Columbia Sportswear Co (COLM) 2022 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Columbia Sportswear Second Quarter 2022 Financial Results Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Andrew Burns. Sir, the floor is yours.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation, explaining our results. This document is also available on our Investor Relations website, investor.columbia.com.

With me today on the call are Chairman, President, Chief Executive Officer, Tim Boyle; Executive 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 expectations, anticipations or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties. Actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the 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 constant currency net sales. 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 earnings release and the appendix of our CFO commentary and financial review. (Operator Instructions)

Now I'll turn the call over to Tim.

Okay. Thanks, Andrew, and good afternoon, everyone. I hope everybody is well. As I review our first half 2022 financial performance and the current environment, I'm confident that our strategies are working. We have tremendous long-term growth opportunities ahead. In the first half, SOREL net sales surged 33%, Columbia grew 12%, Mountain Hardwear grew 11% and prAna grew 3%. These results reflect the strength of our combined brand portfolio. The Columbia brand's differentiated innovation, value proposition and outdoor heritage uniquely position the brand to capitalize on the popularity of outdoor activities. SOREL continues to outperform the marketplace, led by the brand's bold new summer and year-round styles. Mountain Hardwear's product-driven resurgence is underway with innovation fueling continued growth. PrAna's leadership continues to sharpen the brand's focus on the opportunities ahead. Globally, trends vary greatly by region. Canada, Europe-direct, Japan and Korea all had excellent first half performance. These markets continue to realize a healthy pandemic recovery curve with strong consumer demand.

In other regions, our business was impacted by external headwinds. In China, the impact of recent zero-COVID policies, restrictions resulted in a sharp net sales decline. As anticipated, our EMEA distributor business also declined substantially, reflecting the impact of the ongoing Russia-Ukraine conflict. In the U.S., we generated strong first half net sales growth despite later receipts and deliveries of Spring '22 product, which constrained inventory availability and sell-through. The U.S. market also faced difficult comparisons as we anniversary government stimulus, which boosted consumer demand last year. We remain focused on unlocking the growth opportunities we see across all regions as we navigate these market-specific challenges and supply chain constraints. As we look forward, I believe it's prudent to take a more conservative approach to our financial outlook for the balance of the year. As the second quarter progressed, it became increasingly clear that the operating environment is evolving.

In the U.S., inflationary pressures, rising interest rates and recession fears are weighing on consumer and retailer sentiment. Our updated outlook contemplates higher order cancellation risk and more conservative DTC assumptions. It also assumes a more promotional environment as the marketplace seeks to rationalize inventory levels. We have navigated numerous economic cycles in our company's 84-year history. I'm confident that our differentiated brand portfolio, operating discipline and strong financial position will enable us to effectively manage this [cycle]. We're monitoring retail trends and our order book against this uncertain backdrop. I'm confident in the quality of our inventory, which includes a high proportion of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. We also have a fleet of outlet stores, which enables us to sell the remaining high-quality inventory profitably. As the demand environment shifts, we're focused on restraining expense growth to manage profitability. I'm excited to launch our innovative product into the marketplace as we head into the important fall season. Outerwear and winter merchandise inventories are very lean at retail after an exceptional sell-through last season. We have a robust Fall '22 order book to deliver against, and retailers are keen to get initial floor sets in place ahead of weather-driven consumer demand. I'll provide more detail regarding our updated outlook later in the call.

From our review of second quarter 2022 financial performance, I'll reference year-over-year comparisons versus second quarter 2021, unless otherwise noted. When reviewing second quarter year-over-year growth rates and margin performance, it's important to remember that the second quarter is our lowest volume sales quarter and small variances can result in large year-over-year changes in profitability that may not be indicative of the underlying business trends. Overall, our second quarter results were mixed. Net sales growth of 2% reflects robust growth in many markets, tempered by essentially no Russia-based distributor shipments, zero-COVID restrictions in China and foreign currency exchange headwinds. Net sales were below our outlook, primarily reflecting shortfalls in the U.S. and China. Despite the shortfall, we were able to slightly exceed our operating income forecast. By channel, wholesale net sales decreased 1%, including the impact of substantially lower Russia-based distributor net sales. Excluding distributor markets, global wholesale increased low teens percent, reflecting shipments of our robust Spring '22 order book. Our DTC business grew 5% year-over-year in the second quarter, driven by 11% brick-and-mortar DTC sales, partially offset by a 5% decrease in DTC e-commerce net sales. Brick and mortar growth exceeded e-commerce growth in the quarter in part due to consumers' increased desire to shop in store. E-commerce sales declined in the quarter due to lower (inaudible) China e-commerce sales.

Gross margin contracted 240 basis points with the largest driver of contraction being higher inbound freight expenses. Gross margin performance was roughly in line with our forecast, and the overall promotional environment remained favorable during the quarter. SG&A expenses increased 7% and represent 48.7% of net sales compared to 46.2% of net sales in the second quarter of '21. The increase in SG&A expenses reflect broad-based growth across the enterprise to support sales growth as well as technology and supply chain capabilities. Personnel expense growth was driven by incremental headcount as well as wage increases. This performance resulted in a 1.5% operating margin and diluted earnings per share of $0.11.

I will now review net sales performance by region. For international markets, I'll reference constant currency growth rates. Please note that strength of the U.S. dollar resulted in a 10-point translation headwind to international direct markets and a 2-point headwind to consolidated net sales. U.S. net sales increased 9% with wholesale increasing low teens percent and DTC increasing low single-digit percent. U.S. wholesale growth reflects shipments of our robust Spring '22 order book. Early season sell-through of spring merchandise was impacted by later shipments of inventory stemming from Vietnam factory closures in '21 and logistic delays. As the spring season progressed, mounting inflationary pressures and economic uncertainty appear to temper demand in the marketplace. Retail or on-hand inventories increased year-over-year as we anniversary prior year inventory shortages. With higher marketplace inventories and a rapidly changing economic environment, retailers are rationalizing their inventory needs. Despite these pressures, retail product margins -- retailer product margin remained healthy in the second quarter. Low single-digit U.S. DTC growth reflected higher brick-and-mortar net sales, partially offset by a modest decline in e-commerce net sales. Our DTC business remained generally healthy across both channels in April and May before softening in June. Latin America Asia Pacific region, or LAAP, net sales increased 2%. China was down high 40% in the quarter as the market faced strict restrictions due to its zero-COVID policy. Our China headquarters and distribution center are located in Shanghai, which was locked down for several weeks. In addition to store closures, we were unable to fulfill e-commerce orders for a lengthy period of time. Shanghai began reopening in June, several weeks later than we initially expected. Retail traffic trends are still recovering.

On a positive note, the 618 online sales event was a success with double-digit year-over-year growth. Japan increased mid-30% driven by strong consumer demand and the lapping of state of emergency declarations, which hindered sales in the prior year. Korea grew high teens percent led by strong DTC performance. Improving retail operating efficiency is contributing to our success in Korea. The team continues to focus on enhanced in-store marketing and heightened SKU productivity. The pandemic has reinvigorated consumer interest in outdoor activities in Korea. During the quarter, Columbia participated in the Go Outdoor Camp festival. Thousands of attendees celebrated camping and outdoor life and toured Columbia's high-energy installation. LAAP distributor markets were up low double digits percent driven by shipment of higher Fall '22 orders. Europe, Middle East, Africa region, or EMEA, net sales decreased 30%. This decline was driven by substantially lower sales to our Russia-based distributor, partially offset by strength in our Europe-direct business. Europe-direct grew low 30%, fueled by Columbia brand momentum and a recovery in consumer demand. We experienced strong performance in brick and mortar across both DTC and wholesale channels. Robust growth with strategic partners in the sporting goods channel was notable. Our EMEA distributor business was down low 70%. Canada net sales increased 74%, with high growth across wholesale and DTC as we anniversary prior year pandemic-related disruptions.

Looking at performance by brand. SOREL was our fastest-growing brand in the quarter. Net sales increased 24% despite supply chain challenges, driven by strong wholesale and DTC performance. By category, growth was given -- growth was driven by year-round and summer categories, including sneakers, wedges and sandals. SOREL's potential to become a $1 billion footwear brand is evident, and we're investing in demand creation and product design to fuel that growth. Turning to the Columbia brand. Net sales were flat in the second quarter. Strong growth in many markets was tempered by essentially no Russia-based distributor business, zero -COVID restrictions in China and foreign currency exchange headwinds. On the product partnership front, we're continuing our successful collaboration with Disney and Lucasfilm with another Star Wars offering. For this collection, which will be released in the coming days, we've combined the iconic PFG Tamiami shirt with elements of classic Star War comics. The shirt's print features legendary Star Wars characters, Chewbacca, R2-D2 and Han Solo. Columbia recently collaborated with Madhappy to launch a new Summer '22 outdoors collection. Madhappy is a global lifestyle brand on a mission to make the world a more optimistic place. The collection brings awareness to the connection between spending time outdoors and improving our mental health. The line features a variety of styles and silhouettes that incorporate Columbia's innovative outdoor technology. During the quarter, a number of Columbia products have been featured in consumer and industry publications. In Apparel, Columbia's innovative sun protection technology was featured in Gear Patrol and outdoor gear lab articles, highlighting the Terminal Deflector Zero Hoodie, the Silver Ridge long sleeve shirt and the PFG Tidal Tee Hoodie. Columbia's Back Bowl fleece made Outside Magazine's list of best fleeces of 2022. In footwear, both travel and leisure and outdoor gear lab featured the Newton Ridge hiking boots in their list of best hiking boots for women.

Earlier this month, Columbia sponsored athlete Bubba Wallace unveiled a bright new look to his #23 car for the NASCAR Cup Series race at Road America. The car featured the PFG Fish Flag scheme with dozens of fish forming the red stripes of the American flag down the side of the car. The PFG Fish Flag is our top-selling baseball cap with millions of units sold since its launch. The ball caps are one of our fastest-growing products. We believe this speaks to the consumer's brand affinity for Columbia, combined with a product that celebrates the love of country and outdoors. We will continue to bring products to market that celebrate places and build emotional connections with consumers. As we look forward to this fall, the Columbia brand's top global priority from a product and marketing standpoint is continuing to build momentum around Omni-Heat Infinity. We will be running a worldwide integrated marketing campaign featuring Omni-Heat Infinity as the gold standard in warmth, focused on how the technology works and why it matters for consumers. As you know, poly fleece is one of the largest outdoor product categories. We believe the introduction of Omni-Heat Helix this fall will bring disruptive innovation to this largely undifferentiated category. Omni-Heat Helix is the first of its kind patented visible technology. It utilizes highly efficient insulation cells to maximize warmth and provide breathability. Shifting back to our emerging brands, prAna net sales increased 3%. Sales growth in the quarter was constrained by [late receipt] of Spring '22 inventory. The prAna team is working to reposition the brand in the marketplace in the coming seasons. Mountain Hardwear net sales increased 18%. The brand had several product highlights in the quarter. For Spring '22, Mountain Hardwear introduced the new Kor Airshell collection. This ultra-packable stretch layer quickly became Mountain Hardwear's top performing shell. The New York Times' Wirecutter Product-Review website concluded that Mountain Hardwear's Mineral King Tent is the best 2-person car camping tent. The tent features an ultralight suspension system and was described as one of the easiest tents in the market to set up.

Before moving to our financial performance -- excuse me, before moving to our financial outlook, I'd like to note the recent appointment of Christiana Smith Shi to our Board of Directors. Christiana is currently the Principal at Lovejoy Advisors, where she helps brands digitally transform their business. She also serves on the Board of 2 of the publicly traded companies. I look forward to leveraging her insight to help us grow our company.

I'll now discuss our updated '22 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures relating to these statements. Based on the current environment and growing economic uncertainty, we believe it's prudent to take a more conservative approach to our financial outlook for the balance of the year. Supply chain challenges remain elevated and are anticipated to continue throughout the rest of the year. We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners. West Coast port labor contract negotiations could further complicate inbound freight logistics. We have diversified our port exposure and expect less than 40% of our second half inventory will go through West Coast ports, covered by the ILWU labor contract. Our updated outlook contemplates higher order cancellations and a more conservative DTC assumption as well as a more promotional environment as the marketplace seeks to rationalize inventory levels. We have also taken a more conservative outlook in China for the balance of the year as COVID restrictions are impacting the markets. On the invasion of Ukraine, we pause taking any new orders from our Russia-based distributor from Russia, Ukraine and Belarus. As we disclosed last quarter, the company had pre-existing contractual obligations for Fall '22 orders taken before the invasion. Given the uncertainty surrounding these Fall '22 orders, we previously removed any of those sales from our financial outlook. Our updated financial outlook now includes a portion of this distributors contracted Fall '22 orders being realized in the second half of the year. Foreign currency exchange headwinds are now expected to unfavorably impact full year net sales growth by 3% and diluted earnings per share by $0.15 to $0.20. Based on these and other factors, we now forecast net sales to grow 10% to 12% year-over-year. Gross margin is expected to contract between 180 and 210 basis points. SG&A expenses are forecast to grow roughly in line with net sales. We expect operating margin to be in the range of 12.1% to 12.8% compared to 14.4% in 2021. This results in a diluted earnings per share outlook of $5 to $5.40. Based on our year-to-date share repurchases, we now estimate our diluted share count for the year to be 63 million shares. For the third quarter, we anticipate net sales growth of approximately 20%. This high level of sales growth is primarily driven by the (inaudible) our Fall '22 order book and modest DTC growth.

As we highlighted on our last call, we'll be hosting an Investor Day at our campus here in Portland on September 22. We look forward to showcasing the brand strategies and exciting products that are fueling our growth. Invitations for this event will be sent out in the coming days. Before my closing remarks, I'd like to highlight the fact that we recently released our 2021 environmental, social and governance report, which is available on our website. I'd encourage you to review the report, which outlines the progress and accomplishments that we made empowering people, sustaining places and promoting responsible practices. In summary, I'm confident we have the right strategies in place to navigate this dynamic environment and unlock the significant growth opportunities we see across the business. We're investing in our strategic priorities to drive 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.

That concludes my prepared remarks. We welcome your questions. Operator, could you help us with that?

(Operator Instructions)

The first question is coming from Bob Drbul with Guggenheim.

A couple of questions. From your perspective on -- I guess if we could start on the inventory side, can you just give us a little more color around the composition of the inventory? Maybe some color on cancellations, how you're approaching it? Will you just solely use your outlet business on the inventory. I don't know if there's like buckets of -- so you said you've got a lot of evergreen type merchandise in there, but any more color on the inventory and sort of plans or disposition, I think, would be pretty helpful for us. And any more color on the order book and any early numbers on '23?

Sure. Well, as you remember, we're a seasonal business so we have a high percentage of our inventory today is fall inventory, and we're looking at a global lack of inventory at retail in the winter merchandise. So we're confident that we've got a good opportunity to fulfill our order book and get that merchandise into retailers. We're just a little concerned about the state of the consumer at this point. And so that's why we've noted the potential for cancellations later in the season. We have a strong balance sheet. We have multiple methods to just to liquidate our inventories, not only through the value channel and some of our regular retailers in terms of closeouts but also through our own extensive outlet chain. And so that's how we're looking at it. We've got the potential to be -- to improve our situation, but a lot of it is depending on what the consumer does in the next few months. As it relates to the order book, we've got a high percentage of our order book in already for fall -- excuse me, for Spring '23, and it shows that we're going to grow them in Spring '23. So we're pleased with that, and we've got a lot of great opportunity ahead of us.

Yes, Bob, and I would just add. As it relates to inventory composition, the quality of our inventory remains quite healthy. The aging is highly current, in line with where we've historically been. Certainly, inventory is a bit more elevated. We're carrying a bit more excess than we traditionally do. But as Tim touched on, we believe it's very manageable. And we would certainly look to leverage our outlet stores and buy more tightly to anticipated demand as we look out to next year and leverage those outlets to sell that product profitably.

The next question is coming from Jim Duffy with Stifel.

I wanted to start just digging in some on the second quarter. Can you help us understand how much the U.S. was light of expectations in the quarter? And how much of that was change in demand, end market demand versus product flow issues that caused you to miss some shipments?

Yes, Jim, as it relates to our second quarter versus our internal outlook, we were off kind of high -- mid- to high-teen number. And half of that was associated with China and the lockdowns lasting longer in duration than we had initially anticipated. The balance of the half, call it, in the $8 million to $10 million range, that was U.S. related and part of that was wholesale based with regard to cancellations that we saw. And I think those cancellations are, by and large, what Tim had reflected in terms of being late in delivering supply to the marketplace in the early part of the quarter and then some softening that we saw in the latter part. And then D2C made up a component of that as well, and as we touched on -- in the month of April and May, our D2C business performed quite well. As we got into the month of June, we saw some declines in traffic levels where that softened and that's essentially where you're seeing the performance relative to the guidance we previously provided.

Understood. And then can you help us think about spring product inventories in the channel currently. In the CFO commentary document, there was some mention of anticipated accommodations. Are you indeed building that into the guidance that you've provided for the back half?

Well, as it relates to spring inventory, Jim, we did take incremental cancellations relative to what we historically would have given where marketplace inventories stand at this point in time. And so we're really seeing this being much more a function of cancellations as opposed to anything significant in the way of accommodations or returns. They're -- to a lesser extent, there's some of that, but by far and away, the more significant element that's impacting us, and we've been tentative to this as well. We want to make sure that we're keeping the marketplace clean in terms of the amount of inventory that we have out there. So we've been proactively working with our retailers throughout the season.

The next question is coming from Laurent Vasilescu with BNP Paribas.

I was hoping to ask about the full year guidance that 600 basis points midpoint cut full year. Correct me if I'm wrong, Jim, I think about 180 bps is FX versus the last CFO commentary, you've got about 420 bps of pressure here. How do we think about that from a brand perspective? I think your CFO commentary talked about that SOREL is still the fastest-growing brand. Is there any really step change function in one particular brand? And then another way to look at it is, I think you gave us some high-level color about regions in the CFO commentary, but how do we think about just that bridge of that 420 bps decline from a geo perspective?

Yes. The reduction in our outlook on the year is predominantly revenue and to a lesser degree related to gross margin. And from a revenue standpoint, it's probably a bit more weighted on the Columbia side. The Columbia brand is the only brand as an example, that we distribute in China. So there's going to be a factor related to that. The size of the Columbia business internationally and when you think about some of the currency pressures, that's going to also pertain to the Columbia brand. So by and large, it's going to be in that part, Laurent. The other emerging brands are certainly going to have reductions as well because a lot of the pressure that we're anticipating. Our second quarter results were still quite strong. This is really in anticipation of the broader economic climate, particularly here in the U.S. So when we took the top line down in our full year guidance aside from currency in China, the lion's share of the balance of the change is U.S.-based. Our business internationally in U.S. and other of the Asian markets, ex-China are continuing to perform quite well.

Very helpful, Jim. And then in your CFO slides, you're calling for about 20% growth in 3Q, which would imply 4Q, it would be up low single digits. Is the 20% growth rate that you're calling for higher, lower or equal to what you expected 90 days ago? And on 4Q, what's driving that slowdown? Is it driven by wholesale order cuts, which I think you (inaudible) just increased caution from the macro factors with the economy?

Yes, a lot of -- so the difference between Q3 and Q4, Laurent, is largely going to relate to timing shifts in the delivery of our wholesale shipments for the Fall '22 season. If you recall a year ago, we were late in getting Fall '21 product to market, and so it was a bit more weighted to the fourth quarter. We've seen some improvement in our expectations around receipt of inventory and shipment out to our customers, albeit not where we'd like it to be. And it will be late relative to historical terms, but better than where we were last year. And so the lion's share of the 20% growth is going to be exactly that, just the shift in our expectations around the wholesale business. And then how much that's changed versus where we were 90 days ago, I don't have that. I don't have that handy.

No worries. And if I can squeeze in one on the GM, last question here. Obviously, you notched down the gross margin by 100 bps for the full year. But if I kind of bridge the 20% growth for top line and then the imply, let's say, [$1.62] in EPS for 3Q, it would imply a pretty significant gross margin impact in 3Q. I don't know, maybe upwards of 300 to 400 bps. Is that the right way to think about it? Or -- maybe can you give us any guardrails on how we think about 3Q, 4Q evolution of GMs?

Yes. I mean the third quarter will be on par with essentially what we've experienced through the first half of the year. Keep in mind, we'll continue to have certain of the inbound ocean freight costs hit us disproportionately in the third quarter before that becomes a bit more of a tailwind in the fourth quarter. So if you think about in those terms, gross margin will still be down in the fourth quarter, but not to the degree that we've seen through the first 9 months. And the reason being is, the ocean freight will become a tailwind. And then the big thing also that we've adjusted in the gross margin outlook is just that we're contemplating a higher inventory balance. And with that, we do see the risk of the marketplace being more promotional and making sure that we've adjusted our outlook to be able to respond to changes in consumer demand and market conditions.

The next question is coming from Camilo Lyon with BTIG.

This is Mackenzie Boydston on for Camilo. Kind of dovetailing on what you -- your last response on ocean freight. I just want to confirm, so it seems like Q4 then, you're still contemplating will be a tailwind to margins and then continuing into '23.

Yes. We secured freight contracts with our ocean carriers dated back early this year. So we're confident with the contracts that we've got in place. We have built into our outlook, however, given where oil prices are. We have built in some costs as it pertains to fuel surcharges until we see oil abate.

Okay. That's great. And then I guess in terms of demand trends you saw in Q2, is there any specific callouts by month you could provide? And then kind of any update on the consumer landscape that you're seeing into July would be helpful.

Well, that it pertains to Q2, and as Tim touched on the prepared remarks, April and May, business was still quite healthy. Looking at the D2C business, in particular, we were essentially on plan. And then I think as the economic news, inflation in particular, and just risk of recession has continued to weigh on the minds of at least the U.S. consumer that we began seeing some of that trickle through in the form of lighter traffic levels and softness in demand in latter part of the quarter. And we've seen that to some degree, I would say that trend has continued in the early part of July.

The next question is coming from John Kernan with Cowen.

Could you talk to where you think inventory levels will be maybe by the end of 4Q? I think some of the peers in the space (inaudible) this quarter. I'm just curious where you think inventory shakes out as we get into next year?

Yes. I think as it relates to inventory, we would anticipate that at the end of the third quarter is where we would anticipate more of our peak and looking at the rate of growth in inventory being at or greater than where we are here in the second quarter at June 30. And then as we get out to the end of the year, we'd anticipate it to begin to come down, albeit remain elevated. I'd put it probably in the low 30% range. But keep in mind, trying to nail that number down just given the amount of inventory production that we'll have for Spring '23 and the timing of that can create some volatility in what our inventory positions are at the end of the year.

Understood. Maybe just on price increases. Can you talk to the impact of price increases anticipated in the guidance for the back half year?

Are you talking about our costs or our selling price this quarter?

Selling prices.

Yes. I mean, I think there's been some, but it's basically been moderated. The concept for us is to make sure that we've got highly differentiated product with innovations that can have pricing power in the marketplace. And we haven't seen any degradation of any meaningful amount in our order book based on pricing.

The next question is coming from Mitch Kummetz with Seaport Research.

Just to follow up on the margins and freight in particular. So you're expecting gross margins to be down 180 to 210 bps year-over-year. How much of that is freight? And it looks like you expect year-over-year benefit in Q4. I know you're not looking [to give your] '23 guidance, but if ocean container freight rates or ocean container rates kind of hold where they are today, how much pickup could you possibly see next year?

Well, I think maybe just to put it in perspective, Mitch, the way I would think about it is, through the first half of this year, ocean freight had about a 300 basis point impact on our gross margins. And then we'll see that step down in terms of the degree as an impact in the third and fourth quarter before it becomes a tailwind. So I think that's probably the best way of framing it. And obviously, as you're in the first part of the year, it may have a little bit more of a disproportionate impact. I wouldn't anticipate it quite being at 300 basis points in the third quarter. It will be in the -- decline a bit.

Yes. Mitch -- I might just point out that even though we have a tailwind against last year's freight rates, ocean freight rates, they're still incredibly elevated based on our historical experience. And so it's important to understand that.

Sure. And then Tim or Jim, you guys talked about now assuming a slightly more -- well, a more cautious stance over the balance of the year around cancellations, promotions, DTC. I guess, maybe 2 questions. One, is that really focused on the fourth quarter more than the third quarter? And two, as you think about your assumptions around those items, are you kind of assuming a normal environment? I mean last year would have been a better-than-normal environment along those metrics? So are you basically just sort of assuming this year is normal or are you assuming better or worse than that?

Last year was a much higher demand from the consumer and much less supply from all vendors, including ourselves. So this year, we have more supply. Who knows what the consumer is going to be looking at? So it's very likely that it has the propensity for promotional activity as retailers look to clear inventory. So it's hard to describe. And then when you throw the closures in China into the mix, it's just -- it makes it a difficult year to call normal. So we want to make sure that we're cautiously approaching the business. We have certainly the balance sheet to allow us to make the right decisions, not necessarily the most expedite ones, but we're managing the business in order to come through this at the end just as strong as we went into it.

And then Mitch, typically within our wholesale business, we wouldn't anticipate to see significant cancellations until we get deeper into the quarter. As Tim touched on inventories as it relates to seasonal fall/winter merchandise is quite low. So retailers are going to have the need in the early part of the season to take those goods. So it can be until we get out to September, really October, November, where we'd see anything meaningful in the way of cancellations. And then the other way to think about how normalized we planned the business in the back half of the year, our D2C business has planned up a mid-single-digit percent growth combined between brick and mortar and online e-com globally. So that gives you a little bit of a sense. We grew at a low teen number through the first half of the year with Q2 coming down. So we planned it a little bit more in line with what we've seen in the second quarter.

The next question is coming Paul Lejuez with Citigroup.

Curious within the U.S. wholesale channel, if you can maybe talk about sales to your sporting goods, retail partners versus department stores versus others, how you're seeing the trends in each? And I think you mentioned seeing some cancellations. Just curious where you might be seeing those pop up out of those different channels. And I believe just secondly, you talked about high single digit, low double-digit price increases. Wondering if that's what you have [falling] through into the spring season as well. So when you talk about the spring order books being up, I'm curious how much of that is price versus units.

Well, the channels -- as you know, the company is quite broadly distributed in terms of its products. And so we've seen (inaudible) across all channels. I would say that the department store channel probably is growing the most rapidly among all the channels, but we had great business with our Internet retailers as well. I would say, maybe the slowest might be in the sporting goods channel. And then as it relates to spring orders, we're seeing solid improvement across really all the brands and categories but understanding that retailers are going to be leaving the season this year with a little bit more inventory than they otherwise have been in prior seasons.

Yes, as it relates to price versus unit, Paul. If you look at the second quarter as an example where we grew 2%, that's going to be -- units are going to be down a bit, knowing that our pricing for the spring season was up a mid-single-digit percentage.

And how about for the spring season? Is that seeing same dynamic pricing up, units down?

Looking at Spring '23? So my comment I just made was with regard to Spring '22. Spring '23, I think, it would be premature at this point to provide any details with regard to how we're thinking about rate of growth and mix between price versus units. We're certainly continuing to operate in inflationary environment. So there are further price increases that are contemplated in our Spring '23 order book.

The next question is coming from Mauricio Serna with UBS.

I just wanted to ask if you could elaborate a little bit more on your sales growth expectations by region in the second half of the year. And particularly in Europe, I was wondering if we should expect that kind of negative growth rate to continue in the second half. And maybe just elaborate also on China, how that will impact the Latin America and Asia Pacific business.

Well, I think as it relates to Europe specifically, our European direct business is growing. And as Tim touched on, it's quite healthy, and we'd anticipate that Europe continues to drive growth in the back half of the year. So essentially, what's driving the declines in our EMEA business when we look at the first half, it's the fact that we didn't ship or (inaudible) to Russia during the second quarter. So that's going to be the big factor there. And then I missed the second part of the question on...

You basically -- China, we expect that there will be continued shutdowns in certain geographies in China and whether or not we have business relationships or customers in those specific regions, we'll really detail how we do in China for the back half of the year. So we're being cautious in terms of how we're guiding in that geography. But as Jim said, we've got solid business in our direct business in Europe as well as in many of our EMEA regions, including Turkey and Israel, where we have solid business and good growth. It really is a Russia impact for this year.

We have Alex Perry with Bank of America.

Just first, I wanted to ask a little bit more in terms of what you're seeing from -- or what you're expecting from a promotional environment, especially with some mass retailers calling out loaded inventory levels in Apparel. Does that affect you at all? And what have you seen sort of the overall promotional environment come online yet? Or is that just what you're expecting given what you're seeing from the consumer?

Yes. We had -- actually it's been modest promotional activity certainly in the U.S., where we have the most data around our customers' activities. It's been more modest in the first half. We're expecting because of the consumer sentiments that we're all reading about that there'll likely be more promotional activity as inventories in the channel become elevated. And so it's hard to understand or to know in advance which one of our customers have the ability to keep inventory longer, which ones have to liquidate, but we're -- our expectations are that the economic conditions will dictate a more promotional environment.

And on the whole, Alex, when we look at our second quarter results and we monitor a high proportion of our U.S. customers and their promotion levels, and promotion levels were quite lean through the second quarter. So there hasn't been an overreaction to what's going on with the consumer, and likewise, can be said for our D2C business in which margins were really quite healthy through Q2. So the adjustments we've made in our outlook are really just in contemplation of the risks that we foresee with everything that we're seeing in the news.

Yes, that makes a lot of sense. And then my second question is, I just wanted to ask about what you're seeing in terms of product input cost pressures? Or -- and maybe just a little more color on how that would sort of flow through in terms of the gross margin guide?

Certainly. Well, in our analysis, about half of our product input costs are a function of the [collusion] in the ocean freight carrier network. The balance is a function of factory disruptions and oil commodity impact on the products that we make and the components that we use. So I would say, it's a mid-single digit to just slightly north of that impact on costs. While we're able to pass those on, we'll see what happens in terms of the ocean freight carriers, our charges and then what happens with oil over the next several years.

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

All right. Well, thank you for listening in. We're really excited about the opportunity to show you the various activities our brands have planned for the future in our September 22 Analyst Day. We hope that you'll be able to come and see those things in person and look forward to sharing that with you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.