Columbia Sportswear Co (COLM) 2016 Q3 法說會逐字稿

Greetings.

And welcome to the Columbia Sportswear third-quarter 2016 financial results.

(Operator instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ron Parham, Senior Director Investor of Relations and Corporate Communications at Columbia Sportswear.

Thank you, Ron.

You may begin.

Thanks, Bob, and good afternoon, everyone.

Thanks you for joining us to discuss Columbia Sportswear Company's third-quarter financial results, and our updated 2016 financial outlook.

In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary, analyzing our third-quarter results and explaining the assumptions behind our updated 2016 financial 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; Executive Vice President of Finance and Chief Financial Officer Tom Cusick; and Executive Vice President and Chief Administrative Officer Peter Bragdon.

President and Chief Operator Officer, Bryan Timm, who also usually participates on our call, is down in our Mountain Hardwear headquarter today for the kickoff of that brand's fall 2017 sales meetings.

Gert is going to start us off by covering the Safe Harbor reminder.

Good afternoon.

This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated result 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 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 these forward-looking statements after the date of this conference call, to conform to the forward-looking statement to actual results or to change in our expectations.

Thank you, Gert.

I would also like to point out that during the call, we will reference constant-currency net sales growth, which is a non-GAAP financial measure, and you will find a reconciliation of constant-currency net sales to net sales, as reported under US GAAP, in the supplemental financial tables that accompany our earnings release, along with an explanation of management's rationale for including the non-GAAP measure.

And now, I'll turn the call over to Tim.

Thanks, Ron.

Welcome everyone, and thank you for joining us this afternoon.

I want to start by looking back to Q3 2015, when North American wholesale customers were aggressively restocking their fall inventory, following a very favorable winter, driving US sales up 26% and Canada's up 39% on constant-currency basis, and contributing to 39% increase in net income.

Our slightly better-than-expected third-quarter earnings of $83.6 million or $1.18 per diluted share, were achieved against those very difficult comparisons, despite the North American marketplace that looks and feels very different than it did one year ago including: weak consumer traffic across brick-and-mortar retail landscape, lingering effects of wholesale customer bankruptcies, a glut of competitor brands in liquidation channels -- and I would like to take this opportunity to remind the listeners, that we chose, in contrast, to rely primarily on our own outlet stores to clear last year's excess inventory -- this year's lingering warm weather across the key portions of the northern hemisphere, a conservative inventory posture among our North American wholesale customers, and North American wholesale customers shifting delivery of a larger portion of their cold-weather products into the fourth quarter.

During the third quarter, these headwinds in our US wholesale business were partially offset by mid-teen growth in our US direct to consumer business, as consumers increasingly seek to engage directly with brands.

In our Europe direct markets, the Columbia brand drove high 20% growth, making the seventh consecutive quarter of 15% or greater constant-currency growth, and producing mid-20% growth through the first nine months of 2016.

The momentum in our Europe direct markets is broad-based, consisting of growth across each of the markets where we operate, growth within each channel of distribution, and growth from each of our brands led by the Columbia brand.

Our Tested Tough marketing campaign, our global partnership with Manchester United, and our successful sponsorship of the Ultra-Trail Du Mont Blanc, are succeeding in engaging European consumers with the Columbia brand's authenticity and unique personality.

On the operational front, we will open four outlets and two partner stores in Europe this year, and plan to add a similar brand and number next year.

We're also making investments to migrate our Columbia and SOREL brand e-commerce business in-house in 10 European countries, during the first quarter of 2017.

We expect that transition to drive incremental revenue growth, enhance the consumer experience, and improve our online marketing capabilities and effectiveness, while leveraging our existing European infrastructure.

Our updated full-year outlook anticipates our Europe direct business, generating constant currency growth of approximately [20]%.

(sic - 40%) Our team in Europe has been extremely focused on improving profitability, and we expect our Europe direct business to be EBITDA neutral in 2016, despite significant currency headwinds.

We're confident that Europe holds great potential for additional growth and profitability in the years ahead.

The Columbia brand also drove mid-teen constant currency growth in China, including strong wholesale and e-commerce sales.

Our team in China is focused on improving the productivity of our distribution channels, to position the joint-venture for a strong finish to the year and for continued growth in 2017.

In Korea, we are encouraged that consumers ranked the Columbia brand among the top 5, among the more than 50 outdoor brands, that compete in that market.

However, as we've discussed in previous quarters, the Korean marketplace continues to struggle to absorb a large industry-wide inventory overhang caused by a shift in consumer preference away from the outdoor sector in that country.

We remain firmly committed to using our strong balance sheet to strengthen our market position through this market reset.

Columbia brand inventory levels in Korea are gradually declining, however we are currently expecting the industry-wide glut to continue, and make it very unlikely for us return to growth through at least 2017.

In Russia, we're confident that our business is poised to return to moderate growth in the first half of 2017.

Annual sales to our long-time distributor have declined significantly over the last 18 months, as they have adapted their business to Russia's economic and currency challenges.

Our third-quarter sales to this distributor declined as expected.

Stepping back and looking our business from a global brand perspective, third-quarter Columbia brand global sales contracted 4%, comping against 14% constant currency growth in last year's third quarter.

The mission of our Columbia brand is to help people enjoy the outdoors longer, by keeping them warm, dry, cool, and protected in any climate and any weather year round.

For the fall season, our primary emphasis in the northern tier markets is on keeping people warm and dry.

Columbia's patent pending OutDry Extreme technology, first introduced in rain shells this past spring, is the latest example of our significant investments to create superior proprietary technologies that define and differentiate the Columbia brand.

OutDry Extreme has redefined the waterproof breathable apparel category, by moving the waterproof membrane to the exterior of the garment, where it works best to keep people dry, while enhancing the jacket's breathability, in contrast to traditional products that sandwich the membrane between two layers of fabric, where both waterproofness and breathability are significantly compromised.

For fall 2016, we've extended OutDry Extreme into Columbia insulated jackets, gloves, and expanded assortment of rain shells.

And in spring 2017, we will extended it further into soft shells and trail footwear.

In addition, the Columbia's OutDry Extreme ECO rain shell, swept the best of the show awards in multiple categories, at the Outdoor Retailers summer market in August, and has since been heralded globally by journalists and ecologists as the most functional performance rain gear, with the least impact on the environment.

Today OutDry Extreme ECO has generated nearly 150 million media impressions, and it hasn't even hit the market yet.

We're very excited about our December 1, 2016 launch of Columbia's award-winning OutDry Extreme ECO rain shell.

During the entire month of December, OutDry Extreme ECO will be available exclusively at more than 100 REI retail stores and online at REI.com, with availability extending into other outdoor specialty wholesale customers and to Columbia.com in early 2017.

While I'm on the topic of our ongoing efforts to reduce the environmental impact of our products, I'm very proud to draw your attention to the recent publication of the Columbia brands 2016 corporate responsibility report.

While we have a long history of sustainability in corporate responsibility programs, this is the our most comprehensive summary of our ongoing efforts and related metrics from around the globe.

I won't take time to going to detail on this call, but I would encourage you to visit our corporate website to read the online version.

During the third quarter, we launched the second year of Columbia's award-winning Tested Tough advertising campaign featuring our own tough mother Gert Boyle, and began recruiting across the US, Canada, and the UK for candidates to apply to become Directors of Toughness for Columbia for 2017.

This year's Director of Toughness recruiting efforts, attracted 4500 applicants and has already generated over 200 million media impressions, representing a five-fold increase in media attention, compared to our very successful first Directors of Toughness campaign last year.

For those 4500 applicants, we will select two to travel the world for nine months, putting Columbia gear to the test in some of the planet's most extreme conditions, while chronicling their journey, and generating even more consumer engagement with the Columbia brand.

While social media campaigns and traditional advertising helped drive consumers into retail stores in search of Columbia products, we also want to make sure they have a memorable brand enhancing in-store experience when they shop.

During the third quarter, we began deploying new in-store shop-in-shop brand environments, designed to drive productivity for our wholesale partners by inspiring consumers and conveying Columbia's unique connection to the outdoors.

In 2016, consumers will be able to see these experiences in eight locations in the US, three in Moscow, two locations in Beijing, as well as stores in Toronto, Nuremberg, Shanghai, Singapore, Dubai, and Seoul.

Our current plans anticipate rolling out several hundred of these environments around the world by the end of 2017, and many more beyond.

Providing great example of how our balance sheet and global operations enable us to invest in our brands to support our wholesale customers and distributors around the world.

Before moving on from the Columbia brand, I want to emphasize it's broad assortment of lightweight layering styles: rain wear; fleece; and sportswear, including our market-leading performance fishing gear, or PFG, that keep people warm, dry, cool, and protected in all climates and in all seasons year-round.

We believe the brand is extremely well-positioned to address changing consumer preferences towards versatile protection in the face of unpredictable seasonal weather.

Our updated outlook anticipates approximately 4% global growth from the Columbia brand in 2016.

Turning now to the SOREL brand.

Third-quarter sales of SOREL increased 1% in constant currency, comping against last year's 59% constant currency increase, and reflecting cautious advance wholesale orders in response to last year's warm winter, coupled with supply chain issues which have been substantially resolved that pushed some sales into the fourth quarter and a slight impact from the US wholesale bankruptcies.

SOREL's product team continues to make steady progress de-winterizing the brand, SOREL's new lightweight fall styles, led by the Lea wedge, Addington, and Out 'N About collections accounted for 85% of the increase in SOREL's fall 2016 advance orders.

SOREL's expanded spring line, launched successfully 2016 in partnership with Nordstrom, paved the way to opening a significant amount of new accounts across North America for spring 2017.

We continue to have confidence that SOREL represents a large, long-term, global opportunity as we established a year-round brand and gradually expand it into more markets around the world.

Our updated outlook anticipates approximately 6% global growth from the SOREL brand in 2016.

The prAna brand grew 11% in the third quarter, on top of 22% growth in last year's third quarter.

prAna's men's and women's shorts, pants, and short-sleeved tops were their best performers, illustrating once again how balanced that brand's business is between the spring and summer, and fall/winter seasons.

prAna sales are heavily concentrated in the US, where it's fighting through headwinds from US bankruptcies, a warm early-fall, and cautious advance orders from wholesale customers.

Our prAna team is working to increase e-commerce traffic and conversion, through catalog mailings and site enhancements while also planning to expand their wholesale business in 2017.

Our updated outlook anticipates approximately 14% global growth from prAna in 2016.

Finally, our Mountain Hardwear team remains focused on implementing the turnaround strategy we formulated over the last six months.

President and CEO, Brian Timm, is working closely with the team in Richmond, California to implement our brand reset strategy, accentuating Mountain Hardwear's high-performance alpinist DNA across all of it's target market categories and consumer segments, aiming towards a return to sustainable profitable growth by 2018.

This fall, Mountain Hardwear's target consumers and wholesale customers have begun to see the brand's new imaging and messaging platform across social media and in a new print campaign currently running in leading publications including Alpinist, Rock and Ice, Climbing, Outside, and Men's Journal, along with many others.

Mountain Hardwear's key product initiatives are focused on providing lightweight warmth through their ultra-light Ghost Whisperer collection, as well as their innovative StretchDown products that deliver superior warmth and comfort.

Third-quarter Mountain Hardwear sales declined 13% in constant currency against last year's 17% constant currency growth.

Our revised outlook anticipates global Mountain Hardwear sales contracting by approximately 10% in 2016, primarily in the US wholesale channel and the very challenging Korean market.

Overall, we're pleased that the consolidated results of the third quarter despite the sluggish US consumer environment.

Consolidated gross margins were equal to last year's third quarter, overcoming approximately 100 basis points of foreign exchange headwinds with a greater proportion of direct-to-consumer sales, a lower proportion of sales to international distributors, and selective price increases and a favorable sourcing environment.

Inventory levels improved, ending the quarter up 8% from last year, comparable to the fourth-quarter sales growth rate implied in our updated full-year outlook.

On the expense front, our management team again demonstrated solid spending discipline, that resulted in a 1% decline in the spending compared to last year's Q3.

Looking ahead, the global retail stage is set for the fourth quarter.

Historically, our third-quarter sales and profit are predominantly a function of shipping advance wholesale orders, while fourth-quarter sales and profit are more a function of the performance of our direct consumer business.

Based on record, early warm weather during the first four weeks of October, and poor consumer traffic patterns, we felt it was prudent at this time to trim our full-year EPS outlook by $0.05.

Our revised full-year outlook now anticipates sales and operating income growth of approximately 4%, maintaining a 10.7% operating margin.

We expect full-year 2016 net income to increase approximately 8% to between $180 million and $187.5 million or $2.55 to $2.65 per share, including an unfavorable impact of approximately $0.26 per share due to the changes in currency exchange rates.

We remain focused on the things we can control, including strengthening our brands, bringing innovative products to market, and driving consumer demand with the compelling marketing and in-store and online experiences.

Our strong balance sheet provides us with the flexibility to invest behind our strategic initiatives to improve our operating platforms and drive profitability, while our strong cash flow enables us to steadily enhance returns to shareholders, demonstrated by the 6% dividend increase we announced today, marking our ninth increase since we began paying a dividend in 2006.

You can find more details on our Q3 and year-to-date results and our updated 2016 financial outlook in Tom's CFO commentary, available on our website.

That concludes my prepared remarks.

We welcome your questions for the remainder of the hour.

Operator, could you help us out with that?

Thank you.

At this time we will be conducting a question-and-answer session.

(Operator Instructions)

Bob Drbul, Guggenheim Securities.

Hi, good afternoon.

Hi Bob.

Hi Tim.

A couple of question for you.

The first one is, when you look at the marketplace, and where your inventories are versus what you're seeing in off-price competitively, what are your assumptions over the next couple of weeks and months as it relates to demand overall for the cold weather merchandise or for the outerwear category?

Bob, as you know, we've been in this business a long time, and frankly, we spend a lot of time looking at, not only this market but other markets globally, and that amalgamation of all those kinds of variables, basically gives us confidence to give you the outlook for the balance of the year that we have given you.

And Bob, this is Tom.

Maybe just to add a little more color to that, if you look at where we're sold-in from a wholesale perspective for fall for the Colombia and SOREL brands, the cold weather brands in the US wholesale market, we'll will be about 80%-plus, exiting October, so that is a pretty typical pattern for us.

Okay.

As you think about the bankruptcies that have gone on, and some of the murders that are taking place in the consolidation, especially in the US here, when you look at next year, is there a base case on how you consider your positioning and door count on a wholesale basis as you think through the next 12 months?

Yes, we do a lot of analysis, and in fact we're just about to start selling our fall 2017 product in next few days, we've concluded our sales meeting here at Columbia, and the SOREL and Mountain Hardwear meetings are in place now.

So we have fairly good idea about where we think the product will be placed, and where we think the business is going to end up.

Of course, there is a bit of a weather variable involved in all of this stuff, but frankly, we are behind some of our competitors, and we think there's an opportunity for us to gain market share based on the current performance of the product at retail against our competitors.

We're not looking to add a bunch of doors, we're not looking to add additional distribution, but we think there is an opportunity for us to continue to gain share in those key retailers across the US, and obviously in Europe where we have been doing very well against the competitors there in terms of gaining share.

Great.

Tim, when you look at the fourth quarter, and you look at your inventory levels and the inventory levels at retail, when you think about how we are positioned, especially year-over-year, do you think there is a lot of risk in what is happening with the inventory levels out there in the outerwear categories?

Not really.

If you remember last year, the enormous warm weather was in November and December of last year.

I think we've look at the comparable sales, the expectations across, not only our stores, but our customer stores, and the expectation is that we have the right amount of inventory.

This is a time when a strong balance sheet really trumps, I hate to use that word, (laughter) the strong balance sheet makes us less vulnerable than others perhaps.

Thank you very much Tim, good luck.

Thanks.

Andrew Burns, D.A. Davidson.

Good afternoon.

It seems like every season we hear more and more about the buy- now, wear-now trend and retailers pushing inventory risk back onto the brands, and what you saw this quarter, is this a reflection of the cautionary environment we are in?

Or is there any sort of reflection of the more structural change occurring?

And if it is structural, is there any ways as you look at your business that you think it needs to evolve?

Thanks.

You know, we've gotten pretty good over the years at managing a seasonal businesses, especially as it relates to the cold weather businesses.

And you might remember that 2014 was a terribly cold year, and retailers ran out of cold weather product and we had a high demand at the beginning of 2015 and consumers actually went into the stores and bought that merchandise earlier than any year when there has been warm weather.

We're pretty good at managing these things, and again I focus on the balance sheet in terms of making sure that the Company can do the right things as it relates to growing the business and maintaining relationships without having to react to save the Company.

Inventory risk will continue to be an issue, especially in the environment where we have consolidation, and fewer wholesale customers.

It will be of constant discussion point I'm sure over the next several years, will be more important and a bigger part of our discussions.

But structurally, we are committed to being a supplier of merchandise for wholesale to retail customers and we're going to be focused on those retail customers that we believe will be here for the long term.

We have great relationships and lasting 40 years plus with some of these great retailers, and we expect that we'll be able to take advantage of working together to get through these particularly tough times.

Thank you.

And, if you could spend just a little more time as to what the lingering wholesale bankruptcy issues that you brought up are?

And as you look at 4Q, are we fully past this and how should we think of that as a headwind in terms of the timing here?

I think Tom had the number earlier, and it's in the neighborhood of like 1% of our sales were to these folks that went bankrupt.

They were great customers, but unfortunately they didn't survive.

The expectation is that as, obviously, the business climate improves a bit for the retailers, that the remaining retailers are going to be able to pick up that business.

It is tough to lose that part.

And maybe just to add a little more color to that, Andrew, so in the quarter the bankruptcies that we have alluded to, Sports Authority, Sports Chalet, etcetera, impacted Q3 in the US region by about 4%,l and we expect to have about a 2% impact on the US region for the full year, and about a 1% impact on the consolidated revenue for the full year.

Thanks for the color, good luck.

Thank you.

Laurent Vasilescu, Macquarie Group.

Good afternoon.

Thank you very much for taking my question.

I want to ask about the US revenue guide.

It's predicated on a high-key percentage growth, direct consumer for the full year.

Is that US guide dependent on further acceleration in direct-to-consumer during the fourth quarter?

I think in the prepared remarks it says that the third quarter had mid-teen growth in direct consumer,

Yes.

We're planning, so we don't want to get too far into the specifics with regard to specific direct-to-consumer guidance in the fourth quarter, but I guess to just provide some amount of color there, we're planning -- obviously we're comping much easier against Q4 a year ago, assuming normal winter weather this year.

And I would say our outlook is fairly consistent in Q4 with where that business has trended through September this year.

Okay, very helpful.

Maybe just asked a little bit differently, I think the direct consumer number percentage for global sales last year was about 35% of global sales.

Is it fair to assume that the percentage is around 45% for the fourth quarter?

I would say for the full year, we estimate DTC to be about 38% of business this year, and we would expect Q4 to be less than half of the business.

Okay, very helpful.

And then lastly, I noticed you raised your free cash flow forecast for the year, could you talk about the drivers for this range?

Yes.

I would say predominantly it's a function of CapEx spending for the year, and we've taken that down $10 million to $15 million, and the puts and takes within our working capital assumptions set.

We think will be $150 million, plus or minus, for the full year.

Okay, thank you.

Lastly, if I could squeeze one more in, I think there was a call out in the prepared remarks that traffic is challenging across the space.

Could you provide any color on how your US stores are doing quarter-to-date?

We really don't consider ourselves a retailer, so don't publish traffic numbers or other typical retail metrics.

I can tell you that we're not immune to the reduction in traffic which is been seen across all of the channels.

I might leave it at that.

Okay, thank you very much, and best of luck.

Jessica Schmidt, KeyBanc Capital Markets.

Hi, thanks for taking my question.

Could you kind of bridge the gap between what you're seeing in wholesale and direct-to-consumer?

How are your sell-throughs at retail?

Our sales-through at retail, I would say would be comparable to the prior periods.

We're about where we want to be globally terms of how the business is progressing at retail.

In our own DTC business, obviously we don't talk about the metrics there but those would be comparable.

Okay, and then in terms of pricing where you seen these increases?

And has this been difficult, given how promotional the environment still is?

And are you still expecting promotions overall to be up for the holiday?

Yes, I would say the bulk of our increases in price has been spread across our global business.

And then, as it relates to the promotion, you could take a look at the temperatures and determine if there's going to be greater or lesser promotions this year.

So I would just caution you, as a relates to Columbia, to remember that we are a global company and we have sales outside of north-eastern part of the United States.

Okay, great, thank you.

Jonathan Komp, Robert W. Baird.

Hi.

Thanks.

First, just to clarify the US implied outlook fourth quarter.

I know DTC is strong, it's a higher portion of the mix.

Any way to clarify the shift of the wholesale shipments, the later timing?

How much of it swing that will have on the growth when you look quarter to quarter?

Yes.

That's a good question, John.

When we spoke in July, we had assumed -- if we step back, we had a $40 million shift a year ago into Q3 from Q4 in terms of the normal historical order book, and how it shifts between Q3 and Q4 for our US wholesale business.

So $40 million shift a year ago, coming into the quarter we as planned a $30 million shift back from Q3 into Q4, and we actually ended up roughly -- a $20 million shift is what we planned, and we ended up with a $30 million shift into Q4.

And like I had mentioned earlier in addressing Bob's question.

In terms of percentage in the book, shift through the month of October for the Columbia and SOREL brands, 80%-plus, exiting October.

So, we're basically right on track relative historical norms in terms of how we deliver fall wholesale orders.

Okay, that's fair.

And maybe just one more point there.

If you look at our Q4 consolidated-sales growth rate, roughly half of that is coming from this timing shift of US wholesale.

Got it, great.

Maybe following up on the fourth quarter, just a little bit, at least on the top-end diminished outlook, given some of the headwinds you see in the environment, could you just kind of explicitly outline what changes you made?

Or at least brought the top end down for the fourth quarter in terms of the guidance?

Yes, I would say is a combination of the US business and Korea, Korea continues to trend downward.

We have not found a bottom there yet.

Okay, great.

Maybe a bigger picture question for Tim, I know you outlined before the North American environment looks and feels a lot different than it did this time last year, but yet you have had a couple of periods now recently where, depending on the weather in the prior year, you've had pretty big swings in the business.

When you look forward to 2017, if you have a normal winter for the next two months or next few months, do you think that 2017 again could look more like 2015?

The last time you came off of a normal winter?

Or do you think there's structural changes that would make the environment look different in 2017?

We talked about the consolidation retail, so that will be an overhang.

But I think frankly, retailers bought cautiously for 2016, so if we have normal winter that extends through January and early February portion, I think that those shelves will be rather empty, and we will be closer to 2015.

But some of it has to do with share shift, where we would expect to be the recipient of the good news there.

Okay one last one, if I could, broader on the marketing efforts.

The Director of Toughness campaign seems to be driving a pretty big increase in the impressions.

Any change in the thinking bigger picture, longer term about giving some of the social interaction and engagement you're seeing going forward, if that changes your plans at all for marketing the brand?

Is that a veiled application for Director of Toughness position?

(laughter)

No, we've obviously been mindful of the change in how consumers get information about brands and products specifically, so we have emphasized that part of the business in our marketing efforts to be larger on the social and digital front, frankly, than we've been in the past.

It is reaping terrific rewards, especially when we have really interesting technical stories to talk about the product, as well as interesting personal stories about the Directors of Toughness and what they do.

I'm just wondering, previously you've talked about wanting to maybe increase the marketing spend, at least as a percentage of sales, and does the success you're seeing on more of a grassroots basis change that view at all?

No, we still need to be spending more than we have been as a percentage.

We believe that we will grow our market spend in 2016 against 2015, but we need to do more.

And at the same time, spending more can be multiplied by spending it more efficiently so we hope to be doing both.

Okay great, thanks a lot.

Susan Anderson, FBR Capital Markets.

Hi, thanks for taking my question.

I was wondering if you could talk about the shelf space in the stores this fall.

How are you stacking up versus your peers?

I think you made a comment just saying that hopefully you would be a potential winner of any shelf space that's given up.

And also in footwear, are you getting more products shares on the shelves for this fall?

Yes, certainly so.

Let me answer the first one.

In these independent studies that a few of these firms provide, it shows that we're gaining share against most of our competitors, which is a positive, especially in the outdoor space.

So we'd expect that will continue through the balance of the year and into next year as well.

In terms of footwear, I've said for years that it should be our biggest product category, obviously it's not.

But we have new team in place, that our expectation frankly, is going to be grow the Columbia-branded footwear team, and of course even though SOREL has been impacted by the winter of 2015, our expectations for that brand are really for it to become a year-round global brand as Mark Newnow says, toe-to-head, where will be leading in that space.

And so far the results have been astounding, absent of lack of winter, so our expectations of footwear in total, that we'll be a much bigger company between the Columbia brand and the SOREL brand over time.

Great, that's helpful.

Just to clarify or follow-up on the third-quarter revenue, with the lower revenue just primarily the issues within the US wholesale business and maybe the bankruptcies a little bit worse, split between the two of them, or was there something else?

On the US wholesale business, are you seeing those lower orders across all channels?

Maybe to start with, the timing shift and the bankruptcy impact.

Between the two of them, they impacted the third-quarter by about 9% with the bankruptcies being 4%.

A slightly bigger impact from the timing shift of roughly $30 million.

Maybe you could repeat your second question?

The weakness at wholesale in the US -- because I know you're selling in Kohl's too, in sporting goods.

Is it really what you're seeing across all the channels?

It is really a traffic issue I believe, and weather.

We have a lot of information that would show that where there is whether there's fairly significant delta in sell-through, against non-weather locations.

Got it.

The last one, on the inventory carryover.

How much is left in your inventory now and where are you expecting to end the fourth quarter?

Yes, so we are generally comfortable with our inventory level.

Virtually, all the growth is in the US and our Europe direct region, where we are planning for growth in Q4 and beyond.

You know, we've got the outlet channel to clear excesses in both of those regions.

Obviously inventory turns 2.4, 2.5 times are not where we want them to be.

We would like them to be ultimately north of 3 times, so we have work to do there.

We expect inventory exiting the year, and some this will be dependent upon timing of spring receipts, but we expect inventory to be up in the mid- perhaps, high-single digits, depending on receipt of timing and how weather plays out over the next couple of months.

Got it, that's helpful, good luck next quarter guys.

Lindsay Drucker Mann, Goldman Sachs.

Thanks.

Good afternoon guys.

Hi, Lindsay.

I wanted to ask about the shop-in-shops that you talked about in your prepared remarks.

Could you specify what retail partners you're looking to roll these out at?

Whether they involve greater square footage in existing doors?

Maybe the cost to do it and how you think it may impact productivity in those doors, or any other details you have?

Certainly.

In the US we're talking about Dicks and Academy, are two the recipients of the installations.

In Canada, it's with Forzani Group, and then there's one Intersport store in Europe, and we've actually opened up a partner store in Korea with this installation, and the stores in China are partner stores of ours, as well as one store that we directly operate.

The expectation, frankly, is for in the, call it in, the 4% to 5% lift on comparable space, and we've been saying both comparable space as well as increased space in certain installations.

One of the things we talk about, as well as the fact that we have been spending less than we should be on marketing, is the fact that our merchandise doesn't look as good, we believe, in store as it should.

It doesn't look as good as our competitors, and frankly this is something we have to work on diligently to get that comparable appearance.

This shop-in-shop focus is going to get is there.

We showed it to our group of independent distributors last week when they were here in Portland for the sales meeting, universal claim.

And the expectation is that this is going to be helping us to improve our sell-throughs globally.

So I think you said hundreds, how many of these do expect a have?

I'm sorry, I thought we were just talking about the ones in this year, in 2016.

No, we're going put several hundred in place across in the bulk of our key accounts in the US and in Canada, as well as installations in our direct businesses in China, Korea, Europe direct, as well as Japan.

And then we will have installations throughout Russia, etcetera.

So we are putting several hundred in next year, and the plan is to put several hundred per year in key stores were we can get out, get a lift.

And who pays for the fixturing, or for the installation?

It really depends.

The primary investment is on the Company, it's on Columbia.

But there are times, some of our distributors actually will make the investment themselves.

But the bulk of the investments in our direct businesses will be our own.

Got it.

I wanted to go back to part of your prepared remarks where you talked about you did not participate in as much in -- or you declined to participate in off-price for a lot of the excess product you had exiting last year.

Could you talk maybe, just clarify on how you transacted with off-price this year?

And if you're not in that channel, how the heavy inventory levels that you referenced is impacting you?

Well, since we get almost zero return on our cash, we find it a better use of cash if we have excess inventory, to hang onto the bulk of the -- especially the valuable outerwear component.

That's not to say that we don't have good customers in the off-price channel, we do.

But when the market is stuffed, it's more challenging to make that decision to sell off-price -- sell in that channel.

So our expectations are that we end the year with the inventory levels that Tom indicated.

We think there is likely to be some impact by sales of competitors products in the off-price channel, and we've taken that into account when we've given you our guidance.

Okay, and then one last thing, you talked about for this year and maybe next year, the impact of consolidation on your US wholesale business.

Could you put any numbers behind how you think -- whether stores, or accounts, or even dollars -- what you think the impact that could be on your business in 2017?

Well, we have not talked much about 2017 at all, but you know, I would not expect that the entire revenue that we had with Sports Authorities, as an example would be picked up buying existing retailers.

I'm assuming some of that revenue is going to be gone, and some of it's going to be picked up by existing wholesale customers, and some of it frankly picked up by ourselves in our DTC business, but that should be the smaller portion.

As retailers continue to consolidate, it will become more competitive environment at wholesale, which we are prepared for.

And it's hard to know exactly what's going to happen, with the weather obviously, have to be taken into account as well.

I guess what I'm asking, is if your comments are specific to the impact -- the carryover impact, of the Sports Authority or any other consolidation we're seeing among retailers, is that something that you're also thinking about?

The Company is adept at extending credit, so we get a chance to see the financial health of many of our customers.

So talking about the consolidated consolidation, which would include the Sports Authority, Sports Chalet, Bob's, EMS, the combination of Cabelas and Bass Pro Shops, and other bankruptcies which are likely to occur in the future, depending on the state of the retail business.

Okay, thanks very much.

Eddie Ryan, Morgan Stanley.

Thanks for taking my question.

I was wondering, how are you thinking about the potential opportunity with online pure play retailers.

Is that something you're considering?

Or are there too many challenges in that business?

We currently sell through many of those online, pure play retailers, and it's been a solid vehicles for the Company to distribute it's products.

And are there any sort of margin differentials between that and you know your typical wholesale arrangement?

No, not in sales from us.

Okay, got it.

And I have one question on 4Q.

You mentioned how you had to make shift to DSC in 3Q, benefiting your gross margin, do expect that to reverse in 4Q?

And how much of that of that shift to wholesale and 4Q is going to really be impacted in that gross margin?

Yes, so the implied gross margin lift in Q4 this year -- the projection, versus last year's about 25 basis points, plus or minus, and that's really going to be a function of channel, mix, shift, full price, off-price, again assuming normal winter weather conditions, offset by some FX impact but the FX impact won't be as dramatic in Q4 as it is in Q3, where a higher percentage of international wholesale shipments are delivered.

Okay, that's helpful, thank you.

(Operator Instructions)

John Kernan, Cowen and Co.

This is David Buckley, on for John Kernan, and thanks for taking our question.

Could you guys please provide an update on the timing of European distributer improvement, and how that channel performed in the quarter, ex the Russian business?

Yes, I want to make sure answer your question properly, because our EMEA distributor business, frankly, is driven -- a very high percentage of that businesses is through our Russian distributor.

As we said, they've been challenged from the economy in Russia, as well as the currency levels in Russia, so we have strong relationship with that firm, our business is solid there, but they been impacted along with other retailers.

So, I want to make sure answer your question, could you maybe clarify?

No, that's helpful, and you guys are expecting Russia to return to moderate growth in the first half of 2017?

Is that correct?

I would say growth, we really haven't quantified it, but it will be growing in first half of 2017, yes.

Okay, excellent.

And could you just discuss the SOREL and prAna brands for a second?

What are the remaining growth opportunities for both of those brands and how should we think about the growth rate as we look into 2017 and beyond?

Let me take SOREL first, which is obviously we've added a spring component to the business, and that's going to be a significant portion of the growth for that brand.

Once we get the DNA properly situated on the spring product, frankly, it will allow us to be much more impactful internationally.

We had a number of our international distributors very interested in that product range, but they need, if there to make investment in a store or portion of their store, it's going to have to be a year-round business, and we've got a get ourselves calibrated there so that the spring merchandise is successful.

So far, the yearly indications from leading retailers across North America are that we have really solid chance of that business growing nicely, and becoming a real foundation for an international expansion on SOREL.

As we de-winterizing SOREL, frankly, the fall portion and spring portion of the business have enormous opportunity.

prAna has been growing nicely as you can see, it has led the growth in the business this year.

We expect that business, as they expand their wholesale base and their e-commerce business as well, that will provide a solid base for us to again finding the holy Grail as it relates to getting that merchandise distributed globally.

We've struggled a bit on that, we thought we'd be further along at this time, but we think there's a large opportunity internationally with prAna that we have to capture.

Great, thank you and one last question.

How sustainable is your CapEx rate at current levels?

Especially as you go more direct domestically and in Europe, looking out into next year?

Thank you.

I would say the CapEx in the $60 million range, plus or minus, is fairly sustainable for the foreseeable future.

Okay, great, thank you very much.

Rafe Jadrosich, Bank of America Merrill Lynch.

Hi guys, it's Rafe.

Thanks for taking my question.

Hi Rafe.

So you called out faster sell-through than competitors and you're picking up some market share.

Is there any specific channel that you can call out where it's happening?

And what you think is driving the share gains?

Specifically, in our sportswear PFG business, we have a very dominant position in the marketplace there.

It's unique, and that's an area specifically where we've been picking up share, in the outdoor business, and especially in the southern part of United States where winter is relatively absent year-round.

That gives us a significant lift, and the business there has been quite good, so I would point to that as one of the specifics around our growth in market share.

Thank you.

In terms of thinking about the margins longer-term, and your opportunity to drive SG&A leverage.

Can you give us color on what level of sales growth you think you need to hit where you can continue to invest in marketing but still achieve leverage overall?

This is Tom, Rafe.

I would say, and we said that historically, we generally need, all things considered equal, high-single digit to low-double-digit top-line growth to leverage the operating margin.

And, we're not seeing that this year, but we're holding serve on the operating margin, and that's a function of diligent cost management and some improvement in gross margins.

So there's lots of components here, but generally speaking, high-single digit top-line growth will drive operating margin leverage.

Is there target for where you want to take marketing over time?

And can you just remind us where it is right now as a percentage of sales?

Sure.

We're just north of 5%.

Our come key competitors would range from 12% of sales to high-single digits, so that's sort of where we need to be and we're focused on getting there.

Yes, one final question based on where you are hedged right now.

I know FX is a big headwind through 2016, do you have any visibility on, if rates stay where they are now, what the impact of FX will be to 2017?

Yes, I would say where fairly well hedged in many currencies, but not all.

And as we said here today, I would say that you know, currency will be in a tailwind to gross margin next year, absent any major weakness in the China RMB.

Great, thank you, that's really helpful.

Camilo Lyon, Canaccord Genuity.

Thanks.

Good afternoon guys.

I just want to ask a couple of follow-up to share.

It's starting get a little colder here on the East Coast.

Has that tempered any skepsis that the wholesale partners are speaking to you with?

Is there some pent up demand that's starting to release that they're seeing, that they're starting to release that maybe they're considering, they're under-inventoried?

Or is the cautiousness still consistent with what it has been leading up to the start of the season?

Yes, we're thrilled when it starts to get cold, and I know we had some snowflakes in Massachusetts today, and we've had some snow already in Canada in many places.

So we're excited about that weather appearing, but we take into account all of the expectation, and our knowledge of the marketplace and it takes a long time to put these plans in place, as you've seen today.

So that's where we believe the business will end up.

Okay.

So sounds like your little more sanguine that what your wholesale partners are reflecting.

Well, again, harping on the balance sheet, it gives us a lot of confidence and comfort that we can establish strategic plans and stay with them despite the daily weather impacts.

Okay.

So is that to assume that there hasn't been any adjustments to your inventory receipts because of some of these timing shifts that may or may not impact reorders?

No, I think the would have to rely on what Tom might tell you about the cadence of our inventory deliveries.

But we have been fully stocked for winter for quite some time now.

Yes, we're on a pretty normal delivery trajectory through October, at this point in time.

So, I think a polar vortex like we saw in 2014 in early November would be good for everybody.

Yes, from your lips, absolutely.

The other question I had was, you mentioned in your prepared remarks that you expect Europe to be EBITDA neutral this year, Is that to suggest that with your last comment around FX being a tailwind to gross margin, that you expect a return to profitability next year?

Europe returning to profitability next year from the EBITDA perspective?

Yes, that would be our expectation.

Is there any sense of magnitude, assuming --

Maybe just some color there, our European direct business has been hit by a double-digit millions of dollar gross margin impact from currency, so when you look at the $0.26 from currency, they've taken their fair share of that hit this year.

It's not like -- we hedged the Euro in the mid $1.30's a year ago, and you know, it's $1.10, plus or minus, today.

So we're not going to see a snap back there in 2017 for the Euro, but it's better than it was -- we expect it to be better in 2017 than it was in 2016 based on where we have placed our hedges.

Great, and then finally, from where you sit today, what you can tell for the balance of the year, is there any incremental risk that you see from the deferral of distributors shipments going out of Q4 into Q1?

That one's always a tough call because the distributor shipments for spring really straddle the two to three weeks before year-end and after, and they're factory direct shipments, so they come out of factory and go straight to our distributor.

We don't have tremendous control in that process, it's really more a function of the manufacturing process, so we've used all the intelligence we have to forecast that, which is considered in our outlook here.

Is there way to think about what that magnitude could be if there were a shift?

What percentage of the shipments are distributor based in the fourth quarter?

They go both ways.

They do go both ways.

I think we've talked historically about $10 million to $20 million, $30 million shifts one way or the other, so it's that order of magnitude.

It's not like we don't have excess -- plenty of factory capacity right now in Asia though, so keep that in mind, as always the timely delivery of product.

Got it, thanks very much and good luck in the holiday season guys.

Thank you.

Jarrod Feinstein, Buckingham Research Group.

Yes, thanks for taking my question.

I was wondering if you could talk a little bit more about the potential puts and takes with regards to input costs in the fourth quarter?

And some high-level thoughts on 2017 to get us a way to conceptualize any potential opportunity you have?

Sure, you're talking about input, you're talking about costs in Asia as a relates to 2016?

Correct, and next year if you could.

Yes, so we made purchases obviously for 2017 spring, and we're on the cusp of making 2017 fall purchases.

And we find, as Tom mentioned earlier, there's plenty of capacity.

The dampened demand in the US has had a similar impact in Asia, and there's factory capacity which is available and that tends to be one of the key components of the costs that are input in our business.

As well as you know, the commodity costs, which in many cases are based on the price of oil.

I would say the same thing would be true of 2016 as it relates to 2015 and early 2016 when we were buying that product.

So there is capacity in Asia for production, and there's obviously a low commodity prices right now in oil, so our expectations are that there shouldn't be too much impact negatively on our pricing for 2017.

Okay, great, thanks for taking my question.

You're welcome.

Thank you.

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 from listening to us, and we're looking forward to talking to you next quarter.

This concludes today's teleconference.

You may disconnect your lines at this time Thank you for your participation.