Columbia Sportswear Co (COLM) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Columbia Sportswear Company Third Quarter Fiscal Year 2018 Financial Results Conference Call.

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

I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations.

Please go ahead.

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

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

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

With me on the call are 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.

Thank you very much.

This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operation.

Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from what is projected.

Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K and subsequent filing with the SEC.

Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any of the duties to update any of the forward-looking statement after the date of this conference call to conform that forward-looking statements to actual results or changes in our expectations.

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 and insurance claim recovery benefit, program expenses and discrete costs associated with Project CONNECT, income tax charges associated with Tax Cuts and Jobs Act as well as constant currency 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 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'll turn the call over to Tim.

Thanks, Andrew.

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

So far 2018 has been a great year for Columbia Sportswear Company and these results demonstrate our brand-led consumer focus strategy is working.

For the quarter, we're elated to report record revenue and earnings that exceeded expectations.

With strong year-to-date performance and ongoing business momentum, we are raising our full year outlook.

It's important to note that these results include significant investments in our business that are designed to help us adapt to the rapidly changing retail environment and fuel sustainable long-term profitable growth.

Non-GAAP sales increased 6% for the quarter adjusting for favorable impact of new revenue accounting standards.

Non-GAAP net income increased 11% to $99.3 million or $1.41 per diluted share compared to $1.28 per share in the comparable quarter last year.

Year-to-date non-GAAP sales increased 10%, and year-to-date non-GAAP earnings per share of $2.34 is up 40% compared to the same period last year.

Regionally, the United States business grew 9% in the quarter and year-to-date is up 11%, led by high teens DTC performance as well as mid-single-digit growth in our wholesale business.

In our DTC business, brick-and-mortar store productivity gains as well as e-commerce growth have exceeded our expectations.

E-commerce sales were up high 20% in the third quarter, reflecting higher traffic, conversion and brand strength.

From our review of international markets, I'll reference constant currency growth rates after adjusting for new revenue accounting standards, which we believe best reflect the underlying business trends.

Year-to-date, our international markets were up 6%.

And in the quarter, international sales grew 2%, led by growth across Europe-direct, Japan and Korea, partially offset by declines in our China and international distributor businesses.

Europe-direct and Japan's growth momentum continued in the quarter with these markets growing high teens and mid-teens percent, respectively, driven both by DTC and wholesale performance.

Our international distributor business was down in the quarter, in part due to timing of shipments, and is up low single-digit year-to-date.

Geopolitical instability and currency fluctuations can impact select distributor markets in any given year.

We believe our balanced portfolio of over 25 distributors across more than 60 markets has proven to be a profitable growth engine that mitigates risk while extending the brand's -- the brand portfolio's reach beyond our core markets.

Our China business was down low double-digit percent in the quarter.

To help address this softness, we're investing in our in-store experience, including store picture upgrades and full-store renovations in 135 stores in China this year.

We're also in the process of hiring a new China GM.

We continue to believe China 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.

Our purchase of the remaining 40% interest of our China joint venture in early 2019 remains on track.

Turning to margin performance.

Third quarter consolidated non-GAAP gross margin was up 110 basis points to 47.8%, driven by higher DTC sales, favorable full price sales mix and foreign currency hedge rates.

A healthy retail environment as well as strong execution fueled better-than-planned gross margin performance in the quarter and has given us the confidence to raise our full year gross margin outlook.

During our last conference call, I addressed the potential financial impact of the recent escalation of trade battles between the United States and other countries, particularly with respect to China.

As a quick refresher, in 2017, 38% of our sales occurred outside the U.S. and are thus not directly impacted by U.S.-China trade battles.

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

In 2018, product sourced in China will represent approximately 10% of our total imported value into the United States, more heavily weighted towards footwear than apparel.

Looking at the $200 billion round of tariffs set to go into effect January 1, our primary product categories will not be impacted.

We face a small impact to an accessory category, which will not have a material impact on financial results.

With 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 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 customers as we pass along these additional costs over time.

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.

On the SG&A front, our spending accelerated as expected in the third quarter, growing 12% compared to last year on a non-GAAP basis.

Demand creation as a percentage of sale increased 80 basis points compared to last year, reflecting our commitment to investing in this strategic priority.

As a percent of sales, non-GAAP SG&A increased 200 basis points, with the biggest drivers in SG&A growth being investments to support our expanding DTC operations, higher demand creation and incentive compensation expenses.

Non-GAAP operating margin was down 90 basis points to 16% in the quarter, reflecting higher SG&A spend.

However, our year-to-date operating margin is up 160 basis points.

Our full year revised guidance calls for up to 60 basis points in non-GAAP operating margin expansion, reflecting our focus on driving sustainable, profitable growth through investment in our strategic initiatives while maintaining cost discipline.

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

Looking at the Columbia brand globally, our brand-led consumer focused approach generated 7% revenue growth in the quarter and is up 13% year-to-date.

This growth was achieved via strong DTC performance and wholesale growth.

From a category perspective, both footwear and apparel are up double digits year-to-date.

Looking at our season to-date Fall 2018 sell-through, it's clear this momentum is intact heading into the important holiday sales season.

On the product front.

Our Fall 2018 launch of Omni-Heat 3D was recognized by several industry publications, including Outside Magazine, which featured the Columbia Omni-Heat 3D crew top in its annual design and tech issue, calling it one of the year's most advanced performance products.

Favorable Omni-Heat 3D reviews can also be found on GearJunkie, Backpacker Magazine, SKI Magazine and Women's Health, which awarded our new ski pads their 2018 fitness award.

We are optimistic that this positive industry buzz is continuing to build consumer demand for our newest Omni-Heat innovation.

Early-season sell-through of Omni-Heat 3D is promising.

Our footwear product innovations were also recognized by industry publications during the quarter, including Men's Health, which placed Columbia's Fairbanks Omni-Heat boots in their 2018 footwear awards in the winter boot category; as well as Runner's World, which called the Columbia Montrail Variant X.S.R.

a true door-to-trail shoe in its 2018 fall shoe guide.

This season, we also had several unique product collaborations, including new collections with both Kith and Opening Ceremony that combine their fashion DNA with our iconic outdoor products.

For amplifying these product innovations and brand stories by increasing our engagement with consumers with an always on digital-first marketing strategy.

To help us connect in relevant ways, we recently announced the McCann Worldwide Group as our new agency of record for global content strategy and U.S. media.

We believe McCann's grasp of the changing consumer digital and retail landscapes around the world will help us to execute a larger, more fully integrated authentic marketing strategy that connects seamlessly across creative, media and PR channels around the world.

Recent Marketing campaign stories include Columbia's Montrail F.K.T., or Fastest Known Time, which garnered 5.1 million video views and 65 million impressions.

With over 18 million minutes of watch time, this campaign demonstrates our ability to generate authentic stories that are relevant to the trail running community.

Our sponsorship of the globally popular UTMB trail run, or Ultra Trail Run du Mont-Blanc, that begins in Chamonix, France, and spans 3 European countries was a success with several strong finishes for Columbia sponsored runners in addition to the coverage we received.

Given the success of this partnership, we recently announced a 3-year extension of our UTMB partnership.

The Orca Songs campaign, featuring 2018 Grammy nominee Kesha, launched this month and has received very positive engagement around supporting the Center for Whale Research.

The PEOPLE.com article which highlighted this unique story garnered 43 million earned impressions.

Following the success of our targeted Houston, Texas, marketing initiative, we're excited about the October 22 launch of our Chicago marketing effort and omnichannel campaign to drive sell-through of cold weather outerwear and footwear across key wholesale partners as well as our own DTC stores and columbia.com website.

Before moving to SOREL, I'd also like to highlight 21-year Columbia brand veteran Dean Rurak was appointed Senior Vice President of North American Sales for the Columbia brand, taking over from Joe Craig who is retiring.

I'd like thank Joe for his 23 successful years representing the Columbia brand and convey my confidence in Dean's ability to drive future growth.

SOREL continues to have a strong year, with sales up 12% in the quarter, reflecting growth across wholesale and DTC channels.

Solid demand for fashion fall styles such as the Joan of Arctic Wedge highlights SOREL's ability to extend beyond the core winter boot category and become a year-round function first fashion footwear brand.

We're encouraged by early-season sell-through trends and are looking to maximize opportunities to capitalize on current brand momentum.

We're pleased with the exceptional growth in our spring 2019 wholesale order book, which reflects continued strength in the U.S. market.

At prAna, sales grew 8% in the quarter, reflecting healthy full price e-commerce and U.S. wholesale growth.

For Fall 2018, lifestyle product are performing well, including notable strength in women's bottoms.

New for this season, prAna launched its supersoft Cardiff Fleece collection as well as added a holiday capsule and gift guide.

At Mountain Hardwear, sales were down 22%, primarily reflecting lower closeout sales compared to the prior year as well as the brand's 2017 decision to exit the Korean market.

With a clean inventory position and the brand's U.S. Fall 2018 order book reflecting a return to growth, we're optimistic about the Mountain Hardwear team's ability to deliver sustainable growth in the future.

While we are very early in the season, initial sell-through trends for the innovative new stretch down outerwear have been encouraging.

We recently concluded our Spring 2019 wholesale order book, which indicates promising growth for the brand in the U.S. market.

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

Total inventory exiting the quarter was up 10% to $617 million or 13% excluding the impact of balance sheet reclassification related to the new revenue accounting standard.

We're comfortable with the quality and the aging of the current inventory.

Based on earlier buys and receipts of Spring 2019 product to alleviate manufacturing capacity constraints and drive cost efficiencies, we expect year-end inventory growth to exceed 20% compared to 2017.

Our balance sheet remains extremely strong with cash balances of $451 million exiting the third quarter.

We continue to have no long-term debt.

During the first 9 months of 2018, the company repurchased nearly 1.3 million shares of common stocks for $107 million and paid $46 million in dividends.

Including the $200 million increase in our share buyback authorization approved by the board in August, we had approximately $231 million remaining under the current stock repurchase authorization at quarter-end.

Included in today's earnings release, we also announced a 9% increase to our quarterly dividend to $0.24 per share.

It's from this position of strength and confidence that we're investing in our 4 strategic priorities, which remain: 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.

Our commitment to investing in demand creation is evident in 2018.

We're on track to lift our demand creation spend as a percentage of sale to approximately 5.4% this year compared to approximately 5% in 2017.

Additional areas of investment include the Consumer-First, or C1, strategic initiative that will enable us to deliver more personalized seamless experience for consumers across our global retail operations.

That includes new retail ERP platform, loyalty, order management and point-of-sale systems.

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

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

We expect to begin implementation of both C1 and X1 in the first half of 2019 in our North American business.

Finally, I want to provide a little more color about our updated expectations for 2018 and initial 2019 growth expectations.

Our 2018 non-GAAP outlook now anticipates 9.5% to 10% revenue growth, up from our prior guidance or 7.5% to 9%.

We now expect up to 60 basis points of operating margin expansion to approximately 11.9% of sales on a non-GAAP basis.

Together, we now expect 20% to 21% non-GAAP net income growth.

While our 2019 outlook has not been finalized, I want to provide a little color about what we're expecting for the upcoming year.

We remain fully committed to the long-term financial objectives that we've delivered on in recent years, driving sales growth through our brand portfolio, expanding gross margins, increasing demand creation investments and expanding operating margin.

Based on favorable initial Fall '18 sell-through, advanced orders and distributors' orders for Spring 2019, early feedback from customers regarding our Fall 2019 product line, and plans for continued growth in our DTC business, we anticipate high single-digit percent net sales growth in '19 compared to expected 2018 GAAP net sales.

When assessing our 2019 business, it's important to note that our plans include Project CONNECT initiatives designed to materially reduce the number of lower volume styles as well as increase our focus on key wholesale partners.

We believe the outcome of this and other work will result in improved product margin performance.

Project CONNECT, which is now part of our sustained go-forward operational strategy, will have meaningful financial benefits in '19 and beyond.

These financial benefits will be most evident in our planned gross margin and enable us to continue significantly investing in the business to support our strategic priorities.

Based on these assumptions, we believe low-double-digit percent net income growth compared to our expected 2018 non-GAAP results is achievable.

We will provide additional 2019 guidance detail when we announce financial results for the fourth quarter and full year 2018 in February.

Before I conclude my prepared remarks, I'd like to highlight that this year we celebrated our company's 80th anniversary as well as our 20th anniversary as a publicly traded company.

I'm proud of our company's long heritage as well as our shareholder returns since the 1998 IPO.

Without splits, the share price has risen from the $18 IPO price to approximately $260 today.

Including dividend reinvestment, this equates to over 1600% return and a 15% annual equivalent return, which compares to a 7% return for the S&P 500.

As we look forward, I believe that the combination of our global multibrand, multichannel business, our sound strategic plan and our teammates around the world form a solid foundation for expanded profitability and increase total return to shareholders in the years ahead.

Thank you, and we'll now take questions.

Operator, could you help us?

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

I was wondering, Tim, on the China business, can we just expand a little bit on what's happening there?

You're investing in store experience and making some changes there; looking for new a GM.

Can you just give us some bigger picture category perspective of what's happening in China?

The Columbia brand, you said you pulled back on the value customer.

Can you just give us a little bit more take on what you're seeing and what's materializing in that market right now for Columbia brand, please?

Absolutely.

Well, I can tell you that we consider China to be our biggest-single geographic opportunity.

So regardless of the quarter and the disappointments there, we believe that that's -- there's significant opportunity for us there.

The bulk of our change in revenue was the result of an issue with the finite grouping of customers, and we believe that our strategies are correct there.

Although, I have to admit we haven't probably kept investing on the in-store experience as heavily as we should have been.

Things in China change more rapidly than in the U.S. and consumers are used to getting sort of an improvement in the facilities and the experience on a more rapid basis than here in the U.S. So if there is anything we've learned, we need to be increasing our investment there on a more rapid basis.

We've got good momentum throughout the rest of Asia and the brand is strong, and we're convinced that we're in a position we can capitalize on the opportunities there in the future.

And Bob, this is Jim.

I'd add, as well, while we saw a decline in sales in China in the third quarter, we are anticipating growth back there in the fourth quarter.

And obviously, we're in a important period here with the double 11 sale and in the presales activity currently.

Okay, great.

And then if I could shift gears.

On the inventories, I guess, the -- like within the inventory commentary that you made, the first one I have is within the U.S. business, have you had any cancellations or -- and you said there was a shift out of Q3 into Q4.

But I guess, a bigger picture question that I have is, when you look closely at sales growth versus inventory growth, you had been trending negative for, I think, all of '17 and slightly positive for the first half of the year.

And you just told us that the end of this year, you're going to end up 20%.

Can you just help us understand what's happening with your inventories a little bit more in detail?

Yes, let me give you just a slight overview, and then I'll ask Tom and Jim to maybe add additional comments.

But one of the things that the company has in its favor is a enormously strong balance sheet frankly.

We can have a higher return on the balance sheet by investing in inventory where it's appropriate.

So we've done a lot of work around Project CONNECT to level load our factories, which is going to increase the -- a percentage -- a certain percentage of the inventories that we carry at certain times of the year when comparing.

And to answer your question about cancellations, actually, it's been quite the opposite.

So we're very comfortable with the inventories where they are, and we believe we're in great shape to keep the business growing.

Yes, Bob, I would add.

We look at our inventories at the end of September, the aging on it is really clean.

We're -- all of the increases in our inventory at September 30 is all the current season spring and fall inventory.

The aged inventory, anything it's greater than year old, is actually down as of September 30.

So as Tim mentioned, feel pretty comfortable from that perspective.

And obviously, with the demand that we see and we anticipate continuing in the fourth quarter, we would anticipate with clean inventory exiting the year as well.

As it relates to the end of year projected inventory, and as noted, we have made some earlier buys, and we anticipate early receipts for Spring 2019 products; we're just bringing that product into the market a bit earlier to get out in front of certain manufacturing supply constraints and then also to deliver cost efficiencies.

And I think those cost efficiencies, you'll begin seeing that in our Spring 2019 in our product margins as we provide further detail on our outlook, out to next year.

And then with regard to just the uptick in inventory, in general, I would just describe that as we came through 2016, 2017 at a lower rate of growth and then certainly, as the business picked back up, there is additional inventory to support that.

We made some opportunistic purchases for our Fall 2018 really to take advantage of some of the demands that we're seeing in the market.

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

I was hoping just to get a little bit more color.

I know the U.S. looks very strong, and I think you raised the outlook, implying a good fourth quarter; part of that may be the timing of shipments year-over-year.

But can you just talk about from a wholesale perspective what you see in the U.S. environment?

And then, separately, it looks like your DTC business also is very strong.

So if you could comment more on some of the drivers there.

Yes, certainly.

Well, we believe that the company and its brands are taking market share.

So we're seeing an acceleration in terms of liquidation.

You may remember, the company monitors about 85% of our wholesale partners' sales and inventories, so we can be helpful if necessary.

But we're seeing very strong liquidations on the company's products at wholesale, and we would expect that as the winter kicks in that we'll continue to see that.

We've had similar good news in our DTC business as well.

So we're actually quite bullish on North America because we have more visibility than in really any place else in the world.

And Jon, I think as it relates the timing shift you had mentioned.

Our rate of growth for our U.S. wholesale business in the third quarter was up low single-digit percent adjusted for the timing shift as we see that -- those shipments into the fourth quarter.

Our revenue for the wholesale business would have been up more in line with the whole season at a mid-single-digit rate; and we'll see that as we complete the fourth quarter, and we report results where our wholesale business, we are anticipating being up to a greater extent as we report results.

And then I'd also indicate, we'll continue to see that strength from a DTC standpoint, both within the brick-and-mortar and e-comm channels.

And I assume if you're talking maybe like a week or 2 shift in deliveries this year -- or maybe you can comment on kind of the state that your deliveries sitting here today versus where you might have been last year?

I don't think there is any meaningful shift in that, so nothing specific to call out.

Okay, great.

And then, Jim, maybe a bigger picture question on the margin that you're contemplating for next year.

Certainly, the gross margin, I know you called out some benefits from the initiatives there.

Could you just talk about any product cost pressures that you see on the horizon that you are embedding in your initial outlook?

And then separately, kind of what you're thinking about the expense rate for G&A, and any opportunity to get leverage there on a high single-digit sales growth?

Yes, yes, sure.

I think specifically as it relates to input costs, I mean, certainly, we're seeing some of that inflationary pressure as it relates to raw materials.

And that will have an impact, as well as the labor rates that we're seeing in Asia.

Having said all of that -- and obviously, we've spent a fair amount of time communicating with regard to the Project CONNECT benefits and the Project CONNECT efforts that we've been working on for the better part of last 1.5 years.

And as we get into next year, we anticipate that those efforts around design to value, around the assortment optimization and just the efficiencies we're going to see at our product line are going to drive improved gross margins beginning with our Spring 2019 season as you carry into the fall season as well.

So I would fully anticipate that our gross margins are up nicely next year.

Now with that said, and as you're seeing in the latter part of this year as you look at our results in Q3 and what's implied in our Q4 outlook, our rate of SG&A growth is up, and we'll see that ultimately when we provide more detailed outlook for 2019.

But really at this stage, it's early in our planning process.

We've just kicked off our budget cycle.

We want to provide some initial indicators in terms of what we're planning for in our business is what Tim shared.

And maybe just to reiterate on that briefly: we're planning a high single-digit rate of growth, off of our GAAP net sales and important just kind of pick up a note around GAAP net sales; and then also planning the net income up on a low double-digit percent off of our non-GAAP net income.

Beyond that, there's not a lot to share in terms of the underlying composition from a gross margin, SG&A perspective aside from the qualitative comments that I just shared.

Our next question comes from the line of Rick Patel with Needham & Company.

I had -- it looks like the wholesale in the third quarter was negatively impacted by timing shifts.

I'm curious if that shift was anticipated, or if it reflected customers delaying their initial purchase plans.

And any way to quantify that as we think about the benefit to 4Q?

Again, nothing all that significant.

In fact, I think, when we reported our second quarter results, we really weren't anticipating much of a timing shift.

But I think as our overall fall forecast and outlook has increased, we look at the proportion to what we ship third quarter versus the fourth quarter that if there is a little bit of a proportional shift between the 2 quarters.

But effectively maybe just to recap briefly here, as we're talking about our U.S. wholesale business, it's about a $10 million shift between the third quarter and the fourth quarter.

And then similarly, within our distributor business, we shipped in our Fall '18 product a bit earlier, and so that shipped into the second quarter.

Got it.

And hoping you can talk about your outerwear business.

Is there any way to distill growth for that classification in the third quarter and what your expectations are for 4Q based on your order book?

Certainly.

Well, the company in many parts of the world is considered really only an outerwear company even though we have significant businesses both in footwear and in sportswear.

But I would say our outerwear is performing probably among the best of the categories right now.

We've had some cold weather, and there was certainly cold weather at the tail end of last winter where people were not able to buy new merchandise.

So I think it's been one of the stellar performers.

And the expectations, as we continue through this season in our wholesale outerwear was one of the drivers of our raise of guidance this year.

So we're excited about the potential there.

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

Gert and Tim, to start, that 15% annual return over your public company history is really phenomenal.

Congratulations on that.

That's impressive.

Well, thank you.

I wish we can take -- the 2 of us could take all the credit, but there's obviously a significant amount of efforts from the entire employee base.

Clearly, yes.

Tim, a change of behavior from you, to offer a view to the out year so early.

Just a few years ago, you'd reserve that until you had fall orders in.

hand.

From a macro standpoint, you've got a lot of elements of uncertainty.

Why were you compelled to put those numbers out for 2019 at this juncture?

Well, we wanted to make sure that we had a hand in setting guidance or setting the tone for 2019.

And we thought -- we just thought that we would avoid analysts or the investing public to get in an area where we thought that might be outside of where we would expect them.

So -- and we, frankly, see so much good stuff happening in the business right now that we really -- we wanted to be able to talk about it.

And that were -- those 2 were the primary drivers.

Yes, Jim, I might add just couple comments as well.

I mean, certainly, we're seeing some momentum in our business.

And so part of providing the outlook from a top line perspective is we just -- we're seeing the Fall '18 early sell-through results, which is encouraging.

We've sold in our Spring '19 season, so we've got some visibility in terms of the order book; and beginning to show our Fall '19 products as we go-to-market with that as well.

But more importantly, and probably one thing to touch on is over the last several quarters, we've made some remarks with regard to Project CONNECT and the financial benefits.

Certainly, we're seeing those in a pretty meaningful way.

Even in 2018, we're seeing meaningful benefits from that, and we continue to anticipate and have confidence and be able to drive those benefits into next year.

On the same token, as we've described, we've accelerated investments in our business from an SG&A perspective, knowing that we're trying to drive sustainable profitable growth.

And so in light of our past communications around this, wanted to collar really how we were thinking about the out year here from both the top line and bottom line perspective.

Got it.

And then, Jim, you clearly have a confident tone on gross margins looking into 2019.

You've touched on some of the inflationary pressures.

Can you elaborate on some of the things you're doing in the supply chain with the cost value assessment, and so forth to improve the margin picture?

Maybe it's SKU rationalization and SKU concentration and mix, and so forth.

Help us with a little more detail there if you don't mind.

No, not a problem.

I'd probably ask Tom to comment as well.

But frankly, it begins with the SKU rationalization and focus on a smaller number of products where we can have real meaningful business relationships with factories.

It also includes design to value where we do a lot of work with consumers to find out whether or not they appreciate the features that we've been putting into the garments.

And then lastly, just efficiencies around our sourcing base.

And again, as we said, some of the inventory growth that we expect is a function of level loading factories, so we can -- we don't have the spikes.

So Tom?

Yes, I guess, the only thing I would add to that, Jim, is, we've obviously priced and costed the Spring '19 line, and we've done essentially the same for Fall '19.

So we've got pretty clear visibility on margins as we sit here today for 2019.

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

I got a couple of questions.

I guess, first, how much of -- when you look at fourth quarter as a function of timing shifts, which you called out on the U.S. wholesale side; and how much of it is just feeling better about whether it's DTC or sort of a initial sell-through as you go into the fourth quarter, any segment to them if you could, how much is one versus the other?

In terms of the timing shift itself, as I had indicated, it's about $10 million that's shifting out of Q3 into Q4.

So I mean that is going to be a low single-digit percent impact when you look at the overall growth rate that's anticipated for the fourth quarter, and our outlook for the fourth quarter on a non-GAAP basis is 7.5% to 9.5% revenue growth.

And by far, the key drivers in there similar to what we saw in the third quarter is really the growth that we're seeing in the U.S. business.

And that's going to be a combination of the U.S. wholesale business, which had a part of this timing, but our Fall '18 season as a whole for the U.S. wholesale business was anticipated planned up; and then continued productivity gains and growth out of our DTC businesses, both from brick-and-mortar and e-comm perspective.

And I'd share we're -- what -- 3 weeks into the month of October, we've continued seeing that momentum in the business both from a DTC perspective and with regard to the sell-through that we're seeing amongst our wholesale customers.

Okay.

That's good to hear.

I want to -- just on Europe, just curious, others have mentioned some pockets of weakness.

So I'm just curious how you look at your subsidiary European businesses, sort of the trajectory; and just any thoughts as you look further down the road in terms of what's going on there.

Sure.

Well, for people who follow the company and the shares for a number of years, you know that Europe, which at one time was an enormously profitable business for the company, went into a period of somnambulation, and it took us a long time to get the right team together to get that business reinvigorated.

So I would say that Europe, well, it's as a percentage of -- the growth have been significant, and frankly, it's coming along nicely.

It's nowhere near what our opportunity is there.

So our strongest markets still are France, Germany, Spain and Switzerland.

And -- so the giant markets of the U.K. and Germany, we're still very much behind there.

And I can't -- I wish I could blame it on pockets of weakness.

But frankly, it's been in areas where we just haven't -- we haven't grown as rapidly as we should.

But frankly, we've got the right team there now, and we're very excited about the results we've been seeing.

Okay.

So in your view, Tim, it continues to be a market share and execution opportunity regardless of the macro backdrop or some other things going on, but there is just a lot of low-hanging fruit?

Yes.

We've improved our offerings there; we've improved our teams; and we focused heavily on the larger retailers that can drive the business.

But there is still an enormous opportunity for the company.

We're larger than virtually all of our competitors there because there are generally local market leaders.

And so we just need to be leveraging our strengths and continuing to take advantage of the opportunities that we have in that market.

Got it.

Just on the SKU rationalization.

Have you ever disclosed or discussed in more detail about percentage of what that reduction is, or what it's like, or any color around the categories or anything like that?

Well, we really haven't gone into that kind of granular detail, but I can tell you it's a significant reduction in the amount of styles that we've been offering in, call it, north of 15%.

And then we've also been organizing our sales teams and the focus on customers that are larger and can help us.

And so there has also been an adjustment in the number of customers we're calling on to focus on the big opportunities.

Got it, okay.

Last 2 things from me, real quick here.

Just on the thought process for '19, high single-digit revenue growth: if I caught you correctly, you said, the revenues are based on GAAP.

The net income is based on non-GAAP.

And if the revenue is based on GAAP, if I have this correctly, just correct me if I'm wrong, that's -- if you hit the high end of your guidance for this year, it's [2750] or thereabouts.

Is that what the revenue growth is -- high single is based off of?

Just want to be clear about that.

Yes, you've got it.

You've got it.

Okay.

And the net income is based off of non-GAAP.

And does that include the -- so I'm being cute here, but the minority interest?

Yes, it does.

I'm tracking with you, Chris; that's correct.

You've got it.

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

I wanted to ask about the gross margin guide raised by 25 bps.

I would assume over the last 90 days, FX has become a bigger headwind.

Maybe you can talk a little bit about what your expectation was for FX as a headwind for the overall year gross margin guide relative to what it is now?

Yes, Laurent, I'll cover that.

And really where we've seen the pressure from a currency standpoint with the strength in the dollar has been a lot more from a translation perspective when you look at our revenue.

I think coming into the year dated back earlier, we felt we had about 1.5 point of the benefit from foreign currency, and as we sit here today, it's probably closer to 0.5 point.

So we've steadily taken our top line up throughout the year despite the currency headwinds.

With that said, and to your question around gross margin, we hedged most of the production that we buy for our international businesses dated back to last year.

So we were in a good hedge position coming into the year; and currencies actually been favorable to us.

And I think in my CFO commentary, you will see a note in there.

It's about a $0.10 EPS tailwind to the full year.

And as we get out to next year, I'd say it's probably more of a positive -- slight positive to neutral impact.

We're hedged quite a ways out into 2019 as well.

That's great to hear.

And then, correct me if I'm wrong, but I think your global direct-to-consumer sales were about 40% of FY '17 revenues.

And just some -- maybe some dumb math here, but it looks like it might go up to 44% for the year.

Is that fair?

And then do you have any high-level thoughts of what that percentage rate could be for next year?

In terms of your indications there, it's definitely trending that direction.

It will see and we'll report -- as part of our Q4 and year-end call, we'll provide an update in terms of where we've landed, both from an overall DTC perspective and our e-commerce business.

And as is it relates to 2019, yes, it's a bit early.

We're still in our planning phase and making those determinations.

Okay.

Very helpful.

Okay.

And then maybe on e-commerce, I don't know, did you make any comments about how e-commerce did this quarter?

Any thoughts for the year?

I think with regard to the third quarter in particular and specifically focused on our U.S. business, we'd indicated that it grew high 20%.

So we're seeing nice improvements there really across the brand portfolio.

And I don't believe, within our detailed guidance, that we've got something on a full year basis.

But continuing to see nice gains there.

Generally, the metrics have been good with that business.

Our next question comes from the line of John Kernan with Cowen and Company.

This is Krista Zuber on for John.

Just a couple of questions.

Thank you, again, for the prelim fiscal '19 guidance.

And just if I'm looking at the revenue growth, kind of how do you see the various parts of your portfolio channels and sort of regions falling out within that high single-digit guide?

Well, you know it's -- we've really got an enormously complex business.

So we have obviously geographies; we're dealing with categories of merchandise, distributors, channels on those areas that we control.

And to make all that stuff add up to the right number, it requires an enormous amount of time and effort.

So without speaking specifically about any category, I would just say I think in general most of the categories are going to be we expect performing at the average of the growth rate we talked about.

Okay, great.

And then just my follow-up question.

You're seeing the returns on the strategic investments that you mentioned.

And just to follow-up on a prior question on the SG&A, just to sort of frame it for me.

How are you thinking about the longer-term run-rate for the SG&A?

Well, I would just tell you that, in my opinion, we have under-invested in a couple of key categories of the business.

One would be, obviously, we've talked about at length the demand creation spend.

We need to be increasing that.

And then as the company grows and the sophistication of our wholesale base and our consumer base increases, we need to be investing more heavily in logistics and ability to manage the business as well as, I guess, more specifically, the e-comm business.

But -- so I would expect those large buckets have been, over time, under-invested, and we're catching up now.

So Jim, maybe you have more comments?

No, Tim.

I'd just add that if we look back over the course of last 1.5 year, we initiated this Project CONNECT effort really to help us enable transition over to a brand-led consumer-focused operating model.

As a part of that effort, we'd undertaken several initiatives that were driving financial benefits that really enabled us to ensure that we're able to continue investing back into the business, positioning it for long-term sustainable growth.

And so certainly as you look at our results and our plans for '18 and going into '19, there is a more significant and accelerated rate of investment from an SG&A perspective.

And so we feel like those investments are going into the strategic priorities that Tim's articulated.

Our long-term objective is to continue growing the top line and put more dollars into demand creation; and at the same time, expanding our operating margin and managing the business with discipline.

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

This is Pallav Saini on for Camilo.

My first question is, as it relates to the brand performance in Q3, were there any deviations from your plan?

And I don't think you provided an updated guidance by brand for the year.

Is there any change from -- there from the last time that you provided brand-specific guidance?

And then I have a follow-up.

Yes, so with regard to the third quarter, by brand, nothing stands out to me.

I think in terms -- as we look at the third quarter results relative to where we -- our internal expectation coming into the quarter, really the major drivers of it, we beat by, call it, $15 million relative to our internal outlook.

And 2/3 of that was really -- we saw in our U.S. DTC business via our stores and e-commerce.

And the balance of that was effectively the performance that we saw in our European business.

But how that breaks down by brand, I think, it's probably pretty ratable or predominant -- it's probably a bit more weighted to the Columbia brand, frankly.

And as it relates to the full year outlook from brand standpoint, with our top line planned at double digits at the top end of our range I think it's fair to say that between Columbia, SOREL and prAna, that they're all at or around that double-digit rate of revenue growth.

And then the Hardwear brand is probably -- is down a double-digit rate as we're working through our continued turnaround efforts within our Hardwear brand.

And my second question is around your DTC business.

It's a substantial part of your mix.

And more and more brands are focusing on elevating their in-store and online experience to strengthen their connection with the consumer.

Can you talk about some of the initiatives you are undertaking to do that any measurable impact that you can share in that regard?

You're talking about -- I just want to make sure I answer the question properly.

Our DTC business in terms of how we look at it or frankly -- do I have that right?

Right.

Anything that you are doing in-store to differentiate yourself from your competitors to strengthen that emotional connection with the consumer.

Yes.

So we've said many times before that this business has a low barrier to entry.

So we have lots of competitors and really successful brands.

It's incumbent upon them to differentiate themselves.

So for us, the focus of differentiation has been on our innovations.

And I would point out especially those that are visible like Omni-Heat and like our OutDry Extreme product in rain gear.

Additionally, again, when we talk about the emotional connection, we're fortunate to have the star of our ad campaign here in the room with us, my mom, who -- that allows us point of differentiation, which few other brands can accomplish.

And so whether it's a store that we own or operate or whether it's one of our valued wholesale partners where we install point-of-sale materials that help the sales of our products, they're really concentrating on those points of differentiation, which again, I would say, would be innovation as well as our emotional connection with Gert.

(Operator Instructions) Our next question comes from the line of Susan Anderson with B. Riley FBR.

Really nice job on the quarter.

Good to see the momentum continue.

Thank you.

I guess, I wanted to follow-up a little bit just on the SKU rationalization front.

I think you said it was going to -- it's -- as much as 15%.

So I guess, curious is this is in your initial '19 guidance, like how should we think about the impact to top line?

And is it across all the product categories?

Yes, I guess, I should be more specific.

The comment was really about the Columbia brand in terms of its reduction of SKUs.

And really you'll see almost all of that -- the results of that heavy lifting in our expectations on gross profit margin improvement.

So this gives us the ammunition to reinvest in demand creation in the other areas of the business where we've historically under-invested.

So I think...

Okay, got it.

Okay.

And then, I guess, on Europe, I may have missed this, but did you talk about where you guys are at from a profitability level?

Now we've seen a couple of years at least of double-digit growth there.

So just curious where you are at in terms of getting back to profitability versus the core company?

Yes, I would say this is -- and Jim will correct me if I'm wrong, but I think this is the second full year that we've had profitable operation in our Europe-direct business.

Our EMEA region has always been profitable based on the significant businesses we have in that region, which are distributor markets.

But our Europe-direct business has been profitable, it's growing.

And the expectation is frankly that should be one of our larger markets.

And we're not back to what historical profitability was in that market, but we're well along; and we've got the right team and the right strategy, I believe, to get us -- continue growing and much more profitable.

Yes, I think that's right.

We made phenomenal progress over the course of the past couple of years.

But that said, to Tim's point, we've got the infrastructure in place to support a much larger business in terms of the distribution capability, the back-office functions.

We implemented the SAP platform into Europe in the first half of this year.

So we should be poised to deliver leverage in that market for years to come, assuming top line growth.

Great, okay.

And then one last one, I guess, on Mountain Hardwear.

I think earlier this year you were talking about it, the brand finally stabilizing and maybe even getting back to growth next year.

Maybe just kind of give us an update on where you're at with that.

Certainly, what you saw that the shortfall in sales for the quarter, which frankly was a function of the final liquidation of inventories in prior periods.

So we just were up against a real comp on full price sales.

The team there, which continues to impress us, I believe, has got the right approach to the business.

And they're -- even though they're new to the company, they're very experienced in this business.

And our expectation is that, that brand will be leading the profitability of the company at some point in the future.

It's very well thought of, and it's really a -- mostly a product issue.

So Joe Vernachio and his team there are focused on the right stuff, and we're expecting to see great things come out of that brand.

And Susan, I'd add.

We're beginning to see some encouraging signs.

Our Fall '18 U.S. wholesale order book for the Mountain Hardwear brand is actually up.

I know we reported a sales decline this year.

And as Tim touched on, it's largely a function of liquidating excess inventory, but the overall season should be up.

We should see much better results as we report fourth quarter sales.

And as we've got visibility to Spring '19 order book in our Hardwear brand, I'd anticipate with that order book in hand that we'll be up that season as well.

So some good signs.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back to management for closing remarks.

All right, well, thank you all for listening in.

We look forward to talking to you about Q4 and some more information on 2019 in February.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.