q3 versus Q4 given that is an easier comparison, both wholesale and retail, and that is where you'll probably benefit the most from the sell-in of your strong fall pre-book?

It is probably a little too early to call the Q3, Q4 split.

We're really trying to stay away from giving specific quarterly guidance.

At this point, I would say we are planning the first and second half to be fairly comparable in terms of growth rates.

Got it.

And then again, when I pull out China from your guidance, it looks like you are expecting all-in 8%-ish growth for the year, top-line growth exing out the benefit from the China transition.

I'm just trying to reconcile that with the strength of your fall orders, which I know you're not giving the backlog, but you said they were up double digits.

I guess the delta would be your assumptions around things like cancellation rates and reorders, and maybe what is happening on the direct side with regard to e-commerce, or comping in your stores.

How are you thinking about those variables?

How conservative are you being around those variables as it relates to your guides to kind of tie the order book in with the overall sales outlook?

It is really a function of spring and fall wholesale, and again, the distributors, whether those ship in that spring business between Q1 and Q4, and then the direct consumer business and reorder and cancel rates are really driving the deltas there.

And that is why we no longer publish our order book, because it adds confusion given the multiple inputs here.

Let me ask you in a different way.

Are you being more cautious on things like cancellations and reorders, relative to where they were last year, which I would imagine were pretty good compared to historical levels, given the strength of the winter season?

We have planned the second half based on a normal winter weather pattern.

So if winter is better, I would expect sales and gross margin more so, to be positively impacted and if winter is not normal, to the downside, then there would be some downside risk.

We've planned for more normalized cancel and reorder rates.

Got it, that is what I was looking for.

Thanks.

Jim Duffy, Stifel.

Thanks, good afternoon, everyone.

Congratulations on the great start to the year and the transaction.

With respect to prAna, I am interested to hear little bit more about where you see the growth opportunities for the brand.

Do you see it as a wholesale growth agenda?

Do you expect to continue to open retail stores from an international standpoint?

Tim, what's your -- some of the markets which you think are most ready for the concept?

Any help you can provide there would be helpful.

Sure.

We expect that the cadence that the management team has already put in place in terms of opening additional wholesale customers will continue.

Again, that has been primarily focused on specialty stores and better sporting goods stores.

I think over the long term there's an opportunity in moving to department stores, but we haven't really attacked that as of yet.

There'll be some direct-to-consumer, but frankly, it will be at the end of the day growth will primarily come from wholesale.

When we think about outside of the US, obviously the first order of business is Canada, and that is going to be a significant opportunity for us there.

And then, I think there is opportunities for us in South America, in some of our Asian markets, and Europe where they have had some exposure in the market there.

But we think we can expand that business there.

Of course, we don't want to get too far ahead of ourselves because we've got our own challenges in Europe, but I think the brand is really spot on for the female consumer and I think there is a real opportunity for us to grow this business quite well.

Good to hear.

Shifting gears a little bit.

Pretty strong quarter from the China JV, and the team's more optimistic view on the contribution for the year.

Can you provide an update on how that transition has gone, and some of the traction that you are seeing there?

Let me give you sort of a high-level overview and maybe Tom can chime in here if we've got some specifics.

The business there is successfully transitioned to Shanghai where it is being operated.

We still have a portion of the staff running the businesses based in Hong Kong, and there is a portion that's actually commuting back and forth from Hong Kong to Shanghai.

But we moved into the offices there and our business is now operated out of Shanghai.

We are excited about the potentials there.

Really I think, if we look at how we've operated the business from a merchandising standpoint, we've had less specific involvement with merchants in China than we intend to.

We think we can add significant opportunities to the business by just being closer to the consumer in that market, as opposed to assuming that they are going to just take USA merchandise directly.

I think there is lots of opportunities to be more specific around how that consumer in China looks at our products.

And then we're looking, obviously, always making sure that our stores are fresh and refreshed on a constant basis.

Some of them are up to 10 years old in that market.

Our expectation is that over time, we are going to have a really terrific business there.

Lastly, guess I would point out, the marketing spend in China is significantly higher than it is globally for the rest of our brands, and approximating 10%.

Tom did you have something to add?

Jim, on the slight uptick in the anticipated earnings accretion, that's really a function of slightly lower expense outlook.

A significant part of that G&A expense is a shared services model, where we are relying on the JV partner and those expenses have been adjusted downward slightly.

And then Tom, housekeeping item.

Can you speak to the contribution to gross margin in the quarter from the consolidation of the JV?

Yes, it is not overly significant.

I would say it is a very low, single-digit millions of dollars number.

What I am speaking to specifically, is a combination of the deferred profit related to the licensed revenue that was historically recorded below the line and separately in licensing income.

Do you [there's a] delta there from the change in accounting convention?

Correct.

Got you.

Thanks.

Kate McShane, Citigroup

Hello good evening.

It's Corinna Vander Ghinst for Kate.

I was hoping you could provide a little more color on the outperformance in the US this quarter?

Were there specific channels or markets that exceeded your excitations more than others?

And also if you could talk about your ability to fulfill reorders on the cold weather styles this quarter, since I think in the past you guys have said that you had limited ability to chase within the season.

I am not sure I caught the last question.

Let me get started and if I missed something, you will remind me.

Basically, the first quarter as you know, was obviously -- had a heavy environmental impact due to weather.

Of course that is our company's strength is in cold weather apparel and footwear.

As the weather continued to be helpful to us, we just got to the point where we were not marking down inventory.

Our customers were selling merchandise closer to full price even beyond Christmas, which is very unusual, even to the point for us where we actually ran out of inventory in the Sorel brand.

All of those things helped to have a high level of sales and a high level of gross margin on those winter products.

We had very little opportunity to fill back in at those late times.

So we probably lost lots of sales.

That is okay.

We are more than happy to be clean, rather than long on inventories.

In addition, we pulled forward approximately $14 million of spring orders into Q1 that were scheduled for shipment later in April to get in front of the ERP go-live.

So that is another factor.

Right, but even if I back that out it still looks like you guys are at double-digit growth for the US, so that's pretty impressive.

That pretty much answers my question, as pretty much on the inventories for --chasing inventories into the post-Christmas period.

But then also with the acquisition of prAna, I was wondering how this impacts your women strategy for the Columbia brand, or do you view this as an incremental new customer?

I am sorry, the question is whether or not it impacts the Columbia brand.

And I would say, one of the reasons we were very interested in the prAna brand is that there is almost no overlap.

The customer, the consumer for prAna, which is mostly women, we didn't feel we could even approach with our current brand portfolio.

We would expect zero cannibalization from the Columbia brand frankly.

Okay, great.

Congratulations.

Andrew Burns, D.A. Davidson & Company.

Good afternoon.

Congratulations on the quarter and the acquisition.

I just had one quick question in terms of weather, you clearly -- benefiting cold-weather products, but I was encouraged by the comments on the spring assortment and sales holding up there, could you perhaps elaborate on little bit on, seemingly, the strength you are seeing there?

Certainly.

Our spring products are in fact, more warm weather, and it's been really gratifying to see the strength of our PFG brand and how well that's done, even in periods of time when it's been colder than normal.

It's really a strong endorsement of that product and how well it's been selling.

But we've also had great rainwear sales, and fleece sales have held up actually quite nicely too.

We are pleased with that.

Our footwear business, especially in the hiking category, and this would be globally, has been very strong.

We have had a tremendous amount of business on a specific hiking shoe in Europe with one of our biggest customers there.

So, we are not clicking on all cylinders yet, but there is certainly a lot of great momentum seasonally for the product, and then geographically.

Good, thanks and good luck.

Camilo Lyon, Canaccord Genuity.

Thanks and good afternoon guys.

Really nice job on the quarter.

I wanted to go back to the prAna acquisition.

I want to get your thoughts on the opportunities to incorporate a footwear offering given your strength in your home brands with footwear.

And also, if you could talk about any opportunities to improve their, EBIT margins, whether it is from supply chain efficiencies, buying power, anything of that sort.

Where do you think their margin structure could ultimately go to?

We haven't even considered a footwear opportunity.

The brand needs to get bigger, we need to make -- to continue to simplify our approach.

We are going to really encourage the management at prAna to manage their business independently of ours.

(technical difficulty) We are going to really encourage the personality of the prAna brand to expand with the management down there.

There may, in fact, be a footwear opportunity at some point in time, but we haven't even considered it.

It would be added at a time when we thought it was appropriate.

As it relates to margins, our company has a significant sourcing operation globally, and we would expect that we would weigh in on helping, where appropriate.

But we haven't really delineated any specific gross margin improvements as it relates to our sourcing operations.

From what you can tell, are there any obvious deficiencies that you can help them achieve or this is purely just benefiting from the high pace of growth that they are now enjoying as they start to open up more distribution, both domestically and internationally?

I would say if we're going to contribute anything it is just the strength of our balance sheet.

They had been owned by a private equity form for a number of years, we would expect that our strong balance sheet will allow them to be more creative and we're comfortable, in fact, more than comfortable with the management team.

We would expect that we would be able to utilize more of our assets on the balance sheet to continue to provide the great growth that they've seen.

Just moving on to the guidance and how the Chinese JV layers into that.

The first quarter definitely had some nice improvement from that part of the business going direct.

Could you help me understand why that wouldn't continue into the future quarters, and why you wouldn't see a comparable benefit from that?

Yes, when we look at the year taken as a whole, the China component and the licensing piece that gets moved into gross margin, coupled with the fact that their gross margin taken as a whole, is greater than the corporate average, is the single biggest driver for gross margin expansion for the full year.

Coupled with channel mix, with the higher percentage direct-to-consumer and wholesale business, in a smaller component of distributor business, lower margin, distributor business.

And then there is a fairly sizable offset there with our hedge rates, given the weakness in the Canadian dollar and the yen.

That is what nets us down to the 50 basis points for the full-year.

And then as we look at Q2 for example, that quarter will be much more heavily weighted toward our distributor business, because the majority of our distributor shipments will ship in the second quarter which will weigh down the margin on overall basis in Q2.

And then -- I would assume you would get also a sales lift as you go direct in that country.

And so the --with not really having changed you sales guidance too much, I would assume that there -- I would have thought that there would have been a bigger lift realized from China that you would -- that we would see in Q2 to Q4?

Q2 is China's smallest quarter of the year as well.

Okay.

That is helpful.

Thank you.

(Operator Instructions)

Robbie Ohmes, Bank of America Merrill Lynch.

This is Rafe Jadrosich on for Robbie, thanks for taking the question.

Can you guys talk about the outdoor market in China?

And then how you guys feel about the inventory levels?

Have those improved at all?

We think the outdoor market in China is continuously growing.

The China market is enormous, obviously, not only from a population standpoint, but geographically.

We are very bullish on that area.

It is a competitive, and becoming more competitive there.

We have seen some of our competitors expand the amount of inventory that they have for sale beyond what the consumer can accept.

So there has been some amount of inventory there, that we've had to deal with there, just from a general market standpoint.

We feel very strongly about that market.

Consumers continuously becoming more wealthy, and really gravitating towards outdoor products, not only for specific uses outdoors, but just in general.

It is becoming an increasingly more comfortable way for people to dress.

We are excited about it.

There are challenges.

It is becoming more competitive.

We think with our balance sheet, and our strong partner there, the JV, that we have significant opportunities to continue to grow the business.

And then can you talk a little bit about the Sorel brand?

You guys said you sold out of it and the outlook in Europe there?

Are you still closing doors, or do you feel comfortable with your distribution?

Let me just talk to you about the Sorel comments because those were primarily North America, with the tremendously cold weather that we had in North America, we literally ran out of inventory at Sorel here to supply our wholesale customers, and also for our direct-to-consumer customers.

As it relates to Europe, we have a high degree of confidence in our new team there.

They are really focused on simplifying the business, concentrating on a smaller set of markets, and a smaller set of key customers that can really drive the business.

I am very pleased with the work that our team there has done so far, and my expectation is that over time we are going to be very pleased with the decisions we made there in Europe.

Can you give any color around your direct-to-consumer comps in the quarter?

And, then I think you're planning to finish with 75 outlet doors in the US, at the end of the year.

Do have any sense of how many you operate longer-term?

Could you go to 100 plus like some of your competitors?

Let me answer the question a couple of different ways, split into a couple of pieces.

We don't give comp information, because we don't consider ourselves a retailer, we consider ourselves to really be a wholesale customer with these additional set of assets to help us manage our inventory levels.

I'm going to ask Tom to specifically talk to the numbers, but I can tell you that we are cautious in terms of our opening.

We believe that there are more opportunities for us in the outlet space.

We also believe there is opportunities for us in branded stores.

Let me have Tom give you the numbers on the outlet stores.

And as the business grows, we will probably need more, but we don't have a specific plans to add any significant amount soon.

Yes, your 75 number was correct for the US and Canada combined.

We will end up in the US with 74 outlets and a couple of additional in Canada as well exiting this year.

And then as it relates to -- we're very pleased with our direct-to-consumer results in the first quarter; we saw great growth in both traffic and conversion.

Great.

Thank you.

(Operator Instructions)

There are no further questions at this time.

I would like to turn the floor back to management for closing comments.

Thank you very much.

Again, we are just thrilled with the addition of prAna to the company's brand collection.

And we are also very thrilled with the results of the hard work we have done here over the last several years in managing our business during the tough times.

We look forward to talking to you in July with more good news.

Thank you.

This concludes today's teleconference.

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