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Columbia Sportswear Company (COLM) Q4 2023 Earnings Call Transcript

Columbia Sportswear Company (COLM)

Q4 2023 Earnings Call Transcript

Company Participants

Andrew Burns - Investor Relations

Tim Boyle - Chairman, President and Chief Executive Officer

Jim Swanson - Executive Vice President and Chief Financial Officer

Conference Call Participants

Bob Drbul - Guggenheim

Laurent Vasilescu - BNP Paribas

Abbie Zvejnieks - Piper Sandler

Krista Zuber - TD Cowen

Alex Perry - Bank of America

Mauricio Serna - UBS

Presentation

Operator

Greetings. Welcome to the Columbia Sportswear Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded.

I will now turn the conference over to your host Andrew Burns. Please proceed.

Andrew Burns

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

With me today on the call are Chairman, President and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrative Officer and General Counsel, Peter Bragdon.

This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations.

I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and the appendix of our CFO commentary and financial review.

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

Now, I'll turn the call over to Tim.

Tim Boyle

Thanks, Andrew, and good afternoon. I'm proud of what our global workforce was able to achieve in 2023 as we navigated a challenging environment. One of our top priorities throughout the year was executing an inventory reduction plan. I'm pleased to report that, we exited the year with inventories down 27% compared to last year. This inventory reduction helped us to generate over $600 million in operating cash flows for the year. International markets were another bright spot, growing 7% on the year. In constant currency, China full-year net sales grew low 30%. The investments in talent and operational improvements we have made over the last several years are yielding results. Our Europe direct business grew low double-digit percent, reflecting strong execution across our product, brand and marketplace strategies. We also generated healthy growth in Japan, up low double-digit percent. In Canada, up mid-single-digit percent for the year.

In the U.S., the marketplace proved more difficult. Consumer demand and traffic tapered off throughout the year. In the fourth quarter, a warm winter impacted cold weather categories. I'd note that, the onset of winter weather more recently has boosted sell through. This helps us and our retail partners work through seasonal inventories and mitigate the impact of carryover inventory in future seasons. Overall, 2023 net sales increased 1% to $3.5 billion. In this muted growth environment, we experienced SG&A deleverage and our operating margin performance was well short of my personal goal for the business.

Our balance sheet is strong. We exited the year with $765 million in cash and no debt. This provides resiliency during turbulent periods and allows us to continue to fund growth initiatives, while returning capital to shareholders. In 2023, we repurchased $184 million in stock and paid out $73 million in dividends. Our commitment to returning capital to investors is evident in our track record. Since the beginning of 2018, we have repurchased over $1 billion in stock, which resulted in a 14% reduction in year-end shares outstanding.

Over this time period, we also increased our quarterly dividend by 36% from $0.22 to $0.30. Looking ahead, we expect 2024 to be a challenging year. Retailers are placing orders cautiously and economic and geopolitical uncertainty remains high. Our spring and fall order books reflect these challenges. The impact of these headwinds is most pronounced in the US. We are projecting growth in many markets outside of North America.

Our initial net sales outlook for '24 is a decline of 2% to 4%. We are seeking opportunities to maximize sales in this environment, and my personal goal is to exceed this outlook. Despite our cost containment actions to-date, we expect the net sales decline to result in operating margin contraction. To mitigate further erosion in profitability and to improve the efficiency of our operations, we are implementing a multiyear profit improvement program. When the benefits of this program are combined with the cost savings that we anticipated from normalized inventory levels, we believe we can reach $125 million to $150 million in annualized savings by 2026.

In our initial 2024 financial outlook, we are including approximately $75 million to $90 million in realized cost savings, net of severance and related costs of up to $5 million. We are focused on four areas of cost reduction and realignment. The first area of focus is operational cost savings. In addition to eliminating expenses associated with carrying excess inventory, we are optimizing our distribution network and driving cost efficiencies throughout our supply chain. We are also optimizing our technology cost structure, while increasing the throughput and agility of our digital technology teams.

The second area of focus is organizational cost saving. Our overall headcount and personnel expenses have outpaced the growth of our business. We are executing a workforce reduction plan, primarily impacting our U.S. corporate teams. This represents at least a 3% to 5% reduction in our U.S. corporate personnel cost. This work will be done with respect and thoughtfulness, consistent with our core values, while taking the actions required to get back to sustainable growth. We expect the vast majority of these actions to be completed by the end of March.

The third area of focus includes operating model improvements. We are streamlining decision rights and our ways of working to drive improvements in our operating efficiency and execution of strategic priorities. The last area of focus is indirect or non-inventory spending. We are focused on driving cost savings in this area, from our strategic sourcing and vendor rationalization outside of our supply chain. It's important to note that, we are not cutting back on demand creation investments. At the same time, we believe there is an opportunity to optimize the efficiency of our marketing spend to drive greater returns. Steps are being taken to amplify the impact of this spending.

We anticipate these cost savings will ramp-up over the course of '24 and '25 with the full benefit being realized in 2026. This profit improvement program is an integral component of our goal to restore operating margins to a low teens percent rate. We have achieved this level of operating margin performance before, and we are confident it's achievable again.

I will now review fourth quarter financial results. Net sales were at the low end of our guidance range and operating income was below plan, reflecting the compounding effects of a difficult U.S. environment and a warm winter. Overall, net sales decreased 9% year-over-year to $1.1 billion. The decline was primarily driven by our wholesale business, which declined 17%. On-time fall '23 shipments shifted a greater portion of sales into the third quarter this year, relative to last year. The impact of this timing shift was greater than 100 million in the fourth quarter when compared to the fourth quarter of last year. Direct-to-consumer net sales declined 4% with weakness concentrated in the U.S. Gross margin expanded 20 basis points as lower inbound freight costs and favorable channel mix more than offset promotional activity.

SG&A expenses were essentially flat, as higher DTC expenses were offset by lower demand creation spending on lower net sales and incentive compensation expense. For the full year, our demand creation is a percent of sales increased slightly to 6% compared to 5.9% last year. We incurred a $25 million non-cash Prana impairment charge during the quarter, which impacted diluted earnings per share by $0.31. Diluted earnings per share in the quarter decreased 23% to $1.55.

I will now review fourth quarter year over year net sales growth by region. For this review, I'll reference constant currency growth rates. U.S. net sales decreased 12%. U.S. wholesale decreased high teen percent, primarily driven by on-time fall shipments, which shifted sales into the third quarter relative to last year. US DTC net sales decreased high single digit percent. Across both brick and mortar and e-commerce, softer consumer traffic and weather weight on results. Our DTC business performed well during peak sales windows like Black Friday and Cyber Monday, but fell off during non-peak periods.

Brick and mortar was relatively flat driven by the contribution from new stores opened over the last year, as well as incremental sales from temporary Claris locations. U.S. e-commerce net sales were down high teens percent, darrell.com was particularly hard hit in the fourth quarter as shifting consumer trends coupled with warm weather impacted demand.

Latin America, Asia Pacific region or LAAP net sales increased 7%. China net sales increased high teens percent led by strong DTC performance. The team drove e-commerce growth across several platforms during the key double 11 holiday period. Transit, our premium China specific collection performed well this season, highlighting our continued efforts to create localized product that resonates with Chinese consumers.

Under the strategy of our new leadership team, we're now gaining traction in this important market. We expect China to again be one of the fastest growing parts of our business in 2024. Japan net sales increased mid-single digit percent led by wholesale and to a lesser extent, e-commerce growth. During the quarter, we built on the momentum of our SAP Land Boot collection by expanding distribution to wholesale and e-commerce. The collection celebrates the sister city connection between Sapporo and Portland in a boot that combines style with performance. The SAP land was a key pillar of growth in the quarter and sell through of the collection was exceptionally strong across all channels. ...

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