Columbia Sportswear Co (COLM) 2020 Q3 法說會逐字稿

Greetings welcome to Columbia Sportswear's Third Quarter 2020 Financial Results. (Operator Instructions) Please note, this conference is being recorded.

At this time, I'll turn the conference over to Andrew Burns, Director of Investor Relations. Mr. Burns, you may begin.

Good afternoon and thank you for joining us to discuss Columbia Sportswear Company's third quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and updates regarding COVID-19 impacts and the company's response. The CFO commentary is also available on 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 Operating Officer, Tom Cusick; Senior Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrative Officer, Peter Bragdon.

This conference call will contain forward-looking statements regarding Columbia's 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 take -- 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 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 third quarter 2020 earnings release.

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

Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon. I hope everyone is well and your families are all safe and healthy. As we continue to work through this unprecedented year, I'm pleased to report third quarter results exceeded our internal forecast. While results were down substantially in comparison to last year, sales and profitability trends sequentially improved compared to the second quarter, and we expect continued improvement in the fourth quarter and into 2021.

The tremendous efforts of our global team of dedicated employees as well as our cost containment and capital preservation actions have preserved our financial strength and positioned us well to recover from the pandemic and execute against our strategic plan. We exited the quarter with $315 million in cash and short-term investments, no bank borrowings and nearly $1 billion in total liquidity.

Before reviewing our results and outlook, I'd like to discuss the senior leadership changes we announced today in a standalone press release and Form 8-K filing. After 18 years with the company, Tom Cusick has announced his intention to retire next year, following a transition period. Tom has been a true source of leadership and instrumental to our success over his tenure. He will be sorely missed. We are thankful for the time and energy he has devoted to elevating Columbia Sportswear to what it is today.

As part of this transition, Lisa Kulok will become Executive Vice President, Global Supply Chain; and Jim Swanson will become Executive Vice President, Chief Financial Officer, both reporting directly to me.

We also made changes to capitalize on Columbia's omnichannel growth potential by aligning our organizational structure globally to accelerate our business transformation with a focus on e-commerce and digital. As part of these changes, Franco Fogliato will lead the company in focusing on the omnichannel experience by transitioning to Executive Vice President, Global Omnichannel. In this role, he will oversee all Columbia brand sales in direct markets globally.

I encourage you to review these important changes to our senior management team outlined in the press release, which you can find on our Investor Relations website, investor.columbia.com.

Third quarter net sales declined 23% and diluted earnings per shares declined 46% year-over-year, primarily reflecting the ongoing negative effects of the COVID-19 pandemic. The third quarter is typically a heavy wholesale selling quarter for our fall product line. Our wholesale business decreased 28% year-over-year in the quarter, driven by earlier actions to rationalize the wholesale order book and curtail purchases of full 2020 inventory.

As expected, net sales were also impacted by timing. Approximately $45 million of fall 2020 shipments shifted into the fourth quarter due to previously communicated production and logistics disruptions related to the pandemic that is resulting in later inventory receipts.

Excluding this timing shift, total consolidated third quarter net sales would have decreased 18%. Direct-to-consumer net sales declined 10% in the third quarter. E-commerce was once again the bright spot, growing 55%, while brick-and-mortar store performance remained under pressure.

In accordance with the plans we described earlier in the year, we successfully completed the deployment of our new e-commerce platform, X1, during the third quarter. Following the implementation across 10 countries in Europe-direct and for the prAna brand last year, we went live on the platform in North America for the Columbia, SOREL and Mountain Hardwear brands during the third quarter.

The newly refreshed sites have been aesthetically enhanced, performed exceptionally well and offered consumers improved search, navigation and checkout capabilities as well as new mobile payment tenders. We're excited to have this enhanced mobile experience deployed and ready for the holiday season.

While much uncertainty remains, we're confident in our strategy. As fall 2020 gets underway, I'm encouraged by early sell-through and reorder trends. We believe inventory in the channel is lean compared to prior seasons, and we have the inventory to chase in-season demand during our peak season.

I'd now like to provide an update on the impacts and our response to the ongoing pandemic. During the pandemic, our objective remains to carefully navigate this environment with our historically disciplined approach and emerge in a stronger competitive position. The vast majority of our global DTC stores remained open throughout the third quarter. Overall brick-and-mortar store traffic and sales trends remained well below prior year levels. Stores in destination locations and tourist-dependent markets remains some of the most severely impacted stores. We anticipate traffic in these markets to remain depressed until tourism resumes.

We continue to evaluate our own store fleet and have made the decision to permanently close a small number of locations. Year-to-date, we've permanently closed 8 stores in the U.S. and 1 in Europe. We continue to evaluate portfolio and anticipate closing additional underperforming stores. To enhance store profitability, we're focused on improving store labor efficiency, and lease negotiations are ongoing.

As I referenced earlier in my remarks, our DTC e-commerce business grew 55% in the quarter. New customers purchasing product on columbia.com for the first time grew 65% year-over-year, which demonstrates the strength of the brand and the success of our marketing tactics.

As a percent of the mix, our DTC e-commerce sales grew to 12% of total net sales in the quarter, a twofold increase in penetration relative to last year. It's important to note that these sales carry a higher contribution margin than our corporate operating margin.

If you include our wholesale partners' online businesses, along with our own e-commerce site, we estimate online sales were about 1/3 of the Columbia brand's U.S. sales mix in the quarter. We continue to prioritize digital marketing spend within our overall marketing mix to further attract active customers, propel online sales growth and elevate our differentiated brand and product stories.

Our marketing investments on social platforms, in particular, have driven meaningful growth and are capturing new customers. We believe we have significant future opportunity to improve our consumer engagement on social media platforms.

Turning to supply chain and logistics. While we've been pleased with early-season wholesale sell-through and continued momentum in our DTC e-commerce business, port congestion, logistics and parcel shipping capacity constraints are straining fulfillment service levels industry-wide and could become more challenging as the holiday season progresses. We're working closely with our third-party logistics providers and our customers in an effort to mitigate these risks.

In our distribution centers, we continue to execute our peak season volumes with safety measures in place that are impacting productivity levels. With media reports highlighting potential holiday season bottlenecks, consumers began their holiday shopping earlier this season. We expect earlier holiday marketing and promotional activities as retailers seek to mitigate social distancing and shipping capacity constraints to encourage consumers to stretch holiday shopping over a longer period of time. All this is to say that it will be an unusual season, and we are prepared to maximize our sales volume within these constraints.

I'd like to thank our global supply chain team for the exceptional work they've done to help us mitigate the impacts of this disruption and position us for success this holiday season.

On the cost-containment front, we realized $45 million in SG&A savings for the quarter from lower variable expenses and cost containment actions. Year-to-date savings have been greater than we initially planned and will exceed $100 million in annual cost savings in comparison to last year, before any expenses related to the pandemic.

In addition to the immediate cost containment actions outlined above, we are executing cost reduction and resource allocation actions that will impact the company's cost structure for 2021 and beyond. We're taking these actions to ensure the business is structured for sustainable and profitable growth in the face of the evolving market landscape. We plan on providing an update on anticipated 2021 SG&A expenses -- expense levels on the next call.

Now I will quickly review third quarter results. Sales trends at most regions during the quarter were correlated to each market's management of the pandemic and consumers' willingness to shop in store.

Net sales decreased 23% to $701 million in the third quarter. As I referenced earlier in my prepared remarks, this decrease primarily reflects the ongoing negative effects of the pandemic, and to a lesser extent, the timing of fall shipments shifting into the fourth quarter.

Breaking down this performance by region, U.S. net sales decreased 23%. This performance reflects a high 20% decline in wholesale and a low double-digit percent decline in DTC net sales. Within our DTC business, U.S. e-commerce net sales increased high 50%, while U.S. brick-and-mortar declined mid-30%.

While September was our strongest month of the quarter in our U.S. DTC business, we have not seen a sustained improvement in brick-and-mortar store traffic to date. For my review of international markets, I will reference constant currency growth rates, which we believe best reflect the underlying business trends.

In our Latin America Asia Pacific, or LAAP region, net sales decreased 27%. This decline was most pronounced in the LAAP region wholesale and distributor business with direct-to-consumer net sales performing better, while that's still down year-over-year. In Asia, which entered the pandemic first, store traffic trends improved during the quarter. And recently, we've actually seen some periods with positive year-over-year traffic growth. While the environment remains challenging, we're committed to supporting and investing in this region to unlock its full potential over the long term.

By market, China net sales were down mid-20%, Japan declined low 20% and Korea declined high teens percent. LAAP distributor net sales decreased high 40%, reflecting the outsized impact of this pandemic in Central and South America as well as geopolitical and economic headwinds in several markets.

In our Europe, Middle East, Africa, or EMEA region, net sales decreased 8%, reflecting a low double-digit percent decline in our Europe direct business, partially offset by a high 20% EMEA distributor net sales growth that was driven by a greater portion of fall 2020 shipments falling into the third quarter, which more than offset lower fall 2020 advanced orders. We're closely monitoring the European shutdowns that are occurring in real-time and are not factored into our financial outlook we are providing today. In Canada, net sales declined 33% in constant currency.

Shifting to profit and margin performance. Gross margin declined only 40 basis points to 48.9% of net sales and SG&A expenses decreased 13%. This performance resulted in an operating margin of 12.2% of net sales, down 460 basis points from the prior year. Diluted earnings per share decreased 46% year-over-year to $0.94.

Exiting the quarter, our inventories were up 8% year-over-year. Nearly 90% of the inventory at quarter end consists of current and future seasons. Aged inventories increased year-over-year but continued to represent a small percentage of our total inventory mix. Unsold inventory as of September 30, 2020, was slightly elevated year-over-year, but declined sequentially compared to second quarter 2020. We are comfortable with our inventory composition and are positioned to support unplanned demand.

As a reminder, our sales are comprised of a high concentration of evergreen styles in our product line that change very little season to season and have minimal fashion risk. These carryover styles, as we call them, typically represent over half our style count and an even higher percentage of our sales mix.

Historically, we have utilized our balance sheet strength to drive manufacturing efficiencies that improve gross margin and capitalize on sales opportunities. This strategy helps drive sales, but also led to higher inventory levels and slower inventory turns.

As we've mentioned on our recent calls, in the current environment, we are acutely focused on managing inventory and improving turns. We remain confident in our ability to profitably sell the remaining inventory in current and future seasons, leveraging the company's wholesale customers, e-commerce platforms and fleet of outlet stores.

Moving to performance by brand. Columbia brand net sales decreased 23% in the quarter. Even though results were clearly impacted by the pandemic, we had several exciting marketing and product innovation stories during the quarter to keep consumers engaged and differentiate the brand in the marketplace.

On the marketing front, we proudly announced Bubba Wallace as Columbia's newest brand ambassador. In addition to his racing talent, Bubba is an outdoor enthusiast whose courage and charisma aligned with the Columbia brand's Tested Tough ethos. This announcement was extensively covered by media outlets, including the Washington Post, Forbes, Men's Journal and Fox Business, among others.

You may have already seen our Dorado PFG paint scheme or Omni-Heat wrapped car on race day. I'm excited to see what Bubba can achieve next season with his new NASCAR team, whose principal owners include Michael Jordan.

This year, we're celebrating the 10th anniversary of Columbia's patented innovation Omni-Heat Thermal Reflective. Originally inspired by foil space blankets, Omni-Heat is one of the best-selling winter technologies in the world. Early in the fourth quarter, we kicked off the season-long celebration on 10/10/20 with a full day of online events with special messages, Q&As and interviews with Columbia brand ambassadors, including key athletes and country star, Luke Combs. Luke has been on an award-winning streak in recent months, including 3 billboard music awards, including top country artists and 2 ACM awards, including album of the year. Congratulations Luke.

On the innovation front, we launched our newest technology Omni-Heat Black Dot during the quarter. The outdoor industry's first external thermal shield, this new textile acts as a heat magnet, featuring thousands of multilayered black dots that capture solar heat and trap warmth to keep people warmer in cold weather. This limited collection is available at columbia.com and select retail locations.

Footwear continues to be one of Columbia's best-performing categories, driven by classic styles like our Newton Ridge Hiking Boots as well as newness across the entire product line. Our successful PFG footwear line with popular styles like the Dorado and a growing assortment of sneakers and modern hiking styles, including the recently launched Facet collection, are all expanding the brand's reach in this important category.

In December, Columbia's fifth annual Star Wars collection will be released. This year's collection is based on The Mandalorian, the hit streaming series that launches its second season on Disney+ beginning October 30. While we're hesitant to provide too many details at this early stage, we can confirm that we work closely with the team at Disney and Lucasfilm. The Star Wars collection is our most extensive to date with several styles for adults and children. Historically, these collaborations have sold out quickly and have been a fantastic way for Columbia and Star Wars fans to enjoy the outdoors in authentic Star Wars style.

Looking to 2021, we will continue to bring new innovation into the marketplace. For spring '21, we will launch Omni-Heat -- excuse me, Omni-Freeze ZERO ICE. This touch-activated cooling fabric takes on the heat before you start sweating, while an improved sweat-activated pattern enhances moisture management and evaporative cooling. Combined, it's the most advanced solution for dry and wet cooling power we've launched to date.

For fall 2021, we're planning the largest innovation launch in our company's history, with the introduction of Omni-Heat Infinity. This new addition to the Omni-Heat family provides significantly more heat reflection and dramatically different visual appearance to the consumer. A new expanded pattern of gold dots reflect more of your body heat to deliver instant warmth without compromising breathability. The Omni-Heat Infinity launch will be able to leverage and build on the well-established consumer and retailer awareness we've created around Omni-Heat over the last decade.

In footwear, our product engine is not slowing down in 2021 with several new PFG, trail and hiking styles coming to the market.

Before moving on to the rest of the brand portfolio, I'd like to congratulate Columbia's DTC customer service teams, who recently received the #1 ranking in Newsweek's best customer service in the outdoor and athletic apparel category. This recognition is in addition to Newsweek's best-in-state customer service study that we mentioned on our last call. Great customer service creates loyal, lifelong customers, and I couldn't be prouder of our team for this well-deserved recognition.

SOREL net sales declined 21% in the quarter, reflecting lower wholesale sell-in, partially offset by strong e-commerce growth. Continued online momentum was fueled by the sneaker category with the Kinetic collection and function-first fall products include the Out 'N About and Explorer collections. SOREL is also seeing encouraging traction in its expanded men's line, including new sneaker boot collections, such as the Mac Hill and updated icons like the Madson and Caribou.

SOREL's brand power and momentum as a year-round fashion footwear brand will not be deterred by the pandemic. SOREL launched a comprehensive media plan, defined by content partnerships with the leaders in fashion and lifestyle publishing. One of the highlights is the second season of SOREL's podcast, The Step, in partnership with POPSUGAR, which highlights unstoppable female leaders in the community. The team has an excellent, innovative and design-forward product pipeline ready to propel the brand back into growth mode.

prAna net sales declined 21% in the third quarter with lower wholesale performance, partially offset by strong e-commerce growth. prAna's e-commerce business continues to experience record customer acquisition trends as new consumers flock to the brand. During the quarter, top-performing categories online included women's active and men's lifestyle assortments. prAna also recently launched an exciting new outerwear line available exclusively on prana.com and in branded stores.

In August, prAna reinforced its commitment to being an industry leader in sustainability and its mission to create clothing for a positive change by launching the Responsible Packaging Movement. The goal of this movement is to completely eliminate plastic from consumer packaging by 2021 as well as eliminate use of materials from ancient and endangered forest by 2022 and virgin forest fiber by 2025.

Mountain Hardwear was our best-performing brand in the third quarter, with net sales declining 15%. Mountain Hardwear generated the fastest e-commerce growth of our brand portfolio in the third quarter, led by equipment as well as popular outerwear lines like the StretchDown and Ghost Whisperer insulated collections and apparel styles, including the Dynama Pant collection.

As we've mentioned in past calls, our Mountain Hardwear team has been hard at work reinvigorating their product line, starting with the fall 2019 collection. While unfavorable winter weather last season and a pandemic have interrupted sales velocity since then, it's increasingly clear the refreshed product line resonates with consumers and brand momentum is building. This is not only evident in robust DTC e-commerce growth, it's also apparent at key wholesale accounts that are embracing the brand's new product line in direction.

I'd now like to provide some detail on our 2020 financial outlook and preliminary 2021 commentary. Please note that significant business uncertainties and risks surrounding the ongoing pandemic, economic conditions, logistics capacity constraints, global geopolitical tensions and changes in consumer behavior and confidence. Outlook and commentary assume no material deterioration or disruption to the company's current business operation or consumer demand.

For the fourth quarter, the company anticipates continued sequential fundamental improvement. Net sales are expected to decline 8% to 11%. Operating margin is expected to be between 10.7% and 12.7% compared to 14.5% in 2019. Diluted earnings per share is expected to be between $1.07 and $1.32.

For the full year 2020, we anticipate a 19% to 20% decline in net sales, resulting in diluted earnings per share range of $1.25 to $1.50. Despite the significant financial impact of the pandemic that is evident in this outlook, we still anticipate generating approximately $150 million in free cash flow during the year.

While it's early in our 2021 planning process, I'd like to provide limited commentary on the first half of 2021 net sales. Based on advanced wholesale orders for spring 2021 season and plans will return to growth in our global DTC businesses as we anniversary prior year store closures, we currently believe we can achieve high-teens percent year-over-year net sales growth in the first half of 2021.

I'd note that we are taking a disciplined approach to buying inventory for the spring 2021 season, and we'll be maximizing utilization of on-hand carryover spring inventory with an acute focus on managing inventory levels, generating cash flows and improving turns. We anticipate providing more detail on the 2021 outlook when we announce financial results for the fourth quarter 2020 next February.

In summary, I'm confident that Columbia Sportswear Company's best days are ahead of us. I believe our global team of dedicated employees, our powerful brand portfolio, our long-term retail partnerships and strong financial position and operating discipline will all contribute to Columbia Sportswear emerging from this pandemic in a stronger competitive position.

We're committed to driving sustainable and profitable long-term growth and 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 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 comes from the line of Bob Drbul with Guggenheim.

Tom, congratulations on your retirement and best of luck. Thanks for everything, in the last 20 years, however it's been. Tim, I got a couple of questions. I'm not sure I can stick to one. But I guess the first question is, from the business standpoint, I think when you came out of Q2, the trends from June, can you talk through the monthly progression in terms of what you saw sort of July, August, September? And I would also be curious if you could just give us some insight on what you've seen thus far in October? That's my first question.

Yes. We saw sequential improvement, Bob, in those 3 months. Obviously, as consumers are beginning to learn how to accommodate the impact of the pandemic and begin to somehow get back to normalcy, we saw increased consumption, especially of outdoor products in September. It really helps when Anthony Fauci is telling people to go outside and we were the beneficiary of that in September, where we had the best month of the quarter, certainly.

As it relates to October, we really haven't started talking about Q4 yet, but we can see in our sales trends, at retail, and remember that we have visibility of about 80% of our wholesale customers selling, that our sell-through has been strong, and we see depletions ahead of prior periods. And that's on lower inventories, frankly, because ourselves and others have had logistics issues getting merchandise to customers as fast as they wanted. So I'm quite encouraged by all these signs. And absent the closure -- the unanticipated closure of stores for whatever reason that we could end up with a good year this year.

And Bob, I might add, as you're aware, Q3 is typically a fairly significant sell in quarter for us, where it's much more heavily weighted to the wholesale business. So looking at month-to-month progression is a little bit more difficult. When we look inside the direct-to-consumer business itself, as Tim touched on, e-commerce growth was really quite solid throughout the quarter. And we've seen that trend continue through the month of October here. And then with regard to the stores, traffic remains quite depressed. We saw exiting the second quarter. We continue to see those trends through July and August and then a bit of an improvement as we got into the month of September, which is encouraging.

Okay. Okay. And I guess just when you think about -- I sort of tied the next 2 together, but Tim, from a -- channel inventory seems lean, I think, there's definitely some opportunity for you. But in the guidance that you're giving us today on the fourth quarter, can you just talk through like the assumptions on your wholesale business, your reorder business and your DTC business, sort of how you see that this quarter just the opportunities on a lean inventory position in the channel and your own inventories?

Yes. Of course, obviously, it's difficult to have much visibility on this when you have the pandemic and, of course, the additional question mark around the election next week. But I personally feel comfortable and quite encouraged, as I said. And maybe I'll ask Jim to give you a little bit more detail on the specifics.

Yes. Bob, as we look out to the end of the year, and we -- in my CFO commentary, we comment where we see inventory come out at the end of the year to low single-digit percent of growth. But as Tim touched on, in light of where early season fall 2020 sell-through is at retail and the fact that we see inventory positions being relatively lean, we feel like we're in a really good position going into the quarter in terms of inventory that we've got available to fill that demand. And then likewise, our e-commerce business continuing to see nice growth through that channel as well. So we'll stay after here and get that inventory balance down.

Got it. Okay. I guess just, if I could just sneak in a third. In terms of just market share and market share opportunities, when you think about what's happening in either the outerwear category or the footwear category, can you just talk through where you see your positioning and how it's sort of transpiring currently, Tim?

Sure. Well, among our most known competitors, there was a significant retrenchment in several of those in terms of buying and innovation around future seasons. So we did not retrench as it relates to both inventory acquisition and really focusing on innovations that are going to differentiate the company. So we're in a position, I believe, of significant strength, not only from our balance sheet but from a market and market acceptance position to be able to get more business this fall as it relates to filling the shortfalls that were provided by other competitors as well as gathering market space -- market share in 2021 fall because we've, as we said, launched this new outerwear Omni-Heat Infinity innovation, which is going to get a significant boost from the marketing efforts that we're putting forward as well as just the fact that it's new and exciting and different.

Our next question comes from the line of Laurent Vasilescu with Exane BNP Paribas.

Thank you, guys, for all the color on the fourth quarter on revenues and EPS. Jim, to square away, the guidance or at least the color, we've got the remaining balance of SG&A savings, cost savings for the fourth quarter. How do we think about the gross margin for the fourth quarter as we start to lap some of the challenges that you've seen in the last few quarters?

Great. Yes. I think if you look at the SG&A side of that, Laurent, you'll be able to kind of more or less back into the SG&A guidance just based on the variable rate of expense and just -- and what our track record is the last couple of quarters on cost containment in general. But as it relates specifically to the gross margin, what's implied in our guidance is a bit more contraction in the gross margin. With that said, I mean, it's going to be highly dependent upon consumer demand in the marketplace and what we generally see in terms of the promotional effects across the industry. To date, as we sit here in the month of October, I could share with you that we've approached this on a very much on a normalized basis. And our product margins through our own DTC channel have been quite healthy. So I think we're poised and ready to react should we need to, but we'll see how the quarter plays out here.

Okay. Very helpful. And then I think you mentioned high-teen growth, high-level color for 1H '21. Is there -- are there any hurdles for you to get back, which would imply about $1 billion in revenues, let's say, for 1H '21, are there any hurdles for you guys to -- that would prevent you from getting back to your historical level of $3 billion in revenues that we should consider?

Yes. I mean it's -- we have been measuring ourselves, frankly, against '19. '20 is such an unusual time period. So we're measuring ourselves against '19 in all the stretch goals and focus as it relates to how we're planning the business. I think we have a chance to get there. We're certainly not guiding, as you know, from that period. But the opportunity exists, especially when we look at the weakness in many of our competitors that we globally compete with.

And Laurent, I think to part of your question there, in terms of the hurdles, I think the biggest hurdle for us in part is going to be with regard to the direct-to-consumer business and particularly the brick-and-mortar stores until there's essentially an end to the pandemic. And we see a resumption of traffic back to more of a normalized level, particularly in those destination-based stores or these tourist markets. That's going to be a pretty key factor in being able to return to that level in the time period that, that will require.

And then lastly, just one more question. Your inventories look like they're in good shape, about 7.5%. There are some questions out there in the marketplace around just inventory levels for your brand, not on your balance sheet, but with regards to your retail partners. Any thoughts like how you see the inventory levels for your brand within the key retailers in the United States?

Yes. Again, as I said, we have visibility to -- around 80% of our wholesale partners' selling and inventory levels. And frankly, we're very pleased the inventory levels are lower than last year, and the rate of sales has been higher. So that's what gives us a lot of confidence for Q4 in that we believe inventories are light. And then there's a high degree of demand for the product. So yes, we're very comfortable with our positions today.

Yes, and the reorder trend that we've seen in the quarter has been quite positive. As much as retailers canceled orders in the first part of the year, there's definitely an appetite now that they're getting into the season.

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

A couple of questions for me. Just starting on the fourth quarter, would you expect the wholesale business to inflect positive with the offset being the outlet stores? Is that the right way to conceptualize it?

I don't think it quite gets to that level, Jim. There's that $45 million ship that will certainly have an impact where the wholesale business isn't down as -- nearly as significantly as it was in the third quarter, but we would still project that part of our business being down for the quarter. And then the offsets will obviously be -- we're continuing to see nice growth out of the e-commerce channel. We've got that planned in the third quarter and then offset by some weakness in the brick-and-mortar channel.

Okay. And can you guys help with a little more explanation on the logistics challenges you spoke to for 4Q? Is the product not already yet in the right countries? Are you talking about domestics logistics issues that could be a challenge?

We, by and large, received most of our inventory for the fall 2020 season. We did have some delays related to some of the port congestion, in which inventory receipts were a bit later. And as a result, you see some of this shift out into the fourth quarter. As it relates to the ongoing disruption, as we look at the capacities, both within our distribution centers, of which our teams have done an incredible job over the course of the last several weeks, delivering the growth that we've demonstrated to date. And as we plan for the peak volumes in the fourth quarter, we believe that we've got the capacity in place to achieve the forecast that we're providing here today. And there's likely some upside to consumer demands there where we can support it. And then the other challenge to this, obviously, is in the case of the third-party logistics providers. And we've also confirmed with those vendors that we work with that we've got capacity from them to support the forecast we provided. Now to the degree, there's upside to our forecast, that becomes the productivity and that strain becomes increasingly challenging, but that would be a good problem to have.

Next question is from the line of Camilo Lyon with BTIG.

This is Mackenzie Boydston on for Camilo. My first question is just about any additional color you could provide on sales by geography, specifically the down mid-20% in China compared to maybe the U.S. and Europe? And any current trends you're seeing? Do you see Asia recovering quicker than the U.S., especially with pricing case counts and just kind of what you're seeing right now?

Yes. I think it's clear that we're underperforming our opportunity in China. That's the single largest geographic opportunity for the company, and we need to be better there. I think the other regions in the world, we're having, frankly, good success by comparison to our competitors. And the opportunities for us are to really to continue to gain market share in those other markets. There are some places in the world where outside of our control, where the stores have all been closed due to the government regulations or there have been significant geopolitical disruptions similar to Hong Kong, where we just -- there's nothing we can do that's going to overcome those things.

Yes. I think in a lot of these markets, there's a pretty significant correlation, particularly on our direct-to-consumer brick-and-mortar business between cases of the virus and what we see in the performance. So if you look at the quarter with our Japan and Korea business being down in the 20s, both, a lot of that reflects some of these second waves that have come through and more recently, with some of what's going on in Europe, we've seen impacts.

Got it. And then on the wholesale side, any differences that you're seeing to note whether between sporting good stores, mid-tier department stores or any kind of things that you're seeing there?

Yes. I think our best performance from a sell-through perspective is good in the sporting goods channels. When people are thinking about going outside, buying camping equipment and buying outerwear, they typically think first of sporting goods and outdoor stores. And that's where we've seen significant improvement in businesses. So that plus, I think, you come to Columbia and get good service directly from our e-comm sites.

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

This is Krista Zuber on for John. Two, if I may. Just first, as you continue along your digital transformation, could you kind of talk to your digital economics through sort of the margin differential you're seeing and the potential you see for your e-com base versus what you're seeing in wholesale? And I have one follow-up.

Yes. I think as Tim touched on, we saw phenomenal growth in the corner in our e-commerce business. And when we look at the overall contribution margin that comes from our e-commerce business, it's north of the company's overall operating margin. It's a very healthy contribution margin. It's not quite to the level of our wholesale business, which is our most profitable. But given the contribution that it does have, we continue making that investments that have strong returns in that category or area of our business.

Yes. I think it's important to note that the company really considers itself to be a wholesale business. And the wholesale business provides not only profitable revenues but significant scale that we would not be able to accomplish through our own direct-to-consumer business. So we have a significant opportunity to have a broad distribution of our company's products. We consider ourselves to be a very democratic brand. And that's an important -- the wholesale business is an important part of our future.

Great. And then second, just in terms of your capital allocation from here in terms of sort of the metrics driving a restart of the quarterly dividend or share repurchase, could you just touch on what you're sort of looking to see to sort of proceed on that front from here?

Yes. I think we're really looking to see some of the uncertainty lift a bit. We're in the process of pulling together our 2021 plan. And among the things that we're looking for in the business is a more sustainable and predictable flow of both profitability and cash flow. And as we begin to see that increasingly, we would revisit our capital allocation strategy. And I'd anticipate as we come back around to our year-end earnings call in February, we'll provide some more details on that topic.

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

It's Tracy Kogan filling in for Paul. I had a question about expenses. You guys mentioned the $45 million in expense savings this year, and that you are looking for more savings in 2021. And I guess I was just wondering if you could give us a sense preliminarily of what the big buckets are where you think you have savings left to achieve? And maybe if you could give some quantification?

Yes. It's difficult to provide quantification of that. We'll come back to that at one of our future calls. But in terms of where we see the greatest opportunity here and really break it down into 4 primary areas within the supply chain area, certainly looking at how we can drive efficiency in the flow of product and our freight and logistics cost. It's a pretty significant item in the P&L, what's in our gross margin.

In our retail business, there's really 2 major areas that we're looking at within the retail business, part of which ties to how we can drive more efficiency within the stores from a labor standpoint. And then as we've commented on, we're in discussions with our landlords with regard to lease negotiations as a result of the poor traffic that we're seeing in the stores.

And then the fourth component is going to be much more around the organizational side of things and really streamlining the business from an organizational perspective. And then I think the only offset to that in part is going to be -- we need to be mindful of where we need to reallocate capital and resources to support our strategic priorities, the growth in the business, including what we're doing from a digital strategy standpoint. And again, we'll look forward to sharing more detail in February.

Great. And I just have one follow-up. I was wondering if you could talk a little bit about the demographic of the customers, the new customers you're drawing in, in your e-com channel, if it differs from your core existing customers?

Certainly. Well, I think our typical demographic would be a family -- a young family because we have a significant children's business, youth clothes business as well, obviously, women's and men's. And I think we've had the bulk of our success around attracting new consumers has been utilizing the digital ability to find consumers who look like our existing consumer base and finding more of those. So as I said, families, and then frankly, having Dr. Fauci tell people to go outside, that's been a significant advantage for the company.

Next question is from the line of Chris Svezia with Wedbush.

I guess just the first one, just to go back to the cadence of the third quarter for a moment. When you made the comment that, I think June, you were down 20% in total, somewhere along those lines. And you made the comment in that you showed improvement sequentially every month of the third quarter. But you had overall sales were down 23%. So I'm just sort of -- September being the best month. So I'm just curious, was there just the fact that there was this $45 million that fell out that, yes, I guess, is not so much thought through, I guess, maybe on our side or where the case might be, it's something really slow down somewhere intra-quarter? I'm just trying to connect the dots a little bit between where June was and where third quarter ended and the sequential improvement, yet you're still down.

Yes, Chris. Yes, let me jump in and shed some light on it. And again, I think we commented back in June -- the month of June is a tiny quarter in the grand scheme of -- or tiny months in the grand scheme of things. And when you look at the third quarter, it's predominantly a wholesale ship in quarter. And so it's difficult really to look at the month-on-month progression. What I would say is when we look at the -- if you set aside the wholesale business, which is much more reflective of timing of shipments and deliveries and whatnot and you look at the direct-to-consumer business, the e-commerce performance that we put out of 55% was really pretty steady throughout the quarter. And we've continued to see a light level of growth as we sit here in October.

As it relates to the brick-and-mortar business, I think part of the comments, we're pertaining a bit more to the brick-and-mortar business as it relates to the progression. And essentially, the exit rate that we had seen in our brick-and-mortar business dated back to June, that really kind of held at that level pretty challenged in the market through July and August. We saw a nice improvement in traffic, albeit well below prior years or pre-pandemic levels in the month of September. Things still remain a bit challenged in that. It's going to take time, like we've mentioned, just given the dependence on travel and tourism and just people having confidence going out and shopping physical retail.

Okay. Okay, that helps a bit there. With regards to what you're seeing in the market today, which is it seems like sell-through is accelerating, what are the retailers telling you or saying to you about willingness to take on additional inventory? In other words, if you see the product moving at higher velocities, and you feel like they're going to have lean on inventory. Are they coming to you and saying, look, we rather chase we really have to or are they accepting of additional product? I'm just trying to get a sense of connecting those 2 pieces about...

Yes. Yes, at this point in the season, retailers aren't buying more merchandise unless what they have is selling. And they're buying more of what's selling, and they're less interested in taking stuff that's not selling. So we've been the recipients of the largesse there, and we've had reorders of our merchandise, which is tending to be selling better today. So that's -- we haven't had the...

Yes. Our reorder trend has been as good as it's ever been. But I mean some of that's indicative of how significant the cancellations were earlier in the year. So given the fact that they're lean, I mean there's definitely appetite as they see that sell-through coming through.

Okay. And then just on the commentary about the high-teens growth for the first half of the year, maybe just any color about how you think about the order book versus DTC. And also, do you have better visibility, I guess, maybe to Q1 just because it's more of, I guess, a selling quarter and Q2 is maybe a little more reorder. You always have timing distributorship shipments? Just trying to get an idea of overall visibility when you think about that?

Yes. Well, we're, of course, comping up against several months, in some cases, where stores were completely closed. So we have confidence that we'll beat a store closure, for sure. And then Q2 is really a very tiny quarter and reliant -- it can fluctuate wildly based on what merchandise gets shipped from Asia to a particular independent distributor market. And so, in general, we believe that Q1 next year, which will probably still be impacted by the existence of the pandemic, we should do very well next year, as based on order book and just -- again, our reliance on -- we're comping up against an easy quarter.

Okay. So the order book is pretty even between Q1, Q2 is what you're saying?

Well, we haven't got really down into that level of detail. But I mean, looking at the high teens rate of growth through the first half, certainly, the direct-to-consumer business with the brick-and-mortar stores haven't been closed for the lion's share of the second quarter, that's going to be a key driver. But looking at our wholesale order book for the spring '21 season, it will be up a pretty good amount percentage-wise. It will be in the low double-digit level.

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

I guess, Tim, just a sort of higher-level broader question. Sort of how are you thinking about the demand for the cold weather apparel and footwear, given the consumer spending more time outdoors? I guess what I'm trying to reconcile is some of the differing commentary out there in the market with demand for some of the hardgoods category so strong, but it seems like the softlines categories are sort of lagging. Do you think there's sort of a delayed impact? And then I guess just trying to square that away with a lot of the retailers that you guys sell into have reported really strong results. So just trying to sort of reconcile all the different commentary out there.

Yes. Certainly. Well, again, as I said, we've had very good early selling. So it gives us a lot of confidence that our products that we have in the marketplace are in demand. The brand is well-known. And on a typical year, weather trumps almost everything in terms of sell-through. So we're going to get our first real dose of winter weather this coming weekend in the Northeast. We already had snow in the Rockies. And so we're pretty excited about the potential for a great year this year. And again, we're competing with people who, in some cases, have not delivered well. And so there's an opportunity for there to be a bit of scarcity in the marketplace.

Got you. And then could you just elaborate a little more on, I guess, the market share opportunity that exists in the fourth quarter, given, as a follow-up to the earlier question, some of your competitors have called out sort of very lean inventory receipts and not having the ability to fulfill demand. I mean, how much upside could that drive in the fourth quarter? And then will you run up against the capacity constraints off of that? Like, just trying to square away sort of what could limit the upside there, given the competitive environment?

Yes. Certainly, well, when we talk about competitors, we're talking about our global competitors, which should include some small brands, both in North America and in Europe, which are stressed financially and not able to really keep their inventory levels at the area that they want. The outerwear business is such a high degree of componentry. By that, I mean, there could be 60 or 70 pieces of various components in a piece of outerwear. So it requires us to make a bet early out of the year. So everything that we've got to sell is already, for all intents and purposes, in a distribution center somewhere ready to be shipped. So we think there's upside in terms of the opportunity, but it is finite based on the amount of inventory that we have. So as it relates to how big it could be, I don't know. We gave you what we think will happen based on everything that we've seen today.

Got you. And then just final one. Could you comment on sort of how you're thinking about how the promotional environment may shape out, given sort of your comments on overall -- it sounds like the overall channel inventory levels are pretty clean. So I guess, there shouldn't be a lot of promo, sort of how you're thinking about that for the fourth quarter?

Yes. I think you're right. I mean, in a normal situation, you would expect that scarcity would not foster promotion. However, you have the other components, which include some customers that may financially need to drive cash and therefore, become more promotional than they otherwise would. So there's just so many components and areas that we look at that could cause a disruption in the promotional plan.

Yes. I think on that, Alex, our fourth quarter outlook would contemplate an increase in promotional activity. But again, I mean, it's so highly uncertain. It's not that we've necessarily seen that to date as we're sitting here in the month of October, but not knowing how various retailers are going to react as we get closer into the holiday season here and really needing to drive the conversion on that traffic.

Next question is from the line of Jonathan Komp with Baird.

Maybe you touched a bit on this a little bit already, but just thinking kind of broad strokes for next year, I know you shared the first half to you. Trying to get a sense, when you think of inventory in the channel and any sort of replenishment effect that you might have, is there -- do you think there's going to be meaningful differences in kind of the fall/winter product and what it looks like in the channel versus what you signaled spring/summer? Just trying to think about any differences in the positioning in the channel there?

You're talking -- you asked me a question about fall '21?

Yes. Just trying to understand what might impact your replenishment relative to the state of the channel inventory going into the key season next year?

Right. Well, it's difficult to -- we haven't given any guidance at all in the past Q1 -- past first half of '21. But I can tell you, in my experience, historically, when we start off with low inventory levels at retail, such as we have today, and we have decent sell-through which means the weather continues to cooperate, that there'll be healthy orders for fall. And we believe that we have ammunition as it relates to innovative product, including our Omni-Heat Infinity that could provide good opportunities. But we're -- it's so far in advance of that season, we really don't want to be going too deep in that. But my assumption is that there will be very low inventories at the end of the winter season this year.

Okay. That's really helpful. I look forward to seeing the initiatives play out. Maybe just separately, one other question. Really a bigger picture question, but it seems like both the shifts in your business, combined with the cost opportunities you're realizing, it seems like there's more structural tailwinds than headwinds to your margin. So whenever you do get back to kind of prior peak sales, is there anything structurally that you think will prevent you from getting back towards the margin you've seen historically?

Well, we're definitely pushing on driving SG&A efficiency in the business. I think it's too early to provide any indication of investments that may be required to continue to drive and grow the business. I mean certainly, we would be committed to certain investments to continue to drive growth. From a consumer experience and from a digital standpoint, I think our supply chain at some level will require investment, but what that equates to in providing specific outlook regarding SG&A and overall cost or operating margin structure a bit early, but we certainly expect the actions we've taken this year to drive efficiency in our business.

Yes. And I guess, I know, Tim, you've always talked about being pleased with your margin, but certainly seeing further opportunity, and that's when it was at higher levels than it is today. So I just wanted to make sure nothing's shifted or changed in the amount of investment that you think the business will need going forward?

No. I think we concluded 2019 at top-quartile profitability, and we believe we can improve on that. And our goal is certainly to be top quartile and then prepares for our investors.

Yes. Agreed.

At this time, we've reached the end of our question-and-answer session. I will now turn the call over to Tim Boyle for closing remarks.

Well, I want to thank you all for listening in, and we're looking forward to nice, cold weather globally and talking to you again in February about the results. Thank you.

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