Columbia Sportswear Co (COLM) 2018 Q2 法說會逐字稿

Greetings, and welcome to Columbia Sportswear Company's Second Quarter Fiscal 2018 conference call.

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

It is now my pleasure to introduce your host, Andrew Burns, Director of Investor Relations.

Please go ahead, sir.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second quarter results and updated 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.

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

With me today on the call 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 Sportswear's business opportunities and anticipated results of operation.

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

Thanks, Gert.

I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including non-GAAP results, which exclude the effects of new accounting requirements associated with ASC 606, programming expenses and discrete costs associated with Project CONNECT 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 measure 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 will host a Q&A period, during which we will limit each caller to 2 questions, so we can get to everyone by the end of the hour.

Now I will turn the call over to Tim.

Thanks, Andrew.

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

We're delighted to report better-than-expected second quarter results with revenue, gross margin and earnings per share all at record levels.

With strong first half results and momentum in our business, we are raising our full year outlook as well.

Non-GAAP net sales increased 17% on a constant-currency basis for the quarter, adjusting for the favorable impact of new revenue accounting standards.

Non-GAAP net income increased to $11.3 million or $0.16 per diluted share compared to an earnings loss of $0.13 per share in the comparable quarter last year.

This represents the first quarterly profit in the second quarter, our lowest volume quarter since 2007.

First half non-GAAP net sales increased to 11% on a constant-currency basis with the first half revenue eclipsing $1 billion for the first time in our company's history.

Non-GAAP earnings per share of $0.93 was up 133% compared to the first half of 2017.

Because the second quarter is our lowest volume quarter, I'm going to focus my remarks largely on our first half non-GAAP results as they more accurately reflect underlying business trends.

Regionally, United States business grew 13% in the first half, benefiting from strong -- continued strong DTC performance as well as improved performance of our wholesale business, which was up high single digits percent.

In our DTC business, both the brick-and-mortar and e-comm businesses exceeded our expectations in the first half with improved brick-and-mortar store productivity and low 20% growth in our e-commerce sales.

International markets grew 9% on a constant-currency basis in the first half after adjusting for new revenue accounting standards.

This growth was driven by our Europe-direct international distributor, Japan and China businesses, partially offset by Korea, which was down mid-single digits on a constant-currency basis.

Europe-direct was up low teens percent on a constant-currency basis in the first half, led by strong wholesale performance, continuing the trend of healthy growth we've seen in recent years.

Our first half international distributor business benefited from early shipments of fall 2018 product falling into Q2 as well as growth in our fall order book.

We're particularly pleased with the growth we're seeing in our Russian-based distributor and Japan remains a steady growth engine for the company and is on track to add to its long record of consecutive years of local currency growth, which spans 2 decades.

China was up mid-single digit on a constant-currency basis in the first half.

As we discussed in our Q1 conference call, we remain on track to conclude the purchase of the remaining 40% interest of our China joint venture in early 2019.

The China market represents one of Columbia's largest regional growth opportunities and as such, we remain committed to investing in that business to ensure long-term success.

We intend to maintain the existing team and organizational structure following the buyout.

Please note that the current General Manager of Columbia Sportswear China, Jason Zhu, has decided to depart in September.

A search for his replacement is underway and Doug Morse, Senior Vice President of Emerging Brands and APAC, will assume direct management responsibility for the China region until Jason's replacement has been hired.

Turning to our margin performance, first half consolidated non-GAAP gross margin was up 110 basis points to 47.7%, as a result of our clean inventory positions driving full price sales mix and foreign currency hedge rates.

With the recent exploration and trade battles between United States and other countries creating concerns among investors, I wanted to provide some background about how this is going to affect our business, particularly with respect to China.

First, in 2017, 38% of our sales occurred outside the U.S. and are not directly impacted by U.S.-China trade barriers.

We rely on a diversified sourcing base, mostly across Asia and have considered our diverse and flexible supply chain to be one of our strengths.

In 2017, China represented less than 20% of our total imported value in the United States.

To date, newly announced tariffs in the U.S. have not targeted our primary product categories.

In addition, because a high percentage of our fall 2018 products will have been shipped in the coming weeks, if tariffs are raised on our primary categories, the impact would likely be felt mostly in future years.

We do face cost increases related to some accessories.

And we are anticipating the immaterial cost increases for some construction and fixturing as a result of steel and aluminum tariffs.

That said, the escalating global trade battles have the potential to be very disruptive to our business as well as our vendors, our customers and to many of the countries where were we do business, including the United States.

Apparel and footwear products already carry some of the nation's highest tariffs, averaging in the double digits.

To add to those high tariffs with additional punitive measures would not only have a detrimental impact on our business, it would represent a significant tax on American consumers.

China continues to be an important market for us, both for manufacturing and sales.

We have a long history of sourcing in China and remain committed to maintaining these important partnerships as the local manufacturing base is critical to our success.

We also have several hundred employees in our China joint venture focused on helping Chinese consumers to stay outdoors longer with our market-leading products.

We will continue to monitor trade debates closely and engage with policymakers to seek constructive solutions.

On the SG&A front, we remain focused on driving sustainable, profitable growth through investment in our strategic initiatives while maintaining cost discipline.

In the first half, excluding the Project CONNECT program and discrete costs, we improved our non-GAAP SG&A rate by 260 basis points, helping drive non-GAAP operating margin up to 7.6% from 3.8% in the first half of '17.

The majority of Project CONNECT initiatives are being implemented throughout the business and are part of our sustained go-forward operational strategy.

We are realizing some of the financial benefits from Project CONNECT this year and continue to expect the more meaningful financial value capture in 2019 and beyond.

We remain confident that the expected financial results from Project CONNECT will enable continued incremental investment while delivering consolidated profit improvement.

As we move into the second half of 2018, our SG&A growth rate will increase, reflecting higher demand creation expenses, continued investment in our DTC business, capability development, informational technology spending to support our strategic initiatives.

These investments are factored into our guidance and are expected to result in a contraction in operating margin in the second half.

Our full year revised guidance calls for up to 40 basis points in non-GAAP operating margin expansion.

I will now review our performance by brand on a reported basis.

Looking at the Columbia brand globally, our brand-led consumer-centric approach generated 14% constant-currency growth in the first half.

This growth was achieved via strong DTC performance, including our brick-and-mortar stores and e-commerce businesses as well as improved wholesale performance.

From a category perspective, our spring 2018 product line experienced healthy sales -- sell-through across apparel and footwear.

PFG footwear was a particular standout for the spring 2018 season with sales more than doubling, in part driven by the Houston marketing campaign, which I will discuss in more detail in a moment.

Columbia's innovative product were recognized by several industry publications, including Outside Magazine's coveted Summer Buyer's Guide, which featured the Columbia Montrail Rogue FKT 2, which was called out as the most lightweight and technical of all the trail shoes that outside tested.

The exceptionally versatile Columbia Blue Magic trunks were also featured.

Our newest cooling technology, Omni-Shade Sun Deflector, won Elevation Outdoor's Summer 2018 Peak Gear Award and was highlighted in Field & Stream magazine's Best New Fishing Apparel for 2019.

Sun Deflector has performed well in its initials season at retail.

It will be incorporated into more styles and categories for spring 2019.

For fall 2018, we're launching our latest innovation of the popular Omni-Heat platform, Omni-Heat 3D, which combines improved heat retention, durable warmth and next-to-skin comfort to create our most advanced Omni-Heat product to date.

This exciting launch will be supported globally with several unique marketing stories throughout the upcoming winter season.

We're also launching our third Star Wars collaboration in our global DTC channel in December.

This collection is particularly relevant to Columbia brand, given that it's true performance outerwear.

Our first 2 Star Wars collections performed extremely well with last season's product selling out within minutes online.

As part of our commitment to demand creation, we remain focused on increasing our engagement with consumers with an always on digital-first marketing strategy.

This year, that commitment includes 2018 new artist of the year, Columbia PFG loyalist and country music star Luke Combs; and 2018 Grammy nominee Kesha as well as organic partnerships with She Explores and other outdoor influencers, all amplified on social media and other digital channels.

We're also engaging with an influence around the world, such as our partnership with the U.K. National Parks.

Most recently, our best bad idea marketing campaign was launched in June, features former Director of Toughness, Lauren Steele, and friend Paddy O'Connell testing our cooling technologies in extreme summer heat, hiking 80 miles of Utah's infamous White Rim Trail.

The campaign has already garnered nearly 2.4 million video views and 23 million impressions.

On our last call, we highlighted our marketing and sales intensification efforts for PFG footwear in the Houston market.

This successful initiative generated over 150 million impressions and fueled a surge in Columbia brand sales across Texas and the Southeast.

PFG footwear sell-through for participating sporting goods retailers exceeded expectations, more than doubling compared to last season.

Including all styles, Columbia Footwear sales were up over 70% year-over-year in Houston.

We're pleased with these results and we'll execute a similar marketing initiative in the Greater Chicago market later this year as temperatures drop.

SOREL had a very strong first half with revenue growing 23% constant currency, driven by healthy sell-through of spring/summer styles, such as the JOANIE and ELLA collections, as well as strong demand for winter product earlier in the year.

The new kinetic line of casual sneakers embody SOREL's brand positioning as a function-first fashion footwear brand and quickly sold out at retail.

We'll look to build on this success with more kinetic products in the seasons ahead.

Overall, the spring 2018 growth validates the SOREL brand's ability to extend beyond the core winter business and become a year-round presence at retail.

At prAna, sales grew 9% in constant currency in the first half, largely driven by DTC e-commerce growth as well as U.S. wholesale.

For spring 2018, the men's lifestyle category performed well and we continue to build out our swim and active lines in the women's business, both of which remain meaningful growth opportunities for the brand.

At Mountain Hardwear, we're encouraged by the brand's U.S. fall 2018 order book, which reflects a return to growth, including new products such as StretchDown outerwear and GORE-TEX technical climbing outerwear and gloves.

First half gross margin materially improved, reflecting a clean inventory position compared to elevated clearance activity in 2017.

First half sales were down 10% on a constant-currency basis, reflecting our decision to exit the Korean market.

Under Joe Vernachio's leadership, the Mountain Hardwear team is well along in developing compelling products and marketing strategies to deliver sustainable growth in the future.

I'll now quickly review our balance sheet and cash flow.

Our inventories are clean with total inventory up 2% to $571 million or 4% excluding the impact of balance sheet reclassifications related to the new revenue accounting standard.

Our balance sheet remains extremely strong with cash balances of $775 million exiting the second quarter.

We continue to have no long-term debt.

During the first half of 2018, the company repurchased approximately 500,000 shares of common stock for $40 million and paid $31 million in dividends.

We have approximately $98 million remaining under the current stock repurchase authorization.

In summary, we're pleased with our solid first half performance and how we positioned our brands and regions for sustained growth in 2018 and beyond.

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

In June, we went live with the global ERP in our Europe direct business and are currently optimizing processes ahead of the important [call] and holiday season.

This substantially completes our global ERP rollout, which has been a fundamental component in the improved operating performance we see today.

I'd like to congratulate and thank our global teams with the hard work and dedication over the last several years to make this project a success.

Our Consumer-First or C1 strategy and a strategic initiative will enable us to deliver a more personalized, seamless experience for consumers across our global retail operations and includes a new retail ERP platform, CRM, loyalty, order management and point-of-sale systems.

We have completed the design phase and moved into the build phase and continue to expect to begin implementation in the first half of 2019 with our North American business.

Our newest initiative, Experience First or X1, will create a mobile first architecture designed to enhance the mobile consumer experience.

This encompasses an upgrade of our e-commerce platforms to offer best-in-class search, browsing, checkout, loyalty and customer care experiences for mobile shoppers.

We are currently in the design phase and expect to begin implementation in the first half of 2019 in the North American business.

Finally, I want to provide a little more color about our updated expectations for 2018.

Our 2018 non-GAAP outlook now anticipates 7.5% to 9% revenue growth, up from our prior guidance for 6.5% to 8.5%.

We now expect up to 40 basis points of operating margin expansion to approximately 11.7% of sales on a non-GAAP basis.

Together, we now expect 14% to 17% non-GAAP net income growth.

In summary, we believe that a 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.

To accelerate our performance, we will continue to invest in our 4 strategic priorities, which are: drive global brand awareness and sales growth through increased 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.

You can find more detail on our Q2 results and our 2018 financial outlook in Jim's CFO commentary available on our website.

That concludes my prepared remarks.

We welcome your questions.

Operator, could you help us with that?

(Operator Instructions) Our first question today is coming from Bob Drbul from Guggenheim Securities.

Tim, I guess, the first question that I have for you is, when you look at your sort of the top line results, but I think, equally impressive is the gross margin results.

When you look at the full price sales, are you attributing a lot of this?

Is it all the product improvement that you've made?

Can you just give us some insight in terms of you look at it -- I know it's a small second quarter, but if you look at it from outside and you look at the record gross margins and very strong top line, I mean, is that what's driving in here?

And I guess, you have some -- when you look at the next several seasons, right, you have -- fall's already locked and loaded, but like when you look at spring of next year and you look sort of it, you guys have some pretty long lead times.

How do you feel about sort of what's driving the business right now and how sustainable are these type of results?

Well, listen, we are thrilled with the results, obviously.

And it's -- there is a number of factors that play here, including our ability to manage the inventory levels properly.

So we don't have a bunch of markdowns.

And additionally, the help from our direct-to-consumer business and our innovations, which, frankly, give us pricing power in some of these categories where we haven't in the past had them.

So -- and lastly, maybe, specifically the U.S., just the power of our PFG business, where we don't compete heavily with a lot of different brands in that particular kind of category.

So there's a number of things that play here, but I think the opportunity for us to maintain these kinds of gross margin rates and possibly even expand are certainly in the foreseeable future.

And Bob, this is Jim.

I'd add couple other points to that as well.

I think, operationally, we've been disciplined.

If you look at the CFO commentary, our excess inventory is down 8% at this point in time this year relative to last year.

So as Tim commented, we're really clean on inventory.

And then on a go-forward basis, if we look out to next year, you'll recall the Project CONNECT work that we've been doing and certainly our expectation will be that Project CONNECT delivers solid gross margin pickup as we get into 2019 and beyond.

Okay.

And I think just you sound -- Tim, you sounded pretty optimistic on the Mountain Hardwear progress.

Can you elaborate a little bit more on Mountain Hardwear?

Certainly.

Yes, it's -- that brand is a very special brand.

We've owned it for a long time.

And we allowed, to our detriment, the product team to be suboptimal.

So having Joe Vernachio there with a keen focus on product, that's going to build the base for us to allow us to really improve that business and really harvest the opportunity that we have.

I think he is a spectacular merchant.

He's -- we've got lots of opportunity ahead of us.

And what we've seen so far in terms of his first flagship products for fall of '18 are going to be quite well accepted and get us well along in our way.

Great.

And I know you said 2 questions, but can I sneak in a third?

Yes, sure.

Just -- so the cash balance is pretty high and, I guess, when you look at the balance sheet, you look at where -- what you're projecting for the year.

Can you just give us some updated thoughts on uses of cash at this point and sort of how you're thinking about that?

Well, yes.

As you know, we have the 3 primary cash usages, which have been dividends, share repurchase and inventory levels to make the business right.

And frankly, at this time, with what we're seeing happening in Washington, DC, and the nuttiness around this trade activities, having a strong fortressed balance sheet allows us really to -- with confidence invest in the future of the business, where others who have more tenuous financing might not be able to do so.

Our next question is coming from Jonathan Komp from Robert W. Baird.

Just a broader question on the guidance.

It looks like, when I look at the first half performance, I know you previously put out a range for operating income performance in the first half and you exceeded that by a pretty nice margin.

And I think you're flowing through last to the full year in terms of the operating profit upside.

So I wanted to maybe just understand that dynamic and what you're assuming there?

Yes, Jon, I'll summarize.

So I think if you look back as part of our April call, you're referring to our non-GAAP operating income, we projected to be up $25 million to $30 million through the first half of the year.

And obviously, we're incredibly pleased with the performance in terms of what we achieved in the second quarter and exceeded that to the tune of, call it, I think, $15 million, $16 million from an operating income standpoint.

And we break down that beat, a good chunk of that related to better top line performance.

We certainly saw that with our U.S. business.

Our U.S. wholesale business performed exceptionally well, saw strong replenishment, as Tim noted, our direct-to-consumer business, both from a brick-and-mortar and from an e-commerce standpoint, both drove productivity as well.

And so that benefit in growth we've seen in the business, we effectively pass that along as a part of the full year take-up.

What we haven't in there is the working timing shift as it relates to our distributor business and a little bit less so in other parts of our wholesale business worldwide.

And then we had some timing shifts on discrete product base cost out of the first half and the second half and that's effectively the delta, but really pleased on our performance on the first half and have passed those benefits along to the year.

Understood.

And an update of a follow-up to some of that, but I wanted to ask a broader question, really mostly on the Columbia brand.

For the second half, I know the consolidated revenue you're pointing to mid-single-digit growth on the second half and just wanted to better understand the thinking there, especially -- I know different seasons, but given some of the momentum you're seeing from a brand-wide perspective, kind of what you're expecting to slow down in terms of the momentum and how the overlaps versus last year play into that?

Yes.

Let me answer it like -- as this.

So our back half -- we planned the back half up a mid-single-digit level that's relatively in line with what we've seen in our fall '18 order book.

There are some timing shifts as I'd indicated with regard to our distributor business in which we shipped a higher proportion of our fall '18 orders in the second quarter, so that has a little bit of an impact.

Certainly, planning for nice growth still within our direct-to-consumer business.

I think the other delta, certainly, that you're going to have when you look at first half relative to second half, is foreign currency was a nice tailwind to the first half of the year, contributing, I think, nearly 2.5 points of positive benefit to the top line.

As we get into the back half of the year, that will actually go slightly the other way.

So I think when you kind of normalize for the effect of timing and what's going on from a currency standpoint and you look at the guidance we provided in the second half of the year on an adjusted basis, it come up more in line with our full year outlook.

Okay.

And just as a follow-up, I know the e-commerce business in the U.S. has been very strong and up more than 20%.

Is there anything unique in the last couple of quarters or could you see some of that continue?

Yes, this is one of the areas where we've seen some of the first fruits of our Project CONNECT business in that the taxonomy and other technical aspects of the business were impacted positively to give us the kinds of conversion rate improvement and business improvements.

So we expect that those will increase over time and certainly we expect to have those kinds of positive things happen in the second half.

I'd also note the site traffic that we've seen has been quite positive in the conversion.

We've been able to convert that traffic on the site and the performance we've seen both from a desktop and mobile perspective has been quite fruitful through the second quarter.

Our next question is coming from Kate McShane from Citigroup.

Tim, you mentioned the fact you're getting pricing power, thanks to your innovation.

I just wondered, is ASP growth accelerating and contributing more to the sales growth than even a year ago and how should we think about higher prices as we get to the second half or fall and winter?

Yes, we've had some ability to increase prices, although that hasn't been the primary -- the bulk of our pricing power has been these new areas that we've invested in.

The Sun Deflector category, which is -- we're able to price at a premium, has been very helpful as well.

The back half of the year, I don't think it's going to be as impacted from that area where we have more competition.

In the springtime, we tend to have less competition in some of those more technical products.

Okay.

And then my second question is just your view, Tim, I'd appreciate hearing just how you're viewing the consumer going into the back half of the year as we start to lap, but seem to be better numbers and better spend from the U.S. consumer as we get into the back half of the year.

How are you guys feeling about the state of the consumer?

I think even though the traffic in total has been challenging for many businesses.

I think we monitor a lot of our retailer's progress, and traffic has been an ongoing issue.

I think the consumer is generally spending more.

Whether or not that's a result of the tax cuts or whether that consumer is feeling more confident, I don't know.

But we just have to be mindful of these tariff issues and whether or not they're going to be impactful in the second half more than we think.

Some of the additional tariffs on aluminum and steel will impact consumers certainly once that are involved in businesses and manufacturing products out of either steel or aluminum.

So I think, in general, the consumer is fairly confident, but the results of the whole year will be -- we'll have to wait and see.

This is again a reason to have a very, very strong balance sheet, so we can weather these storm should they arise.

And this is a follow-up -- quick follow-up to that, for any products that do have aluminum or steel and that are you seeing any kind of different ordering pattern from retailers?

Are they trying to order product before the October deadline, any change there?

No, we don't manufacture products with either of those components.

However, our consumers do.

So that's what I am -- we're concerned about.

And again, if you remember, for our business, orders for our products for fall have been in place, it's almost since November of last year.

I think, Kate, in Tim's prepared remarks, there was a comment in there that pertains more to the fixturing that we've put into both our own stores and our wholesale accounts.

So there would be some impact to that over time.

Our next question is coming from Jim Duffy from Stifel.

I have a question on Project CONNECT.

You guys alluded to meaningful financial benefits and clearly digital is already seeing some benefits.

As you guys progress further into this initiative, can you highlight some of the Project CONNECT specific financial benefits, maybe that you're most excited about and the timing of when you expect those to show in the model?

Certainly, well, as we pointed out at the beginning where we can immediately impact the business are in our e-comm business, but we would expect SG&A savings from products that we manufacture; those will be likely in the future.

And then the whole focus on streamlining our product offering globally, which has been an area we've undertaken with some significant amount of activity and not without its challenges, but we're making meaningful progress to simplify the products that we offer.

And so I would expect over time that the simplification is going to be impactful.

And those are just some of the areas.

Jim might be able to point out more.

I think maybe just touch on a couple of pieces there, Jim, and I'll point particularly to what's really driving our performance in 2018.

Some of it relates to indirect procurement spend from SG&A standpoint that Tim had touched on, just everything from packaging to travel base cost to certain things that we're doing from a freight standpoint as well.

And then I think as we get into the latter part of this year, in particular, to our retail business, I think, the combination of changes we've made as we've done some AB testing on our e-comm site and it's seen meaningful returns from a conversion standpoint with consumers that are shopping there and then even within our brick-and-mortar stores as we've done some testing and began to implement some changes with regard to pricing markdown and optimization that's driving a combination of top line and margin performance.

And I think as we get into the back half of this year, hopefully we see a bit more of that benefit flow through.

Great.

And then I have a follow-up question on the digital business here.

A number of years into your investments here and I recognize this is somewhat of an ongoing journey, but is there a way to characterize where you stand in this journey?

Do you expect that you get to a point in coming years where you're seeing leverage on these investments and we get more flow-through on them or is there so much to do and is it progressing at such a rate that it's kind of a continued area of investment?

We're seeing returns now on these investments.

So I would expect the investments will continue.

I would like to think that at some point, there will be a punctuation, but we're very conservative in terms of how we approach these digital investments and really try to do with some cadence where we can have a visibility of the returns quickly and so far we have been rewarded with those kinds of returns.

But it does seem like a very -- a never-ending journey, really.

Our next question today is coming from Camilo Lyon from Canaccord Genuity.

This is Pallav Saini on for Camilo.

First of all, you noted improving performance in the wholesale channel in the U.S. Can you give us your thoughts on the channel inventory?

Has there been any change in how the retailers are planning their business for the fall versus when you last spoke with us in April?

No, again, the kinds of products that we're selling today at retail, whether it's in our own DTC business or wholesale, it would be spring-related merchandise, lightweight rainwear, shorts, lightweight tops, fishing apparel and that's quite different from the products that our retailers will be selling, call it, from September and beyond into the fall, which are heavyweight items, fleece items, so of different collection of products.

The products that retailers will be selling again in September and beyond for the back half of the year were purchased from us beginning in November last year.

So we haven't seen any change in their activities.

And our expectation is that we're going to have a good second half.

And can you quantify the sales shift from Q3 to Q2, and excluding these shifts, which brands or channels drove the outperformance versus your plan in Q2?

Yes, so as it relates to the shift from Q3 into Q2, that's predominantly our distributor base business, its load, well, I'll call it the $10 million range shift out of Q3 into Q2.

And in terms of the outperformance on the quarter with a result, I would describe the lion's share of that with the Columbia brand.

Yes, that's probably it.

Our next question today is coming from Laurent Vasilescu from Macquarie Group.

I want to follow up on the third quarter guidance of revenues.

I think you just mentioned that there was a $10 million shift from 3Q into 2Q.

Was there -- is there a shift to 3Q into 4Q; and then overall for the third quarter, how we should we think about DTC and wholesale growth?

Yes, so it relates between the third quarter and fourth quarter.

I know we spent some time talking about this in years past in terms of shifts that we've seen, particularly in our wholesale order book.

As it relates to our fall '18 order book, we don't see a material shift in the timing of our orders between the third quarter and fourth quarter relative to our experience last year.

So it should to be relatively consistent aside from the distributor comment that we made a few minutes ago in earlier timing into the second quarter.

So from an overall standpoint, I think, the wholesale fall '18 order book is up kind in that mid-single-digit range.

As it relates to our DTC business continue to plan the productivity improvements and gains, both at the store and the e-comm level, consistent generally with the way we've planned to come in into the year, albeit, I think, we've obviously had exceptional performance in the second quarter and to the degree we perform at those levels, there could be opportunities we get into the back half of the year.

Okay.

Very helpful.

And drilling down into the U.S., how should we think about DTC and wholesale growth for the third quarter?

Should these third quarter metrics be similar to the U.S. annual guide of low teens growth for DTC and the wholesale at mid-single digits?

Laurent, could you repeat that, please?

Yes, sure.

With regards to the U.S., just specifically on the U.S., how should we think about the third quarter for DTC and wholesale growth?

Any color on that would be great.

Yes.

Unfortunately, I don't have -- we haven't provide that level of granularity and I don't have that immediately in front of me.

Okay.

Fair enough.

And then maybe just as a follow-up question.

I think in the prepared remarks, you've called out that demand creation expenses might go up this year.

I think last year, overall advertising expenses were like 5% of sales.

Where do you think it goes this year?

Yes, I think, our total demand creation spend in 2017, let's call it, just over $120 million, a shade under 5%.

We are looking to take that up as we'd indicated in our call.

Last quarter, we've made some decisions from an incremental investment standpoint of up to $10 million in incremental SG&A back half of the year, a good chunk of that is going towards demand creation.

So we'd anticipate that our demand creation as a percentage of sales is north of 5%, potentially as much as, call it, 25 basis points on the year's probably the right way to think about that.

And we'll continue to evaluate that as you go through the balance of the year.

Next question is coming from John Kernan from Cowen & Company.

I am just wondering how you're thinking about gross margin in the back half of the year.

It sounds like you've got a lot of momentum in terms of full price sell-through, ASPs and inventory on the balance sheet.

It's obviously in a good position.

So just wondering how you're approaching gross margin?

The guidance obviously implies kind of a deceleration in the current trend in terms of year-over-year increase.

So can you help us think about that?

Yes, I'll just touch on some of the contributing factors.

So our first half, up to about 110 basis points, the second half planned up about 25 basis points.

The contributing drivers of gross margin through the first half, which included the clean inventory position that we've had and stronger full price sales, the currency benefits, certainly those carry forward into the back half as does the channel sales mix shift as we've seen the DC business growing at a slightly faster rate than the balance of the business.

I think the delta in part would begin in the back half year's in part, just more difficult comps.

I think if you look at the back half of last year, the relative gains that we saw from a gross margin expansion standpoint comping against more difficult margin levels in comparison to our experience through the first half.

I know we've had some ever so slight shifts from a product sales mix perspective that's impacting the back part of the year, Q4 in particular.

Okay.

That's helpful.

And then my final question is EMEA, it's obviously a smaller portion of the overall business, but its growth has been the best, some of the best in the portfolio at this point, just particularly in the direct business, which you've been calling out, I think, both in this quarter and in the first quarter.

So can you talk about what's changing in Europe?

Obviously, some of it's product driven, but are there other things changing in terms of the marketing or the brand awareness?

What do you think is driving this inflection right now in Europe, particularly in the direct side of the business?

Yes, I would say it's a combination of many, many factors.

But if I was to list the most important ones, it would be focus.

So we had a rather scattered approach to how we looked at our direct business in Europe.

And under the direction of Franco Fogliato, who was our prior European GM, we've since moved him to North America, he has become much more focused and drove the team there to really emphasize our relationships with our largest customers in our largest markets, and that's been very rewarding.

The successor to Franco is a guy who follows the same theorems and so, the combination of an improving product line focused for Europe and that focus on large retailers and a focused product offering has really borne great fruit.

We're now starting to reinvest there from a demand creation perspective.

And so our expectation is that, that market will continue to grow and perhaps, lead to growth in all geographies.

Our next question today is coming from Chris Svezia from Wedbush Securities.

I guess, first question.

Just I'm curious with regards to the shifts and you called out the distributorship business, roughly $10 million seems to be the movement here.

So you did about 16% revenue growth give-or-take for the second quarter and the guidance is sort of mid-single as you go into the back half of the year.

How much of this is just a lot of it was driven by seasonal product like Performance Fishing Gear, which is not as critical in the back half of the year.

How much of it is just being conservative and how much of it is just Q4 is a highly sensitive DTC quarter, which obviously, you don't know 100% how that's going to play out?

So I'm just trying to understand those mechanics, if you can maybe talk about that.

Yes, Chris, I think it's a combination of things.

I mean, if you look at the first half alone, I mean, the replenishment that we saw with the sell-through that we achieved through the second quarter was quite strong.

I think we even go back as far as the first quarter, we had some favorable weather that obviously drove some positive gains through the January, February timeframe that we've spent some time talking about.

Certainly, currency has played a benefit through the first half of the year.

And then as it relates to the balance of the year, we're looking at a combination of our order book and applying more of a normalized view of what we expect from a cancel, reorder and replenishment based perspective, and have planned likewise from a retail standpoint.

And as I've mentioned, certainly to the degree we see the outperformance that we saw in the second quarter, there's potential there for our retail business in the back half of the year.

That said, our comps within retail, we performed exceptionally well through parts of the back half last year as well.

Okay.

And Jim, you mentioned -- with regards to retail, you mentioned, I think, fourth quarter just as it pertains to gross margin, there's some sales, there's some mix impact on sales that I think is a negative to gross margin.

Maybe just elaborate if you could on what that is.

It's really broad based, Chris.

There's no kind of specific -- it's not overall -- I think, from an overall apparel, footwear standpoint, the relative rates of growth that we're anticipating from our apparel business are relatively consistent with footwear, so it's intermixed within the categories.

I wouldn't over-dwell on it from a size perspective.

I think the bigger driver in there is just going to get some more difficult comps with the rate of gross margin expansion that we achieved through the fourth quarter and back half of last year.

Okay.

And last, just 2 things quickly.

Your e-commerce business, just I think in the past, you might have mentioned that it's as profitable if not more profitable than the core business.

Maybe just confirm where that stands.

And lastly, I guess, Jim, now that you've become profitable in the second quarter, does this mean you're going to be profitable all the time in the second quarter?

That's a joke but just curious.

I hear you.

Hopefully, that's the case.

But yes, as it relates to looking at channel-based profitability, certainly the e-commerce business, as we look at that on a direct contribution margin basis, as healthy of a margin-based business as we have, certainly, our wholesale business would be up there as well.

And the brick-and-mortar business obviously, with the additional fixed cost you have with operating in that channel are going to be on the lower end of the range within the channels that we do business with.

So even at that, we're continuing to make investments in the expansion of those stores and seeing nice contribution to our overall profitability.

Our next question is coming from Omar Saad from Evercore ISI.

This is Westcott on for Omar.

I'd love to hear your thoughts thinking 3 to 5 years out how you're viewing the channel shift between say, domestic wholesale, your e-commerce, digital wholesale players, where you expect kind of the growth to come from and how you're expecting that to kind of play out.

Certainly.

Well, as well known, there have been a number of bankruptcies over the last several years of weak retailers that the company had done significant business with.

As I see the landscape of our current domestic retail partners, I find them to be much stronger and much more likely to be in business for the next several years.

And our expectation is that as we've said many times, being a wholesale business primarily, our expectation is that our business with wholesale partners will continue to increase.

That will be exceptionally true if we can make the kinds of progress we think is available for us in the footwear category, which for us and in our business, will be almost exclusively a wholesale business.

Right.

And just a follow up.

If you think about your e-commerce and your store, roughly what percent of the product that's available on e-commerce and new introductions are also available on your wholesale?

Is there any exclusive or are you introducing new things on your e-commerce that you then introduce to your wholesale?

And how are you kind of managing that relationship as well?

Yes, we don't use that channel for new launches.

I mean, frankly, the only time we would have an exclusive launch would be something along the lines of our Disney activity with Star Wars.

But in general, we consider ourselves to be a wholesale company and focus on our wholesale partners to help us launch products and to continue to grow the business.

Our next question is coming from Rick Patel from Needham & Company.

My question is on SOREL.

So you had very strong growth on top of what was a pretty tough comparison last year.

As we think about the success of spring products, anything to highlight in terms of where you're seeing that strength, whether it's by geography or channels?

And whether -- what's your level of confidence that this brand will continue to outperform as we think about fall products in the back half?

Well, I mean, frankly, today in the spring product category, SOREL is primarily a U.S.A.

business.

It's great to see this kind of success here frankly because we want that business to become more year-round, less weather-dependent.

It will help us internationally where our partners on the Columbia Mountain Hardwear and prAna brands tell us that for SOREL to be a truly significant business, it has to be year-round.

So the expectation is that with the great successes we've had in the U.S., we'll have continued momentum globally on those spring styles.

It's important to remember that there have been very heavy investments in the company, not only in spring products, but also fall products for SOREL, so less weather dependent.

So the goal really is to get that brand to year-round activity so we can encourage our wholesale partners to invest in that brand and to help us strengthen the sales there globally.

And I know it won't happen until early next year, but I'm hoping you can give us a sneak preview of the outlook of China after the JV is taken in-house.

Just from a very high level, what do you see as the most compelling drivers of growth as we think about distribution, brand and categories there?

Certainly.

Well, I mean, as I said earlier, we feel that China is the largest geographic opportunity for the company.

And if you remember the bulk of our business -- by far the bulk of our business is in mono branch stores featuring the Columbia product.

Some of those stores we currently operate and the bulk of them are operated by franchisees.

So as our Project CONNECT work continues and we're able to strengthen the product offering globally to be more focused, we think that the opportunity to have a much more robust business in China is quite significant.

It's an important part of our future and we've invested in that business with people and processes to get us to the next level.

About 10% of the stores that we operate in China are our own stores.

We've added personnel to bring our stores up to a higher quality level.

And I've honestly believed that, that's going to be a real shining star in our future growth.

Our next question today is coming from Rafe Jadrosich from Bank of America Merrill Lynch.

Can you talk about how PFG performed in the second quarter?

And then I think a few years ago, you told us that it was around $100 million.

Can you just update on the size it is now?

Yes.

Let me tell you, it's significantly improved and primarily because we've added footwear in a significant measure to the business.

The focus on our marketing efforts in Houston and certainly took for halo effect in the Southeast was really significant.

We've had triple-digit weeks of growth over prior periods, primarily in the footwear, but it's also helped us on the apparel as well.

I don't know that we've actually quoted the exact growth percentages of where we are now, but it's significantly grown over last year.

And again, because of the addition in the footwear category.

And then can you update us on where you are in your shop-in-shops initiative and maybe some of the lift that you're seeing at wholesale from it?

Certainly.

And that's where -- I don't know that we've specifically called out the number of shop-in-shops that we've got installed, but we're continuing to install them and with a focus on PFG, frankly, in the Southern part of the United States, where we have a competitive advantage and an opportunity to continue to grow that business where we don't compete heavily with other brands.

How we appear at retail is bundled into our demand creation efforts.

And so in addition to increasing the demand creation through digital and print media and TV, we're also increasing our investment in shop-in-shops and other in-store point-of-purchase facilities, pictures and stores.

That's really helpful.

And then my last question, just can you compare the -- or give some color on the operating margins by channel between wholesale, your own stores and then e-commerce?

Yes, I think, nothing more than what I described earlier, and it'd all just be on a relative basis.

I think certainly, our higher margin businesses are going to be a combination of our wholesale and e-commerce channels, and they're relatively similar.

I'm speaking probably more specific to our U.S. business.

We look at it within the geography, but the wholesale business being the more profitable, e-commerce being meaningful.

And then the direct-to-consumer business within the brick-and-mortar side is going to be a little bit lower than that, just given the fixed cost nature of the stores.

And then I'd also mention the distributor-based business and the distributor-based business up -- not having much of an SG&A cost structure associated with that, so that's pretty commensurate with what we see within our wholesale and e-commerce channel.

Our next question is coming from Susan Anderson from B. Riley FBR.

This is Luke Hatton on for Susan.

I'll just do one quick one.

So looking at DTC from the brick-and-mortar side, how are you thinking about your current store fleet and new openings for the rest of the year, maybe just by branded versus outlet and then domestically versus internationally?

Yes, to touch on that, I think in total, across the combination of U.S. and Canada from a North America standpoint in 2018, we had, I believe, 8 stores planned for the year, one of which was a branded store.

And we've essentially opened all but 1 or 2 of those, so we're on track.

The balance will be open pre-holidays.

And then from an international standpoint, our European business, I think we've got 6 stores planned in that market.

And then the composition from our Asia business is predominantly shop-in-shop-based, so not a lot of capital obviously involved from that standpoint, but continuing to open stores, both in the Japan and China markets.

Our next question is coming from Michael Kawamoto from D.A. Davidson & Co.

Also just a quick one.

On the Experience First initiative, if I could just get some more color there.

Is that something that you're going to be doing all in-house or will it be a third party kind of software development team to be called in to help with that?

And then did you quantify the investment around that as well?

Yes, so as is true with many of the enhancements to our e-commerce business, there are multiple vendors involved, and this will be the same.

It's important to note that something like half of our business today is conducted on mobile on the e-com business with actually into the 80% range in our China e-com business.

So these are going to be really important investments over time.

I don't know that we will be able to quantify the exact investment but suffice it to say that it will -- it's a coordinated effort among our own teams and vendors.

Yes, that's right.

In terms of the investment we have quoted with that is built into our outlook, both from a P&L standpoint as well as a capital.

And certainly, some of these Project CONNECT benefits we'd begin to generate, that's certainly helping us in terms of being able to make these strategic investments back into the parts of business, X1 being one of those areas.

We've reached the end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Thank you.

Well, I think it's important to note that coincidentally, this is the company's 80th year in business and this is our 80th conference call.

And just speaking personally, it's been a tremendous pleasure to talk to each one of you over the last several years as we've been a public company.

And we always appreciate your questions and they help us greatly to manage the business.

So thank you very much and look forward to talking to you in a few months.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time and have a wonderful day.

We thank you for your participation today.