Columbia Sportswear Co (COLM) 2016 Q1 法說會逐字稿

Greetings, welcome to the Columbia Sportswear first-quarter 2016 financial results conference call.

(Operator Instructions)

This conference is being recorded.

I would like to turn the conference over to Mr. Ron Parham, Senior Director of Investor Relations and Corporate Communications for Columbia Sportswear.

Thank you.

Mr. Parham, you may begin.

Thanks, Bob.

Good afternoon, and thanks for joining us today to discuss Columbia Sportswear Company's first-quarter financial results and updated 2016 financial outlook that we announced earlier this afternoon.

In addition to our earnings release, we furnished an 8-K containing a detailed CFO commentary analyzing our results and explaining the assumptions behind our 2016 outlook.

The CFO commentary is available on our Investor Relations website.

With me today on the call are Chairman of the Board, Gert Boyle; Chief Executive Officer, Tim Boyle; President and Chief Operating Officer, Bryan Timm; and Executive Vice President of Finance and Chief Financial Officer, Tom Cusick; and Executive Vice President and Chief Administrative Officer, Peter Bragdon.

Gert will start us off by covering the Safe Harbor reminder.

Good afternoon.

This conference call will contain forward-looking statements regarding Columbia's business opportunity, 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, and subsequent filing with SEC.

Forward-looking statements in this conference call are based on our current expectation 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.

Thanks, Gert.

Before I turn the call over to Tim, I'd also like to point out that during the call we'll reference constant currency net sales growth, which is a non-GAAP financial measure, and in supplemental table of the Company, or our earnings release, we provide a reconciliation of these constant currency net sales figures to net sales as reported under US GAAP, and explanation of management's rationale for including this non-GAAP measure.

I'll turn the call over to Tim.

Thanks, Ron.

Welcome, everyone, and thanks for joining us this afternoon.

Our first-quarter results are a great testament to the power of our portfolio brands, diversified global distribution, effective operating platforms, and solid balance sheet.

Net sales of $525 million grew 10%, 12% in constant currency, and net income grew 20% to $31.8 million, both first-quarter records.

In the US, first-quarter sales grew 18%.

Late winter weather helped fuel high 20% growth in our US direct to consumer channel, and low teen growth in our US wholesale business.

Combining all channels, the Columbia, Sorel, and prAna brands each contributed double-digit first-quarter US sales growth.

These results suggest that consumer demand for Columbia, Sorel and prAna is growing, and that each brand is gaining market share in its distinct market segment.

During the quarter, we and many of our wholesale customers in North America, succeeded in clearing a portion of remaining fall inventory, setting the table for a cleaner start to the upcoming fall season.

We have reduced global year-over-year inventory growth to just 13%, and continue to expect inventory to finish the year generally in line with sales growth.

In our Europe direct market, an improved product offering and brand momentum drove high teen sales growth, equating to high 20% growth in constant currency, on top of more than 40% constant currency growth in last year's first quarter.

This marks the fifth consecutive quarter that our Europe direct business has produced constant currency growth in excess of 15%, validating that we're gaining market share, led by France, Switzerland, Spain, and the Nordics.

The momentum we have established in this region over the past 18 months is a credit to the focused efforts of Michael Fogliato and our European team, who are driving a consistent global brand message and working with our management team to streamline operations and shorten our path to regional profitability.

Had the US dollar not strengthened so dramatically against the euro during the past 18 months, adversely impacting gross margins, we would have returned to profitability in the Europe direct market this year.

After a brief pause in the seasonally insignificant second quarter, we expect our European direct business to produce mid-teen constant currency growth during the second half of 2016, based on advanced orders from our European wholesale customers, together with our own brick and mortar expansion, and increased e-com sales.

Despite ongoing macroeconomic challenges, we're very encouraged by the Columbia brand's momentum in Europe, and look forward to fueling additional growth in the region, through our entire brand's portfolio in the years ahead.

The Sorel brand grew 35% in the first quarter, concentrated in the US.

Benefiting from delivery of a more complete spring assortment and late winter weather that drove sales of fall and winter styles.

In 2009 we embarked on a dramatic repositioning of the brand from its rugged winter utilitarian male-focused heritage, into a fashion forward female-focused brand that combines great design with outstanding performance and protection.

In March 2015, in an effort to unlock the brand's potential more aggressively, we elevated Mark Nenow to Brand President and are investing in a dedicated and focused go to market Sorel team.

The Sorel team is focused on further dewinterizing the brand, by continuing to expand its successful assortment of lightweight fall styles, introducing a more complete spring line, and launching a select line of apparel and accessories that carries Sorel's unique design and performance DNA.

Sorel has been earning table space in leading fashion retailers and upscale department stores, generating increased visibility and consumer awareness.

Based on our 2016 outlook, Sorel sales will have grown at a compounded rate of more than 20%, and increased nearly 6-fold over the past 10 years.

Over that same period, we have successfully transformed Sorel from a small majority-managed brand to a much larger business, with a consumer mix that this year will be more than 70% women.

While we're very encouraged by Sorel's success thus far, we have only begun to exploit the brand's potential in footwear, apparel, and accessories, and only a nominal business today outside of North America.

As we continue to move the brand beyond the outdoor category and into the much larger lifestyle, fashion, and sport leisure categories, we believe Sorel has the long-term potential to grow to many times its current size.

The prAna brand generated 12% growth during the first quarter, continuing its string of double-digit growth quarters since it joined our brand portfolio in mid-2014.

Our prAna team continues to find success with its differentiated position, as one the only gender-neutral brand in the yoga and lifestyle category.

While it continues to attract an expanding base of female consumers, including a successful swimwear line, its men's business is growing even faster.

prAna's North American wholesale customers showing increasing confidence in the brand, placing strong fall advance orders that support our full-year expectations of nearly 20% growth.

During the first quarter, we welcomed 17-year industry veteran John Walbrecht to our leadership team as the new President of the Mountain Hardwear brand.

John is a proven leader, who has spent his career building brands that connect deeply with passionate outdoor consumers to high-performance apparel, footwear, accessories, and equipment.

He most recently served as President and CEO of Phoenix Outdoors North America, including Fjallraven and a collection of high-performance outdoor brands.

Prior to that, he served at leadership roles with Spyder, Timberland, and Doc Martens.

We're confident that John's leadership will help reset the Mountain Hardwear brand, and position it for renewed long-term growth.

As I look across our organization today, I believe we have never had a stronger, more committed team of leaders guiding our business, and working together to meet the needs of each brand's consumers.

At the same time, our operational platforms continue to grow and expand their ability to serve the needs of each brand, region and channel.

As stewards of these powerful brands and operational platforms, the senior leadership team and I are focusing on enabling them to forge unique, differentiated market positions, and drive sustainable profitable growth in every market.

Before I turn the call over to your questions, I'd like to provide some important context around our updated 2016 financial outlook.

For the full year, we continue to expect global sales and operating income to increase at a mid-single-digit rate, producing operating margins comparable to 2015, at 10.7%.

We've increased our full-year net income and earnings per share outlook by approximately $5 million and $0.05 respectively, aided by the recently issued accounting standard related to share-based compensation.

This outlook incorporates anticipated effects of recent unfavorable external developments: including bankruptcies by several US-based wholesale customers, more cautious fall 2016 advance orders in response to slowing traffic, and the lingering effects of last year's warm winter, and further deterioration in the health of the overall Korean outdoor market.

Despite this challenging background, we believe the momentum that our brands have created positions us to continue gaining market share, most meaningfully in the US and Europe.

Our e-commerce platform, where we anticipate continued strong growth, represents not only a strong sales and profit channel for us, but also a great marketing vehicle that's able to effectively deliver each brand's message to millions of consumers, and quickly convert that interaction into a sale, either through our own e-commerce site, or through the stores or e-commerce sites of our wholesale partners.

In addition, during 2016, we are on pace to open eight outlet stores and one branded store in the US, four outlet stores in Europe, five stores in Japan, and four in China.

You can find more detail on our Q1 results and updated 2016 outlook in the CFO commentary available on our website.

Through periods of rapid growth and periods of uncertainty, our strong balance sheet enables us to make investment that we believe will position the Company for long-term growth and improved profitability.

We see increasing consumer demand for our brands, and remain committed to driving growth, expanding gross margins, investing in demand creation, and improving profitability.

That concludes my remarks.

Operator, could you help us get some questions?

(Operator Instructions)

Bob Drbul, Nomura.

Tim, couple of questions for you.

First, when you looked at the order book, I don't know you're not giving the number, but over the last few months, did it strengthen, was there a material change in your fall order book around your brand, especially in the Columbia brand, that you could talk about?

I would say that, it was -- it started off strong.

We got a little bit of concern from our wholesale partners about the weather, but in general, we're pleased with the way the order book turned out.

We think we have a good match with our purchases, and I think we're in a good place to be able to provide -- to come through with the outlook that we've given you today.

Okay.

And I guess, two questions on the inventory.

The first one is, like how much fall are you carrying forward, fall 2015 to fall 2016?

And in the spring inventory levels, how have spring inventories trended for you, both your Columbia on the books inventories, versus the inventories at retail?

Okay.

I'll tell you what, I'll ask Tom to speak specifically about the fall inventories, but as it relates to spring, as you know, we monitor sell-through very specifically, scientifically, on our US customers.

We cover about 85% or 90% of your customers' inventory and monitor it, so that we know what is happening.

I would say the sell through there has been on par with prior seasons, with more inventory in the pipeline.

We're comfortable with our spring positioning, and how merchandise is selling through.

I would say that our customers fall position and fall inventories, that they own coming out of 2015, improved in the first quarter based on the weather, but I'll ask Tom to speak specifically to our ownership.

Yes, Bob, so as it relates to the fall carry forwards, I'll take a few different angles at this question.

If we look at the inventory aging today, and that would be, when we look at inventory that's older than spring 2016, we're in much better shape today than we were a year ago at this time.

And then, the majority of our inventory on the balance sheet at 3/31 is spring 2016 inventory, and we carried forward -- in the line the carryover inventory in the fall 2016 line, is slightly over half of what we would have otherwise considered excess fall 2015 inventory.

So all in all, the inventory is in better shape today than it was a year ago.

We were able to clear more than we planned of the fall 2015 excess in Q1 in the US, particularly given the favorable winter weather we had in January and February.

And on some of the fall clearance, the success that you had, was that through your own outlets, or would you expect a lot of it has been sold out and packed away for fall 2016?

Can you talk about the distribution of what you have gotten through?

Yes, so the clearance of the fall 2015 in Q1 would be a combination of both of our own outlet business and the wholesale channel.

And within the wholesale channel, the minority of that sell-in, in Q1, would have been to the value channel.

I think the value channel's got plenty of inventory at this point in time.

Okay.

And, Tim, I have just one more question for you.

I think you finished the quarter with $450 million of cash on the balance sheet.

You talked about the opportunity and the financial flexibility for the Company to make long-item strategic investments.

Is there anything imminent, are you close to a transaction?

Is that what you're related to, or speaking to, or is that just more of a broader statement that you're making?

Well, we feel that the balance sheet of the Company is one of our true strengths, and we've never told investors we are going to grow the business through acquisitions.

We really think the lowest risk, highest return for the Company is to continue to focus on improving the results in those assets that we already own.

So that having been said, we're occasionally approached, but frankly we're focusing on what we already have, and making it better.

Okay.

Great.

Thank you very much.

Thank you.

Lindsay Drucker Mann, Goldman-Sachs.

I wanted to ask about the North American market, where it looks like for the Columbia brand, just based on your guidance, you're looking for mid or high single-digit growth across the year organically, and you're coming off a really strong 1Q.

Could you help us understand what the pace of that growth looks like, 2Q, and then to the second half of the year?

Lindsay, this is Tom.

Maybe I'll take that one.

We expect the first half to grow at a faster pace than the second half, albeit the first-half business is smaller than the second half.

Our direct to consumer business outperformed our internal plan in North America in the direct consumer business in Q1.

So that's really what's causing us to shift our thinking in terms of the first half growing now faster than the second half.

And, frankly, as it relates to the second half, we're taking a slightly more cautionary view, given what's happening with our wholesale customers, with the recent bankruptcy filings, as Tim alluded to; and then frankly, our Korean business, which we thought had bottomed in the fourth quarter of last year has softened a bit.

I'm answering a couple of different questions here, but that is really what has caused our thinking to change relative to first and second half pace of growth.

Okay.

And then just maybe to clarify, so first half stronger than second half, but 1Q for the US, up significantly.

So how should we think about 2Q?

Okay.

Yes, good question.

Some of that internal beat relative to the US business was a shift in timing, relative to our internal plan for the US wholesale business.

So we're trying to stay away from sequential quarterly guidance here, but we do think that the pace of growth in Q2 on a consolidated sales basis will be quite a bit slower than Q1.

And, again, some of that is a function of a smaller EMEA distributor business for Fall 2015, particularly our Russia business, where a lot of that business shifts between Q2 and Q3.

So given the seasonality of our business and Q2 being the smallest quarter of the year, and we're between seasons for the distributor business, it can always be tricky.

So that's an element to that slow-down in Q2 growth, as well.

Okay.

Got it.

And just one last one.

You tweaked your gross margin projections for the year, and I just wanted to get some of your thoughts, the drivers of that shift in outlook?

Yes, some of that is just frankly a function of sales mix between the various channels of business.

And, again, some of that wholesale business for fall 2015 that we've taken out of the plan.

So that's really -- I think we're down 10 BPs from our prior guidance, so that is not significant.

There's lots of moving parts in gross margin.

Great.

Thanks so much.

Camilo Lyon, Canaccord Genuity.

I wanted just to follow up on the last question.

Could you articulate the actual dollar amount that you benefited from the shift in US wholesale?

And then just two other questions.

Yes, so the US wholesale shift is really relative to our internal plan, and it is a mid-single-digit millions of dollar type of number.

And I think there's $2 million to $3 million shift in the European direct wholesale businesses, too, moving from Q2 into Q1.

Great.

And then just on the commentary around more cautionary stances, due to the sporting goods bankruptcies.

Is there a discussion of where those sales might trend?

It sounds like you're thinking of those sales are either going away or just won't happen.

But I would think that there is probably just more of a shift to a different retailer.

Is there more of a cautionary stance you're taking on where those sales go, or do you feel that they actually just do evaporate?

Well, I think that the sales will be picked up by several different components including other brick and mortar retailers that we sell to, folks who sell on the web.

And then, we're really up in the air, waiting to see what happens with these stores, whether there will be further liquidation and closures, or whether someone will take them over and operate them as a going concern, or whether they'll change into selling some other commodity.

So, again, we're cautionary because it is really undetermined as to where those things are going to end up.

Again, just strength of the balance sheet allows us to be -- to manage this business with times like this in an appropriate way.

And so, your guidance includes what outcome from those expected store closures?

Well, we assume that some of those sales will go to others, and some will go away.

So we haven't assumed that our order book from January gets completely sent to everybody that they originally booked it.

And some of it goes away.

And not necessarily at the same margin that they would have otherwise gone at.

Got it.

Understood.

And then just with regard to the order book commentary, could you maybe talk little bit in greater detail around different conversations that you might be having by channel?

So are the department stores being more cautious than the sporting goods, the ones that are not suffering from bankruptcies, versus the specialty retailers?

Or is everyone really taking a very protective stance as they view fall 2016?

Yes, I think -- everybody who sells winter-related merchandise with exception of those that are carrying Sorel, honestly, are just cautious about the weather, and the unknown components of the weather.

I know you all see the traffic numbers that are published and distributed quite broadly.

So people are just concerned about the business on a go-forward basis.

They're relying on strong brands, so we take advantage of that.

And so your inventory build is really going to be built to order, with respect to the wholesale channel, and any incremental opportunity will come from demand that flows to your DTC channel?

Is that the way to think about any ordering relative to access demand?

No, not really.

Actually the outerwear products that the company manufactures have some of the longest lead times of any commodity that we sell based upon the complexity of the garments themselves, and the multiple categories of material that go into them.

So we make a bet on our inventory positions early in the year and this is something we've done for a long time.

We've never had the disruption in terms of customer bankruptcies we have had this year, but frankly, that is why we have a balance sheet.

And we have a plan to reduce the inventory levels that we have, as we've discussed, and that's how we have built up our guidance that we're going to give you today -- that we've given you today.

Okay.

Understood.

Best of luck.

Thank you.

Jay Sole, Morgan Stanley.

Just wanted to ask about the free cash flow guidance in the document that says to get the guidance is for $110 million to $130 million.

If you could walk us through the math how you get from the net income guidance to the free cash guidance, given that the net impact of CapEx and D&A should be maybe a $15 million cost.

That was the first question.

So we're planning for operating cash flow of roughly $200 million this year, and about $70 million of CapEx, and there's probably 10% plus or minus in terms of predictability of that operating cash flow, so that gets us into that $110 million to $130 million range.

Okay.

Then maybe I'll ask a different question, maybe about the accounting standard.

It seems like the new rule could add volatility to your reported earnings and cash flow, it did this quarter.

Can you talk about the pros and cons, of how you are thinking about internally of adopting maybe non-GAAP EPS metrics that add back the stock-compensation related expenses and any other related tax benefits to perhaps reduce the potential volatility?

Maybe one clarification relative to the assumption embedded in your question.

The accounting standard change will be required for accounting companies beginning January of 2017, with early adoption allowed.

And given that the way we look at the impact of the standard, assuming a stable stock price between now and, say, through the first half of next year, we think the earnings benefit that the standard is going to provide is fairly comparable of about $0.10 -- $0.09 to $0.10, both this year and next.

And as a result we chose to adopt that standard early.

It is actually GAAP, it is not a non-GAAP element.

Got it.

Okay.

So in other words, you're not thinking about trying to introduce a non-GAAP element just to smooth out any volatility?

No, you will see other companies implementing this standard over the next four quarters.

Okay.

Great.

Thank you so much.

John Kernan, Cowen.

Congrats on the top line momentum.

Just wanted to go back to the wholesale partner question.

Obviously the sporting goods, some of the sporting goods channels are under a lot of pressure, but you do have a lot of other wholesale partners that are in pretty good positions here.

Can you help us understand how you think they're planning their businesses, given the fact that everyone got hurt on inventory last year because of the weather?

Is there an air of conservatism in the way they're building their order books, the non-sporting good channels under pressure?

It is supposed to be, if you believe some of the weather prognostications out there, it's supposed to be awfully cold in the fourth quarter.

So just trying to understand how conservative some of your wholesale partners have been to date with building those order books.

I hope you're right about the weather.

It would be terrific.

It's the La Nina thing, right?

In my experience, retailers plan their future years and seasons based on the one preceding, not necessarily on any predictions of weather.

So these bankruptcies all occurred after the major buying season for our customers.

So customers that made their bets on where the inventories lie with their various vendors.

We have, obviously a plan to move through this inventory that we're going to get back from these bankruptcies, and again, as I said, the bankruptcy -- the state of the stores is not yet known so it is a little bit in flux.

That's why we're taking a cautious approach as to how we're giving you guidance.

But because there are many, many scenarios, many levers for us to pull to manage the year, we feel comfortable that we have got the appropriate methods to manage through the balance of the year, and to provide the guidance that we have given you today.

Just to go back to the international piece, Russia and Korea have been under a lot of pressure.

Do you think these issues are transitory, and can be resolved as we go into 2017, or are there other real structural problems there?

I know they're both fairly large markets for your international business.

Talking about Russia first, it is anybody's guess as it's certainly going to be driven off commodity and price resurgence, especially oil and gas.

Our partner and distributor in Russia has a tremendous balance sheet, and is one of the largest retailers of any commodity in that market.

So we have a high degree of confidence in their abilities to manage through the periods of difficult times and currency devaluation that we've all seen.

So it's anybody's guess there, it is really going to be a function of the commodity pricing resurgence.

As it relates to Korea, the Korean economy is not necessarily bad.

It just happens that in our sector, the outdoor business, with so much growth over the last 10 years, there were so many new entrants into the business, that the inventory levels there just got untenable.

And any slowdown there drives inventory liquidations, and that's what we have seen in that market for the last, call it 18 to 24 months.

There has been many, many brands that have exited the market.

The strength of our balance sheet allows us to stay there and maintain our business, and grow as the business right-sizes itself.

So we have a high degree of confidence in our management team in Korea, and we believe we're going to be there for the long term.

Okay.

Thank you.

Best of luck.

Mitch Kummetz, B. Riley.

Thanks for taking my questions.

So on FX, Tom, can you just talk about what impact you're now expecting on margins and earnings for the year, versus maybe what the prior assumption was?

I know you gave your expectation on the sales, but maybe you could just speak to margins and earnings?

So maybe just to make sure I understand your question, Mitch, specifically to FX, or in general?

FX.

Correct me if I'm wrong, but I think you said last quarter something like 100 basis point negative impact on gross margins for the year.

I think that is what you said.

Yes.

And that's holding, because most of the hedging we had done for spring and fall 2016 was largely done by the time February came around.

So we're still anticipating that 100 basis point headwind from FX, and the $0.28 reduction as a result of FX has ticked down to $0.27.

So almost all of that, I think all but maybe $0.01 of that $0.27 is in the gross margin of our foreign subsidiaries.

And when does the negative impact of hedging, FX hedging roll off the gross margin?

Is there a time frame when that inflects?

As we sit here every day, assuming currencies, assuming they were to hold where they are at today, the hedge impact would become a tailwind for spring and fall 2017.

And we've begun to place some of those hedges for our foreign subsidiaries already.

So I would expect -- I would expect hedging to be, absent some massive strengthening of the dollar over the next six months, I would expect hedging to be a tail wind in 2017.

Got it.

And then as I look at the adjustments that you made to your full-year sales guidance, by brand, it looks like you're still expecting the same growth out of the Columbia sportswear brand, but Sorel, prAna and Mountain Hardwear, those are the ones you took down for the year.

Is that largely a function of the bankruptcies we've been talking about, and the issues in Korea, or --?

Yes, I would say that Korea for Mountain Hardwear is definitely a component.

Sorel and prAna are smaller businesses in that region, but the bankruptcies are weighing in on the most of, if not all of our brands.

Okay.

And then lastly on the fall order book, Tim, it sounds like you're pleased with what you're seeing.

It is obviously embedded in your guidance.

You mentioned that you got off to a strong start, and I'm guessing that it tailed off a little bit, as you were wrapping up the order book.

Is that a fair assessment, or is that not really the case?

It is really hard for me now to think back about the cadence of our order book, but we're getting new orders everyday, and we get cancels every day.

So but the bulk of our customers' orders are early in the year, and then we expect as the season rolls along, maybe there's some strengthening, if the weather has been cooperative and inventory levels are low.

But yes, I mean, the order book came through about like we expected, certainly based on what we saw from early seasonal weather in North America.

Got it.

In Europe, for that matter.

Great.

Thanks.

Good luck.

Laurent Vasilescu, Macquarie.

For the US result could you possibly parse out the growth between unit growth and ASP growth?

And what are your expectations for those two metrics for the balance of the year?

How is that different from last year?

And then could you possibly talk about how much of that 18% growth came from incremental doors year over year.

I'll take a stab at that, Laurent.

Specifically as it relates to the US business, and I don't have these numbers in front of me for the first quarter and the full year, but I'm pretty certain that the vast majority of our growth is coming from unit growth in the US, and not ASP growth.

Okay.

And then from the incremental doors?

I don't have the door figures, but I wouldn't anticipate, at this point in time, any meaningful change in door count in the US.

Yes, the US especially where we're a very mature brand, there's not much store growth, frankly.

Okay.

And then I think the last quarter you gave us the global e-commerce number of $160 million for 2015.

Can you remind us how that grew year-over-year in 2015 and what your expectations are for 2016?

Yes, and again, we're going to be a little guarded in terms of how we announce elements and report elements of our direct consumer business; but I think it would be safe to say that for the quarter and for the year, we're projecting our e-commerce business to grow at a faster clip than our brick and mortar direct consumer business.

And at this point, I'll leave it at that.

Okay.

And then on capital expenditure guidance, it was maintained at $70 million.

And I think your Japan ERP implementation was pushed back to 2017.

Can you quantify the shift in 2017?

What is the balance to get to the maintain guidance?

The $70 million is comprised of multiple components, and as we change the focus in the ERP from Japan to China, there will be a small reduction in CapEx for the full year this year, but not overly significant.

And I wouldn't view that today, as we migrate to Japan, that would be incremental CapEx in 2017.

I don't think that's the way to look at it.

Okay.

Excuse me.

I think I said migrating the ERP initiative to Japan, we're migrating from Japan to China.

Got you.

Okay.

Best of luck.

Jon Komp, Robert W. Baird.

If I could just maybe ask about the outlook, and the change in guidance once more.

Just to the operating profit being about $3 million to $4 million lower than the prior range.

I know you mentioned the two or three factors contributing to that.

I'm just wondering if you could help maybe quantify the impact from the bankruptcies versus the Korean and Russian market, and some of the other factors you mentioned?

Yes, I would say it's pretty hard to put a specific number on the US component, the Korea component, because we're moving various elements of our business around.

Obviously, this is a complex business with multiple channels and multiple geographies, and nothing is stagnant, and the forecast becomes stale the day after you lock it in.

But I would say the two biggest components to, say, the $3 million to $4 million reduction in core operating income versus our prior guidance is the more cautious approach to the US wholesale business in the second half, and to a lesser degree, the softening Korean business.

Okay.

Great.

Maybe one more --

I was going to point out, just for full clarification, we're very proud of the process and the people that we have managing our credit extension here, so investors should know that there is a reason that we didn't end up in the top creditors on these bankruptcies.

In fact, we managed those accounts receivable balances quite well.

So we're in a position where we have inventory to sell and not assets to be written off, not receivables to be written off.

I think our bad debt write-offs for the two recently announced bankruptcies in the neighborhood of $2 million, of which I think about $1.5 million of that was actually reserved in the fourth quarter of last year.

Thank you.

That is helpful.

And just another clarification on the second quarter.

I think previously it sounded like directionally, that total revenue growth globally, could have been, low single-digit growth, maybe 3% or 4%.

Is that still the type of level you're looking for in the second quarter?

Yes, we would expect the second quarter to grow at a slightly slower rate than what we're planning for the full year.

Okay.

Got it.

And then last question for me.

Looking at the SG&A commentary in the release, I notice that it no longer mentions an increase in the marketing spend for the year, the demand creation.

I know you mentioned having different levers to pull.

Is that one of them you're referencing, or any changes in plans for the marketing, and just broader, on the discretionary G&A spend?

Yes, as of -- baked in our guidance today, we're planning a 5.3% marketing spend, so we've ticked that down 10 basis points.

But still up 10 basis points over last year.

And I think that equates to roughly $10 million increase year over year.

Okay.

Got it.

Thank you.

Susan Anderson, FBR Capital Markets.

Good job on the quarter.

I was wondering if you could talk a little bit about just the new spring products that has come out, the reads that you have gotten so far, such as like OutDry Extreme?

And then, the new Sorel spring products, any reads there in terms of how they're selling at retail or how your spring line is selling this year versus last year so far?

Sure, let me talk first about Sorel, because it was a fairly narrow launch, with just a few customers in the US, and we have been very pleased with the progress there.

Mark Nenow and his team have put together some really interesting products.

It is not easy to take a winter boot and turn into a summer sandal, but they have been successful in making it very interesting and ripping off the fall products that were so successful for us last year.

I would say that launch has done well.

We're very excited about the expansion of that seasonal product for Sorel, because it will allow us to go to our international partners, and have them begin to make larger investments in Sorel, where we could put full line stores some of these smaller markets, where a distributor can have a year-round presence in the stores.

So we're very excited about that thing gaining traction.

As it relates to Columbia, our PFG business continues to be a strong component, so it reminds us that we're not just a winter brand.

And then, we're very excited about the results that we're getting publicity-wise from our OutDry Extreme, which is as you know, is the member on the outside garments.

We're going to be extending that into other kinds of products in fall, to complete our dry and protection story.

So we're pretty excited about how spring's products are being launched, and I would be remiss if I didn't talk about how well our prAna swimwear for women is doing.

Great, that sounds good.

And I may have missed this, but Europe sales continue to be very strong.

How is the profitability trending there, and when should we expect that turn?

Well, I would say that, based on the fact we continue to gain business there and gain share, that we're turning already.

As I said in my comments earlier, if it weren't for the currency issues, we would be profitable there this year.

So my expectations are that it will -- quite soon we'll see be seeing black numbers there out of Europe.

At the end of the day we have the right team, and we're focused on doing the right things for the brand.

Again, harping on the balance sheet, this allows us to take a very measured approach to get this business back solid on a sustainable basis.

Great.

That sounds really positive.

Well, good luck next quarter.

Andrew Burns, D.A. Davidson.

Congrats on US DTC and your direct performance in the quarter.

When you look at the recent retail bankruptcies and ongoing sales migration towards online, does it make you look at your DTC or wholesale channel strategies any differently on wholesale, the balance between specialty department store and sporting goods?

And on DTC as you invest for growth, the balance between brick and mortar and online?

Thanks.

Yes, well, again, as I said earlier, we're proud of the approach we take in extending credit to wholesale customers, and it allows us to really, with some certainty, pick the winners in terms of those that have the ability to grow and take advantage of a tumultuous time in the retail business.

So our expectation is that, yes, over time, there will be migration in a better -- in a different way from brick and mortar and into the electronic commerce forms.

We're not retailers; we're continuing to focus on being a wholesale business.

So it is our approach to align ourselves with the strongest in each one of those channels.

Yes, we're not immune in our own business from traffic trends in brick and mortar.

So we monitor those and stay on top of them, and frankly, our approach on electronic commerce is that while we get industry standard with conversion rates, it's really an opportunity for us to tell a very robust story about each of our brands that consumers leave our sites with, and hopefully shop, either in our store or in one of our partner stores with a lot more knowledge about the products and about the brands.

Thanks, and good luck.

Rafe Jadrosich, Bank of America Merrill Lynch.

So just first question you talked about the momentum you're seeing with Sorel in the US, but you also mentioned that you're very underpenetrated outside of North America.

Can you talk about when you might start to capitalize more on that opportunity?

Sure.

I would say that as you remember, Sorel was a Canadian company that we bought in 2002.

It has got enormous heritage there but primarily is a winter men's utility brand.

Our business in the US has continued to grow, and really in North America, as we transition to spring and into a fashion -- and a brand that means much more than say, winter men's.

And we have a solid business in Europe, in the more traditional parts of Sorel.

So what we're most excited about is the opportunity that our spring Sorel success can give us the opportunity to go to a place in the world where Sorel is maybe not as well known as it is in North America and in Europe, and have investments being made there by our distributors; to take that brand and make it a stronger contender in the footwear business, based on the fact that it is a year-round brand.

So it really requires a successful spring season for us to get real traction outside of North America and Europe.

Thank you.

And can you just give an update on what you're seeing in the China market?

Certainly.

You may remember, we made a change in our leadership there in the last 60 days with a new leader, Jason Zhu, who is going to be taking that business over and running it as a joint venture between ourselves and the Swire company.

So we have a young guy there that is very excited, has a tremendous amount of understanding in the marketplace, and sees real opportunities there.

Yes, that business is going through a transition, as well, where there is enormous growth in the electronic portions of the sales of products of our type, and declining importance of brick and mortar there.

But we are opening stores there, and we have good solid partners that have stores.

But I'm guessing that the long-term will be a higher concentration of e-com business there, because it is a relatively new market for our kinds of products.

And then just the last question, can you give an update on the Trans Pacific Partnership, what you -- do you think that could potentially have an impact for you in maybe 2017?

Just what you're hearing would be helpful.

Certainly.

We're only sort of proud of the fact that we're the 58th largest duty payer of any company in the United States, which means, it is evidence of our company's strength, but more importantly, the impact of duties and customs charges on our commodities.

I think until we have a decision on our new president, we're probably looking at a stagnant issue; but I mean Peter may have more information than I do.

I would just add the same thing.

Obviously, none presidential candidates are talking favorably about it now but there is lots of opportunity for people to change their minds after the election.

But 2017 is probably too early in terms of people expecting to have something that still has to get approved and then has to be implemented.

It is a while out even if it does happen.

But we have paid a lot of attention to that, and participated in it and pleased with the way the agreements come together, if it does get approved.

That is really helpful.

Thank you.

(Operator Instructions)

Christopher Svezia, Susquehanna Financial Group.

Tom, for you, just curious, SG&A, you delevered 10 basis points, I think in Q1, I think the guidance was 40 for the year.

Is that just predicated on Q2, just low volume quarter in terms the deleverage on SG&A, is that how we should think about it?

Yes, that's exactly right, Chris, 60%-plus of our cost structure is fixed.

So when we've got a low to mid-single-digit growth in a period, then we'll delever and that is what we expect to happen Q2.

And that will be the most significant deleverage quarter that we see, based on how we put the outlook put together.

Does it potentially spill into the third quarter as well?

Is that fair to say, or no?

Yes, that is fair to say.

Okay.

And I'm curious on the gross margin outlook for a moment.

So it looks like in Q1, you did a nice job clearing out inventory, at what seems to be a reasonable margin, because looks like gross margin was roughly in line which what you indicated.

Your inventories are pretty clean.

FX doesn't seem to be a material impact, relative to your prior guidance.

So I guess we have cleaner inventories potentially, maybe a stronger or full-price sale for direct to consumer in the fourth quarter.

Why couldn't the opportunity for gross margin be potentially better?

I'm just curious how I should think about that if your inventories are cleaner you did a better job in Q1.

Well, our gross margins in Q1 came in largely where we planned them, and I think we've taken our gross margin outlook down 10 basis points from our prior guidance.

We're still going to be up 30, with some pretty significant headwinds, and some uncertainty in the second half of the year relative to the US wholesale business and definitely a softer Korea environment.

So there's lots of elements to gross margin, and that's how we see it today.

We'll be able to provide more color when we get to July, but at this point, I think gross margin is planned pretty much down the middle how we see it.

Okay.

All right.

That's all I have.

Thank you very much.

All the best.

Corinna Freedman, BB&T.

I'll make it very quick.

I was just wondering if you could give us update on outerwear initiative at Sorel and if you have any distribution gains in the pipe for second half of this year?

Thank you.

Certainly.

Well, as you know it probably wasn't the optimum season to add an outerwear component to a brand that's very strong in any case.

But we had great uptake.

It wasn't as large as we wanted it frankly, but we had customers that were very excited about the look of the Sorel outerwear, and how good a job our teams did on capturing the DNA of Sorel, in a product category which is not natural to it.

So we're committed to that category of merchandise.

We think it fits perfectly with Sorel, and we're going to see lots more of it in this coming spring -- sorry, fall 2016.

We're excited about the potential, and as someone else mentioned on the call earlier, it is expected to be a very, very cold and snowy winter.

So that will be good for us.

Great.

Best of luck.

Thank you very much.

I'd like to turn the floor back to Ron Parham for closing comments.

Thank you very much for calling in.

We're very excited about the balance of the year, and excited about how our brands are performing.

We look forward to talking to you soon.

This concludes today's teleconference.

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