Columbia Sportswear Company (COLM) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us remotely for the Third Annual Stifel Cross Sector Insights Conference. Hope you're all finding the virtual conference to be a productive experience. This is Jim Diffy, analyst following sports and lifestyle brands for Stifel. For this session, we're very pleased to be hosting Columbia Sportswear. We've been featuring the Columbia stock on our Select List, given that the brand portfolio, balance sheet strength. So we're excited to have them here to speak about the business. Joining us from Columbia today, Jim Swanson, Chief Financial Officer and Senior Vice President; and Andrew Burns, Director of Investor Relations and Competitive Intelligence. Thank you to the Columbia team for being with Stifel for the session. The format of the session today, it's a 30-minute session. First 20 minutes or so will be fireside chat led by yours truly. For the last 5 to 10 minutes or so, I'll be fielding questions digitally through the dashboard submitted by participants in the audience, and I'll relay those to Jim and Andrew for responses.

Guys, maybe to kick things out, off and before speaking about challenges of the pandemic, let's start by just establishing a baseline for the business entering 2020. Can you speak at a high level about the Columbia brand portfolio and the geographic footprint of the business?

Yes, you bet, Jim. And thanks for hosting us here this morning. I think maybe to kick us off, we view one of the strengths of the company has been the diversification of the business. And so from a diversification standpoint, we're speaking about everything from a brand portfolio, product category, region and channel. And to share a few stats with everyone in terms of each of those areas, the Columbia brand, by far, our largest kind of mother ship brand, if you will, representing 82% of sales in 2019; SOREL, which has been a great growth trajectory at over $300 million in 2019, representing 10% of sales; and then prAna and Mountain Hardwear at 5% and 3%, respectively. By region, being a U.S.-led company, the U.S. represents 64% of sales. We do have a nice-sized international business, including the Latin America, Asia Pacific region, in which we managed direct businesses in China, Korea and Japan, which represents 17% of sales; the EMEA region, which we've got a combination of a Europe direct business, in which we do business directly in, call it, a dozen and a half countries, and that the distributor business represents 12% of our overall sales and then Canada at 7% of sales. And then, categorically, the company has been well known for its apparel, accessories and equipment, which represents 77% of our overall mix. But we've also made tremendous strides in the growth and development of our footwear business. And that's comprised of both the Columbia brand, which we've had nice momentum in that as of late; and then the SOREL brand, as I touched on earlier, that's entirely footwear-focused; and then by channel, a diverse channel base. It's expanded quite significantly over the last decade, one in which was entirely focused on -- or largely focused on wholesale a decade ago, now represents just under 60% of our total sales. And our direct-to-consumer business, which is comprised of both our brick-and-mortar and our online business, represents 41%. So pretty -- a very diverse business, something that we take pride and feel the strength of the company. I think one important note to make here is we entered kind of pre-pandemic in prices. We entered into this in a position of strength. You've got a strong brand portfolio, strong momentum from a brand standpoint. Our operating margins were top quartile in the industry. And of course, our balance sheet, we've -- it's been a fortress balance sheet in which we've managed a strong cash position at nearly $700 million at the end of last year and essentially no debt at that point as well.

That's a great overview. And a lot of those attributes are things that we've been highlighting with our Select List recommendation. Let's dive in on the U.S. market for a moment. Nearly 2/3 of the business in 2019. Jim, can you talk a little bit about your channel mix and distribution footprint? Do you foresee -- with all the changes that we're seeing related to COVID-19, any permanent changes to your channel structure or how you think about go-to-market in the U.S. market?

Yes. Let me answer this. I think, predominantly from a Columbia brand perspective, and then we get into specific as it relates to emerging brands, as there may be some questions. I think, first, with regard to the Columbia brand, the Columbia brand has been known for the breadth of its distribution. We manage it. It's a democratic brand reaching out to many consumers on that front. And consistent with my opening remarks, we've -- the distribution of that is encompassed wholesale, B2C, and online. Within the wholesale channel, in particular, we kind of look at it in relatively 4 equal buckets comprised of sporting goods, the department store channel, in which the company's had distribution; specialty stores; and then the online pure-play retailers that are out there as well. In terms of the question, Jim, as it relates to how we see things moving forward from a pandemic standpoint. Certainly, one of the things that we've seen in our business, up through the time of the earnings call, we've provided some commentary on -- is an acceleration from a digital standpoint. And that's been a trend that we've seen for a number of years. And I think similar to many retailers and whatnots that are out there, this has only accelerated adoption from a consumer standpoint and being comfortable shopping for apparel and footwear online. We feel that the investments that we're making in our business position us well for digital. Our digital business is 8 to 10 years old at this point in time. We are replatforming onto a mobile-first-based technology as we speak. So we feel like, on a go-forward basis, this has just accelerated the trend in which we're already planning strategically around.

And then I have been following the company for some time. Historically, you've managed receivables risk very well. On the fiscal first quarter, you took a proactive $21.5 million year-to-year increase in allowances for doubtful accounts. Do you feel you're well positioned for any potential fallout in the retail landscape as it relates to that broad distribution?

Well, we certainly like to think so. I mean, I think the unfortunate part is there's still -- despite the fact that we're beginning to see a recovery just in general in the U.S. with retail reopening, there's still just a tremendous amount of uncertainty that's out there. As it relates to how we've reserved and the breadth of our distribution and whatnot, the reserve that we booked is, by far and away, more significant than anything we've seen in the past. So if you go back to the Great Recession, some of the bankruptcies that we saw a few years back, at our peak, we were about 1/4 of the reserve that we've booked right now, give or take. And so we'd certainly like to think that we're more than adequately reserved. And as we look at our wholesale customer base, we feel that we've strategically positioned our brands with what we would consider the more healthy retailers that are out there and to have the liquidity and the strength in the marketplace, that there are a lot of smaller and midsized wholesale customers that we work with as well. And so the bulk of the risk, as we see it sitting here today, and as part of our earnings call, is more concentrated in that small to midsized account base. And that's a little less predictable.

Understood. And Jim, you mentioned e-commerce channel partners as one of your 4 buckets. When you think about, for the U.S. business, your own e-commerce and business done through e-commerce sites of channel partners, what would that total to as e-commerce as a percent of the mix in North American market?

Well, from an overall global standpoint, we've provided specifics on this. Our e-commerce business in 2019 represented 11% of the company's overall sales. And when we look at that, combined with what our wholesale customers are doing, in online business, we peg that at, call it, a mid-20% range. And that would include everything from the online pure-plays that we see in the U.S. with an Amazon or Zappos. And when you get out into China, it would include Tmall and things of that sort. Specifically, as it relates to the U.S., we haven't provided an exact breakout of that. I would say, though, from an overarching standpoint, that our direct-to-consumer business and our e-commerce business in the U.S. skews more heavily to the D2C and e-com than it does to the overall weighted average trend for the company.

I see. Very helpful. And then as you think about the global distribution footprint, is there any lasting changes you expect to see in your key channels for international markets?

I think it's going to -- it's going to be very different by geography. And it's probably a bit early as it relates to what we'd anticipate from a pandemic standpoint. I think similar to what we're seeing from a U.S. standpoint, there's certainly a broader trend towards digital and online. We've made those investments, not only domestically and in Canada, but we've also upgraded our e-commerce platforms in Europe. Our Asia direct business generally skews a bit higher from a D2C perspective as well, particularly on the brick-and-mortar front. But we've seen in our Asia business a similar acceleration in the digital side, albeit starting at a much smaller level. So there's plenty of room to run there in terms of as we see that continued shift from a consumer perspective.

Great. And digital has been an area of focus for investment for the business. You touched on some of this, but can you speak to some of the priority areas for digital investment in 2020?

Yes. I think a couple of the more significant areas for us. I've mentioned, I think, a little bit earlier in the remarks the investments we're making in our e-commerce platform. And so we've had a -- our existing e-commerce platform's been in place for 8 to 10 years. It was built on a desktop-first-enabled technology. So we were -- we initiated a project early last year that we anticipate going live here in North America for all the brands preholiday. We refer to that project as X1, our Experience First initiative. We're well down the track to that. So that's a really important project to us from a digital standpoint. The other component that I would point to, less project-based. But as we sit here today, and the experience that we've had from the pandemic and the shift in the consumer, is just how we're thinking about our marketing spend. And so we've made a fairly significant shift in how we thought about marketing more to digital and far less in terms of how we think about it from an in-store standpoint and how we think about it in terms of just traditional TV, radio, billboard-type marketing. So really making those changes.

Yes. Some of those more tactical near-term actions would include the live Instagram events. We have Luke Combs, a brand ambassador, a few weeks ago do a concert on our feed, stepped up our use of micro influencers, and really, on the marketing spend, shifting a bit more closer to purchase. So ramping up some of the activity on social media channels like a Facebook and really just quickly adapting that strategy to where the consumer is paying attention.

Yes. Reallocating those dollars seems good judgment. Having a brand community direct connection with the consumers, I think, is more important than ever.

Yes. And I'd also say that -- sorry. I'm just going to also say that some of the -- whether it's our outdoor guide or some of those live Instagram events, what we're doing is also equipping consumers with providing them teaching tools to help them embrace the outdoors because that's a clearly a trend in the marketplace that we'd like to leverage.

Great. I'm going to shift gears here and talk a little bit more near term. Before I do so, I do want to encourage people to submit questions through the dashboard, and in about 10 minutes or so, we'll field some of those. So guys, near-term dynamics, I want to talk about positioning for post-pandemic success. What are you guys seeing in the business environment today for your key markets, changes to consumer behavior in the past 30 to 45 days, recognizing that stores have been closed and that's a challenge getting access to those consumers?

Yes. I mean, we can speak to -- I probably can't speak all the way up through today, but can provide some commentary as it relates to at least up through the point in time of our earnings call. And of course, at that point in time, our store fleet in North America and Europe were basically entirely closed. And so as we sit here today, the vast majority of those stores have now reopened. So it's encouraging to have that reopen. We'll look forward to providing further updates in terms of just what we're seeing from a traffic trends perspective across our direct-to-consumer business when we get out to our July earnings call. Aside from that, certainly, the most significant shift that we've seen is the change over to digital and online. And that's just reinforced, like I said earlier, the focus we've got on our X1 project, the investments we're making in our e-commerce business and just the digital focus that the company has.

Jim, are you there?

Well, I'm sorry, guys. I went on mute for just a second. Industry data for the U.S. market shows a surge in demand for products associated with outdoor activities closer to home, things like camping, boating, hiking, outdoor fitness. As you look at your category data, are you guys seeing evidence of this in your sales trends?

Yes. Jim, we're certainly excited about that trend. And anecdotally, we firmly believe that, that outdoor participation has -- there's just a lot of interest, whether it's people seeking out, planning their next adventures digitally or planning for their outdoors trip, and where a great appropriately priced brand with Columbia to help them access the outdoors. And so we are excited. Looking at historical data, looking in the rearview mirror, the biggest trend would clearly just be the store closures and how that impacts consumers' ability to access product. When they can, they certainly focus on footwear for us. And as well as the broader industry, footwear seems to be outperforming apparel quite significantly as an industry. Comfort, especially early on, has been a very clear trend, and that's adjusting to the work-from-home environment. And so, in some weeks, you could see the -- any comfortable product that we have on our website, being the best sellers, right? It was just an area of focus for consumers. And now summer setting in, it's clearly top of mind right now for the consumers' interest in the spring assortment and gearing up to get outdoors. And so, overall, we think that trend -- setting aside the consumer's ability to access product, we think that's a very positive dynamic for our brand portfolio.

Great. It's interesting, the dynamic of footwear versus apparel that's consistent with what I've heard from some others. Any insights on why that may be?

It's a great question. We talk about it a lot internally, and I'm not sure I've got a great answer for you. I mean, clearly, some of it was comfort-related. Some of it was running-related. But setting aside those 2, I still think there's probably some other drivers that I can't articulate.

Well, even in the case of SOREL, and we have commented in our April earnings call. SOREL during the month of April, our online -- our e-commerce business was up nearly 300%. And in the case of that, it's still got a functional use, but it's got a lot more of a fashion component, too, as well. So it's an interesting dynamic that we're seeing in the growth patterns.

Yes.

Great. And then let's address some of the tactical changes and strategies you guys have implemented to help manage through 2020. Can you speak to some of the challenges, balancing supply with supply chain disruptions with inventory planning for fall and holiday? And to what extent were you able to manage production orders and receipts for second quarter and the second half to help realign those orders?

Yes. There's probably a lot to unpack inside this. I think from an early pandemic standpoint, and particularly the impact to China, and we manage a very diverse source base in China from an overall finished goods standpoint, represents a low double digit percent of our overall production. With that said, there's still a fair amount, and it skews a bit higher when you think about overall raw materials. And so the disruption early on with regard to our raw material vendors and our finished good vendors, it certainly slowed the production for the fall '20 season. Spring '20 had largely been either shipped or produced and kind of en route, so much less of an impact on that. But fall '20, there is an anticipated delay of kind of the 30 to 45-day range. And then as things have kind of trended forward from there, we saw similar pandemic outbreaks in various other source countries in which we manufacture, Bangladesh, Sri Lanka. So that's certainly had the supply chain shock side of things. We've -- and then as we've seen the consumer demand side of that shock, we've reacted as well. And that's entailed. We've been purchasing inventory really as planned for the year up through the month of February. And then as we began to realize the effects of the pandemic, it was at that point in time that we significantly curtailed our production for the fall '20 season. So at this point in time, and knowing that's the case, and we were well into our fall '20 order taking season with our wholesale customers, we're now at this juncture where our -- where there's an intense amount of focus over the last several weeks of working back through the matching of the supply and production that we've purchased with the anticipated demand, working with our wholesale customers in terms of which orders should be canceled. And we've seen a fair amount of cancellations at that. So there's a lot of effort going into inventory management. And then I think -- go ahead.

Go ahead, Jim.

Let's say, as it relates to Q2, second half, I mean, Q2 is obviously going to be impacted by what we're seeing in the marketplace right now. We've had the spring goods on hand. And in fall, we'd anticipate a slight delay in the timing of production. And obviously, the -- this is all going to be a matter of what we see from a consumer, from a demand standpoint as the business continues and the economy continues to recover in the second half.

Got it. And of course, with stores closed for much of spring, there will be spring/summer merchandise excess. What are the strategies to manage through that access?

Kind of multi -- I'd describe it as a multipronged strategy to how we're thinking about excess. On one hand, there's our -- given the composition of our product line, there is a fair amount of carryover, what we would consider franchise-type styles, that carry season-to-season. So on one hand, we would anticipate carrying forward some of that products, perfectly good product that we can sell at full price in -- as a part of our spring '21 season. We'll also leverage our outlet stores a bit differently than we have the last several years, in which we've built for those outlets in a fairly meaningful way when you look over the last 5 years. And so as we think forward for the fall '20 season, and then certainly into '21, and with inventory that we're carrying, that we would leverage those a bit differently in terms of being able to liquidate and move inventory. With that said, I mean, this is again -- it's good inventory. There's nice size runs and color runs and whatnot in which we're able to sort the stores and manage that from a profitability standpoint. And then to a lesser extent, would we anticipate closeout or more promotional activity in terms of how we intend to manage it? It's not to say there won't be a margin effect. And that's not to say that retailers, from a liquidity standpoint, I would fully anticipate we continue to move forward here through the balance of the year. It's going to be a promotional environment. We'll need to react to that to some degree, but we are going to counterbalance it with some of the -- the strength of our balance sheet plays well into that, and the distribution that we have does as well.

And then, guys, for the moment anyways, there's a lot of optimism about reopening and consumer activity. It will get cold at some point this year, and there will be Christmas. If you think about the industry as a whole, given the defensive approach of many in the footwear and apparel categories, do you think there's a chance there won't be enough inventory for the holiday season? Is that something investors should be considering?

We'd certainly love that to be the case. I think that's the million-dollar question. I don't think we're -- we certainly -- we're in good company as it relates to managing the working capital and the inventory side of things in terms of curtailing inventory purchases. So I think that's all going to be a function of just how strong the consumer is in the back half of the year. I think there's plenty of inventory out in the market. We came off of a relatively -- our fall/winter '19 season, it was a bit warmer. So we're carrying a bit more inventory into the season. So I think as that demand shows up, we -- it should bode well for the inventory that we've got to capitalize on it.

And guys, I'm showing a question through the dashboard here from a client. This is perhaps a good time to ask it. The question is, how should we think about working capital uses and sources in 2020 and 2021, particularly inventory? Have you given any views on where you foresee inventory balances and working capital sources and uses?

We haven't to date, but I think it'd be fair to say that we've been a bit more aggressive the past 2 to 3 years just with the growth that we've seen in our business and taking a bit more of a growth posture and making some opportunistic buys as it relates to inventory. And so I think just given the dynamic and the environment that we're working in right now, we're certainly prioritizing inventory turns, working capital. I think cash flow is obviously just absolutely king in an environment like this. So it's certainly reprioritize how we think about things at this juncture.

And then earnings power in 2020 will clearly be compromised. We've been thinking about the value of stocks based on their capacity to earn 2021 plus. You guys have taken some steps to manage expenses in 2020, including the reduction of operating expenses by more than $100 million. What are some of the areas where you've been able to find savings? And as you plan the expense structure for 2021, what are some of those areas that could prove permanent areas of savings and other areas where you might see expenses come back?

Yes. I think a good question. There's -- and as it relates to that, there's probably a bit of a different dynamic in terms of how -- 2020 versus 2021. In the case of 2020, many -- much of our discretionary spending in a pretty significant way. You'd anticipate travel. We've furloughed employees. There have been, unfortunately, layoffs that have been involved in this as well, our incentive compensation. So there's a lot of measures that have been taken, some of which, as I'm describing it, are temporary in nature to weather through the storm, if you will. And then on the same token, we're also looking at the measures we can take to ensure that we're rightsizing our cost structure relative to the revenue on a go-forward basis. And so as we think about 2021, in particular, we're looking really at all aspects of our business. There's a D2C component, for sure, as we look at our brick-and-mortar stores. And as that business recovers, we're in discussions and looking at everything from our lease costs and our lease obligations to the labor in those stores. We're looking at our supply chain and how we can further optimize the logistics and freight costs and our -- and the positioning of our DCs to support an omnichannel business, and then all the way down into the administrative side of the house and looking at people and other discretionary costs really across the corporate enterprise. And one of the other things I've mentioned that we've looked at style count, how we continue to rationalize our style count, because, certainly, that's a driver of overall cost of the business. And then all the while really making sure that we keep a balance on not only how do we rightsize, but how we also make sure that we're positioning spend and investment in our resources for what's going to drive growth going forward. And so that meant thinking through with digital and with e-commerce and with different brands and categories, how we make sure that we're putting money towards those things that are going to ensure the continued success and growth of the company.

Great. And in your multiyear planning discussions, I'm recognizing there's a lot of dynamics, but are there any changes to where you see the growth opportunities for the business?

Aside from probably what I've talked about from an online standpoint, I think that's certainly the most significant element right now. We've temporarily put a hold on our brick-and-mortar development this year for obvious reasons. So I think we're as anxious as anybody to see how the recovery takes place, so that we can begin to strategize in terms of what that looks like on a go-forward standpoint. And then, likewise, with regard to -- we're monitoring very closely our wholesale customers and dealers and really where we put the emphasis and the growth with them.

Last question. Unfortunately, we've got to wrap it up. But as we think about the current situation with the pandemic, what should investors be focused on to grade your success managing through this crisis? What are some of the key mileposts we should be watching for?

Well, without getting down into specific targets and numbers, I think it boils down to a few things. One, I think market share, and certainly looking for those indicators that are out there, and how the Columbia brand, our portfolio of brands are performing relative to the competitive set. Cash. I think cash is king. Liquidities, obviously, crucial. And we'd like to ensure that we're able to continue managing a strong balance sheet, the fortress balance sheet that we've been historically known for. So that's of importance to us. And then the third piece that's essentially a component of that is our ability to manage inventory and balance the supply and demand side. So those are, at least for us and internally, how we're thinking about it. Those are probably the 3 biggest signals in the near term.

That's great, guys. Stifel really appreciate you working with us and participating. Thanks for all your insights. Jim and Andrew, thanks so much.

Thank you. Appreciate it. Thank you, everybody.

Thanks, Jim. Thanks, everyone.