Columbia Sportswear Co (COLM) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Columbia Sportswear Fourth Quarter and Fiscal Year 2017 Financial Results.

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

It is now my pleasure to introduce to your host, Christian Buss, Director of Investor Relations.

Thank you, Mr. Buss, you may begin.

Good afternoon, and thank you for joining us to discuss Columbia Sportswear Company's fourth quarter results and 2018 outlook.

In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and the assumptions behind our full year 2018 outlook.

The CFO commentary is also available on our Investor Relations website, investor.columbia.com.

With me today on the call today are Chairman of the Board, Gert Boyle; President and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Operating Officer, Tom Cusick; Senior Vice President and Chief Financial Officer, Jim Swanson; 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 opportunities and anticipated result of operation.

Please bear in mind that forward-looking information 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 the forward-looking statement after the date of this conference call to conform the forward-looking statement to actual results or to change our expectation.

Thanks, Gert.

I'd also like to point that during the call we may reference certain non-GAAP financial measures, including non-GAAP results, which exclude program expenses and discrete costs associated with Project CONNECT, changes in revenue recognition and income tax charges associated with the Tax Cuts and Jobs Act as well as constant currency net sales growth.

You'll find a reconciliation of these non-GAAP financial measures to comparable measures reported under U.S. GAAP in the supplemental financial tables that accompany our earnings release, along with an explanation of management's rationale for referencing these non-GAAP financial measures.

Following our prepared remarks, we'll host a Q&A period, during which time we will limit each caller to 2 questions, so that we can get to everyone by the end of the hour.

Now I'll turn the call over to Tim.

Thanks, Christian.

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

I'm pleased to report better-than-expected fourth quarter and 2017 results with revenue, gross margin, operating income and cash generation all at record levels in 2017.

Exceptional execution in a rapidly changing consumer landscape remains the foundation of Columbia's business, as we celebrate our 80th anniversary this year and our 20th year as a public company this March.

It is this legacy that's reflected in everything we do.

We're honored to have our global strengths recognized with our Chairman of the Board, Gert Boyle, receiving the ISPO Cup Award in January at the world's largest sporting goods tradeshow in Germany.

The award has been given annually since 1971 to the global sports personality of the year.

She is the first nonathlete to win the award and joins the an illustrious group of athletes, including Pelé, Jean-Claude Killy and Max Schmeling.

We're also incredibly proud of our 7,000 global employees who have sustained our performance in 2017 with a relentless focus on sustainable high-quality sales and operating income growth.

It is with this discipline that we're executing on our strategic priorities, which will accelerate market share capture across our geographies and brands.

As a reminder, our 4 strategic priorities are: drive global brand awareness and sales growth through increase focused demand creation investments; enhance consumer experience and digital capabilities in all of our channels and geographies; expand and improve global direct-to-consumer operations with supporting processes and systems; and invest in our people and optimize our organization across our portfolio of brands.

We see clear evidence of the power of these strategies in our 2017 results, which also serve as the basis for our plans in 2018.

In the U.S. business, we continue to experience challenges related to wholesale customers, bankruptcies and store closures, leading to a mid-single digit percent sales decline in the U.S. wholesale channel for 2017, with nearly 2/3 of the decrease resulting from the impact of retail bankruptcies.

However, in the fourth quarter, the U.S. wholesale channel played a significant role, contributing to our top line beat relative to our October outlook, aided by improved order conversion.

Fourth quarter net sales within the U.S. wholesale channel increased 6%, driven largely by a shift in the timing of wholesale shipments from the third quarter into the fourth quarter.

Looking forward to 2018, we anticipate that the U.S. wholesale channel will return to growth, reflecting visibility into our spring and fall order book.

Our U.S. Columbia wholesale team is managing the industry's challenging -- challenges proactively with a particular focus being placed on key markets in the Midwest and South.

We continue to believe that the Columbia brand is gaining U.S. wholesale market share in a challenging environment and that wholesale channel inventories are generally upbeat.

We have accelerated investment in our U.S. direct-to-consumer business, which grew at a double-digit percentage rate in the fourth quarter and a high-single digit percent rate for 2017.

The brick-and-mortar channel drove sales growth with improved productivity, while we made the strategic decision to reduce online promotional activity relative to last year driving modest growth in our e-comm business.

Outside the U.S., our results for 2017 demonstrate the power of our global business with total international sales growing at 8.5% year-over-year.

This business generated 38% of total revenue in 2017, led by the Columbia brand.

Our EMEA business remains a stand out in our international markets with constant currency sales growth of 14% for both the quarter and for 2017, the third year in a row of double-digit percent constant-currency sales growth in that region.

We saw high-teens percent growth -- sales growth in our Europe direct business and mid-single digit percent growth in our EMEA distributor partners for both the quarter and the year.

We're particularly pleased with the performance of our Russian distributor who has navigated the challenges of that market effectively, returning to significant growth in 2017.

After achieving breakeven profitability in 2016, our Europe direct businesses returned to a meaningful level of profitability in 2017.

Our team in Europe has done an outstanding job over the last 3 years, and we have plenty of opportunity to drive continued growth and expand profitability in that important market in the years ahead.

Fourth quarter gross margin performance highlights the discipline executed by our team with 80 basis points of improvement, driven by contributions from our DTC business as well as a higher proportion of higher margin full price sales.

For the full year, gross margins expanded 30 basis points to a record 47%.

We remain intensely focused on cost discipline, while investing in growth areas of our business.

In the fourth quarter, excluding Project CONNECT program and discrete costs, we maintained our SG&A rate, helping drive non-GAAP operating margin up to 14.9% from 14% in the prior year.

For the full year, excluding Project CONNECT program and discrete costs, SG&A expenses grew in line with sales in spite of significant investment to support our strategic priorities and the growth of our business.

Together, we expanded our non-GAAP operating margin to 11.3% from 10.8% in the prior year.

I did want to take a moment and talk about our income tax expense in 2017.

In connection with the company's analysis of the impact of the Tax Cut and Jobs Act, we recorded provisional expenses of $95.6 million during the fourth quarter of 2017.

While there remains significant uncertainty on a long-term basis, excluding further refinement of our provisional tax expense, the lower U.S. corporate tax rate should result in a global effective tax rate of around 22%.

Our current intent is to repatriate approximately $200 million in cash currently held overseas.

For more details on our tax expense and our capital allocation priorities, please see Jim's CFO commentary available on our website.

We exited the year with inventories down 6% on 8% sales growth.

Our inventories are clean, including a year-over-year decline in excess and closeout inventory.

Our balance sheet remains extremely strong with record cash from operations helping drive cash balances to a record $768 million.

We continue to have no long-term debt.

In light of rising cash balances and strong cash flow generation, we've chosen to provide additional insight into our priorities for the use of cash.

First and foremost, company remains committed to maintaining a strong balance sheet, while utilizing cash to invest in growth opportunities for the business.

We continue to believe that the lowest risk, highest return for the company is to continue to focus on improving the results in the assets we already own.

We will also look to return 40% to 60% of free cash flow to shareholders by increasing our dividend when appropriate and repurchase shares in the marketplace.

Finally, we have demonstrated the capacity to make and integrate acquisitions as opportunities arise.

To this end, the board has approved the 16% increase in the company's quarterly dividend to $0.22 a share, up from $0.19 a share.

This comes in addition to the 6% increase in the quarterly dividend that we announced in October.

Looking in more detail on how our brand-led consumer-centric approach is allowing us to execute on our strategic priorities.

Impressively in the fourth quarter, our Columbia brand created over 1.8 billion engagements with our consumers and over 3 billion in 2017.

Over the past year, our Columbia brand team has installed and refurbished over 300 Columbia shop-in-shops and elevated brand presentations at key partner stores around the world.

We're also working with our retailers to directly engage with our consumers through collaborative marketing with notable campaigns in the fourth quarter with both Dick's Sporting Goods and the newly combined, Bass Pro and Cabela's where our Directors of Toughness and Columbia Warm campaigns, which together generated over 50 million impressions with consumers.

Our investment in this rollout reflects our commitment to enhance the consumer experience within our global wholesale business and also speaks to the confidence that our wholesale partners have in us as one of their most reliable partners and in the Columbia brand as one of their most consistent performers.

In the fall of 2017, we launched a new seasonal campaign titled Columbia Warm that sits on top of our existing tested tough brand platform and expose consumers to a consistent global story across TV, digital, print, out-of-home, e-mail and social media and includes new micro campaigns across digital channels that were updated regularly to maintain an always on marketing presence.

The effort kicked off in September with a campaign focused on our partnership and outfitting deal with the UK National Park System and was followed by a partnership featuring actor and celebrity Zac Efron and his brother, Dylan, that has already driven over 400 million impressions.

Our marketing campaigns are also being increasingly tied directly to call us to action.

We're launching the Star Wars: The Empire Strikes Back collection in December, is an example of how we can effectively activate our brand with consumers.

The collection launched in December -- on December 8 and sold out in stores and online in minutes in United States.

While driving traffic to our stores and our website, the campaign also generated significant coverage in the media, resulting in more than 650 million impressions.

In addition, pieces from the Columbia collaboration with the New York-based fashion retailer, Opening Ceremony, continued to earn attention and were included in multiple print and holiday gift guides.

Our success has not been limited to our product collaborations.

PGA athlete, Brian Harman, was wearing Columbia golf product in his thrilling PGA Tour win at the Wells Fargo Championship over the summer.

Our athlete, Patton Kizzire, has also started 2018 off very strong, taking home wins at both the Sony Open in Hawaii and the OHL Classic in Mexico.

Finally, Ryan Palmer was tested tough at Torrey Pines, holding the lead through 3 rounds and finishing in second place.

These engagements helped drive 9% sales growth for the Columbia brand in the fourth quarter, bringing total growth for 2017 to 4%.

With the opening of the Winter Olympics less than 24 hours away, we look forward to seeing Columbia uniforms on athletes from the U.S., Canada, Belarus, Kazakhstan, Brazil and the Ukraine.

We also know that the staff of NBC Sports and the TODAY Show are staying warm, dry and protected, as they've chosen to wear Columbia product on-air during the Super Bowl in Minnesota and throughout the Olympics.

With the hiring of Ethan Pochman as the Vice President of Marketing for the Columbia brand in January, we expect to build on our momentum in 2018.

Our successes were not limited to the Columbia brand, with the SOREL brand team executing on the limited edition boot collaboration with renowned Paris-based luxury design house, Chloé.

The product launched in -- on November 15 at 14 of Chloé's premium global wholesale partners, including Nordstrom, Galeries Lafayette, Barneys and Holt Renfrew.

The collaboration is a perfect fit with SOREL's fashion forward female consumer and sold out within 2 weeks on chloe.com.

SOREL's fall 2017 line was supported by the brands new Defy Marketing campaign that reinforces SOREL's position as the most fashionable brand in outdoor and the most outdoor brand in fashion.

The campaign was anchored by street-level window executions across New York City as well as by extensive social media campaign that featured 8 up and coming fashion influencers.

SOREL net sales grew 7% in 2017 and the brand is positioned for continued growth in 2018.

At prAna, during the third quarter, we promoted Russ Hopcus, Columbia's Former SVP of North American Sales to prAna brand President.

I'm confident Russ and his team's ability to magnify prAna's message of sustainability and healthy, active, free-spirited lifestyle to drive growth.

PrAna grew 8% in the fourth quarter, driven by an acceleration in e-commerce.

The business grew 1% in 2017 and is poised for higher growth in 2018.

At Mountain Hardwear, new brand President, Joe Vernachio, continues to build out the new product team that's working to create a compelling, high-performance product line.

While we do expect continued pressure on the Mountain Hardwear business in 2018, we are encouraged by return to growth in the brand's fall 2018 order book.

Response to new product has been favorable with the brand recapturing floorspace in several key accounts.

In summary, we're pleased with our 2017 solid performance and how we've positioned our brands in regions for accelerated growth in 2018.

It's from this position of strength and confidence that we're investing in our strategic priorities.

Our increased focus on the consumer has led us to invest in a consumer-first technology initiative, which includes our global retail ERP platform.

The project includes the IT systems infrastructure to support the growth and continued development of our omni-channel capabilities.

As consumers continue to change the way they engage with brands, we're working to deliver a more personalized, seamless experience for consumers across our retail operations.

The multiyear global initiative is currently in the design phase with Microsoft as our key partner.

We are targeting regional implementation beginning in the first half of 2019.

The platform will be integrated with our global SAP enterprise resource planning system, which has been implemented in the majority of our operations to date.

We launched the SAP system in our China joint venture in 2017 and planned to transition our Europe direct business on to this system in mid-2018.

With this, we will have completed the major components of our global SAP rollout.

On to Project CONNECT, which I described during our July and October conference calls.

In 2017, we completed the operational assessment phase of Project CONNECT, which included a shift in the company's operating model, executive organization structure and decision rights to enable a brand-led and consumer-focused organization.

During the second half of 2017, the company began implementation of operational improvements throughout the business.

Project CONNECT includes initiatives to drive revenue, capture cost of sales efficiencies through design and assortment optimization, generate SG&A savings, and improve our marketing effectiveness.

As these improvements begin to be realized, we intend to reallocate resources to our strategic priorities.

Our 2018 financial outlook contemplates modest financial benefits from these initiatives, while we anticipate more meaningful financial value capture in 2019.

Before I move to your questions, I wanted to provide a little more color about our expectations for 2018.

We're in the midst of the fall advanced order taking process with our global wholesale partners.

Although we no longer report specific backlog figures, I want to share that based on the visibility we have today, we're optimistic that we will continue to generate global growth and that our U.S. wholesale business will return to growth in the first half of 2018 with our spring business and carry that growth into the fall season.

When combined with the continued growth that we expect from our DTC businesses, both the first half and second half of 2018 should show solid growth.

Our 2018 non-GAAP outlook anticipates 4% to 6% revenue growth, up to 20 basis points of operating margin expansion and up to 7% to 10% non-GAAP net income growth, driven by the Columbia, SOREL and prAna brands and in all 4 of our geographic regions.

We believe that the combination of our global multi-brand, multi-channel business, our sound strategic plan and our teammates around the world form a solid foundation that will continue to drive growth, expand our profitability and increase our total return to shareholders in the years ahead.

You can find more detail on our Q4 and full-year results and our 2018 outlook in Jim's CFO commentary available on our website.

Finally, I want to thank our team members for their hard work and discipline over the last year.

I could not be more proud of the people who are at the heart of our global organization.

That concludes my prepared remarks.

We're happy to take questions for the remainder of the hour.

Operator, can you help us with that?

(Operator Instructions) Our first question comes from the line of Robert Drbul with Guggenheim.

Is Gert still there?

Absolutely.

Oh and in good form too.

So Gert, I just have a quick question for you before I -- my other questions.

But did Tim do an acceptable job accepting that cup honor in your name?

We're happy with it.

Every minute of the day.

Good.

I'm glad.

You're going to keep a close rein on him, okay?

I'm trying as hard.

Congratulations on that honor, Gert.

Very well deserved.

Thank you.

Tim, the commentary that you made around your order book spring/fall, just from your perspective on the channel, there's been a lot of door closure, but on the channel inventory levels, how clean do you think it is now?

And talk about some of the geographic opportunities, especially in North America.

When you look at that visibility, first half, second half should it be consistent growth as you return to your wholesale growth?

Or could you just give us a little bit more commentary around that, please?

Yes, why don't I -- let me give you that -- my take on the inventory levels at retail and then maybe Jim can comment on the specifics around where we expect the growth to be from the calendar perspective.

So this year, we've -- we tried not to rely on weather to help us, and frankly, our business has improved.

But it's always good to see weather, and we had appropriate weather actually in North America and in Europe this year, which helped to clean up inventories that otherwise may have been a problem from prior periods.

So in my opinion, the winter merchandise is very clean across North America and Europe, and for that matter, China.

So I think that we've probably seen the bulk of the financial embarrassment in retail trade today.

And so I'm hoping that we don't have any more significant bankruptcies or store closures.

But I would think that -- our visibility in our order book shows that we're: A, taking some share; and B, that the inventories are clean and there's some replenishment going on.

Yes, Bob, and just to jump in.

As you look at the outlook that we're providing on the year for the U.S. wholesale business, that's planned up on a low-single digit basis.

And I'd anticipate based upon our visibility of the order book today, we're not providing a quarterly outlook, but that should be relatively balanced over the year.

Okay.

Great.

And then the second question that I have -- sort of my third, but the second one is on the demand creation and your commitment to increasing that, where did you end 2017?

And when you think about the plans for '18 and sort of longer-term, could just give us an update where you think you are now on that aspect of the business, please?

Yes, in total, we ended up with a growth in the nominal dollars, but the percentage rate was about the same as it had been last year, which is about 5%.

Now we've budgeted the year to be about the same for 2018.

Although, as a portion of Project CONNECT, we've actually been able to analyze the efficiency levels in terms of our spend.

So we expect that if we have a nominal increase, which we will likely have in the spend, it will be more efficient.

And then any savings as a result of Project CONNECT or increased performance from an operating income standpoint, we're -- we plan to reinvest that in our marketing efforts.

So that's going to be the #1 focus of our reinvestment.

Our next question comes from the line of Kate McShane with Citi.

I was wondering if you've seen a meaningful pickup with millennial customers given some of your new marketing campaigns.

And is there any data you can give us with how you're resonating within that demographic?

And what the potential might be?

Certainly.

Well, I think if I look across the North American continent as it relates to our various product categories, the youngest consumer we have is our PFG consumer.

That's an extremely popular apparel product on college campuses, especially in the southern part of United States.

So that's where we've seen the most traction specifically from the millennial consumer.

Although, I know that we're getting pickup in some of our outerwear categories as well.

But if we look for very specifics, it'll be in that PFG category.

And then maybe adding to that, Tim, certainly, in the SOREL brand, we've seen much more pickup with just, as we've changed that brand more to kind of the fashion forward product in the spring season as well.

We've seen a younger demographic that we're selling to with the SOREL brand, and I also indicate that to be the case with prAna.

Great.

That's helpful.

And then if I just could ask one more question.

Switching gears a little bit about outerwear versus sportswear and how that composition has changed over time.

Can you talk a little bit more about how you're managing ready-to-wear and the flow of product on to the floor of retailers?

And has the percentage of your categories changed as a result?

Certainly.

Well, our sportswear business is actually larger on a unit basis by quite a bit, in sportswear versus outerwear.

And obviously, the units tend to skew towards the back half of the year in outerwear.

We also have the -- particularly through around the average unit price of outerwear in this vexing holiday that ends up being in the end of the year, whole Christmas.

So while we really try and keep our stores fresh and our retailers store fresh year around with sportswear, from a dollar standpoint, it's -- we're still fairly heavily involved in outwear.

Our next question comes from the line of Mitchel Kummetz with Pivotal Research.

Tim, you mentioned that in the quarter, you saw improved order conversion.

I assume that's just different language for lower cancellation rate, and then you'll start about better full priced selling.

So were these kind of -- I know last year wasn't good.

So was this year more normal and when we think about 2018 kind of the guidance assumes, something similar to this year?

Or was this year really great and next year, you wouldn't anticipate it to be quite as good on those sort of 2 assumptions?

Well -- no, I mean, this year was, I guess, a return to what we had seen historically from not only lack of cancels, but reorder rate.

As an example, our European reorder rates were probably at historical high this year.

So I think that bodes well for the brand's acceptance and not only from a categorical standpoint, but from a brand perspective.

So I would expect -- I don't think that we've actually assumed a cancel reorder rate as healthy for 2018, but we certainly have the potential to be there.

Yes, and -- just to jump in.

Yes, as it relates to our outlook, and as we have historically reorder conversion between the cancellations and reorders those are planned on a normalized basis as we see it.

And then specifically as it relates to fourth quarter, you're right in terms of the balance between that being much more function of less cancellations and really see in the benefit of that, particular in our U.S. wholesale business as well as our European wholesale business.

Nice performance in each of those on the quarter.

Got it.

And then just from a housekeeping standpoint on 2018, it'd be just two quick questions.

One, what are you expecting for FX or imagine that's a tailwind in 2018 at least on the top line.

And then help me understand the difference between kind of the GAAP and non-GAAP guide, particularly on the sales side.

So what is this $40 million that comes out of the sales line, and goes into SG&A line?

I'm -- help me understand kind of what's going on with this change in accounting standard? .

Yes, and let me take each of those.

So first as it relates to the foreign currency rate, we should see naturally a tailwind from a earnings standpoint in 2018, that by and large being a function of the hedging that we've done on our production for the year and to a lesser degree the translation benefit.

Although as outlined in the outlook that we've provided, the translation benefit to top line perspective is less than 1 point or 75, 80 basis point to benefit, then the flow-through down to the earnings volume may be a little bit less.

So -- but it will be -- the net effect is currency as a benefit to earnings on the year and that's reflected in our outlook as well as if you look at the gross margin outlook we've provided on the year at plus 60 basis points similar to that hedging, the currency benefit is reflected in that.

And then specifically as it relates to the GAAP versus non-GAAP in the $40 million, those are part of revenue recognition accounting standards change that goes into effect January 1 of '18, and this impacts predominantly from a P&L standpoint our businesses in Asia, our Korea business and our Japan business.

And as you recall, much of those businesses are concentrated with shop-in-shops.

And the rental costs and the labor costs associated with operating those rental shops to date have been a deduction to our growth sales and netted.

And so going forward, we're going to move those concession fees and those will be recorded in SG&A.

So effectively, revenue gets grossed up $40 million, SG&A gets grossed up $40 million, the net effect to the operating income is neutral.

However, obviously, our operating margin itself will be impacted a little bit as a result of that higher top line on a neutral earnings impact.

So when we grow this year, we're not growing off the -- if we grow up 4% to 6%, it's not necessarily off the reported number.

It's that reported number for 2017 plus the $40 million.

Well, we've tried to keep this as comparable as we can.

So the 4% to 6% is a comparable number to the way we had reported in 2017.

Our next question comes from the line of Lindsay Drucker Mann with Goldman Sachs.

I wanted to ask about the 2018 outlook, the 4% to 6%, including currency of something a little more than 3% to a little more than 5% ex currency.

How does that compare with what you believe the long-term revenue growth potential is for the business?

Well, I think I've been pretty clear that my own personal goals for the business are much greater, in minimum, double-digit sales growth.

But what we found with Project CONNECT is that the business has been operating well efficiently and now getting ourselves back to just slightly north of average operating margin.

But we're doing it by really starving our marketing spend.

So what we're going to be doing is focusing our time and effort on reinvigorated the brand, telling our stories at a much louder voice and really growing the business from a sound, financial base.

And frankly, the cash for those activities and for the other activities we delineated in my script are going to come from efficiently running the business.

When you've been running a business for 80 years and you have some activities which are no longer as productive as they should be, so Project CONNECT has helped us to focus our time and efforts on those areas of the business that can really move us forward to trade a greater opportunity for marketing spend and telling our stories.

So once we get a louder voice, I believe that the opportunity for sales growth at high teens is even possible.

Great.

And you talked about looking for China to grow mid-single digits in FY '18.

Can you just remind us what the run rate for Chinese growth has been since you brought the JV in-house?

I don't have all that data in front of me.

But I think if you look at each in the last couple of years, we've been growing at a mid-single-digit level.

And it would be in that mid-single-digit level if you start kind of break it down by channel and it's entirely the Columbia brand that we're currently transacting into a business with in China.

But where, really, we're seeing the strength is in the e-commerce business.

And so we feel like there's a lot of opportunities to get other parts of that business growing at an equal rate and potentially there in the marketplace.

Our next question comes from the line of Jim Duffy with Stifel.

Couple of questions for me.

Tim, now that you're through the assessment phase, a number of quarters through implementation Project CONNECT, are you prepared to put some shape around longer-term financial targets, margin objectives or even baseline objectives for annual improvement margin that we think about over a multiple year period?

So we basically broken the Project CONNECT into a few parts, and 2017 was really an analysis base looking for the opportunities that we found and 2018 is going to be really implementation of those findings.

We haven't really put a significant -- we haven't put a finite amount of savings and reinvestment that we expect to find.

Although I can tell you it is going to be significant and I think will have a meaningful improvement not only in the profitability of the business, but also the size of our voice as it relates to telling our story and product.

And Jim, just to add on there as well.

Our 2018 outlook does contemplate some modest benefit flow-through related to Project CONNECT coming through both the gross margin line and SG&A.

But to Tim's point, we really see the more meaningful side of those benefits to begin to flow through in 2019.

And we'll see some variety of ways, looking at both the top line contributions in our business from a commercial standpoint, improvement in the gross margin and also SG&A efficiency.

And then I think what remains to be told is to what degree that flows to the bottom line versus reinvestment that we would make back into these strategic priorities.

So we'll look forward to providing further updates as we get further down the road.

Oh, great.

That takes me to my next question.

Wanted to try to understand as it relates to the marketing expend, again you guys wanted to increase marketing spend to drive growth.

Do you have a figure in mind for marketing spend as a target percent of revenue or a revenue growth rate in which you would expect you could leverage the marketing spend?

Yes.

I think, first of all, with Project CONNECT, we've realized that we can spend what we're spending more efficiently, and that's underway.

And there has been some small amount of improvement in the spend in '17, more in '18.

When I look across the landscape of publicly held companies in our business, the end rate runs from, give me a minute, 13%, 10%, 12% of sales.

I don't think we need to spend that much, but we need to spend more and we need to spend it more efficiently.

And the addition of a new marketing head for the company for the Columbia brand is going to help us unify our spend across the geographies that we currently have, maybe a disparate spend and less efficient.

Our next question comes from the line of Laurent Vasilescu with Macquarie.

I want to follow up on the e-commerce revenues.

I think it was called out that it's about 9% of FY '17 revenue.

So I think that will be $220 million.

Maybe my math is wrong, but I think last year's fourth quarter earnings call quantified e-commerce revenues for fiscal year '16 at $220 million.

So essentially, maybe am I wrong?

But was it flat for the year or just maybe can you conceptualize that number?

Yes, Laurent, this is Jim speaking.

No, we've continued to see nice growth in our e-commerce business worldwide.

Our U.S. business, pleased with the growth that we've seen in that.

I think in the fourth quarter, in particular, as we've noted, a little bit more modest growth in the fourth quarter.

That in part being related to the strategic decision that we've made in not being quite as promotional as we had been in the prior year quarter.

But collectively, when we look across the business, our e-commerce channels worldwide, we've continued to see nice growth and resonating with the consumer.

And I'd also note that earlier in the year, you may recall that our European business, which we've previously operated through a third party that supported that.

We took our e-commerce business in-house.

So continued to see nice growth from a European standpoint as well.

Okay, very helpful.

I got it.

Obviously, these are percentage points, so there might be some variance there.

And then for your direct-to-consumer business.

It's very helpful that you guys quantified it, that it was 40% of fiscal year '17 revenue.

How do we think about that rate going forward?

I think it increased by 300.

That's in fiscal year '17.

Should we think about that similarly for fiscal year '18?

I think it relates to '18, in particular.

We'll anticipate the DTC business will outpace the growth of our wholesale business.

And it may, I think in terms of what you're looking at, growing from 38% as a total in 2016 to 40% in 2017.

We're probably seeing, like shift, as we move forward out to '18.

We're also excited, as Tim had mentioned about the wholesale order book that we have in hand and that we're able to grow that important part of our business as well.

Yes, it's really going to be critical in terms of the -- not only the categorical sales growth, as an example.

If our footwear business continues to grow at the rate we expect, that's almost exclusively a wholesale channel business.

And then from a geographic perspective, our European business we expect to expand significantly and really at the wholesale level.

Okay.

Very helpful.

And just to kind of follow up on this question, if I may.

Any expectations, any kind of high-level thoughts about how many stores you want to open for the year?

Yes, I can provide a bit of that detail.

It's lower than what we've done in 2017.

But if we look at the U.S. as an example, we've got 8 outlets planned in the branded store.

And then across much of the remaining markets, Laurent, it's really on par with what we've done in each of the last couple of years: a couple of stores in Canada; a handful, 4 or 5 in Europe; and then, Asia, obviously, the capital investment and so forth to those stores given the shop-in-shop model that's there, various rates of growth.

But that gives you a little bit of an idea.

Our next question comes from the line of Andrew Burns with D.A. Davidson & Co.

Congrats on a great quarter.

Just a follow-up on Laurent's e-commerce question.

I thought perhaps the reduced online promotional activity, online might be just a function of inventory, but it sounds like it was more a strategic decision.

Could you elaborate on how you view your e-commerce site as a clearance platform going forward?

Yes.

Certainly, well, as -- when you -- LOOK, WE still want to make sure that investors understood that we're primarily a wholesale business.

That means we have lots of retailers with inventory that they purchased from us on their shelves.

And we don't want to be competing with them on price through our own website.

So we strategically decided to forestall promotions that we were copying against the prior years to make sure that our wholesale customers had an opportunity to liquidate their inventories at a high-margin rate.

Yes.

And Andrew, you may recall coming into the Black Friday, Cyber Monday period last year, it was a bit warmer across North America.

And so in light of that, we were a bit heavier-promoted during that period.

And coming into this fall and some of the favorability we've seen with our business, we feel it was necessary and we're less promotional.

Makes sense.

And then I noticed that Columbia was largely not present at the OR Show in January.

As I recall within U.S. wholesale that outdoor specialty was up to 1/3 of the total distribution.

Is there any change in the go-to-market process servicing those retailers?

Or was that -- that's just more of a one-off.

No.

Again, as a function of Project CONNECT, we look at all the expenses that we have in basically dealing with our retailers and with consumers.

And we need to be, frankly, brutal about how we allocate those expenses and the costs associated with going to a trade show where it's basically an opportunity to say a lot of retailers have not really much businesses done.

The business has been concluded with the North American retailers, for all intents and purposes, much prior to the show.

And we just weren't getting the kinds of return that we wanted and that we should expect.

We still have 10 trade shows in Europe and we still had our presence with the smaller brands at Outdoor Retailer.

But when we look at where we need to be focusing our time and effort for a high return, our marketing spend, it really didn't include Outdoor Retailer Show.

Our next question comes from the line of Camilo Lyon with Canaccord Genuity.

Tim, you talked about -- in a prior question, you talked about ultimately getting back to double-digit top line growth and maybe mid- to high teens growth.

Can you just -- as you see this division unfold and Project CONNECT kind of a [delusive at all], is that driven by bringing in the new customer to the business, expanding categories, going further down the DTC road?

Like, if you just kind of put some shape around that comment, I think that'd be helpful, that'd be a far different story from what we've been accustomed to over the past few years.

So I think any context there will be greatly appreciated.

Certainly.

Well, depending on the geography, we're really selling to every retailer that we want to be selling to.

We're just not selling enough, and we see competitors with larger share in submarkets in some retailers and we want to be actively focused on growing our share in those stores.

And we believe there's an opportunity for us to grow double digit if we execute properly.

And we have the kinds of demand creation and focus on having the consumers pull our merchandise off the shelves the way we want them to.

So I think the opportunity exists.

The U.S., we're more mature certainly than we are in Europe where there's enormous opportunity for us.

So I just think there's a tremendous opportunity.

Additionally, we have the DTC business which has been growing nicely, but certainly our focus on -- for rapid growth and for highly profitable growth is going to be with our wholesale partners.

So that to say that, is that a product focus than sort of create more product that is, than more innovation that's desired by the consumer?

Or is it to really, you've mentioned, having a lot of voice, a few times on this call.

Just focus really on your core demographic, but speaking to them more frequently or expanding your core demographic profile so that you're speaking to a broader base.

Well, I think for the Columbia brand that means just creating additional voices and a larger voice for the Columbia brand, which is already very well known, but it also includes the other brands, SOREL, prAna and Mountain Hardwear, which are very underpenetrated and much less known than the Columbia brand.

So we're going to be using the capital that we are able to pool from Project CONNECT not only to focus on the Columbia brand, but to also focus on the other brands and getting them to the level that they deserve.

Got it.

And then just switching gears a little bit.

You mentioned Russia's return to significant growth.

I know South Korea has been a tougher market.

Could you just update us on those 2 markets with a little bit more detail into the headwinds?

But it sounds like Russia is on track.

Is that the case for certainly South Korea?

Or is there more to be done there?

Certainly.

Well, specifically in Russia.

That's one of the longest relationships the company has with an international distributor.

We have a very strong financial partner in Russia and one that has shown the capability of having a sustainable business, even in the face of really disastrous currency fluctuations.

So as the business improves, not only from a total economy improvement in Russia, but also from improvement in their operations, we're going to see great things, I believe, happened in Russia with -- specifically with the Columbia brand.

South Korea, I believe, we are in a trough position there.

Our inventories are much better.

There are some issues, I believe, in the general health of the inventory levels across other brands.

With our brand, we've had great success in cleaning that inventory up and building for the future.

So we don't expect significant growth in Korea for 2018, but I think the future bodes well for improved business there.

Our next question comes from the line of Chris Svezia with Wedbush Securities.

Congrats on the quarter.

I guess, first question I have is -- I'm kind of a little late here.

But just curious, of the 4% to 6% non-GAAP revenue growth that you talked about, I know you've referenced that Columbia, SOREL and prAna were supposed to grow.

Is there any way you can potentially add a little more color about rates of growth or where that falls in that context to that 4% to 6% growth rate?

Yes, I mean, obviously on an absolute basis it's going to be more heavily weighted in the Columbia brand.

And on a relative basis, if I -- if we're to provide a little bit more color on that, I think we're anticipating the prAna brand, in particular coming off a year in which it's been a low single-digit rate of growth, that we would see more acceleration in that.

That's probably the faster-growing of the brands.

And then Columbia and SOREL would be kind of more approximate to each other from an overall growth standpoint.

And then, with the Mountain Hardwear brand being lower, and as Tim commented in the prepared remarks, we've come through a year in which we've been cleaning up inventory.

So we've had some excess closeout inventory and so forth, but we are pleased with the fall '18 order book that's come together and seeing the full price side of that business within U.S. wholesale returning to growth.

Okay.

And with regard to -- in Europe, the subsidiary portion of yours.

Can you maybe just talk, I know profitability has improved, just sort of where you are right now on that.

And any thoughts about how we think about 2018 sort of profitability improvement in the subsidiary around Western European piece of the business.

Yes.

I think Jim can be maybe more granular, but the improvement of profitability was significant in 2017 over 2016 where we're, for all intents and purposes, breakeven.

The business is going to continue to improve where our expectation is for that lead in the growth that we may even have the potential to approximate the company average in '18.

Yes.

And just to jump in there a little bit.

With 2016, and at the year-end which we've finally gotten back to breakeven point after several years of the European direct business performing at an operating loss.

And as noted, we saw a meaningful improvement in the profits in Europe and we feel like there's a lot of head -- there's a lot of room to grow here.

The business is on a trajectory to continue to grow.

And we'd anticipate that, as it does that, there's a fixed cost structure in Europe that we're able to continue to leverage, and we should see continued improvement in the operating profits and there is a ways to go yet before, to Tim's point, before we back up to corporate levels and the levels that we see with another parts of our business regionally.

Okay.

And one last question, and I apologize if I may have missed this, but when you talk about spring for the Columbia brand, North American U.S. wholesale being -- having momentum and growth.

How has that changed as you think about the back half for U.S. wholesale, given how strong fourth quarter was and potentially recover retail's appetite for prebooking and things of that nature.

Maybe you can just walk through that a little bit, that would be great.

I can lightly touch on the order book as a part of this.

Based upon the combination of visibility we have to our spring book, which obviously we've had that in hand for quite a while and we've got confidence in driving growth through the first half of the year with the spring book.

And then with the early visibility that we have is we've got much of the order book in particularly on the Columbia brand through the all seasons, anticipating again a low-single-digit growth and from an overall reorder cancel perspective and replenishment, again just planning those more on a normalized cycle.

Our next question comes from the line of Rafe Jadrosich with Bank of America Merrill Lynch.

On the U.S. wholesale improvement for 2018, are there any channels or categories that are outperforming?

Or is the improvement balanced?

Yes, fairly balanced.

We've been excited about the increase in our footwear business.

It's a smaller base obviously in the apparel business, but it's gratifying to see that part of the business improve with some significance.

Is that Columbia footwear or SOREL or both?

SOREL yes, and we called that out, but I'm talking about the Columbia footwear business.

And then you opened I think 300 shop-in-shops in 2017.

What is the outlook for 2018?

I don't know that we've given a specific number to that yet.

We're still analyzing where the order book falls and we're talking about how to best utilize those assets, but there will be likely more of those.

And the number we called was ones that we'd opened as well as ones that we'd refurbished.

Okay.

And last question is, can you talk about the key innovation or product launches that you have for 2018 that we should be looking out for?

Yes.

We have a product category, and you're definitely familiar with Omni-Heat, and we have an improvement through our Omni-Heat product.

So Omni-Heat will still continue to lead the business, but we found a process to improve the performance of that.

We'll call it Omni-Heat 3D, and that's likely to be among the most exciting things we've launched.

So that's going to be the focus of our marketing efforts for 2018 as it relates to where, and the expectation is for solid grow there.

Our next question comes from the line of Jonathan Komp with Robert W. Baird.

Yes.

I wanted to ask a little bit more about the overall trajectory of your business throughout the quarter and then into early 2018 here.

I noticed in the CFO commentary towards the back, you mentioned specifically that the Q1 growth rate for sales and income should be higher than the full year.

So I'm just wondering is that DTC strength they're seeing in early 2018.

Or is that more based on the spring commentary you've provided?

Jon, but I don’t have specific details in front of me, but I think it's going to be a combination of looking at, as we're shipping in the spring '18, order book currently and then the expectations that we have around the performance of the direct-to-consumer business.

Okay, great.

And then when you look to the balance of the year going back to the U.S. wholesale projection for being up low single digits.

I just want to ask, I know for a couple of years we've heard from a lot of the vendors that retailers are shifting some of the inventory risk back to the brands and vendors.

I'm just wondering if you think that dynamic has changed at all this year relative to the past few or just any color on the dynamic there.

Well, I think there is no question that, that's a pressure point for retailers, but has been, frankly, ongoing for as long as I have been in the business in terms of where the inventory risk lies.

That's one of the reasons we have such a strong balance sheet as our capacity to take risk when it's appropriate.

The retailers have to balance that risk with the potential of not having inventory when it's called.

So I'm not frankly seeing a tremendously changed attitudes on retailers' part this year versus prior periods, but over time that's always been a point of contention.

If a retailer doesn't buy the merchandise who expects us to hold, we're going to sell it to the retailer who wants it first.

And so if there's nothing left for somebody, then that's a problem for them.

Okay, great.

And the last one, if I could.

I'm just looking at your dividend hike, pretty sizable.

And I think even with that for the year, you'll be less than 40% of the projected free cash flow in terms of the payout, just for the dividend alone.

So just wondering if your capital allocation commentary, does that imply that you will be in the market repurchasing.

Or just wanted to clarify that.

Yes, Jonathan.

So the dividend increase that we've made, the 16% increase, from $0.19 to $0.22, and then certainly the target that we've provided in terms of return of capital of 40% to 60% on a free cash flow basis, that would assume at some level that there is a share of purchase assumption built into how we're thinking about the year.

And you'll note as well as part of tax reform, obviously we've got great flexibility around our foreign cash.

And if you look at year-end, about half of our foreign cash was held overseas and we made some comments with regard to bringing back a good chunk of that, approximately $200 million, in the first half of the year.

And so share repurchases would be among the considerations that we have as we bring that cash back to the U.S.

Our next question comes from the line of Susan Anderson with B. Riley.

Congrats on a good quarter, again.

So I guess, I wanted to ask a little bit about SOREL and then your spring product.

I think last year was the first year that you have the new product out.

How much more product do you think you have this year?

Is it going to be much bigger at all?

Yes.

Actually, last year was the second year for the spring product line, and it's increased fairly significantly from a dollar standpoint, but a fairly small basis.

So I don't believe that the line itself, the number of styles offered, is significantly different, but the revenues are better improved and we expect to have a more impactful spring line, which at the end of the day is where our retailers are asking us for is an opportunity to have that product in the store year round.

We've also, in an ongoing attempt to de-winterize the brand, we've added more fall-weight or winter-light product, in addition to the heavyweight product that SOREL is so famous for, to the line.

And we believe that we have -- we're well on the way to making it a less winter brand than it had been in the past.

Great.

That sounds good.

And then one last question on Mountain Hardwear.

Nice to hear that you feel good about the new fall '18 product.

Maybe if you could give any more color on just kind of the space gains that -- or what channel they're coming in for fall of '18, and then just the newness in the product that gives you confidence in some better performance in fall.

Certainly.

Well, Joe Vernachio, who joined the company sometime during the last 9 months.

I don’t have the dates in front of me exactly, but his vision for the brand, which we completely concur, is to take it back to its roots as a truly high-end Alpinist brand, led by really the climbing community.

And he's been building out his team.

I think we're very close to the final members of the team being added now.

And where we have an excited singular vision for the brand, where we think that we can really launch it back to its former glory days.

The product that I've seen, and it's been so exciting, is a combination of the Ghost Whisperer ultra-light down jackets that they've been so famous for as well as the newer StretchDown product, which performed extremely well at retail over the last several seasons.

It's a matter of just getting that product finely tuned and getting the brand's energy back and excitements in the community.

So I think we're very comfortable with Joe's leadership and we're looking forward to great things with that brand.

And we've seen some nice, healthy reacceptance by specialty retailers in 2018 fall.

Thank you.

Ladies and gentlemen, I'd like to turn the floor back to Tim Boyle for closing comments.

Well, thank you very much for listening in.

We're very excited about the potential for the business as we continue our journey on Project CONNECT and we're anxious to be talking about the great successes we'll have in the future.

So thank you.

Thank you.

This does concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.