Columbia Sportswear Co (COLM) 2019 Q3 法說會逐字稿

Greetings, and welcome to the Columbia Sportswear Company Third Quarter Fiscal Year 2019 Financial Results.

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

I would now like to turn the conference over to your host, Mr. Andrew Burns, Director of Investor Relations and Competitive Intelligence for Columbia Sportswear.

Thank you.

You may begin.

Good afternoon, and thanks for joining us to discuss Columbia's Sportswear Company third quarter results and 2019 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 2019 outlook.

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

With me today on the call are 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.

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

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

Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K and subsequent filings 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 after the date of this conference call to conform with forward-looking statements to actual results or to changes in our expectations.

I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including non-GAAP results for 2018.

For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the Supplemental Financial Information section and financial tables included in our third quarter 2019 earnings release.

Following our prepared remarks, we will host a Q&A period.

(Operator Instructions)

Now I'll turn the call over to Tim.

Thanks, Andrew.

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

Record third quarter results exceeded our expectations with broad-based growth across our geographic segments, channels and product categories.

We were able to ship a greater portion of our fall 2019 order book in the third quarter this year compared to the fall 2018 season as retailers restock depleted inventory positions after harsh winter weather and exceptional sell-through in North America last year.

Our largest brands, Columbia and SOREL, both generated impressive double-digit growth, which was led by North America.

We also generated 100 basis points of operating margin expansion compared to prior year non-GAAP results driven by Project CONNECT margin benefits.

Together, this fueled earnings per share growth in excess of 20% while continuing to make substantial investments in our strategic priorities.

Based on strong year-to-date performance, we are raising the low end of our net sales outlook and raising our operating margin and earnings per share outlook for the full year.

In the third quarter, net sales increased 14%.

Gross margin expanded 110 basis points, and diluted earnings per share increased 24% to a record $1.75 compared to non-GAAP third quarter 2018 diluted earnings per share of $1.41.

On a year-to-date basis, net sales increased 11%.

Gross margin expanded 130 basis points, and diluted earnings per share increased 35% to a record $3.15 compared to non-GAAP year-to-date 2018 diluted earnings per share of $2.34.

Regionally, U.S. net sales increased 17% in the quarter and 15% year-to-date.

In the quarter, growth was driven by low 20% growth in wholesale and mid-single-digit percent growth in DTC, which included brick-and-mortar net sales growth and a high single-digit percent increase in e-commerce.

Also, growth was driven by higher advanced orders and earlier shipments of fall 2019 product.

In DTC, both our brick-and-mortar and e-commerce businesses were up against exceptional sales performance last year.

From our review of international markets and brand performance, I will reference constant currency growth rates, which we believe best reflect the underlying business trends.

Net sales outside of the U.S. increased 11% in the third quarter and 8% year-to-date with growth in all international regions.

In Canada, net sales increased 22% in the third quarter and 15% year-to-date.

Third quarter net sales growth was primarily driven by earlier shipment of fall 2019 wholesale product as well as increased fall 2019 advanced orders.

Our international distributor business net sales increased midteens percent in the third quarter and low double-digit percent year-to-date.

In the third quarter, LAAP distributor net sales increased low 20%, resulting from timing shifts and the shift on the fall 2019 product.

EMEA distributor net sales grew high single-digit percent driven by higher fall 2019 advanced orders.

Japan net sales grew mid-single-digit percent in the third quarter and high single-digit percent year-to-date.

We have experienced over 20 years of steady constant currency growth in this important market, which has continued in 2019.

Europe direct net sales increased high single-digit percent in the quarter and mid-single-digit percent year-to-date.

In the quarter, growth was aided by earlier shipment of fall 2019 product as well as higher closeout sales.

We continue to experience a challenging retail environment in several European markets but remain optimistic about our long-term growth opportunities given our relatively low market share in that market today.

Korea net sales increased high single-digit percent in the third quarter and mid-single-digit percent year-to-date.

Columbia remains one of the few successful outdoor brands managing to grow in 2019 despite a Korean outdoor market that continues to contract.

In China, net sales decreased low single-digit percent in the third quarter but are up low single-digit percent year-to-date.

During the quarter, higher outlet store sales and e-commerce growth helped partially offset difficult wholesale performance.

We are working to optimize distribution and remain focused on investing in our consumer experience to reinvigorate growth.

Columbia's brand has strong market position in China, and we believe the decisions and investments we are making this year are building the foundation for long-term growth in this important market.

Turning to gross margin performance.

Third quarter gross margin was up 110 basis points to 49.3%, largely reflecting Project CONNECT benefits, including our design-to-value, assortment optimization and manufacturing efficiency initiatives.

These benefits more than offset modest headwinds due to channel and closeout product mix.

Year-to-date gross margin is up 130 basis points to 49.7%, including greater than 100 basis points of benefit from Project CONNECT.

It's important to note that 2019 gross margin performance is on top of full year 2018 non-GAAP gross margin expansion of 170 basis points.

Regarding the current U.S.-China trade battles, we reiterate that we believe our diversified supplier base gives us competitive strength.

For 2019, we received the majority of our fall 2019 product prior to the September 1 tariff increase, resulting in minimal financial impact to 2019.

When assessing the impact in 2020, it's important to remember that nearly 40% of our sales are outside the U.S. and are not directly impacted by the U.S.-China trade battle.

Based on our projected 2020 production base, product sourced in China for the U.S. market is expected to represent a low double-digit percent of the total estimated imported value.

As with tariffs around the world, we are actively working to mitigate the financial impact.

Looking beyond the direct impact to Columbia, we believe escalating trade battles globally are disruptive for American businesses, bad for the global economy and costly for consumers.

In an industry that already suffers from punitive tariffs, some as high as 37.5%, adding additional taxes on our products places an undue burden on consumers and employers.

Furthermore, raising tariffs in a capricious manner creates uncertainty for business, which discourages investment.

History has shown the costs of these tariffs are borne by U.S. consumers.

Turning to SG&A performance.

SG&A expenses grew 14% compared to last year's non-GAAP SG&A expenses, resulting in SG&A as a percent of sales of 33%, which was flat when compared to non-GAAP SG&A as a percent of sales in the prior year.

The biggest drivers of SG&A growth were planned investments to support our expanding global DTC operations, higher personnel and technology-related expenses and increased demand-creation spending.

Moving to performance by brand.

I'd like to remind you that I will be referencing constant currency growth rates.

Looking at the Columbia brand globally, sales increased 15% in the third quarter and are up 12% year-to-date.

In the third quarter, we were able to ship a greater portion of our fall 2019 order book compared to the fall 2018 season as retailers restock depleted fall season inventory positions.

Our team has done an excellent job of executing in fall 2019 deliveries, and we believe retailers are positioned for success when winter weather arrives.

In markets where winter weather has arrived, we've been pleased with our initial fall 2019 sell-through performance.

In regions that are still awaiting the onset of cold weather, the benefits of our product diversification efforts are evident as our popular PFG line has been a top performer.

During the third quarter, Columbia's innovative product continued to receive media call-outs and awards.

In apparel, Outside Magazine featured the roadrunner jacket and flare gun flannel in their annual winter buyer's guide.

Backpacker highlighted the northern comfort shirt in their article on the best women's hiking and backpacking apparel of 2019.

In outerwear, FREESKIER's annual buyer's guide featured the Columbia Powder Keg jacket and Snow Rival pant as one of the best ski kits of the year.

For fall 2019, the Columbia brand has several compelling product stories to highlight, including our newest collection of insulated product called Heat Seal, which utilizes several of our innovations, including Omni-Heat and advanced baffling construction so that heat stays in and cold stays out.

The Heat Seal collection includes both casual and technical products and will be prominently featured in our marketing this season.

We've also joined up with the team behind Disney's highly anticipated Frozen 2 movie to create a beautifully designed limited-edition outerwear collection inspired by the iconic characters of the film.

This product will be available on our website and at select retail locations starting November 15.

During the quarter, we launched our new SH/FT footwear platform at an exclusive media preview in Brooklyn, New York and amplified the launch with comprehensive marketing campaign, including influencers, digital, in-store and out-of-home advertisements.

Grammy award-winning artist, Zedd, helped to share the SH/FT story with consumers around the world.

Since the launch, coverage has reached over 288 million impressions, including placement in major outlets and publications such as CNBC, Billboard, People, Gear Patrol, HYPEBEAST and Men's Health, which awarded the SH/FT OutDry Mid a 2019 sneaker award in their hiking category.

We are pleased with the launch and believe this exciting new product is reaching younger urban consumers around the world.

We followed this initial August launch of the Low and Mid product with the release of the SH/FT hiker and boot collections in October.

We're excited about the SH/FT's potential as well as several new footwear platforms that we'll be launching in the coming seasons.

For Omni-Heat, our most successful cold weather technology, I'd like to note that since it was launched in 2010, cumulative sales have far exceeded $1 billion, and we still see tremendous opportunity in the years ahead.

For fall 2020, we will be celebrating Omni-Heat's 10-year anniversary with our most innovative Omni-Heat product to-date.

I look forward to sharing more details as we get closer to launch.

Moving to marketing.

In August, the Columbia-sponsored UTMB trail run event, or Ultra-Trail du Mont-Blanc, highlighted Columbia's relevance to the global trail running community and created a powerful brand experience for participants, spectators and online viewers from around the world.

Collectively, our UTMB sponsorship and content has generated over 200 million impressions since 2015.

Several Columbia-sponsored athletes competed in the race as well as our Americas General Manager, Franco Fogliato, who successfully finished the grueling race in a mere 41 hours.

In the fourth quarter, we're executing 2 key city attack plans, 1 in Denver next month and 1 in the Tri-state area, including New York City where our market amplification has already begun.

During most of October, thousands of consumers today were able to view our winter displays at the iconic Macy's Herald Square location.

We continue to believe this focused marketing effort in targeted cities drives brand awareness and growth across our wholesale partners, DTC stores and columbia.com.

For our SOREL brand, 2019 has been a fantastic year that validates the brand strategy and positioning as a year-round, function-first fashion footwear brand.

SOREL net sales increased an impressive 29% in both the quarter and year-to-date.

Growth in the quarter was led by U.S. wholesale, Canada and U.S. DTC businesses.

SOREL's success can be attributed to its evolution beyond its legacy winter utility business to become a year-round footwear brand.

To put this in perspective, in 2016, winter product represented 70% of U.S. sales.

In 2019, winter product is expected to be just 45% of the U.S. mix.

And within that, the product mix has shifted significantly towards lighter winter-style products.

For fall 2019, SOREL has added several new bold products to its collection, including the Joan next winter light boot and the Joan wedge zip boot.

We are also excited to expand our successful Disney partnership beyond the core Columbia brand with the recently launched SOREL Frozen 2 collection for women and kids.

SOREL's brand and product momentum are evident, and we are investing in demand creation to unlock its full potential.

In October, SOREL hosted its biggest event yet, creating a mile-long runway through the streets and The High Line of New York City.

100 women walked in a full mile -- walked a full mile in SOREL's fall collection, transforming the event to a celebration of unstoppable women and demonstrating the meaning of function-first fashion footwear.

In recent quarters, prAna sales performance has slowed with net sales down 3% in the quarter and down 1% year-to-date.

To reinvigorate the business, the product team is focused on raising brand awareness, solidifying the brand's position at the intersection of style and outdoor, optimizing distribution and refining the product offering.

We believe the prAna brand continues to resonate with consumers, and we are taking the necessary steps to drive sustainable long-term growth.

Mountain Hardwear sales declined 2% in the quarter and year-to-date.

In the third quarter, Mountain Hardwear launched a refreshed and reenergized fall 2019 product line, including a new GORE-TEX snow sport line, which fueled robust growth in our U.S. wholesale business.

This was more than offset by a decrease in international sales, some of which was impacted by timing and lower DTC sales.

We are excited about the new product direction at Mountain Hardwear and expect strong growth in the fourth quarter will drive full year net sales growth.

During the quarter, Mountain Hardwear also created a unique product and brand story with their Everest expedition.

A group of 6 employees embarked on a 10-day trek to Everest base camp, meeting up with a team of climbers, including brand president, Joe Vernachio, as they prepared for their chance to reach the highest summit on earth.

They field-tested products along the way, learned firsthand about the community that enables climbers in the fall, connected with places that inspired the brand's existence as well as connected with each other, bringing a stronger foundation back to Mountain Hardwear's home base.

I will now quickly review our balance sheet and cash flow.

Total inventory exiting the quarter was up 16% to $717 million, primarily reflecting current and future season inventory, while aged inventory increased modestly.

Inventory levels are slightly elevated driven primarily by a more aggressive buy in lower-risk styles and the effects of level loading to alleviate capacity constraints.

We are well positioned to capture consumer demand and confident in our ability to manage inventories by leveraging the strength of our brands and the breadth of our distribution channels.

We anticipate high-teens inventory growth at year-end, primarily consisting of current fall season inventory and, to a lesser degree, future spring season inventory.

This is a slight change versus our prior expectations, reflecting earlier-than-anticipated receipts of spring 2020 products.

We are focused on aligning inventory and revenue growth in 2020.

Our balance sheet remains extremely strong with cash balances of over $240 million exiting the third quarter.

I'd note that our cash position is typically lowest at the end of the third quarter and rebuilds in the first quarter driven by collections of wholesale receivables and fourth quarter DTC sales.

Year-to-date, we repurchased 1.2 million shares of common stock for approximately $116 million at an average price of $97.50 per share and paid $49 million in shareholder dividends.

Exiting the quarter, we had $220 million remaining under the current stock repurchase authorization.

Before reviewing our updated 2019 financial outlook, I'd like to provide an update on current areas of investment.

On the technology front, we rolled out our new retail platform, Consumer-First, or C1, to our North America store fleet in the third quarter.

These stores now have enhanced point-of-sale systems, including mobile checkout, access to our greater rewards loyalty program as well as improved merchandising and pricing functionality.

Customers also have the additional payment options, providing an improved consumer experience.

As a reminder, we implemented our new mobile platform, Experience First, or X1, last quarter in our Europe-direct and prAna e-commerce businesses.

X1 enables us to create mobile-first design sites more efficiently which, in turn, will elevate the consumer experience as they shop our brands.

We still expect the remainder of the X1 North America implementation to occur in 2020.

As part of our headquarters expansion initiative, we recently purchased the property adjacent to our headquarters campus for $33 million in order to provide room for further future expansion and employees that are currently off-site.

We expect to begin occupying the property next year.

We are also continuing to make strategic investments across our supply chain to enable growth, improve productivity, enhance service levels and add capacity throughout our distribution and fulfillment networks.

I'd now like to provide some detail on our updated 2019 financial outlook and preliminary 2020 commentary.

For 2019, we anticipate 7.5% to 8.5% full year net sales growth.

Gross margin is expected to improve by approximately 60 basis points, with the largest driver of year-over-year improvement coming from Project CONNECT benefits partially offset by difficult fourth quarter comparisons given last year's record performance.

We expect operating margin to be between 13% and 13.2% compared to 2018 non-GAAP operating margin of 12.9%.

Diluted earnings per share is expected to be between $4.70 to $4.80, up 17% to 20% from 2018 non-GAAP results.

For the fourth quarter, it's important to remember we are lapping last year's record results that benefited from an extremely favorable retail environment as well as ideal winter weather.

Additionally, fall 2019 shipments were more heavily weighted to the third quarter this year compared to fall 2018 shipments.

Including these factors, we anticipate low to mid-single-digit percent net sales growth and diluted earnings per share growth -- excuse me, earnings per share of $1.55 to $1.65, which compares to 2018 non-GAAP fourth quarter diluted earnings per share of $1.68.

Regarding our current planning efforts for 2020, based on advanced wholesale and distributor orders for spring 2020 season and plans for continued growth in our global direct-to-consumer business, we currently believe we can achieve mid- to high single-digit percent net sales growth in the first half of 2020.

We will provide our full year 2020 net sales growth outlook when we report fourth quarter results next February and have better visibility to fall 2019 performance as well as fall 2020 advanced orders.

In 2020, we believe we'll be able to sustain meaningful gross margin benefits related to Project CONNECT that were achieved in 2019.

Based on our visibility to spring and fall 2020 product costs, higher tariffs and anticipated product mix, we expect gross margin to be relatively stable compared to 2019.

Beginning in 2018, we initiated significant investments in the business to support our strategic priorities.

These investments increased in 2019 and will continue into 2020.

Based on the full year impact of initiative spending that commenced in 2019 as well as planned investments in 2020 to support our strategic plan, we expect modest SG&A deleverage as a percent of net sales.

We will provide our full year 2020 financial outlook when we announce fourth quarter results in February.

In summary, our record year-to-date performance is evidence that our brand-led, consumer-focused strategy is working.

Our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence from which we will continue investing in our strategic priorities to: drive global brand awareness and sales growth through increased focus 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 third quarter results and 2019 financial outlook in Jim's CFO commentary available on our website.

That concludes my prepared remarks.

We welcome your questions for the remainder of the hour.

Operator, could you help us with that?

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

Tim, I guess, 2 questions for you.

The first one is the performance in the footwear business was very strong.

You talked the launch on that SH/FT product.

Can you just comment on early reads for October, sort of what you're seeing in terms of sell-through?

And the second piece is can you elaborate a little bit more on the DTC performance for the quarter maybe just to break out between what you did see digitally versus your brick-and-mortar stores, and a little bit more color would be great.

Certainly.

Well, yes, our SH/FT launch was really one of the most comprehensive we've done and the sales -- sell-through was quite good in several areas, especially our own DTC business, especially the e-commerce business.

So it was -- I would say the best sell-throughs were in our specialty sneaker areas.

And if you remember, we were very methodical in terms of how we launch this product with the larger chains and the mall operators.

So I would say it was good.

There's going to be way more SH/FT-type product in that collection to be launched further in October as well as in 2020.

So we're pleased with the launch, and that's giving us a lot of confidence in that part of the business.

As it relates to the DTC quarterly performance, as you know, Bob, we consider ourselves to be really a wholesale business, so we don't report a lot of information that a typical retailer would report.

On that, Bob, one quick comment.

And I think Tim touched on this in prepared remarks, we did see some deceleration in the growth rates in our DTC business relative to the third quarter last year.

And just keep in mind, the growth rates that we achieved in the third quarter last year were significant.

We were up a low 20% in our brick-and-mortar channel, a high 20% within the e-commerce channel.

So we're lapping those.

And then we've continued to see nice growth within those channels, both from the contribution from new stores and our existing stores that continue to be productive.

And I guess if I could just follow up on -- so when you think about those comparisons in the third quarter, can you just give us an idea, remind us what you're up against in the fourth quarter and sort of how you're planning the fourth quarter in this updated guidance today, especially on the DTC piece of it?

Yes.

We continue to plan the business on a more normalized basis as we've suggested in the past.

As it relates to what we achieved in the fourth quarter last year, the brick-and-mortar business was up a mid-teen percent, and the e-commerce business was up a high 20%.

And so we've taken that into account as we've provided the outlook that we have here today, so that's reflected.

And based on the results we've seen thus far in the quarter, it's consistent with expectations.

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

Congrats on all the momentum.

Great to see.

Thank you.

So Tim, you talked about 100 basis points of gross margin benefit from Project CONNECT so far this year.

How are we thinking about that in the fourth quarter?

And then keeping in mind that there are -- some channel mix is going to work against you and potentially tariffs, but just how do we think about the overall benefits and puts and takes to gross margin?

Because if I look at your guidance, it's assuming basically flat.

Yes.

Well, we have to look at the Project CONNECT benefits on really a 2-year stack basis, and maybe Jim can make sure I don't guide you incorrectly.

But we saw some benefits in 2018 and some in '19, and they're going to be spread across the business quite dramatically which, Jim, you might want to just get more specific on.

Yes, that's right, Tim.

So if you look at it on a 2-year stack basis, our gross margins were up 170 basis points in 2018.

And with the updated outlook that we're providing here today, we anticipate 60 basis points of improvement for the full year.

As you look at that and you think about the fourth quarter, certainly, as we look at the first 3 quarters of the year, our gross margin's been up well over 100 basis points.

And that's, by and large, reflecting the effects of Project CONNECT.

We would anticipate along those same lines of improvement from Project CONNECT going into the fourth quarter.

There are, however, a couple offsets.

And so one of those offsets is going to be the environment and the positive environment that we had in the fourth quarter of last year.

And then the other component of which is we do anticipate some incremental closeout mix, obviously, which is the lower gross margin relative to some of the full price selling.

And we'd see that in the fourth quarter.

Those are really the delta that are going to drive the gross margin down, I think, 70 basis points or so that we've got contemplated in our fourth quarter outlook.

Sure.

Okay.

And then just maybe a follow-up on the X1 initiative.

I think it's largely falling into next year.

It sounds like you're looking for modest SG&A deleverage though, so just maybe any puts and takes to the X1 initiative and how we should think about the costs and benefits of that as we go into next year.

Sure.

Yes, X1 is up and running now on 20 sites now?

20 sites, which will include all of our Europe business, which have multiple sites, multiple brands, multiple languages as well as the prAna site here in North America.

And so we like it.

It's offering a lot of opportunity for enhanced consumer experience.

But the big business, the North America Columbia/SOREL business for next year with X1 will be next year sometime.

And X1 is just one of a few platforms that are being revised/improved.

So it's probably the most recognizable, but there are other significant investments in digital capacities going on throughout next year.

Our next question comes from the line of Alex Perry with Bank of America Merrill Lynch.

Congrats on a strong quarter.

Just first, maybe for Jim, can you help us frame the impact of the timing shifts given the earlier shipment of the fall 2019 orders?

So if you normalize that out, can you help us quantify maybe the dollar value or EPS impact of that pull-forward?

Yes.

Absolutely.

So in our second quarter earnings call, I'd indicated that the shift was going to be about $20 million out of the fourth quarter and into the third quarter relative to the experience that we've had last year.

And as we sit here today, and obviously we had the earlier receipt of our inventory that we've been reflecting in our inventory balance, that shift became about $45 million from -- again from Q4 and into Q3 and, call it, 2/3 of that was in the U.S. There's a portion of that was international as well.

And that's, by and large, what drove the upside to our outlook for the quarter.

So it's more of a timing shift than anything.

Perfect.

That's really helpful.

And then if I could just get some more color on the assumptions behind the sort of stable gross margin outlook for 2020 given the strong 2019 performance, just sort of what the puts and takes are there and if you'll continue to see Project CONNECT talents through 2020 or do those start to moderate and then maybe any specific sort of tariff commentary you can give us with regards to that as well.

Yes.

And Alex, I missed the first part of your question, but as it relates to Project CONNECT, by and large, we'd anticipate that the benefit that we were striving to achieve from a gross margin standpoint, we've effectively realized those as we get through the balance of the year here.

And obviously, that's been reflected in the outlook that we've provided.

And so we've seen a nice step function improvement in our gross margin both in 2018, some of which stemmed from Project CONNECT and, certainly, as we get into -- as we wrap up 2019 as well.

As we get into next year, and with Tim's prepared remarks on our 2020 outlook, we do not anticipate that step function improvement to continue into 2020.

With that said, the processes we've put in place as part of Project CONNECT, those are sustainable processes in which we'd be seeking to maintain those margin gains that we've previously achieved.

Yes.

As it relates to tariffs, the company prides itself on its ability to navigate tariffs globally.

We have a really excellent team here, and they're focused on modifications that can be made in garments as well as location of manufacturing, et cetera.

But nobody can really predict the capricious nature of these tariff impacts.

We can't predict in advance where or when it's going to happen or if.

So once they happen, we feel comfortable of being able to -- with our diverse source base and our expertise in tariffs, we can do what we can.

But in this environment, it's quite difficult.

Our next question comes from the line of Paul Lejuez with Citigroup.

Curious, excluding the timing shifts that you talked about as benefiting the quarter, can you just talk about where you saw results come in ahead of plan versus below plan?

Where are you feeling better or worse as you look across the business?

I think, by and large, the results came in where we would have anticipated.

We did have this shift that I referred to where we came in about $25 million better on the wholesale side.

Relative to our internal outlook, our internal outlook -- we came in about $15 million better, so there are a couple offsets in there.

Part of that would relate to the direct-to-consumer business.

So as we've gotten off to a slightly warmer fall/winter season, particularly in the month of September, which was quite a bit colder last year, that we've seen some offsets in that and, to a lesser degree, in parts of the wholesale business for the same reason.

But we've captured all of that in the updated outlook that we're providing today.

Got you.

And you'd mentioned, I believe, higher closeouts planned for 4Q.

Can you just talk about what's driving that?

And also, what do margins on the closeout could look like this year versus closeout last year?

Are you getting better margins or worse margins on the closeout product?

Well, this year, as you know, we mentioned in our prepared remarks, our inventory is just slightly elevated, so that's driving an expectation of some additional closeouts.

Last year, we actually ran out of inventory, so the closeout comparison to prior period is not really accurate.

But historically, our closeout margins run fairly high by comparisons to our regular gross margins.

So not like we're trying to build initial inventory to close out, but we have healthy margins typically on our closeouts.

Yes, Paul, I'd add one other comment, too.

Our closeout levels last year were at an exceptionally low level just given how well sell-through was and our inventory position.

Even this year, despite the fact that it's an increase relative to last year, they're still relatively low relative to some of our historical levels.

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

First question, a point of clarification, did Joe Vernachio summit Everest with the team?

No.

You know what, actually, as a testament to his good decision-making, there was a very significant rockfall present that actually last year killed a few people.

And so once they get close enough to the summit where they can recognize this danger existing today, they determined that it was too dangerous.

And so they came back down.

So we're happy to report that they have a lot of great experiences, but -- they did not summit, but they did come home.

Okay.

Good to hear.

And then I had a question around the 2020 commentary.

You didn't provide a full year revenue view.

But Tim, you spoke to expectations for deleverage.

Would you change that view based on revenue outlook?

Or is that kind of the plan, irrespective of what you see as growth for the year?

Well, we have -- as I'd mentioned, we have several initiatives in flight, which are going to be helping us to become a more efficient business and more focused on demand creation and consumer connections.

And so it's difficult for us to predict the full year's results because the big fall season, we haven't signed any business up yet.

But the expectation is that we know we need to add these additional capacities to the business, and so they're very likely going to build in investments.

And of course, if we have a terrific revenue year, we'll be back to leveraging.

That's our ultimate goal.

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

I got 2 questions.

So one of the gross margins, so you've taken -- Jim, you've taken the guide down 20 bps.

I can appreciate that closeouts were few and far between last year, and you're assuming a more normalized level this year.

But why did it come down 20 bps from your prior outlook?

Is it on the closeouts side?

Or is it on something else?

It's predominantly that, Mitch, in terms of closeouts.

We weren't anticipating quite the degree of closeouts, so that we evaluate inventory positions.

We've taken the closeout forecast out for the year, and there's probably a bit more normalization that we've done in our gross margin as well just given the experience that we saw in the month of September with some -- just some of the warm weather, so we made some adjustments on that as well.

Got it.

And then, Tim, on 2020, I know last year, you gave a sales outlook for the full year.

This year, you're giving it for the first half.

If I recall correctly, last year, at the time that you gave it, you mentioned that sell-throughs were great.

You referred to your spring order book for spring '19.

You talked about early feedback on the fall 2019 line.

All of that gave you a lot of confidence to guide to full year sales for 2019.

Is there something missing today that does not give you that confidence?

Or is it that, last year, the season started so strong that it was kind of fully baked to the time of the Q3 call and this year, there's just a lot of the season -- more the season last?

Or how should I think about that?

I would say there's a number of factors.

Certainly, we will have better opportunity to be more accurate later in the year after we've seen some orders.

We just all have to recognize the global headwinds that or talked about ad nauseam to consumers.

So the expectations for difficulties ahead are many.

In fact, I don't -- I have been trapped in a comfort room all day, so I don't know what the Fed did today or what they plan to do tomorrow.

But if they are lowering rates to, what, a near 0 or something like that, it's an indication that maybe the experience that we've all had in the last several years of just incredible growth is moderating.

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

I guess just to go to the direct-to-consumer initiatives, X1, C1.

How do you think about those initiatives driving direct-to-consumer growth, I guess, to a degree, Q4 but, more importantly, as we start to look to next year to accelerate growth from those key initiatives?

Maybe talk a little bit about what those provide.

Certainly.

We look at the e-commerce business that we do directly here at all of our brands as being really 2 parts.

One is obviously the commerce that they generate and the ability to have a highly profitable revenue stream.

But additionally, they provide a terrific marketing tool for the company.

So if we get open rates of 10% or 15%, and then we get a conversion rate, which is more normalized to the industry, we get millions of people getting a terrific marketing message from a company.

And it's much more valuable than a mere billboard or an ad, which we do those in addition, but it's a very robust way for us to connect with consumers.

And so we need to be making -- to confirm that whatever consumers see from us digitally is of the highest quality and has the most interest.

So that's the 2 reasons that we're really moving forward on this X1 platform.

In addition, the consumers are moving rapidly to their mobile phones for almost everything, and so this is going to enable us to be much more mobile-focused than we have been ever.

If I can add a follow-up to that, is there any color you can add as you've layered in some of these initiatives, particularly X1, on the international side, whether from a conversion perspective or just anything you're seeing in like a similar view, probably on C1, here in North America in its early days, but anything you're seeing at all that's positive in the call?

Yes.

Certainly, it's early days on both C1 and X1 in terms of seeing their returns.

But certainly, the returns have been gratifying enough for us to continue to invest in those, and these are not insignificant investments.

So we wouldn't go forward if we didn't have the expectation that we're going to get great results.

Okay.

And I guess, Jim, for you, just on the point of leverage.

I know you're making investments as you think about 2020.

But where would you argue or where can we get a handle on where the leverage point is from a revenue perspective in the business?

I mean you potentially can grow almost 8% or thereabouts this year.

I think in some regards, you're making disproportionate investments this year, but just curious where that leverage point could be from a revenue perspective.

Well, I'd take a step back here and look at what we've been able to deliver each of the last few years from having an operating margin or EBITDA margin that was well below our peer group.

And as we sit here today, we've got EBITDA margin that's every bit as competitive or in the upper quartile of what we view our peer group to be.

And so when we step back and look at the SG&A investments that we made in '18, we made in '19 and what we'll continue to do in 2020, it's had a strong return to shareholders.

Our return on invested capital is quite strengthening and solid.

And so as we go out to next year, there are going to be years in which we're in an investment cycle.

It's going to require a bit more from a top line standpoint to leverage.

But over time, certainly, our expectation would be that we're generating positive returns and leveraging that.

But with the outlook provided today, it's going to be -- it's going to take a little bit more revenue growth to leverage the SG&A next year.

Okay.

And just last eventually, just on the inventory piece.

I'm just curious, as you come out of '20 -- as you come out of this year, you're looking for growth.

But is there any color how much you can break out between what's the advanced spring receipts versus maybe some of the residual closeout inventory that should move in the fourth quarter?

And probably you can break out between those 2 pieces as you go out towards the end of the year.

Well, with the outlook we provided in terms of our inventory being projected up a high-teens rate at the end of the year, keep in mind, it's incredibly difficult to forecast the timing of inventory receipts, particularly at the end of the fourth quarter, when we're sitting heavily on inventory, so there can be volatility related to that.

Sitting here today though, what we've contemplated in that high-teen rate of growth end of the year, it would assume that our spring '20 receipts are slightly greater than where we were from a spring '19 perspective, obviously, which had pulled foreword quite a bit in light of the Project CONNECT and the production capacity changes that we've made.

So most of the increase we'll have at the end of the year in our inventory will be fall '19 inventory we're carrying.

The aged -- the last point I'd make there is our aged inventory positions are really -- remained really quite healthy, so it's more current season.

Okay.

It's more current season inventory by the time you get to the end of the year?

Current fall '19 season that we'd carry in and sell through the first part of the year and, if necessary, move into the latter part of the year and leverage our outlets.

And then there'll also still be current season or future season spring inventory in the case of spring '20 and, to a far lesser degree, it is something that is older season inventory, meaning a year older.

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

This is Carlin Lynch on for Susan.

Just had a quick question on Mountain Hardwear.

I know you -- we saw a little bit of pressure this quarter, but you had guided fourth quarter for some strength.

I just wanted to get a sense of what was driving that strength.

Is it the new product that you announced rolling out in Europe?

Or is it just kind of the easier compare in 4Q versus last year?

Yes.

So if you look at the Mountain Hardwear business over the last several years, it's declined and primarily because our prior management team didn't have as good a handle on it on the product offering that we know needs to be unique and differentiated.

So Joe Vernachio and his team have been working diligently to get that product line correctly organized and correctly set up for success.

So the comparisons, when we talk about the decline, had been, in many ways, a function of the liquidations that took place in prior periods.

So Joe's products are now just hitting the stores, and we're expecting good sell-through and a robust growth in sales in the fourth quarter of '19.

Yes.

I'd just add that the lion's share of growth, we'll see in the U.S., and it will be focused in the U.S. wholesale business.

We got order book that would support that at this point.

Got it.

And then just as we think about that in the calendar '20, is Joe's product expected to kind of roll out more globally in spring of calendar '20?

Or is it going to be kind of wait-and-see on U.S. sales before we roll that out globally?

No.

It's global today, including '19's products is global.

And so the spring product is going -- they go out, a portion of it, a small portion, in Q4, but the bulk of it in Q1 of next year.

And then it will be global.

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

I just wanted to ask on the U.S. wholesale business, I think you slightly bumped up the outlook for the year at a midteens growth.

I just wanted to confirm that and maybe ask what drove that.

As well as when you look at the wholesale business today, if you could comment on any -- at a high level, any pockets of strength or weakness across the various segments.

Certainly.

Well, I think our business out of wholesale is quite good in the U.S. We're gaining market share.

I would say all of the product -- sorry, the channels of where we're doing the best as it relates to sell-through, et cetera, are probably in the department store channel.

But we've had good uptake, new business with customers like Macy's, et cetera, and that business has been quite good.

We had, as you may have noticed, an exceptional promotional event with Macy's at their Herald Square store.

We had great views of our outerwear, et cetera, and so that's been probably the best area of great sell-through.

And Jon, we did take the forecast up slightly from a low double-digit up to a low teen to a midteen -- or sorry, low double-digit to low teens, sorry, and part of that reflecting, in the quarter and particularly early in the third quarter, our conversion rate and our replenishment on our spring/summer goods was in -- it's in real good shape.

Softened up a little bit, which is the warmer winter that we got in the month of September, but conversion was generally pretty positive in the quarter.

Okay.

Great.

And then maybe just one clarification on the inventory.

I just wanted to confirm, are you now expecting to have more fall '19 product on hand at the end of the year?

And if I could maybe just understand, if that is the case, why that might be.

Yes.

We expect to have a slightly more fall '19 inventory.

We're comfortable with the quality inventory.

Frankly, we talked in the prepared remarks that we have slightly more than we would like.

But we have the ability, we've got our balance sheet to carry it into next year and liquidate it through our own outlet stores, if we so choose, or to liquidate it either this year or next year at closeout.

And I think part of that stems, Jon, from we came out of a really clean fall '18 season, so we bought in more aggressively, and that's effectively why you're seeing a bit more inventory as we exit this year.

Okay.

Great.

And then maybe just last one from me, bigger picture, kind of the evolution of the Columbia brand, certainly with the footwear more of a kind of a fashion, performance fashion orientation and see some of that, too, at some of the retro or in streetwear elements in parts of the apparel assortment.

I'm just wondering how you're viewing that evolution for the brand and maybe any thoughts going forward on where you think it can go.

Sure.

Well, we say frequently inside the company that nobody needs another brand of apparel and footwear.

So the key for us is to differentiate ourselves from the other zillions of brands of apparel and footwear that are available globally.

And we've really chosen to focus on the points of differentiation around innovation and technologies.

And I think if we're critical of ourselves, we probably haven't thought of the F word as much as we should, meaning fashion.

And I think we're really beginning to blend much more of our technology and fashion together to give ourselves a real opportunity to grow the business.

And that's our plan.

We'll continue to be a point of differentiation around technology, but we know we need to have really trend-right product.

Our next question comes from the line of Warren Cheng with Evercore ISI.

Just actually a follow-up on the last question that was asked.

How much of the new footwear innovation that we'll see from Peter and his team over the next year or 2, how much of that will be targeted towards your traditional trail and winter categories?

And how much will be in new categories like we saw with the SH/FT launch?

Well, it really depends on how good a job we do with the SH/FT product.

The expectation is that we'll have continued design investments against SH/FT and against the whole concept of urban outdoors and technology and fashion together, really focusing on a younger urban consumer.

So it's a function of -- it's a question of how well we do against that initiative.

But additionally, we have the opportunity, and it's fairly significant, to grow our PFG footwear business where we really have a very tiny competitive set and a real white space there that we can lean on the well-known PFG brand, the focus on technology, et cetera.

So there's a number of different areas where we can be really successful, not to mention the real franchise we have in winter footwear between the Columbia brand and the SOREL brand.

So there's really lots of opportunity for us in that category.

Got it.

And the other question I had was you've been piloting some pretty interesting new marketing initiatives with influencers and some product collaborations.

Is there any data you can share on your new versus existing customer mix, whether those collaborations and also some of the new product is bringing new customers into the brand?

Certainly.

Well, I think it's interesting, the Zedd collaboration or acceleration was a real opportunity to bring us newer customers that maybe knew the brand but didn't recognize it, the fact that it was more forward than they had thought.

And that was really gratifying to see, the number of visits and visibility that, that brought us especially from younger folks.

But simultaneously, we had Luke Combs who's a very popular, young country western singer that just happened to find our brand.

And his popularity, both as a young performer as well as a fisherman, the guy who does what his parents and grandparents have done, it's a nice combination of opportunity for the business that we can speak to both of those kinds of generations and be really relevant.

Ladies and gentlemen, that concludes our question-and-answer session.

I'll turn the floor back to Mr. Boyle for any closing comments.

Thank you very much for listening in.

We look forward to talking to you in February about our results in Q4 and about our plans for 2020.

Thank you.

This concludes today's teleconference.

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Thank you for your participation.