Columbia Sportswear Co (COLM) 2021 Q2 法說會逐字稿

Greetings, and welcome to the Columbia Sportswear Second Quarter 2021 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Burns. Thank you, Andrew. You may begin.

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, Executive -- 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, and 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 second quarter 2021 earnings release.

(Operator Instructions) Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon. Hope everyone's well.

I'm thrilled to report second quarter financial performance that exceeded our expectations. The robust recovery in our business fueled record-setting second quarter and first half net sales, gross margin, operating income and diluted earnings per share. We eclipsed pre-pandemic first half 2019 financial results, which represented record performance at that time. This marks an important milestone in our recovery.

Net sales upside in the second quarter was primarily driven by better-than-planned performance in our U.S. wholesale and DTC brick-and-mortar businesses. It's important to highlight that even as consumers return to in-store shopping, our e-commerce business also remained strong. Measuring second quarter 2021 financial performance versus second quarter 2019 results, which were not impacted by the pandemic, is a useful measure of our business recovery trend line.

Globally, net sales were 8% above 2019 levels in the second quarter with all 4 brands surpassing pre-pandemic levels. Second quarter net sales in our U.S. DTC brick-and-mortar business slightly exceeded 2019 levels, and U.S. DTC e-commerce sales increased over 80%. It's clear that our brand portfolio is resonating with consumers, and we are well positioned to benefit from current consumer and outdoor trends.

Columbia's value proposition and differentiated innovation positions the brand to capitalize on the increasing popularity of outdoor activities. Consumers are gravitating to SOREL's energized spring-summer product line, validating its evolution to a year-round brand. Mountain Hardware spring '21 sell-through rates and fall '21 orders demonstrate consumers are responding to the brand's authentic and innovative mountain sports product line. As consumers' interest and sustainability in the outdoors grows, prAna is well positioned at the intersection of these 2 powerful trends.

These record results were achieved despite ongoing pandemic-related disruptions. Industry-wide supply chain disruptions are causing production and delivery delays as well as shipping cost pressures. Ongoing periodic lockdowns and temporary store closures are also impacting DTC and wholesale and brick-and-mortar store performance in several international markets. Thanks to the tremendous efforts of our dedicated global workforce, we were able to overcome these disruptions to achieve record sales results. I'd add that we also achieved these results with a lower inventory position, exiting the quarter with inventory down 16% year-over-year.

Overall, our spring sell-through has been exceptional. Retail inventory positions are very low, and our fall '21 and spring '22 order books point to continued momentum in the business. Looking at the seasons ahead, I'm confident in our pipeline of innovative products and ability to execute in this dynamic marketplace. Our fortress balance sheet is intact with cash and short-term investments totaling $821 million with no bank borrowings.

Based on second quarter results, we're raising our financial outlook for 2021. Our updated outlook now calls for 25% to 26.5% net sales growth and a diluted earnings per share of $4.30 to $4.55. This outlook includes our current view of the impact from supply chain disruptions, which are impacting fall '21 production and deliveries. Furthermore, in our revised outlook, we're assuming approximately $40 million of incremental ocean freight costs not contemplated in our prior outlook, as we emphasize supply chain continuity and market share gains over costs.

Now I will quickly review our second quarter 2021 financial performance and reference year-over-year comparisons versus second quarter 2020. 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 changes can result in large percentage changes. Additionally, second quarter 2020 was significantly disrupted by the pandemic. Many of our DTC and retail partner stores were closed for the majority of the quarter last year.

Second quarter net sales increased 79% driven by 89% growth in our wholesale business and 69% growth in our DTC business. Wholesale growth was led by the U.S. and was primarily driven by later timing of spring '21 shipments compared to spring '20 and higher spring '21 sales. While shipments were delayed several weeks on average, order cancellations were minimal. In this inventory constrained environment, retailers remain eager to get product as it arrives.

Globally, DTC brick-and-mortar net sales grew 149% as we lapped prior year temporary store closures. Sales in this channel significantly exceeded our expectations as store traffic levels and sales improved faster than anticipated.

Overall, we made great progress in the quarter. Store traffic still remains below pre-pandemic levels. DTC e-commerce net sales grew 5% and represented 16% of the total sales mix. These results were in line with our expectation as we lapped the prior year surge in e-commerce sales.

Gross margin expanded 540 basis points to 51.6% of net sales. In addition to decreased inventory reserve provisions relative to elevated levels last year, we benefited from lower DTC promotional activity and favorable wholesale product margins. This was partially offset by unfavorable channel sales mix.

Our SG&A expense increased 20%, primarily reflecting the variable component of our expense structure with increased sales volume. This performance resulted in operating income of $35 million or 6.2% of net sales compared to an operating loss of $70 million in the prior year. Diluted earnings per share improved to $0.61 compared to a loss per share of $0.77 in the prior year.

Looking at first half financial performance. Net sales increased 35% year-over-year and diluted earnings per share increased to $1.44 compared to a loss per share of $0.76 in the first half of 2020.

I'll now review second quarter year-over-year net sales growth performance by region and brand. For this review, I'll reference constant currency year-over-year net sales growth rates unless otherwise noted.

U.S. net sales increased 107% reflecting low 140% growth in our wholesale business and mid-80% growth in our DTC business. The robust economic recovery, improving vaccination rates and strong consumer demand for outdoor products, create an excellent retail backdrop during the quarter.

In our U.S. wholesale business, spring '21 season-to-date sell-through rates have been exceptional, driving double-digit sell-through growth compared to spring '19 on lower retail inventory stock levels.

In our U.S. brick-and-mortar business -- DTC brick-and-mortar business, it was apparent that consumers are increasingly willing to shop in-store. Net sales increased mid-250% year-over-year as we anniversary-ed prior store -- temporary store closures. During the quarter, same-store sales and traffic trends recovered much faster than expected. Even though international tourism remains quite low, we experienced a meaningful improvement in stores that historically relied on this business. U.S. DTC e-commerce net sales increased a low single-digit percent in line with our plan with significantly less promotional activity compared to the prior year.

Turning to international sales performance. During the second quarter, many regions continued to struggle with the vaccination rollout. We experienced sporadic lockdowns and temporary store closures at various points throughout the quarter in several markets, including Japan, China, Europe, Canada and distributor markets. Latin America, Asia Pacific, or LAAP region, second quarter net sales increased 11%. Across Asia, performance was mixed. In China, net sales were down low-single-digit percent, primarily reflecting lower wholesale sales resulting from earlier timing of spring '21 shipments, which shifted to the first quarter. China DTC net sales were up year-over-year, led by e-commerce growth. China represents one of our largest geographic growth opportunities, and we know that e-commerce will be an integral part of unlocking Columbia's full potential in this important market. Our management team is hyper focused on enhancing our digital capabilities, strengthening strategic partnerships and developing talent to drive growth and enhance the consumer experience.

Overall, first half net sales in China increased low 30%, and we anticipate full year net sales to approach 2019 levels.

Korea net sales decreased mid-teens percent as we anniversary-ed growth in the prior year that was aided by government stimulus which boosted retail consumption.

In Japan, net sales increased mid-50% as we anniversary-ed prior year pandemic-related disruptions, which were more impactful than the state of emergency declarations in various regions throughout the second quarter of 2021.

LAAP distributor markets were up high 30% as we anniversary prior year pandemic-related order cancellations. Europe, Middle East, Africa or EMEA region, second quarter net sales increased 46%. Europe direct net sales increased mid-30% driven by higher spring '21 sales and later shipments of spring '21 orders.

EMEA distributor net sales increased mid-50% as we anniversary-ed prior year pandemic-related order cancellations and earlier delivery of fall '21 product compared to fall 2020. Canada net sales increased 140% in the second quarter primarily driven by later shipments of spring '21 orders and higher spring '21 sales.

Looking at performance by brand. Columbia brand net sales increased 79% in the second quarter. Despite the delays in shipments, sell-through of our spring '21 product line has been fantastic. Top-performing categories included headwear, footwear and fleece with particular strength in PFG products. It's important to note that these high sell-through rates were achieved with strong full price selling, resulting in favorable product margins.

Columbia's innovations received several media call-outs and awards during the quarter. Outside Magazine featured the PFG ZERO Rules Ice Shirt and the roundup of best fishing gear, highlighting its unique Omni-Freeze cooling technology and UPF protection. Outside also featured the Escape Summit OutDry shoe in its list of best hiking shoes. Gear Patrol featured the OutDry Extreme rain jacket as the most innovative rain jacket in its list of best rain jackets of 2021. The feature noted the jacket's differentiated look and unique proprietary waterproof construction.

On the product and partnership front, this June, we continued with our successful collaboration with Disney Lucasfilm with Columbia's first spring-summer Star Wars collection. This new Outer Rim collection combines iconic elements of the Star Wars legacy with the comfort and performance that our Columbia PFG apparel is known for. The media coverage of this launch generated over 20 million impressions, and the product quickly sold through in our branded stores and online.

During the quarter, Columbia broadened our partnership with the Greening Youth Foundation to promote equitable outdoor industry career paths for diverse youth and young adults. As part of this ongoing relationship, Columbia has made a donation of product and funds to support its historical black colleges and universities internship program. This program connects young people from underrepresented communities with outdoor industry job opportunities.

In addition to releasing a special pride month collection in June, Columbia was excited to celebrate our partnership with the Venture Out Project during the quarter. This nonprofit organization helps individuals gain skills and confidence through shared outdoors experience. We will be working closely with this organization in the months to come.

On the marketing front, we're eager to launch our global Omni-Heat Infinity campaign later this month. Omni-Heat Infinity is the newest and largest innovation launch in our company's history. This new highly differentiated addition to the Omni-Heat family is the next evolution of thermal reflective lining. We will be supporting the launch with a comprehensive global marketing campaign that will create awareness throughout the season. Our full funnel campaign will be visible to consumers in-store and across traditional, digital and social outlets.

On October 1, we'll celebrate Gold Medal Day which will feature content from a group of partners and outfluencers promoting the initiative across social media platforms. They'll be inviting consumers to join with them in taking Columbia's challenge to spend 24 hours outdoors in total warmth and comfort wearing Omni-Heat Infinity.

Given the challenging retail landscape, I believe it's worthwhile to reiterate our distribution channel strategy. Throughout our long history, we have valued the strong relationships we've built with our top global retail partners. For the Columbia brand, we believe broad democratic omnichannel distribution is an integral part of the brand's success. We will continue to partner with retailers to serve our loyal consumers wherever they choose to shop. We will also continue investing in our profitable and growing DTC businesses.

With our broad omnichannel strategy in mind, we see sales opportunities as some brands exit wholesale accounts. We are actively engaged with these retailers to help serve their customers. We believe the Columbia brand's exceptional value and differentiated innovation is a winning proposition for retailers and consumers alike.

Turning to our emerging brand portfolio. SOREL net sales increased 71% in the quarter, with strong wholesale growth led by exceptional sneaker and sandals performance. Strong sell-through velocity and full price selling reflect consumer excitement around SOREL's bold spring-summer styles.

On sorel.com, the kinetic sandal was the top-selling style. This sports style sandal expands the Kinetic collection and builds on the success of the popular sneaker product line. The brand also noted strong growth in the newly introduced sandal collection, Cameron, led by the Cameron platform.

During pride month, SOREL partnered with Paper Magazine to spotlight 3 individuals as they use style to express their everyday pride. Featuring the Kinetic Rush Pride sneaker created in their honor, the program captured these bold and confident individuals in their unique element. As part of this collection, SOREL made a donation on behalf of each of the individuals to the charity of their choice.

prAna net sales increased 43% in the quarter, led by wholesale growth as spring '21 product reached our retail partners, we were encouraged by sell-through rates and full price selling. During the quarter, prAna demonstrated its belief in adventure for all with a pride collection and partnership with the Venture Out front. Interest in prAna recently introduced ReZion fabric continues to build with strong orders noted across key retailers for spring '22.

In June, prAna Brand President, Russ Hopcus, announced his pending retirement this fall. Over Russ' 8 years with Columbia and prAna, he's been a valued member of our senior management team and want to thank him for his contributions. A search is underway for his successor.

Mountain Hardware net sales increased 95% in the quarter with strong wholesale and DTC performance. Spring product sell-through was excellent, driven by especially strong sportswear and equipment demand. For fall '21, the order book reflects continued strength in the business. The Mountain Hardware team has done an amazing job bringing new innovation to the marketplace and elevating the brand's online and in-store presence with important wholesale accounts. We're excited to see Mountain Hardware athlete, Kyra Condie, take the global stage in the debut of sport climbing in the Olympics. She's 1 of only 4 U.S.A. sport climbers to represent the country in this inaugural event. We look forward to sharing her journey through Mountain Hardware's social media platforms. Good Luck, Kyra.

After 4 years leading Mountain Hardware's business, Brand President, Joe Vernachio, made the decision to pursue another opportunity. Joe has made a tremendous impact at Mount Hardware and is leaving the brand in a strong position with a very talented team. We thank him for his contributions. A search for his successor is underway.

I'll now discuss our 2021 financial outlook. This commentary includes forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements.

As we begin the important fall sales season, we're focused on navigating pandemic-related disruptions and delivering products that inspire active consumers. We're also investing in demand creation and capabilities to leverage our compelling brand portfolio to connect with consumers and enable long-term profitable growth. Based on second quarter results, we're increasing our full year financial outlook.

Our updated 2021 outlook contemplates 25% to 26.5% year-over-year net sales growth with growth across all 4 brands. This compares to our prior outlook of 21.5% to 23% growth. This outlook assumes no meaningful deterioration of current supply chain or market conditions related to the ongoing pandemic.

Gross margins are expected to expand 95 to 115 basis points. Our revised gross margin outlook includes approximately $40 million of incremental ocean freight costs not contemplated in our prior outlook.

Currently, global demand for ocean vessels and containers is far outstripping available capacity. In general, we've been successful in securing allocation of containers and vessel bookings to transport our products. We have worked to incorporate what we know about ocean freight rates into the financial outlook we are providing today. But these markets are highly volatile, and rates are difficult to estimate.

In this environment, we have prioritized supply continuity and market share gains over costs. We are diligently working with our logistics partners, industry representatives and government officials to address these challenges.

We expect SG&A to grow slower than net sales. Demand creation is anticipated to increase as a percent of sales to 6% in 2021 compared to 5.7% in 2020. Combined, we expect operating margin to be in the range of 11.7% to 12.2%.

Diluted per shares -- diluted earnings per share is anticipated to be in the range of $4.30 to $4.55 compared to our prior range of $4.05 to $4.30. While it's too early to provide specific details around our first half 2022 planning process, I'd like to share some initial thoughts on our spring '22 order book.

As I referenced earlier, strong consumer demand for our spring '21 products has driven exceptional sell-through rates. This has resulted in very low channel inventories and high retail restocking demand for our spring-summer product line. As a result, our spring '22 order-taking process has been substantially completed far earlier than the season is normal.

Our bookings point to high teens to low 20% growth in our spring '22 order book over spring '21 sales levels. With inflationary pressures building across our business, we have implemented price increases to help mitigate these higher costs. We're confident in our brands portfolio's pricing power. As a reminder, our order book only covers our wholesale business and is not an indicator of DTC performance expectations.

Before my closing remarks, I'd like to highlight that we recently released our 2020 corporate responsibility report, which is available on our website. I'd encourage you to review the report which outlines the progress and accomplishments that we have made empowering people, sustaining places and promoting responsible practices. 2020 was an incredibly challenging year for everyone. But our commitment to our core values do not waver.

2020 highlights include setting a climate target goal for a 30% reduction in manufacturing emissions by 2030, establishing a senior-level diversity, equity and inclusion leadership team. The report also features spotlights on Columbia Sportswear's response to issues, including COVID-19 voting social and racial injustice and climate.

In summary, the momentum in our business is incredibly strong. I believe we have the right strategy in place to navigate pandemic-related disruptions and drive sustainable and profitable long-term growth. We're committed to investing in our strategic priorities to drive global brand awareness and sales growth through increased focused demand creation investments; enhance consumer experience and digital capabilities in all of our channels and geographies; expand and improve global direct-to-consumer operations with supporting processes and systems; and investing in our people; and optimize our organization across our portfolio of brands.

That concludes my remarks. We'd welcome your questions for the remainder of the hour. Operator, could you help us with that?

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

Congratulations. Great quarter. I guess the first question that I have is, Tim, when you look at the competitive landscape, and I guess the comments you made about market share opportunities, can you just talk a little bit more in terms of like where you see the opportunities that you're pursuing either by category or by region? Just what you see happening on the competitive front that you're going to be a little bit more aggressive and go after it from that perspective. And I think the second question that I have, maybe for Jim, is the price increases, can you give us a little bit of flavor sort of how much you're taking price up or the inflationary pressures that you're seeing in the business. If you could just help us quantify that, that would be helpful.

Sure. Well, I think, Bob, probably the #1 area we're taking share would be in smaller brands that may not have the capital, the balance sheet to be able to provide them the solace to pay these exorbitant prices that we're all facing in terms of our freight rates coming in. So that would be an area where we would be able to point quickly to where we can take share. Additionally, we've got a number of businesses where we have a unique position that would include specifically PFG in North America, where the business is incredibly strong. And geographically, that would be focused on the south and southeast.

But across the business and across the globe, frankly, the business has been very strong, very low inventories. And I think we've all been surprised at the brick-and-mortar traffic levels and just the extraordinary consumer demand for outdoor products and -- those are the first things that come to mind when I think about where we're growing so rapidly.

And then, Bob, as it relates to your question on price increases and specific to spring '22, the price increases we're contemplating are a low-single-digit percent. So when you look at the order book that Tim commented on with low 20 to high-teen growth, most of that's unit volume. We do expect to continue to see costing pressure out to the fall '22 season. And of course, we'll be looking further into price increases to help mitigate and offset those -- that inflationary pressure.

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

Maybe a broader question on the earnings outlook. It looks like the first half of the year, your earnings were above 2019. For the full year, that's not what you're assuming. So maybe just wondering, as you look to the back half, how we should think about the earnings potential especially in light of the 2019 numbers that you delivered.

Yes. Good question, John. If it hadn't been for -- Tim commented on it. If it hadn't been for the ocean freight costs and the vast majority of the $4 million of incremental ocean freight cost that we anticipate incurring this year will be in the latter part of the year. So absent that, the $0.70 beat that we delivered for the quarter, we would have delivered to the full year. And if you do the math on that, the earnings recovery, I think we'd be looking at overall earnings at or better than where we were in 2019. So we're awfully encouraged with the momentum in the business. Obviously, the supply chain challenges, we'll deal with those and manage what we can. And I think that pretty well covers it.

And maybe as a follow-up, how do you think about the recoverability of some of those margin pressures, especially since you're taking some pricing next year. Theoretically, the freight issue should be temporary at some stage once you get past them. So any thoughts on the margin recoverability. And then even as you look to fall '22 orders, any high-level thoughts on some of the swing factors as you look out to fall '22?

Yes. I think the brand -- what we're realizing is the brand really has the power to price appropriately. We're also very mindful of our business -- this industry has been incredibly deflationary over the last 20 years, merchandise becoming less and less expensive. So this is an area where we've been very focused on managing our ability to raise prices and to be mindful of what the cost portions of the business are going to be as well as continuing to invest in innovations, which will separate us and allow us to differentiate ourselves. And lastly, our investment in brand building and brand awareness, I think, will really pay us big dividends in the future.

And Jon, absent the ocean freight costs that we're incurring and based on everything that we're learning from the logistics partners that we work with and various other advisers, we anticipate continuing to see these elevated freight charges through the first half of next year. Absent those charges -- and we're not providing specific gross margin guidance today, but absent those charges, we would have expected our spring '22 product margins to be better than spring '21 based on where we've priced and how the order books come in.

That's helpful. And just lastly, if I could, could you comment on any direct shipping delays you're baking into third quarter? And is that impacting the Omni-Heat Infinity launch plans at all?

No, we've really prioritized Omni-Heat Infinity because it's so important for the company in total and for the investments that we've made. And we want to make sure we have the product in the stores. So we prioritize shipping of that merchandise. We expect that there will be delays on other categories and other items, but all of those delays have been built into the guidance we've given you today.

Yes. We're continuing to experience that 3- to 4-week delay, generally speaking, as it relates to the timing of our inventory receipts in our wholesale shipments. And so we will see some pushout out of the third quarter and into the fourth quarter. And as Tim touched on, there is some commentary related to our second half growth rates, including Q3 and Q4, and that's all baked into that outlook.

Our next question comes from John Kernan with Cowen.

Nice job on the quarter. Just wanted to talk to the SG&A rate as well. At the low end of the guidance on a rate basis, it's still above 2019. And you are guiding at the high end of sales to be above that fiscal '19 basis. Just curious, the tick up in the SG&A relative to 2019, if there's any cost related to supply chain in that or how we should think about the SG&A rate.

Yes. A couple of comments in there, John. I guess, first and foremost would be demand creation. We did plan to make incremental investments in demand creation. This year, you'll recall, 2019, our demand creation spend was at 5.5% of sales. In our outlook, we're currently contemplating 6%, so that's a pretty meaningful component of that.

As it relates specifically to the supply chain, the 1 item -- or 2 items that would be in here specific to the supply chain is there's a fair amount of labor pressure in the market right now. And so we have made wage rate adjustments for our distribution centers. We've also done likewise with regard to our retail store associates in order to attract talent as we go into the full steam of the season that lies ahead. So those are the predominant drivers when you think about the SG&A deleverage over '19. There's some incentive comp I believe, as well as it relates to just the strong year that we've had thus far. But that would be really the recap.

Got it. That makes sense. Just to go back to the supply chain, it sounds like there's going to be some headwinds into fall 2022. What -- when you take a look at all the inflation here, whether it's shipping, ocean, air, some of the headwinds regarding production in Vietnam and other places. When you -- looking into a crystal ball, how do you think this unwinds? I mean, at what point do we start to see what seems like cyclical inflation come down in a sense, particularly with some of the freight rates. It doesn't sound like you're assuming that they're going to get much better into 2022. I'm just curious if there's anything you see that could alleviate some of these cost pressures and when we might see that?

Yes. I think actually the only thing that will significantly impact the ocean freight rates will be government intervention, whether that's European government or the U.S. government acting to break up some of these monopolistic organizations that are really causing the bulk of the problems. I mean it's one to deal with delays, which we all understand that that's possible due to the container dislocation, but the freight rates are clearly monopolistic in my opinion.

So when will that happen? That's anybody's guess. But I think, in general, as I said earlier, we are entering a period of inflation when in fact, the industry as a whole has been in a deflationary spiral for many, many years. So it's going to be incumbent upon companies that are well organized like ourselves to be able to have brands with pricing power that can continue to grow -- and grow sales and have strong margins.

Got you. And then just a follow-up on the comment -- earlier comment on product margin in 2022 for the fall versus 2021. I know we're a ways out, but did you confirm that fall -- or spring 2022 product margin would be up versus 2021 even with the inflation?

Yes.

We had strong margins in spring '21 -- correct me if I misstate this, Jim. But we had strong increase in gross margins for spring '21. They did not offset the freight costs which have been higher. And we have not yet set prices for fall '22 although we expect that we'll be able to cover known cost increases in a better way, certainly for fall '22.

Yes. I think, John, the comment I made is, if you set aside the ocean freight costs that we're currently seeing in the business. We're just looking at the product margin before that. Our spring '22 margins are more healthy than they would have been for spring '21. Now obviously, we're looking at these ocean freight costs, and there's a lot of estimation in terms of what lies ahead as we think about the first half of next year. But that will put some pressure in there. And as Tim touched on, we're a bit early as it relates to fall '22 as we're finalizing the line in our pricing before we go to market.

Our next question comes from Jim Duffy with Stifel.

A few questions for me guys around the trends you're seeing and how that's translated to the guidance change. Did I hear you correctly that U.S. direct-to-consumer brick-and-mortar was up in the 2Q versus 2019? And if so, I'm curious, has that -- was that consistent across the quarter and into the third quarter?

Yes, that's correct, Jim. So our brick-and-mortar business was up a low single-digit percent through Q2. We saw a nice tick up in that D2C business dated back to March, around the time that we saw some of the U.S. stimulus. And we've really been able to sustain that level.

Having said that, consumer traffic levels still remain down quite significantly relative to pre-pandemic. But we've been making up for with improvement in all other operating metrics in the stores, including conversion. So it held -- and as we look at the quarter month by month, it held steady through the month of June. And we've continued to see nice trends as we sit here in the month of July. And as it relates to how we factor that into our outlook, we've taken a prudent approach in terms of not expecting that traffic would get back up to pre-pandemic levels exiting this year and that revenue would be at or slightly down. So I give you a little backdrop on that.

Okay. Helpful. And you've mentioned inventories tight, retailers anxious to get product. Were you able to make any adjustments to fall orders to upsize those to capture some of that demand in the second half of the year?

Well, we have -- as we've said, we have logistics issues we're dealing with for the merchandise that we've already sold for fall '21. And we have inventory available, and we believe that we'll -- we're obviously in a much lower inventory position than we were exiting the quarter last year. So to the extent we can fulfill orders, we'll be there and provide that merchandise.

Our next question comes from Alex Perry with Bank of America.

Congrats on a great quarter. Just wanted to circle back. I think you talked about rising cases in sourcing countries across Southeast Asia impacting the product availability and deliveries. I guess just given the shutdowns you have seen in the last few weeks, are you still on track to hit shipping windows for peak selling periods? I guess another way of asking is, is the upside potential here capped given sort of what you're seeing in the supply chain?

Well, we've taken -- we've approached our forecast in the way we have historically. As it relates specifically to some of the closures in Asia, which would include Vietnam. As we sit here today, about 70% of our inventory has either been produced or is in transit or we've received it. So we're in a pretty good position as it relates to having inventory available for the season.

Now we still have some, obviously, to produce. And certain of that inventory is in factories in Vietnam that are experiencing closures. So there'll be some risk associated with that. But by and large, those impacts to our business, including the supply chain disruptions, are reflected in the revenue outlook that we've provided today.

Perfect. That's really helpful. And then I just wanted to touch on it a bit more, Tim, some of the comments you made about the approach your competitors are taking to the wholesale marketplace in North America. Can you just comment on sort of the white space opportunity you sort of see there from what you -- the position your competitors are taking and what you're sort of doing to capitalize on that.

Certainly. Well, it's been well publicized at the reduction in major brands, distribution partners is in the billions of dollars. And that's just in North America. So there's lots of opportunity for our brand, which is high demand, to fill portions of that. So I mean it's a significant amount.

It eclipses our current footwear business, just the footwear portion eclipses our current footwear volume. So it could be very significant if we're able to capture a good portion of that business.

Our next question comes from Laurent Vasilescu with Exane Paribas.

Jim, I think in the CFO commentary, it says that there has been a shift in Canadian and European direct sales from 1Q to 2Q. Can you possibly quantify those shifts. And then if I look at the third quarter, fourth quarter implied guidance with regards to on a 2-year stack basis, it looks like 3Q would be down mid-single digits, but then 4Q would be up mid-teens. Is it the right way to think about it, if you didn't have the delays, it would -- third quarter and fourth quarter would be more normalized on a 2-year stack basis across both quarters?

Well, as it relates to your first question on Europe and Canada, from a wholesale perspective, and I might approach that just kind of looking at it from more of a global standpoint because certainly, we've had a fairly significant shift in our inventory receipts for spring '21 that have shifted out of Q1 to Q2 and hence had an impact on our ability to deliver and ship those in Q1. The impact of that, our spring '21 order book ex timing, we're up low 20% from a global standpoint. There'll be some -- both Canada and Europe, I can't recall specifics, but they're going to be in or around that level of growth. So certainly, the outsized growth you're seeing in the quarter is largely related to later inventory receipts and shipments.

And then as it relates to Q3, Q4, Laurent, I think the only detail I can share with you is about what you're seeing in the CFO commentary, and that's the fact that we see relatively balanced growth in Q3 and Q4, it's a low 20%. There is a fairly significant shift out of the third quarter into the fourth quarter just in light of the fall '21 later inventory receipts and just impact that that's having on the wholesale business.

Okay. Very helpful. And then drilling down on footwear I think your full year revenue guide at the company level implies low single-digit growth on a 2-year stack. I think in the CFO commentary, it says that apparel will grow faster than footwear. So far, your footwear has grown 20% year-to-date on a 2-year stack. So if footwear is supposed to grow slower than apparel, does that mean we should think that footwear actually declines in the second half on a 2-year stack basis? Maybe if you can help us kind of put the puzzle to that, that would be really helpful.

Yes. I don't think it's declining in the second half. It will certainly decelerate from a growth standpoint in light of some of the manufacturing capacity constraints that we anticipate on the year. But we're still seeing footwear growth in the low 20% level. So not quite to the level that we are from an apparel standpoint.

Okay. And maybe if I could squeeze one more in. On the gross margins, the reversal provisions, you've had 2 quarters in a row. Do we expect any more reversals? Or maybe asked another way, how much is your gross margin guide of about 100 bps, how much is that embedding reversals for the full year?

What we've realized to date is essentially, Laurent, I wouldn't anticipate -- given how clean our inventories are at this point in time relative to where they were at the same point in time last year. Last year, the economy was shut down. We had booked fairly significant reserves in light of our unsold positions. And as we sit here today, the aging and the unsold positions that we have in our inventory is quite healthy. And so we brought our reserves down on a more normalized basis. So I wouldn't assume that there's any further benefit as we look at the balance of the year.

Our next question comes from Camilo Lyon with BTIG.

I just wanted to clarify, on the $40 million of incremental supply chain expense for the back half, can you help us think about the weighting of when that $40 million is going to hit more Q3 versus Q4?

Or is it -- should we think about it as evenly split?

I would look at it just in terms of -- if you look at the relative revenue volume that we do in each of the 2 quarters, I'd weight it against that because we're essentially realizing those costs in line with the rate of sale.

Okay. That's great, and -- perfect. And is that the right amount of cost -- incremental cost that we could think about for spring '21 as well?

For spring '22?

I'm sorry, for spring '22. Spring '22, pardon me.

Tough to call right now. We're certainly going to see that pressure out to next year, I mean, all indications, as Tim touched on, absent government intervention here, we would expect that we'll continue to see elevated freight charges through the Chinese New Year. And so by then, we'll effectively receive all of our spring '22 inventory. So the first half of the year would be impacted by what we're currently seeing based on everything that we know today. And obviously, there's a ton of volatility. The rates have skyrocketed in the last 60 days. And if we had this conversation 60 days ago, we wouldn't be having this. We saw a fourfold increase in ocean freight from June 1 through, call it, the middle part of July.

Yes. No, it's pretty pervasive everywhere. Okay. Perfect. And then if we could just step back for a second and maybe if you could detail and peel back the layers on what you're seeing in Europe. It seems like they're a little bit behind us in terms of -- behind the U.S. in terms of vaccination rates. And I'm just curious to see how that region has been pursuing your brands and driving that growth, relative to what you've seen that's been a much faster kind of recovery here in the U.S.? And maybe if there is a time line that we can put around -- a time differential that we can put around Europe versus the U.S.? Are they a quarter behind us in terms of that recovery curve really starting to ramp up and look more like the U.S.? Or is there a further out period before they start to really embrace the recovery the way that we have here?

Our European business is still recovering, and it is behind the U.S. in terms of vaccination uptake. And so we have less visibility on that because it's a country by country, obviously, vaccination mandates. But our inventories in Europe are less than the U.S. So there's less of an opportunity to capture any particular uptrend that we might have. But it's more difficult and more challenging there for us versus the U.S.

Got it. And if I could squeeze one more in. For the back half of this year, would you be able to parse out how we should think about wholesale versus your DTC assumptions within the context of that 20% back-half revenue growth projection?

I don't think we've broken that detail out. But our -- I would just comment. Our fall '21 wholesale order book was quite robust coming off of retailers being exceptionally clean coming out of the fall '20 season. So we'll see outsized growth in the wholesale business. Keep in mind, e-commerce is going to be going up against some fairly significant comps that we delivered last year. We did provide commentary that we anticipate the e-commerce business from an overall penetration perspective. And we were 19% of sales in 2020, that we would see that come down ever so slightly. And then you'll have the recovery pick up of the brick-and-mortar business.

Our next question comes from Jay Sole with UBS.

Tim, I just want to ask about your thoughts about the underlying growth rate in your categories. Because you mentioned spring-summer '22 order book up high teens, low 20s. You mentioned the sell-through in this quarter was up strong double digits versus 2019. Just between the different moving pieces of restocking versus price increases and some of the things that are changing, what do you see the category growing as we get into 2022, just because of the increased consumer trend toward outdoor activities that's been in play now for the last few quarters.

Great. Well, I think the smallest impact is going to be price increases, frankly. The underlying business is incredibly strong. Sell-through rates have been among the best that the company has ever seen. And the brands are really riding an incredible wave of demand being the strength of the brands as well as the strength of the industry in general. And then again, as I mentioned earlier, the smaller brands that would be delivering a portion of products that a store might get are just going to be under incredible pressure. And so I think it's really sort of a great opportunity for the company at a time when the brands are strong and we were investing heavily in demand creation.

Understood. So maybe one more for me. Just in terms of the guidance that you've given for the full year, if we think about the supply chain and all the impacts that it's having on the ability to chase into possible upside to orders or just demand in your direct consumer channel, is the ability of the company to sort of beat the guidance different this year just because of all the complications that have happened through the supply chain? How should we think about that?

Well, we've really given you the best view we have of a highly complicated business which is global in nature and spread across multiple brands. So we've really given you our best shot at what we think the year will turn out.

Our next question comes from Paul Lejuez with Citigroup.

Can you just talk about the second quarter of DTC business? I'm kind of curious about the drivers of the sales improvement versus 2019 in terms of units versus price. And related to that, can you talk about merch margin by channel. Sorry if you did and I missed it, but curious how retail works compared to your retail business in 2019. And same question for wholesale.

Paul, sorry, the sound quality is pretty poor. We didn't catch that. I heard something with regard to D2C revenue and ASPs and gross margin. But maybe we can have you repeat if it's any clearer.

It's Tracy filling in for Paul. I think he was asking what the drivers were in the U.S. DTC channel -- the drivers of the improvement this quarter versus last quarter in terms of price and traffic.

Yes. We saw a significant uptick in our traffic relative to where we had been the last few quarters. We're still quite a ways under where we were from a pre-pandemic standpoint, but there's been a nice flow of traffic. I think consumers are generally with vaccination rates in the U.S., in particular, gotten to levels they are. I mean consumers are showing signs of getting back out physical retail, which is great to see. And then our in-store operating metric, as I touched on earlier, our in-store operating metrics between conversion and just the other metrics, we monitor with the consumer were all quite good.

As it relates to price itself, you can see in our gross margin. Our gross margin was up several points on the quarter. Most of that's due to the fact that we're less promotional. And so to the degree we're less promotional, there's some price benefit we're picking up from that vantage point.

Great. And then the second part of his question, I believe, was merchandise margin performance within channels. So wholesale merchandise margin versus 2019 and then DTC merchandise margin.

I think we had strong margins across all of our channels. And the way we analyze the business, we -- because of this shortfall in the amount of inventory available to retailers, we had strong margins across the business. Yes.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Well, thank you very much for listening in. We're looking forward to great results when we talk to you at the end of Q3. And please stay healthy.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.