Columbia Sportswear Co (COLM) 2021 Q1 法說會逐字稿

Greetings. Welcome to Columbia Sportswear First Quarter 2021 Financial Results. (Operator Instructions) Please note, this conference is being recorded.

At this time, I'll turn the conference over to Andrew Burns. Please go ahead, Andrew.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's first 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 in our Investor Relations website, investor.columbia.com.

With me on the call today are Chairman, President and 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 following 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 first quarter 2021 earnings release.

Following our prepared remarks, we'll host a Q&A period, during which we will limit each caller to 2 questions, so we can get to everyone by the end of the hour.

Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon. I hope everyone is well. I'm pleased to report the pace of fundamental recovery exceeded our expectations in the first quarter, resulting in a return to net sales growth and financial results that were stronger than we anticipated at the time of our last call. Based on first quarter results, favorable early season spring sell-through, visibility provided by our fall order book and an improvement in business fundamentals, we are increasing our full year financial outlook.

Our fortress balance sheet remains strong with cash and short-term investments totaling $875 million with no bank borrowings at quarter end. It's hard to believe how much difference a year makes. Just over one year ago, we were securing additional liquidity, curtailing factory orders, reducing capital outflows and cutting costs to prepare for an unprecedented global health and economic crisis of unknown duration.

As new challenges emerge daily, it was increasingly clear that the tremendous effort and dedication of our global workforce and our disciplined operating approach would be some of the most valuable strengths. Our fortress balance sheet allowed us to sustain our new product innovation pipeline and invest in critical areas of the business, including digital capabilities.

After the initial demand shock at the height of the global lockdowns in 2020, consumer behavior began to change as markets slowly reopened. Our powerful brand portfolio is well positioned to capitalize on many of the trends that emerged, including growing participation in outdoor activities, and more broadly, the casualization trend that accelerated as consumers adapted to their at-home work environment. It's hard to predict the future, but I believe many of these new outdoor enthusiasts will continue to share our passion for outdoor activities long after the pandemic is contained. I also suspect that many consumers are in no rush to return to uncomfortable business attire as offices reopen.

The pandemic also accelerated the shift to online shopping, which increased our confidence that the investments we are making in digital capabilities, such as our e-commerce platform, Experience First, or X1, are critical to driving sustainable and profitable long-term growth. The strong results and growth outlook we reported today are driven by the culmination of these factors.

Looking forward, I believe our dedicated global workforce, fortress balance sheet, ongoing investments in strategic priorities and powerful brand portfolio are contributing to Columbia Sportswear Company emerging from this pandemic in a stronger competitive position.

With that said, we remain mindful that the global fight to contain the spread of the virus is not finished. Regional outbreaks are ongoing and vaccine availability remains limited in many markets. Nearly all aspects of our business have been disrupted by the pandemic, and we are continuously adapting to new operational challenges. There is no guarantee that these pressures will alleviate and unforeseen challenges may arise. I'm encouraged by the strong start to the year, but we know that now is not the time to become complacent.

Looking at first quarter results in more detail, net sales increased 10% year-over-year or 8% on a constant currency basis. Measuring 2021 financial performance versus '19 results, which were not impacted by the pandemic, is a useful measure of our business recovery trend line. Compared to first quarter of 2019, net sales were down only 4%, indicating great progress on returning to pre-pandemic sales levels.

Globally, our DTC business grew 20% year-over-year in the first quarter, our DTC e-commerce business grew 35% and represented 20% of our total net sales mix. Our DTC brick-and-mortar business grew 10% with continued sequential improvement in fundamentals as well as the benefit of lapping prior year temporary store closures and heightened pandemic-related disruptions. Store traffic levels vary by region, but remain below pre-pandemic levels.

Better-than-planned wholesale shipments in Asia-direct and Europe-direct markets, we're able to offset later timing of spring '21 inventory receipts in the U.S., which is experiencing industry-wide supply chain disruptions. Spring '21 deliveries in the U.S. were delayed by approximately 3 weeks on average during the quarter. To date, we have not experienced any material cancellations and/or chargebacks resulting from delays, but this will result in a shorter selling season.

Our operations and distribution center teams did an amazing job mitigating these timing disruptions and adapting to heightened health and safety protocols to achieve unit processing levels that were above pre-pandemic levels while supporting e-commerce growth.

Footwear net sales grew 35% in the quarter, significantly faster than Apparel, Accessories and Equipment, which grew at 4%. I'd note that we continue to anticipate the year-over-year growth rate of Footwear to be relatively comparable to apparel in 2021.

Turning to margins. Gross margins expanded 360 basis points to 51.4% of net sales, primarily driven by decreased reserve provisions related to less inventory -- less excess inventory, lower DTC promotional levels and favorable channel and region sales mix.

SG&A expenses decreased 8%, primarily reflecting a reduction in bad debt expense driven by healthier wholesale customer base, partially offset by higher incentive and personnel expenses. This performance resulted in operating profits of $70.5 million or 11.3% of net sales compared to an operating loss of $2 million in the first quarter of 2020.

Diluted earnings per share improved to $0.84 compared to breakeven diluted earnings per share in the prior year. Compared to first quarter 2019, diluted earnings per share of $1.07, first quarter 2021 diluted earnings per share were down 22%.

I will now review year-over-year growth performance by region. U.S. net sales increased 9% in the first quarter, reflecting low 20s percent growth in our DTC business, partially offset by low single-digit percent decline in the wholesale business. The combination of favorable late season winter weather, U.S. stimulus-driven demand and the ongoing vaccination rollout, all contributed to healthy retail backdrop and growing consumer confidence during the quarter.

In our DTC business, stronger-than-anticipated consumer demand drove low 30% e-commerce growth and improved store performance. We are pleased to see the continued recovery of our DTC brick-and-mortar businesses, but store traffic levels remain depressed, and it will take time to fully recover the pre-pandemic sales volumes.

In our wholesale business, net sales were impacted by shipment delays I referred -- I referenced earlier. In this inventory-constrained environment, we're encouraged to see strong early sell-through velocity and lower promotional activity.

For my review of international markets, I'll reference constant currency year-over-year growth rates, which we believe best reflect the underlying business trends. Latin America Asia Pacific, or LAAP region, first quarter net sales increased 3%. Across Asia, performance varied greatly by market. In China, net sales were up low 60% - 60s percent, primarily driven by the anniversary of heightened pandemic-related disruptions in the prior year and, to a lesser extent, earlier shipment of spring '21 wholesale orders.

I'm pleased to announce we have appointed Pierre Lion as our General Manager in China. Pierre joined our company in December 2020 and has been serving as our interim General Manager since hiring. Pierre has over 20 years of industry experience and has proven to be an exceptional leader. We look forward to Pierre continuing to build a high-performance culture and working to unlock China's full potential. We know we have a powerful brand recognition in China and Pierre's immediate areas of focus include elevating our product, marketing and merchandising capabilities in this important region.

Korea net sales were up high 20s percent, primarily driven by the anniversary of heightened pandemic-related disruption in the prior year. We are encouraged by renewed interest in outdoor activities in this region as young consumers have embraced hiking and the outdoors as a safe, socially distanced activity.

In Japan, net sales were down low double-digit percentage year-over-year as the country restricted nonessential activities for much of the quarter as they work to contain the spread of the virus. Given the slow rate of vaccinations in Japan and ongoing state of emergency, we anticipate the recovery of our Japanese business to be slower than other markets.

LAAP distributor markets were down low 60s percent in the first quarter as many regions continue to experience significant economic and health impacts from the pandemic. In addition, many distributors continue to work through carryover inventory from the spring '20 season that was heavily impacted by regional lockdowns.

Europe, Middle East and Africa, or EMEA region, first quarter net sales increased 18%. Europe direct net sales were up high single-digit-percent with wholesale and DTC e-commerce growth more than offsetting brick-and-mortar declines due to store closures and restrictions during the quarter. EMEA distributor net sales doubled compared to the first quarter of 2020, primarily reflecting the timing of spring 2021 shipments that shifted out fourth quarter 2020 and into first quarter 2021.

Canada net sales decreased 3% in the first quarter, primarily reflecting later timing of spring 2021 inventory receipts and wholesale shipments as well as the impact of government-mandated temporary store closures and restrictions.

Looking at performance by brand. Columbia brand net sales increased 12% in the first quarter. Favorable late season winter weather helped drive DTC sales, allowing our wholesale partners to sell-through fall 2020 product and exit the season with clean inventory positions. The combination of these factors fueled the strong finish in the fall '21 booking season, which contributed to the updated full year sales outlook we provided today. While later timing of shipments impacted spring '21 sell-in, we have been encouraged by early season sell-through rates, which benefited from a healthy retail environment, aided by U.S. stimulus-driven demand as well as lean inventory positions at retail. In this strong demand environment, I believe the brand is well positioned heading into the summer sales months.

Columbia's innovations received several media call-outs and awards during the quarter. Women's Health highlighted the Facet 15 shoe as the most weather proof trail sneaker, calling out its outer shell as capable of standing up to hard-core hikes over any terrain. Runner's World included the Columbia Escape Ascent in their 2021 Shoe Awards issue. This new addition to Columbia's Footwear line features exceptional fit and support, and its Adapt Trax outsole provides enhanced traction in wet or dry conditions. The magazine notes that Escape Ascent's advanced seamless mesh construction shaves weight without sacrificing stability. Men's Health featured the Men's PFG Bahama Vent as the ideal water shoe with its water resistant treatment, vent ports in the midsole and a wet grip outsole. It's great to see PFG Footwear gaining recognition.

Looking at our season-to-date spring '21 sell-through, our PFG collection of apparel, footwear, accessories and equipment is, once again, a top-performing category.

Our PFG business surpassed $200 million in 2019 and is on track to have its best year ever in 2021. PFG's heritage is based on an end-use focus of providing solutions to our consumers while they're on the water in the sun. Many of our PFG products feature cooling and protective attributes, including UPF protection, unique venting and proprietary technologies like Omni-Freeze ZERO Ice and Omni-Shade Sun Deflector to enhance their performance.

This authenticity as a differentiator -- this differentiated fishing and water performance brand has allowed us to expand the PFG product line into lifestyle categories, which reach a broad consumer base of multiple generations. Over the years, we've expanded the offering from being only apparel at its inception to the year-round multi-category head-to-toe collection we have today.

While sportswear remains PFG's top category, the rapid growth of footwear and accessories speaks to PFG's long-term potential. The phenomenal growth of PFG ball caps highlights consumers' willingness to proudly show their affinity for PFG and is a direct expression of the strength of the brand.

Unlocking Columbia's Global Footwear potential remains an important area of strategic focus for the brand. During the first quarter, we launched our latest footwear collection, Trailstorm. This multi-shoe -- multi-sports shoe feels equally at home in the forest or the city and combines our latest technologies to deliver uncompromised performance on the trail with the style and comfort of a sneaker. In addition to expanding our assortment of modern athletic inspired styles like the Trailstorm and the Facet collection, we continue to refresh and improve traditional hiking styles like the Newton Ridge, which remains one of our best sellers.

On the marketing front, we continue to prioritize digital marketing spend to further attract active customers and propel online sales growth. During the first quarter, our marketing activities centered around our Made for Outside campaign. The global campaign is meant to inspire and encourage our consumers to get outside and highlights the Columbia brand's strength, providing unparalleled apparel and footwear innovation to help them thrive in any conditions they may face.

We also celebrated International Women's Day during the quarter with a week of storytelling, highlighting women who pushed the boundaries. We celebrated women who inspire us from the waters of the Atlantic to the peaks of Everest, whether it's the Ebony Anglers, a group of 5 black women balancing their professional lives with competitive fishing, family and business or the first Saudi women to summit Mount Everest, their stories inspire us. Just like our fierce founder, Gert Boyle, a tough, no-nonsense leader with a lot of heart.

As we look to fall '21, our marketing efforts will focus on the largest innovation launch in our company's history, Omni-Heat Infinity. This new highly differentiated addition to the Omni-Heat family is the next evolution of thermal reflective warmth. It features a new expanded pattern of gold dots that reflect more of your body heat to deliver instant warmth without compromising breathability. Retailers around the world have embraced our latest technology, and fall '21 orders for Omni-Heat Infinity have been exceptional. We will be supporting this launch with a global campaign emphasizing digital and social media platforms as well as TV and print advertisements. I look forward to sharing more details in the coming quarters.

Turning to our emerging brand portfolio. SOREL net sales increased 20% in the quarter led by DTC e-commerce growth. Strong late season sales of winter products in North America and Europe fueled growth. In addition to consumers embracing the latest spring styles such as the Kinetic Impact sneakers and sports sandals. Sneakers are once again the fastest-growing category with sales of sneakers more than doubling year-on-year on sorel.com.

In wholesale, SOREL's early spring '21 sell-through velocity is well ahead of last year, and lean inventories are translating into strong whole price selling. It wasn't that long that SOREL's first quarter was anchored in late season winter product sales. With SOREL's successful evolution to a year-round brand, first quarter 2021 net sales are approaching $50 million, driven by strength in winter products as well as a powerful consumer-driven rotation to non-winter styles and categories.

prAna net sales declined 14% in the quarter, primarily reflecting lower spring '21 orders and the later timing of inventory receipts, which impacted wholesale shipments and e-commerce sales. Recent sell-through trends have been encouraging with lower-than-normal promotional activity. In the first quarter, the men's category was a bright spot. This was led by the popular Zion product line of pants and shorts, featuring stretch Zion performance fabric and the recently introduced ReZion fabric, which features recycled nylon and PFC-free durable water repellency.

The swim category was another bright spot in the quarter with consumers responding to this season's elevated styles and colors. 100% of prAna swim wear line has at least one sustainable attribute, highlighting prAna's ongoing commitment to Clothing for Positive Change.

Mountain Hardwear net sales decreased 4% in the quarter, primarily reflecting lower spring '21 orders, later timing of inventory receipts and the conversion of its Europe business model from direct to distributor. This was partially offset by strong DTC e-commerce growth, reflecting growing consumer interest in the brand. We remain excited about Mountain Hardwear's anticipated momentum in fall '21. The order book reflects robust wholesale growth.

Consumers will be able to find Mountain Hardwear products in hundreds of new points of distribution. The brand is hyper-focused on elevating in-store merchandising and signage alongside its digital and social media brand storytelling to maximize sales across all channels.

On the product front, Mountain Hardwear has a series of new innovations and product introductions that are being well received in the marketplace. This spring, the brand introduced a new lightweight collection of tents and sleeping bags. In the fall, the brand is launching a new ski assortment as well as new next-to-skin layer called Air Mesh that delivers the perfect balance of warmth and breathability.

Before reviewing our full year financial outlook, I'd like to discuss key areas of strategic focus in 2021, including creating highly differentiated product, investing in demand creation, enhancing digital and supply chain capabilities and talent.

First, we're committed to creating products that inspire active consumers. We know that products are the foundation of our success. Across our brand portfolio, we have an exciting pipeline of new products and technologies and are actively planning the largest innovation launch in our company history, Omni-Heat Infinity, as I referenced earlier.

We are also committed to investing in demand creation to leverage our compelling brand portfolio and connect with consumers. Given the confidence in our products and brand portfolio, we're increasing our demand creation investments this year. We anticipate demand creation increasing as a percentage of sales to 6% in 2021 compared to 5.7% in 2020 and 5.5% in 2019. In 2021, continuing to enhance digital and supply chain capabilities are our key enablers to support growth.

On the digital front, we're building on the recent investments of our X1 e-commerce platform with a focus on leveraging consumer data and deploying new capabilities to better segment and target consumer marketing efforts. We are also enhancing our supply chain capabilities to improve inventory management processes and to adapt our supply chain to shifts in our business, including increased penetration of DTC sales through our e-commerce sites and brick-and-mortar stores. These supply chain investments include improvements to our demand planning and retail store allocation systems and processes. The investments are intended to enable us to better fulfill wholesale and consumer demand as well as optimize fulfillment and productivity of our DTC channels in North America.

With our improved financial outlook, we're planning to invest a portion of this upside back into the business to fuel long-term profitable growth. Our updated financial outlook includes incremental investments in demand creation and investments to enhance digital and supply chain capabilities.

Lastly, on the talent front, I'd like to highlight the recent hiring of Craig Zanon to serve as Senior Vice President of Emerging Brands. Craig has spent over 20 years in the industry and brings a wealth of experience that will help us accelerate the growth trajectory of SOREL, Mountain Hardwear and prAna. I look forward to seeing what he can accomplish as we build on the brand-led, consumer-focused strategy that we've been pursuing for the last several years.

Craig will be filling the vacancy created by Doug Morse's retirement this summer. Doug has been a crucial part of our senior leadership team and has helped guide our growth strategy. His career at Columbia spanned well over 2 decades and his business acumen and commitment to excellence will be missed.

I'll now review 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.

Based on first quarter results, favorable early season sell-through, visibility provided by our fall order book and an improvement in business fundamentals, we're increasing our full year financial outlook. Our updated 2021 outlook contemplates 21.5% to 23% year-over-year net sales growth with growth across all 4 brands. This compares to our prior outlook of 18% to 20% year-over-year growth.

From a category perspective, we anticipate the year-over-year growth rate of Footwear to be relatively comparable to Apparel in 2021. Demand for our Footwear continues to improve and outpace production capacity. 2021 Footwear growth would be higher absent these capacity constraints, and we're working to capture as much of the anticipated demand as we can across both the SOREL and Columbia Footwear businesses.

Gross margin is expected to expand approximately 110 to 130 basis points, and we expect SG&A to grow slower than net sales. Combined, we expect operating margin to be in the range of 11.4% to 12% compared to operating margin of 5.5% in 2020. This results in a diluted earnings per share outlook of $4.05 to $4.30 compared to our prior range of $3.75 to $4.05. We are forecasting approximately $190 million in free cash flow in 2021 and are acutely focused on managing inventory levels and improving turns.

Looking at the first half of the year, we now believe mid-to-high 20% year-over-year net sales growth is achievable. Please note, the second quarter is typically our lowest volume of sales quarter, and small changes in the timing of product shipments and expenses can have a material impact on reported results. Historically, second quarter profitability has been challenging given our fixed cost structure, resulting in the company reporting a second quarter earnings loss in most years.

Compared to 2019 financial performance, our 2021 financial outlook contemplates us returning to or exceeding record 2019 net sales of $3.04 billion. We are focused on returning to and, ultimately, exceeding pre-pandemic sales and profitability levels.

Our 2021 operating margin outlook of 11.4% to 12% remains below 2019 operating margin of 13%.

I'd note that this margin compression is primarily due to 3 factors: first, we are purposefully investing in the business to drive long-term profitable growth. One area of strategic focus is investing in demand creation. As a percent of net sales, demand creation will be 50 basis points higher than it was in 2019. Secondly, we are incurring additional costs associated with operating in a pandemic, including higher supply chain and retail expenses. Lastly, our DTC brick-and-mortar store traffic remains below pre-pandemic levels, which impacts sales performance and profitability in this channel. We remain committed to driving operating margin expansion over time.

In summary, I'm confident in our strategy and encouraged by the fundamental recovery underway. We're committed to driving sustainable and profitable long-term growth and investing in our strategic priorities, drive global brand awareness and 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 for the remainder of the hour. Operator, could you help us with that?

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

I guess I'll stick to the 2-question rule. And the first one, can you just talk a little bit more about, like, the fall order book, is it totally complete? I think you were well along the last time we spoke. And if you could just give us sort of an update. The second part of this would be, when you are planning your inventories for the back half of the year -- second quarter but also just the back half of the year, how are you planning your bricks-and-mortar DTC business on the inventory side?

Yes. Well, thanks, Bob. So our order book is strong, and it's basically a component of early orders from our customers. As you know, the big -- largest single component of that order book is fall outerwear and fall footwear, both of which have incredibly long lead times. So we're basically done with the book, although throughout the whole season, we'll get orders and cancellations. But for all intents and purposes, we're a very high percentage, over 90%, probably in the 95% range book. That's what gives us the confidence to talk about the balance of the year in such glowing terms.

And then as it relates to the inventories for the back half of the year on DTC, we have the opportunity to load the stores with some merchandise, which is going to be relatively new for that channel, purchased strictly specifically for that channel as well as some inventory that's going to be liquidated from prior periods at a high-margin in the stores. So we're basically very comfortable with how we're looking at the balance of the year, and we're excited about it. The channel is incredibly clean, and there's great things happening on it.

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

Tim, I want to start talking on the D2C (sic) [DTC] brick-and-mortar store traffic. In the quarter, it seems it exceeded your expectations, seemingly came back across the quarter. Commentary for the full year suggests you still expect it subdued. Maybe riffing off Bob's question here, what's assumed in the guidance for brick-and-mortar productivity? Can you characterize how you're assuming that falls relative to maybe where it was in 2019?

Yes, certainly. Well, I think we were all, frankly, surprised at the level of comfort that consumers have going into a store. We had assumed that there would be some reluctance in there. The traffic patterns have not yet returned to the pre-pandemic levels, but the conversion rates have been really encouraging. So people are coming into the stores. You have to remember some of our largest stores were in markets where we had very heavy consumers from outside the U.S., whether that be South American tourists in Florida or Chinese tourists, either in Japan or in Canada. So those are -- just continue to be depressed. But in general, they're stronger performance than what we thought we were going to see.

And Jim, I might add we've seen steady improvement in our brick-and-mortar traffic trends and KPIs over the course of the last few quarters, including here in the first quarter. I'd note that there's a more significant pickup in traffic levels and sales levels in March, I think, on the back end part to some of the economic stimulus, and we've seen that carry into the month of April.

And then specifically, as it relates to how we're thinking about the balance of the year, it'd be continued improvement in that traffic and revenue. But we don't -- we're still contemplating that getting to full recovery is probably extended out to 2022. So we're -- from a productivity standpoint, we contemplate the business still being down a bit exiting the year. And of course, to Tim's point, that's partially dependent upon traffic and tourism resuming.

Makes sense. And then one area of the commentary I'm still scratching my head on some. Tim, you mentioned footwear that grows outpacing production capacity. What's the challenge to scaling production capacity? Is it just so competitive out there as volumes come back that you're having difficulty with your partners getting additional capacity?

Yes. I mean the general footwear business, I think, has been fairly strong, especially in the casual, athletic and outdoor categories. And what we're finding is that the importance of scale in footwear continues to be a challenge for us. Our business is growing incredibly well, but we're still not able to get the kind of scale on a unit basis that we need -- actually, I should say, on a style basis that we need. We have a number of styles, which are incredibly popular with large volumes, but we also have a growing list of footwear styles that are just emerging where we're really small. And so a large buyer in a factory can take precedents over our smaller runs.

The next question is from the line of Laurent Vasilescu with Exane.

Jim, there's -- I think it's Slide 7 and 10 of the CFO commentary, you talked about later timing of spring inventory receipts. Could you potentially parse that out? And then I think in the prepared remarks, you guys called out that second quarter profitability is generally in a loss. But if I look back in my model, 2Q '18 and 2Q '19 delivered positive EPS. Just try to parse out that a little bit more on that commentary. And then I have a follow-up question on footwear.

Yes, you bet. As it relates to the spring receipts, we've seen, with the challenges from a supply chain, predominantly due to port congestions, vessels and containers, by and large, our inventories coming into the U.S. market about 3 weeks later than anticipated. That was factored into our outlook. And so we'll see some of that inventory shift into the second quarter, albeit most of this effect was early in January, February. By the time we exited the quarter, we were pretty well caught up. And certainly by the early part of Q2, we'll be more fully caught up on spring. What I would note, we do anticipate seeing light effects just as it relates to the supply chain disruption and likely late receipts for our fall product. That's also incorporated into our outlook. It's a bit difficult, Laurent, to parse what degree of shift that is in the inventory moving between quarters. I won't get down into the granularity of that.

As it relates specifically to Q2 and the guidance that we've updated, we provided top line guidance, haven't gotten down into earnings. I don't want to parse that too much. But to your point, historically speaking, Q2 is a very small quarter for us, and it could be very volatile from a profitability standpoint. For many years, we've incurred operating losses in the second quarter. Directionally, I would anticipate an operating loss in the second quarter. Getting down into any more specifics than that would be difficult at this stage.

Okay. Helpful. And then as a follow-up question on Footwear. To Jim's question, I think you guys are talking about manufacturing capacity constraints. But I'm just curious to see why did Footwear grow 35% in the first quarter? Just trying to understand that, like when does the capacity constraint get resolved? And then where -- Tim, where do you think -- again, where do you think Footwear can go as a percentage of your overall revenues over time?

Certainly. Well, remember that many of these footwear factories were shut down during the pandemic raging in China. So the capacity that they have is being rebuilt and so we -- even though we had significant sales growth in the first quarter, they were -- it was still constrained by availability. We could have grown faster, and the business would be bigger with more capacity. So as the footwear factories become more online, there's likely to be increasing opportunity for us.

And when you're an emerging footwear business, which despite the fact that we're -- a significant component of our volume as a company is in Footwear, we're still not of the scale we need to be. This is where we're going to get very, very focused on Footwear revenues because we believe that footwear can be the largest single product category for the company. It's about building garment -- by building items in the white space where we can be differentiated from the other players there. And that will include, I'm sure, a big component of PFG footwear.

And Laurent, keep in mind from a supply standpoint in terms of being able to support that level of revenue growth in the first quarter, there's a fair amount of inventory that we were carrying forward from the spring season last year just in light of the wholesale order cancellations. So that's helping supply the demand that Tim is speaking of.

Our next question is from the line of Jonathan Komp with Baird.

First question, just the comments around the spring sell-throughs, I think they were U.S.-focused. But maybe sticking with the U.S., can you comment where you're seeing relative strength within the channel? And then just given the positive comments on the sell-throughs, do you see any inventory risk from the 3-week delay and shorter selling season? Or do you think that's mitigated by the strong sell-throughs?

Certainly. Well, I can tell you that the sporting goods and outdoor store channel has been, by far, the best channel for us. And that's where we see the biggest sales growth. And it's been incredible, frankly, the revenues and volumes that are going through there with relatively lower inventories. And then as it relates to the delivery impact, by far, the largest sales periods for us, meaning the highest revenue periods for us are around Memorial Day and Father's Day. And those are obviously yet to come, and we expect that almost all of our spring merchandise will have been shipped by that time and in the stores and available for sale in those really important sales periods.

Okay. Great. That's helpful. And then maybe, Jim, a broader question on the operating margin and really the path back to 13% and then growing from there. When you think about some of the factors you outlined this year, store traffic being lower, that should recover in '22. Pandemic-related expenses should theoretically go away. And then you have channel mix going forward. How do you think about that path to 13% beyond this? And the likelihood that you get there after 2021 here?

Well, our aspiration, certainly, our expectation would be that the 13% operating margin that we achieved in 2019 is not the ceiling. But there's opportunity for us to expand as we look forward. And of course, we're not providing outlook beyond 2021 today. But obviously, we've got to get through some of the current issues that we have as it relates to incremental costs associated with the pandemic. I think one of the more significant hurdles we got to work through as well is the recovery of the brick-and-mortar business because certainly, having the fixed costs associated with operating a store fleet and the lower revenue, that will be a key to unlocking and continuing that margin expansion over time as well.

Our next question is coming from the line of Alex Perry with Bank of America.

Congrats on a great quarter. Just first, I wanted to ask, are there opportunities for channel fill and market share gains in the U.S. given some of your large competitors have decided to consolidate the wholesale channel and exit a pretty significant amount of accounts?

Yes. I think there's definitely opportunities, and we've been having lengthy conversations with some of those retailers who've had certain brands removed from their shelves with the opportunity to purchase some. We're not squarely in the athletic channel. But certainly, casual footwear, outdoor footwear has been a big growth area and one that -- where we can compete as an authentic supplier. And so yes, there is significant opportunity for us to fill those shelves.

That's really helpful. And then just a second question. I think LAAP revenue was down 16% versus 2019 despite earlier shipping of China wholesale. Can you maybe help us parse out the region? And then I think you've said in the past that China is Columbia's most significant geographic opportunity. Just maybe remind us on sort of how you're positioning yourself for the longer-term opportunity in China?

Certainly. Well, Japan is by far the most challenged geography for us with its shutdowns, et cetera, freezes, and an area where we have significant business. Korea has been a growing market for us as the market -- as the consumers there are embracing the outdoor business again. And many of the competitors that were -- that flooded into the market have now left, leaving us in a good position from a competitive standpoint.

But clearly, as we've said many times, China is the big opportunity geographically. And we have a very well-known brand there. Columbia is known and has been in the market for 15 years. But we've just been underperforming there for a number of reasons. And that's why we made the change in our in our leadership there with Pierre Lion moving to head the business. We think there's a huge opportunity for us to be much better and operate a better business and become stronger and grow faster. It's one of the company's most profitable geographies. So there's really no reason why we can't be successful. We just have to focus on it and really start to perform.

And Alex, looking at the rest of the LAAP region and from an outlook perspective, looking at full year 2021. Tim touched on the prepared remarks, there's a couple of areas of that business that are a little more challenged, japan being one just given the low rate of vaccination and just ongoing state of emergency and the effects of the pandemic. And I would say, likewise, as it relates to our distributors in the LAAP market that have had an outsized impact, particularly in Central and South America on their businesses.

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

Congrats on the guidance increase and the detailed guidance, really, for the rest of the year. Maybe just one short-term and one long-term question. Short term, we can back into your top line growth in the back half of the year that you're implying. It is nice growth off the back half of 2019. You have a history of being fairly conservative with your guidance, Tim and Jim. So I'm just curious where you think you've left yourselves room this year in terms of guidance? And can you elaborate on the expectations for wholesale and retail for the remainder of the year?

Yes. Well, the approach that we've taken is consistent with our track record. We're seeking to provide based on the best estimate we can, based on the current trends that we see in the business, the fall order book that we have in hand, the trends that we're seeing in our direct-to-consumer business. That's essentially what's reflected in the outlook for the balance of the year. And of course, as much as we're seeing nice trends from a consumer demand perspective currently, I think, keep in mind, the environment that we continue to operate in here as well. There's a lot of risk associated with pandemic. We've got store closures off and on in various of our international markets that have been impactful. So there's still a lot of year left here for us to be able to manage.

Yes, I'd also point out that the areas that we cannot control, obviously, the virus, the vaccine uptake and really, most importantly, the weather, in terms of how we look at the balance of the year. So we're confident in the numbers we've given you and [maybe] that's our best view.

Sure. Understood. Maybe a longer-term question. You talked about the spend to enhance digital and supply chain capabilities. I think there should be some long-term benefits to gross margin in there, both from the mix to digital, but also on the planning and allocation side and supply chain and sourcing side. You're going to be at your all-time peak gross margin this year. I'm curious as to where you think long-term the gross margin can get to and where you see low-hanging fruit to produce more gross margin expansion?

Well, I can tell you where I think we're underperforming and where I think that will ultimately yield margin is in the operation of our retail stores. Frankly, we consider ourselves to be a wholesale supplier, and we have operated retail stores relatively recently in the kind of scale that we have. And obviously, the digital business is also relatively new for the company. And so we have systems in place that can be improved and are in the process of being improved in terms of inventory yield, inventory carrying costs and in stock positions, et cetera. That's where we think that the business improvements will come. What the ultimate yield is in terms of gross margin improvement, we haven't really spent time on. But we know that there are multiple areas where we can improve the business operations, which will ultimately provide us with better gross profit margin.

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

Europe, that was better than what I was expecting. And in the -- in your slide deck, you mentioned that Europe-direct was up high single-digits constant currency, which I guess, was in line with the overall business. And you call out wholesale as being strong. Can you elaborate on that? I just would have thought with COVID and the slow rollout of vaccines in Europe, that, that business would have been weaker. And I'm kind of curious what you're seeing, if that's market share gain or something else?

Well, there's some market share gain there as well, but we have -- in Europe, I don't want to say as opposed to the U.S., but there are multiple digital retailers that we've been very successful with. So I would say that the biggest impact there has been the fact that these multiple digital retailers have been very successful with the brand. And I would say that's driving the bulk of our improvements there.

Yes. A couple of other comments I'd make, too, Mitch. We had a nice cold stretch in the month of January and February. And so that aided some of the reorder business of cold weather product during that stretch. So I'd keep that in mind. And then as it relates to the spring season, I think a bit better of an order conversion or ability to ship more timely relative to the experience we've had in the U.S. So those 2 factors combined with what Tim has described.

Got it. And then second question, just on margins. Looking at your gross margin bridge, you call out as a headwind channel profitability. And you mentioned a higher proportion of wholesale closeout. That surprises me, too. I would have thought just with really clean channel inventory, that wouldn't have been the case. Could you maybe just explain that? And how do you think channel profitability in terms of closeouts and promotions, things like that, how does that go moving forward?

Yes. Mitch, sorry about that. I think maybe there's a little bit of confusion, just the interpretation there. From an overarching standpoint, channel profitability was in our favor during the quarter. And a couple of different things are going on there. One, as clean as the inventory channel is, promotional levels have been far lower than they have been historically or in comparison to last year. So D2C (sic) [DTC] margins were much better. And then when we look at the overall mix from a channel regional perspective and knowing that there's a bit more of a concentration on the D2C (sic) DTC side, both between e-com and brick-and-mortar relative to wholesale, that was in our favor as well.

And there's a partial offset to each of those items as it relates specifically to a higher proportion of wholesale product sales as we were continuing to clean up some of the excess inventory. And as Tim noted, our excess inventory exiting the quarter was in pretty healthy shape and a pretty significant reduction year-on-year.

Our next question is from the line of Camilo Lyon with BTIG.

I think just a quick couple of questions. Tim, could you just help us understand the mix between unit and price in the order book? Is this -- and specifically referencing the composition of -- or the benefit of the Omni-Heat Infinity product and if you're generally taking price on your products heading into the fall season?

Yes. I think I have -- I want to make sure I understood your question. I think you were talking about the average selling price in the order book...

Omni-Heat Infinity.

Yes. And with the invention of Omni-Heat Infinity and the significant component of that category of merchandise in the fall order book, which has higher margins for us and higher margins for our retailers, it's really -- the opportunity for us to improve our average selling price at both retail and our own businesses. So we would expect that the unit -- units will be equal with gross margin and revenue will be higher.

Got it. And then I'm curious, you talked about investing in data analytics and understanding more about those consumers of yours that are coming to you from direct channels. Are you seeing a new consumer come to the Columbia brand through your direct channels? And if so, what are the characteristics of that? Is it a younger consumer? I'm curious to see if your demographics are at all changing with this new -- with this more accelerated digital strategy.

Yes. We -- I would say that we're not -- under the category of areas where we can improve and continue -- we will continue to improve its data analytics to help us to make better decisions on the company's products. We know that the PFG product has the youngest consumer in our entire portfolio. So that's something that we need to understand more and how to sell more to that particular group of individuals. But the consumers coming to the brand are a function of the demand creation that we've invested in, and we believe we're moving in the right direction to get the right age consumer into the brand.

And Camilo, some of what was referred to in the prepared remarks, there are some investments we're making in how we capitalize on that consumer data to more segment and target our marketing communications, whether that be e-mail or certain of the mid-funnel investments in making sure that we've got more targeted messaging to the consumer.

Great. And then just one final housekeeping question for me. Can you quantify the benefit of the bad debt reversals to gross margin and SG&A in the quarter?

Yes. On a year-on-year basis, we booked a pretty significant provision, as you recall, in the first quarter last year. That reserve provision was about $21 million. And if you look at it this year, given just the health of the retailer, which has improved quite significantly relative to the same time last year, we unwound a portion of those reserves to the tune of around $8 million. So on a year-on-year basis, about a $29 million change between Q1 of last year and Q1 of this year.

The next question is from the line of Paul Lejuez with Citi.

I think you mentioned you're growing your points of distribution for some of the smaller brands. Wondering if you could quantify for us? Also curious what's happening in terms of the points of distribution with the Columbia brand? And then just also curious, the mix of business between men's and women's, how has that changed over this past year? How do you think that looks going forward?

Certainly. Well, I think it's safe to say that the emerging brands of prAna, Mountain Hardwear and SOREL have the narrowest distribution certainly geographically of our portfolio. So the discussion around increasing distribution is twofold, obviously, geographic expansion. But in the case of Mountain Hardwear, specifically, their channel of distribution, which is primarily high-quality sporting goods stores, high-quality outdoor stores, has improved. And that's where we're going to be seeing the bulk of the growth for Mountain Hardwear.

The other brands, SOREL, additional distribution in Europe. And with prAna, additional distribution, really, across the South and Southwest. That will be areas where we're going to be focusing on.

As it relates to the Columbia distribution, we're currently everywhere we want to be in terms of selling tickets to wholesale customers. We're just -- we just need to expand each of those retailer's purchases from the company. And we'll do that by building more gross margin for the retailer and, as we discussed on the Omni-Heat Infinity strategy as well as better and more specific footwear to fill some of the voids that we talked about in terms of other brands vacating markets. So that's where we'd expect some small changes in the Columbia brand, mostly around just filling customers', retailers' shelves better.

Got it. And men versus women?

Men versus women, I think it's about 50-50. Now that would be across all the brands. Of course, the SOREL business is probably our most heavily women's-oriented, it's about 70% to 75% women's.

And have you seen a big change in that percentage this past year?

Not in the past year -- well, no, not in the past year. I would say the percentages haven't changed. Obviously, the SOREL business is much larger, but I would say the percentages are about the same.

The next question is from the line of Jay Sole with UBS.

My question is just on the impact from supply chain constraints on gross margin, whether it's shipping or freight, are you seeing an impact there? And can you quantify what that impact is?

Yes. We have, to a degree, here in the first quarter and predominantly related to ocean freight and some of the peak season surcharges that ocean carriers are passing along to us. And so our outlook would contemplate a continuation of that effectively through our fall '21 season. So we're anticipating incurring additional ocean freight charges here in the second quarter. And we really get underway with a lot of our fall production and deliveries here. In the month of May, June, we're starting to see inventory receipts. So we do anticipate continuing to incur those costs. That's all embedded in our outlook. So to get down into any more granularity than that, I really can't here today.

Okay. And then one more. Just on the DTC business being up 20% in the quarter. I think can you help us understand what maybe the impact of stimulus was on March, which maybe possibly drove some of that DTC growth versus what you've seen in April to give you that confidence that really -- the momentum you've seen in the business is about people returning to outdoor activities and the brand getting momentum with consumers. If you can give us a sense of what you grew in March versus what you've grown in April, that would be helpful.

Yes. I think there's no question that we saw sequential improvement in the business. We definitely saw a bump from the stimulus. But frankly, we believe the bulk of the growth is really a function of people recognizing that the outdoors is an area where they can be relatively safe with their families and an area where they can enjoy themselves. And we believe, frankly, it's a long-term change in terms of how people are spending time and enjoying themselves, so...

Yes. The step-up function that we saw in the D2C (sic) [DTC] business from February to March when stimulus checks were issued, we saw that both across our direct-to-consumer business -- frankly, we could see that also in the case of our rate of wholesale sell-through. And as we've continued to monitor sell-through and D2C (sic) DTC performance here in the month of April, we really have seen those trends dissipate. It's been pretty healthy over the course of the last several weeks here.

At this time, we've reached the end of our question-and-answer session. Now I'll turn the floor back to management for closing remarks.

Well, thank you all for listening in. We're very excited about the opportunities in all of our brands and look forward to giving you more information at our next quarterly conference call.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.