COLM - NASDAQ

Greetings. Welcome to Columbia Sportswear Third Quarter 2024 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, VP of Investor Relations and Strategic Planning at Columbia Sportswear. You may begin.

Good afternoon, and thanks 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 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 don't undertake any duty to update any of the forward-looking statements after the date of the 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 in the appendix of our CFO commentary and financial review. Following our prepared remarks, we will host a 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.

Thanks, Andrew and good afternoon. Overall, third quarter financial results reflect a continuation of the trends we've experienced all year. The North American outdoor marketplace remains challenged and we are working to maximize sales in a soft consumer demand environment. Outside of North America, we continue to experience positive momentum in most direct and distributor businesses led by our China and Europe direct business. Third quarter net sales declined 5% year-over-year and came in at the low end of our guidance range. Despite this, we were able to exceed our diluted earnings per share guidance range through a better than planned gross margin and disciplined expense management. Our financial position remains strong. We exited the quarter with cash and short-term investments of over $370 million and no debt. We are on track to generate over $300 million in operating cash flow this year. In addition to investing in our business to drive long-term profitable growth, we are returning free cash flow to shareholders via dividends and share repurchases. Through the first three quarters of the year, our share repurchases totaled $231 million. Highlighting our continued commitment to our capital allocation strategy, the Board of Directors has approved a new $600 million buyback authorization. As we enter our peak sales season, there's no shortage of uncertainty. We await the arrival of colder weather in many regions of the world. With this in mind, we are taking a more cautious net sales outlook for the remainder of the year. Despite the top line pressure, we are slightly raising the bottom end of our diluted earnings per share guidance. Before reviewing our results and outlook in more detail, I'd like to discuss Colombia's new growth strategy named ACCELERATE. In recent months, the Columbia brand initiated ACCELERATE, a growth strategy intended to elevate the brand and attract younger and more active consumers. Over the past 86 years, we've built an extraordinary company and one of the largest outdoor brands in the world. Our top strategic priority is to accelerate profitable growth, and I know our company is capable of growing rapidly. The ACCELERATE growth strategy is centered around several consumer-centric shifts and enhanced ways of working. First, we have strengthened our consumer segmentation framework to clearly define the growth opportunities ahead of us. We will continue to serve our existing consumers with accessible outdoor essentials while also focusing on bringing new, younger active consumers into the brand. We know that this consumer segment is the largest and fastest-growing part of the outdoor market. We already successfully serve this consumer outside the US where we are seeing strong growth in markets like China and Europe. In the coming seasons, our brand, product and marketplace strategies in the US will focus on reaching younger, more active consumers. We know that when we deliver the right product to the right consumers at the right time, we win in the marketplace. The second shift is elevating consumers' perception of the brand. We're doing this with a refreshed creative strategy that brings Columbia's unique brand personality to life. We're embracing the spirit of the brand that our one tough mother, Gert Boyle, made famous. We engineer exceptional products for whatever life throws at you, helping to keep consumers warm, dry, cool and protected. And at the same time, we don't take ourselves too seriously. The Columbia brand is fun, irreverent and authentic, and this will become increasingly evident in our marketing. To lead this new marketing direction, we recently hired Matt Sutton as the Columbia Brand Head of Marketing. Matt has extensive experience in brand and digital marketing and will be leading the strategic integration of the Columbia global marketing efforts. We've also announced a new global ad agency of record, Adam & Eve, to help us bring our vision to life. The third shift is around product. The foundation of our success is creating iconic products that are differentiated, functional and innovative. Under the leadership of Woody Blackford, our product teams have a new product construct to drive growth with targeted consumer segments. Consumers already trust the Columbia brand for its quality, value and reliability. In the coming seasons, we will be emphasizing innovation and style with new products as well as updates to our most iconic styles. We're reducing our assortment to focus our efforts on fewer, more powerful collections with clear purpose. The fourth shift in ACCELERATE is elevating the position of the Columbia brand in the US marketplace. To activate our brand and product strategies, we will invest alongside our best-in-class strategic retail partners to elevate in-store presentations and bring our unique brand and products to life. In our direct-to-consumer e-commerce business, we've already begun to evolve columbia.com to be the best expression of the brand. We want visitors to come to the site to see our latest products and innovations with enriched brand storytelling. In our brick-and-mortar stores, we're focusing on enhancing our assortments and in-store presentations to tell better brand stories and drive sales. The next Shift and Accelerate is our integrated full funnel marketing strategy. We'll have a greater emphasis on the consistent year round share of voice in the market. Not only are we planning to invest more into marketing but we're also going to be more efficient with how and where we activate these demand creation investments. We will be more differentiated with creative marketing activations and immersive ways to experience the brand. Combined, our Accelerate product, marketing, and marketplace strategies are engineered to get the right product to the right consumers at the right place in time. This will enable us not only to meet our consumers where they are but inspire them to go further with us. We're excited to bring Accelerate to life. This will be a multi-year strategy that steadily builds momentum in the seasons ahead. As 2025 progresses, the changes we're making will be increasingly evident to consumers. While we are not prepared to provide financial metrics for the Accelerate growth strategy at this point, I firmly believe these actions will drive brand-right profitable growth. We will seek to balance brand investments with disciplined expense management to achieve our goal of profitable growth with operating margin expansion over time. I will now review our third quarter financial performance. Net sales of $932 million declined 5% year-over-year, driven by a 9% decline in global wholesale net sales, partially offset by 2% direct-to-consumer growth. Gross margin expanded 150 basis points to 50.2%. This was ahead of plan driven by favorable international gross margin performance, lower than expected promotional activity in the U.S., and lower freight expenses. SG&A expenses increased 3%, primarily reflecting higher DTC expenses, partially offset by lower supply chain expenses. Favorable gross margin and SG&A underspend resulted in operating income and diluted earnings per share coming in above our guidance range. Looking at our net sales by geography, U.S. net sales decreased 10%, primarily driven by mid-teens percent decrease in us wholesale. As a reminder, our fall 2024 order book in the U.S. was down a mid-single-digit percent. While still very early in the season, wholesale sell through has gotten off to a slow start. We expect sell through to pick up with the arrival of cold weather. US DTC net sales were relatively flat. Brick-and-mortar was up mid-single-digits percent, driven by a contribution from the temporary clearance locations increased store productivity and new stores opened over the last year. U.S. e-commerce net sales were down high-teens percent reflecting challenging outdoor market conditions as well as a shift in Columbia.com digital marketing strategies. For my review of third quarter year over year net sales growth in international geographies. I will reference constant currency growth rates to illustrate underlying growth in each market. Latin America Asia Pacific region or L A AP net sales increased 18%. China net sales increased low 20% with healthy growth across wholesale and DTC. Despite broader economic headwinds in China, the outdoor category continues to grow. Colombia is capitalizing on this trend with localized product lines like transit and unique brand activations that highlight Colombia's heritage and innovation. During the quarter, Columbia hosted a hiking event in Shangri La National Park. The well-attended event featured music and hiking in the first-of-its-kind event at this premier hiking destination. The event was amplified by celebrity brand ambassadors whose online content generated millions of impressions. China's e-commerce business continues to build momentum with several highlights in the quarter. Columbia had an incredibly successful Super Brand Day on Tmall ranking third in sales volume across all outdoor brands. On TikTok, Columbia's first footwear store launched and is off to a strong start. It's exciting to see the Columbia brand realize its full growth potential in this important region, and it remains on track to be one of our fastest-growing markets this year. Japan net sales increased double-digit percent aided by continued strength in international tourism. Korea net sales increased mid-single-digit percent. During the quarter, we appointed Jeff McPike as the new General Manager of Columbia Sportswear Korea. Jeff is a 25-year industry veteran with a passion for building innovative omnichannel consumer experiences. His marketplace expertise will be instrumental in building the right strategy to drive our business forward in Korea. LAAP distributor markets were up mid-20s percent, primarily reflecting robust fall 2024 orders. Europe, Middle East and Africa region, or EMEA, net sales increased 10%. Europe direct net sales increased low single-digit percent, led by a robust DTC growth. The European team is doing an exceptional job of creating brand visibility and relevance with unique marketing activations like the Hike Society. This season, we hosted 90 hike Society events, creating grassroots connections with young hikers and introducing them to Columbia Technologies. Our Europe direct business remains on track to be one of our fastest-growing markets this year. Our EMEA distributor business increased by approximately 130%, driven by a shift in timing of shipments as well as higher fall 2024 orders on the strength of the Columbia brand in many distributor markets. Canada net sales decreased 19%, driven by lower wholesale sales. The Columbia brand remains well positioned in Canada with high brand awareness and consumer trust. Looking at performance by brand. Columbia brand net sales decreased 1%, primarily reflecting a challenging marketplace in the U.S. and Canada, partially offset by a continuation of healthy trends in most international markets. This fall, we have several innovations that are integral to our product and marketing strategies. Omni-Heat Infinity remains our largest innovation platform and one of the fastest-growing parts of our business. Our newest cold weather innovation, Omni-Heat Arctic will be prominently featured in our DTC channels. As a reminder, Omni-Heat Arctic starts with the translucent outer layer that lets solar energy in. Heat is then transmitted to an insulation layer close to the body for maximum warmth, mimicking the Polar Bears warmth protection system. I'd like to congratulate our Chief Product Officer, Woody Blackford, and our Vice President of Innovation, Haskell Beckham, who were honored by the American Association of Textile Chemists and Colorists for their significant contributions in developing new fabrications and technologies in the apparel industry. Thank you for everything you do to make Columbia a leader in the outdoor space. Great work team. On the collaboration front, this fall we partnered with Disney on Mickey's outdoor Club collection inspired by the iconic artwork from the Mickey Mouse comic strip. This collection featured beloved Disney characters on a camping trip top styles quickly sold out and the line was featured in numerous Disney focused and outdoor media outlets. This holiday season Columbia will launch our ninth annual Star Wars collection. The first content promoting the collaboration will go live tomorrow and will feature a surprise appearance from a Star Wars special guest. Fans of Star War and NASCAR are going to want to see this. Shifting to our emerging brands. Mountain Hardwear net sales increased 2% driven by DTC growth. The brand has several exciting brand and product activations for the balance of the year including an expanded Ghost Whisperer collection, new snow sports offerings and a soon to be announced Product Collab Mountain Hardwear's product line and brand positioning are on track and the team is focused on accelerating growth. prAna net sales decreased 7% in the quarter. I'm encouraged by the progress the prAna leadership team has made in recent months activating wholesale distribution, refreshing marketing and recruiting new talent to the team. I'm confident these actions position the brand for growth starting with a positive order book for Spring 2025. SOREL brand net sales decreased 39% driven by lower fall 2024 orders and elevated clearance and promotional sales activity in the prior year. The SOREL team is focused on building brand, product and marketplace strategies to drive the long-term growth potential that I know the brand is capable of. This process will take time and I expect sales trends will remain under pressure in the Spring 2025 season. I will now discuss our 2024 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. Looking across the global marketplace. There are many external risks and uncertainties outdoor Industry and U.S. consumer headwinds, weather, geopolitical conflicts, supply chain disruptions, and the upcoming U.S. elections. These factors among others have the potential to impact consumer demand and our operations. With this uncertainty in mind, we are reducing our net sales outlook to reflect a 3% to 5% decline this year. Gross margin is now expected to expand 40 to 90 basis points. SG&A is expected to be 42.8% to 43% of sales leading to an operating margin of 7.7% to 8.4%. The profit improvement program is on track to deliver approximately $90 million in cost savings. This year we are slightly raising the low end of our diluted EPS guidance range which is now $3.70 to $4.05. As we noted on the last call our Spring 2025 order book reflects a return to growth in our wholesale business in the first half of the year. This order book reflects growth across Columbia, prAna and Mountain Hardwear and growth in the U.S. and international markets. Based on Spring 2025 orders, we anticipate first half wholesale net sales to increase mid single digit percent. While we are not providing any full year 2025 guidance at this time, our objective is to deliver net sales growth and operating margin expansion. We will provide our next update on 2025, when we report in February. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities, we see across the business. The accelerate growth strategy provides clear strategic shifts that will unlock brand right profitable growth for years to come. We are investing in our strategic priorities with renewed emphasis, to accelerate profitable growth, create iconic products that are differentiated functional and innovative, drive brand engagement with increased focused demand creation investments, enhance consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that is digitally-led, omni-channel and global and empower talent that is driven by our core values. That concludes my prepared remarks. We'll welcome your questions for the remainder of the hour. Operator, could you help us with that?

Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from Bob Drbul from Guggenheim. Bon, your line is live.

Hi, good afternoon. Hi Tim.

Hi Bob.

I guess, I have two questions for you. The first one is just on the accelerate growth strategy. You talk about bringing newer, younger active consumers into the brand. Do you believe those consumers are already in the channels that you're competing in, I just trying to understand sort of how do you get after that segment of the consumer base? And the second question I have for you Tim is, you said it's obviously weather 75 or 80 today in New York, but like warmer weather, slow start to the season. How do you feel like the channel is out there with many of your wholesale partners?

Great. Yeah, I can help you with both of those. Bob. As it relates to the younger consumers we believe that they're already in the brand. We know they're in the brand internationally. We just need them to be more involved in the brand domestically. And our expectation is that with the new marketing leadership and help from a creative agency that we've announced in the script today that we're going to be again returning to a more differentiated approach to a humorous, irreverent brand personality where we can be really quite different and be more important to these consumers that we're trying to attract. We believe that they're already in the brand and they know the brand well. It's just a question is that we're don't have enough of them. So that's the plan is to spend more to get those folks to spend it more efficiently and to get the messaging properly. So we get consideration improved. And then as it relates to the channel, I believe the channels in the proper position now. Our customers have spent a lot of time cleaning up inventories with the chemistry that was a problem for a few different geographies. But right now the channel appears to be in good shape and we're just waiting for great weather to supercharge things.

Great. Can I just follow-up Tim?

Sure.

So just in terms of the marketing, is the plan to create like a one tough father strategy with you and Joe. Are you guys going to get back into the acting business or what are we looking for here?

No I said card is expiring and. I think I'm done with that. No. This is going to be an approach that is going to be frankly quite interesting and different and we previewed it with a few customers. We're going to be showing it to a few more here in the next several days and the reaction frankly is quite – is quite interesting and good and we'll have to get in front of our investor group here soon but suffice it to say that we're pretty excited about the opportunity. It's going to give us.

All right. We’ll be watching. Thank you, Tim. Good luck.

Thank you. The next question is coming from Laurent Vasilescu from BNP Paribas. Laurent, your line is live.

Good afternoon. Thank you very much for taking my question. Tim, I wanted to follow up on the comment around 1H 2025 wholesale growth of mid single-digits. Maybe can you unpack that a little bit more for the audience like what's driving that growth? Is it just easier year-over-year compares? Is it driven by pricing restocking? And I noticed you mentioned that growth will be coming from all regions but are all regions equal in that nature or should we think about just more growth coming from international as at least for spring 2025?

Yes, that's right. The business is going to be more balanced in the first half of 2025 and we'll have strong improvement in our in our US business as well as retailers who are cautious about placing orders in the prior periods for again chemistry that was going to be fragile from a selling perspective. So there will be improvements really in almost every market, not all to the same extent but I just might point out that our international business has performed much better than our domestic business and our expectations are that those markets will continue to improve maybe more rapidly than the US.

And then Laurent, maybe just a couple added comments to that. In terms of pricing versus stocking is as it relates to the spring 2025 season, by and large, we've held price for the season aside from whatever mixed shifts there might be with what's sold in. And I think that Tim's point, as you think about regional growth opportunities and we're calling for a single-digit rate of growth, a reasonable chunk of that. Just given the sheer reliance on the US business and the Colombia brand, you can assume that the US Colombia is generally following suit with that overarching first half expectation.

Okay. Very helpful, Tim and Jim. And then just to follow-up on more maybe more on margins. With regards to the ACCELERATE plan, I think Tim you mentioned the higher and more efficient demand creation. I know demand creation last year with 6%. Where do you wanted to go through this ACCELERATE program? And then Jim for you on the cost savings program that the 90 million for 2024. I was just curious how much you've realized so far. The first few quarters and how should we think about for the fourth quarter? And then for 2026, I know you're not commenting about 2025 financial targets but like should we think about that 125 to 150 kind of balance between the two years that remain for this profit improvement plan?

Yes, let me make sure I get my questions out of the way and then I'll turn it over to Jim here. The margins are planned to be quite strong and certainly in comparison to last year. The marketing rates will be established as we go into the end of the year but suffice it to say they're going to be increasing amount of spend in marketing as well as a more efficient use of the market. We haven't settled on a firm number yet but we know we need to spend more and we're building those additional costs into other parts of the business so that we can offer growth and expanding operating margin as well.

And then, Laurent as it relates to the Profit Improvement Program, we're well along this year in achieving the targets that we've set. In fact earlier in the year, we said that would be 75 million to 90 million. With the revisions and updates we're making today, we believe that we're tracking to the high-end of that. We're really pleased with it forms across the business in that regard. Certainly a component of that is attributable to getting our inventories clean and less supply chain and inventory carrying costs. But broader than that a lot of optimization efforts going on across our supply chain and just a focus on disciplined cost management. So, happy to see that we're progressing in that regard. And then as it relates to the out years and that could be premature in terms of kind of breaking down in detail. I think when we come around to our call in February. I'll provide a bit more detail on what our expectations are for 2025.

Okay. Very helpful and best of luck with the holiday season.

Thanks Laurent.

Thank you. The next question is coming from John Kernan from TD Cowen. John, your line is live.

Hey. Good afternoon, guys. Thanks for taking the questions. Tim, what do you think the catalyst is for improved spending on outdoor categories? The competition seems fairly high, the macro seems somewhat depressed. But what do you think gets us out of the slump? You are calling for mid-single-digit wholesale growth next year, which is a nice uplift. What do you think sustainable growth looks like? And what's the catalyst for it in the outdoor industry?

Well, frankly, I'm always disappointed when we aren't growing in high-teams, because I think the company with its balance sheet and the infrastructure that we have built around the company, we should be building and growing in rates much stronger than that. Frankly, our rates of growth outside the US are much -- we would point to a much bigger opportunity. I think much of our malaise in the US is a function of how we've been marketing our products. Our products are clearly superior in our opinion to many of our competitors. We're just not talking about it. We're not giving it enough emphasis and we're not talking about it in a differentiating enough way. And then, for me will be the key in terms of making us a bigger business in the US just overall. Secondarily, we've talked for a long time about the opportunities and categories where we're underperforming, specifically footwear and those areas are going to get much greater emphasis from a product standpoint and a marketing standpoint.

Understood. That's helpful. Maybe just a follow-up question on the margin structure of the business and the SG&A rate is going to sit somewhere in the low-40s, gross margins now above 50%. You look back at the business versus its own history, the SG&A rate is really the reason for the margin to leverage over the last five years. Like how do we think about SG&A rate going into fiscal 2025 and fiscal 2026? There's obviously been some cost savings programs announced but how do you I guess stop the deleverage of sale sales and SG&A?

Well, the first order of business is going to be growing the top line which is a. Focus of the company. But there are other levers we have available to us and maybe I'll ask Jim to just talk about a few of them. Because many of them are under way.

Yeah. We do have this profit improvement program that we've initiated and -- some of the efforts that we have on going into 2025 and 2026 is how do we reduce our total cost of our supply chain that had gone up by several points over this five year time frame that we're talking about. And certainly, we believe there's efficiency and how we streamline our operations our processes, our product flow and there ought to be savings attributable to that. And so we're you know, I think as a management team, we're focused on the discipline that we need to have to get that SG&A back down to more appropriate level. While the same time there needs to be some balance in it because this Tim's touched on. We want to make sure that we're also fueling growth and making the right investments along the way from a demand creation perspective and putting the energy behind our brands.

Yeah. So I think at the end. Of the day this is about growing the business. We think we can. We can control costs as well as anybody. But we have to have growth and we will. We intend to have growth.

Understood. Maybe just one final question on the wholesale channel commentary. How would you describe the US Wholesale channel? So you know international trends are above domestic. Just curious you know as you look into fiscal 2025 the order books and maybe even some of the near term sell through dynamics that are going on. How would you characterize the North American wholesale channel?

It will -- well, clearly in North America there's been significant consolidation at the retail market for many, many years. And you know, I mean, that puts more leverage in the in the hands of the retailer. So we have to be better we have to be a good supplier and we have to have greater sell through which is going to be driven. By great product and supercharged by great marketing.

Got it. Best of luck into the fourth quarter guys. Thank you.

Thank you. The next question will be Paul Lejuez from Citigroup. Paul, your line is live.

Thanks. It's Tracy Kogan filling in for Paul. I had a question about your gross margin. It came in better than plan in third quarter. And I think you mentioned that there were lower promotions in the US market. So I was just wondering if you could characterize the current promotional environment. And then and secondly I was wondering what was built into your guidance for 4Q in terms of promotions. Thank you.

Yeah. We would expect promotions to be stronger frankly as we approach the holiday season. And then the gross margin improvement was due to a number of certain areas including you know free charges et cetera and then the first cost on the. Of the goods coming into the country. So our expectations are for further promotions but we built. Those expectations into our guidance today.

Yeah, maybe just a couple of added comments, I would make you'll recall. In July, we lowered our full year gross margin forecast in light of some of the promotions that we were seeing during the second quarter. Just an anticipation of a more promotional environment that didn't play out quite to the degree that we had anticipated in the third quarter. So, things were a bit better, with that said, and as Tim touched on you know still it's still a very promotional environment. And so as we've provided an update to our outlook we've not increased the bottom end of our range you know with the expectation that there are going to be promotions out in the marketplace and we're going to need to react in order to spur the demand. And so that's essentially what's baked into our fourth quarter guidance as you think about the year-on-year change. And of course you know we're going up against much easier comps just given how warm it was through the entirety of the fourth quarter last year. The world where we see the benefit and the gross margin expansion in Q4 is going to come through cleaner inventory with less wholesale close out sales in the fourth quarter of this year. And we think about our own direct to consumer business and margins. They're really on par with where they were a year ago from a promotion and from an overall margin standpoint.

That's very helpful.

Thank you. The next question will be from Alex Perry from Bank of America. Alex, your line is live.

Hi. Thanks for taking my questions here. I wanted to ask about your exposure to potential China tariffs. Can you just remind us you know what percent of us goods are sourced in China? Do you have any initiatives in place to mitigate any potential impact? And you know would you consider price as a lever as well? Thanks.

Thanks. Yeah we strategically began our move out of China several years ago, even prior to the Trump administration four years ago. And we have a very small percentage of merchandise that's brought into the US from China. So exposure there is not great. You know we're obviously very concerned about the imposition of tariffs. The products that we make, the commodities that we engage in footwear and apparel are among the most highly tariffs in the United States. Some of the product carrying as much as 40 -- nearly 40% duties and that has not translated into increased investment in domestic production. So we believe that the argument about -- tariffs improving the domestic production of items such as footwear and apparels are fallacious. Additionally, the expectations around our international business and the impacts of a trade war we're getting are concerning. But you know we consider ourselves to be very adept at managing tariffs and duty rates globally showing that we're very successful at that international business. But the trade wars are not good and not easy to win.

And then -- and Alex just to elaborate on our sourcing exposure that China our footwear category is about 20% and apparel is a low single digit percent. So it's in the grand scheme of things. It's quite small as Tim described.

Really helpful. And then I just wanted to follow up to the prior question actually on the gross margin. So I think at the high end implies you know roughly 150 basis points of expansion in the fourth quarter. Can you just it sounds like lower close out sales you know is part of that. Can you maybe just talk about other pieces in there that would be driving the expansion and then you know do you expect those tailwinds that you're seeing in the fourth quarter and the third quarter here to continue you know as we move in through the first half of next year? Thanks.

Yes. I just reiterate by far and away the single most meaningful impact to why we would anticipate fourth quarter gross margin expansion is going to be a function of having much cleaner inventory than we did a year ago. And where we where we see the biggest benefit of that is in our wholesale business where we anticipate a much lower percentage of our total business is being done through close out sales. And then as I touched on as it relates to our outlet business we do have a much better assortment of inventory in the outlets in terms of the composition between what's special makeup and what is true excess inventory going through there. But we do to the point made earlier, we do anticipate that promotions are going to remain and markdowns remains a bit higher. And so we've taken a, I think the best approach or most reasonable approach we get to the margin outlook that we're providing here today.

Perfect, very helpful. Best of luck going forward.

Thank you.

Thank you. The next question will be from Mitch Kummetz from Seaport Research Partners. Mitch, your line is live.

Yeah Thanks for taking my questions. Tim, we we've talked about the weather on this call and how it's been a warm start to the season. I'm just curious, the assumptions that are embedded in your outlook. Are you are you essentially assuming normal weather for November, December, or are you expecting it to continue to be warm? What's sort of the underlying assumption that gets you to your guide?

Well, certainly through the month of October as we've seen it's been quite warm and that that's had a dampening effect on sell-through across both our wholesale and our D2C business. And that that's certainly been picked up in the updated outlook that we're providing here today as we get into the latter part of the year going up against the warm weather we had last year, we are anticipating some improvement such that things moderate a bit Mitch, but we're certainly not expecting a polar freeze that amplifies demand in any meaningful way. So we've taken as close to a middle of the road approach as we can. Now we all know that there is a weather and a seasonal component to our business that we're dependent upon.

And Tim you've been doing this for a long time. When do you really need the weather to turn to get the impression that it's better for the cold weather to come before maybe Black Friday and things get too promotional, the best bet for full price sell-through is before the market turns promotional going into the holiday. So is there like a line in the sand where you think that that's where you need the weather to come before retailers hit the panic button and start putting everything on sale that's somewhat seasonal in nature?

Yeah, I mean these are difficult to read frankly. But it's in my opinion, it's never too early to start snowing, Labor Day would be okay. But what the expectations are that the severity of the weather and where the weather occurs as an example, we've had really pretty good weather in Europe. Our business in Europe is quite good based on the fact that we had more normalized weather there as well as in China. But yeah so the weather is going to have to get here eventually. And it's -- our expectations are that we built the proper focus on the quantity of inventory that we need to move and. And at the promotional cadences that we think are better than our goals. And so yeah it's hard to give you a date.

That's part of the reason why we've widened the guidance range to -- and/or kept that wide not narrowed that in as we've got into the latter part of the year just given the degree of uncertainty around that aspect of our business.

And then maybe the last one on SOREL, Tim, you you've kind of talked about that being -- having $1 billion sales potential, and it's trending more towards probably $250 million this year. Are you seeing, I know that and it sounds like the spring order book is down. So at least through the first half of next year it looks like that that business is continue to kind of get go lower. Are you seeing any you know green shoots yet? I know there's been a management change there and you kind of altered the strategy, but any green shoots that gives you confidence that there's still a billion dollar potential with that brand.

Yeah I mean I think it's a. It's a very. Unusual product and brand with a very unusual background and personality. We just. have to harvest that. So I mean I'm looking for green shoots. It's really the men's product was virtually abandoned the prior periods. And so I think there's real opportunity there just to take advantage of the popularity of brand itself with men and then we just have to get our products correct here for the female shopper. And it's going to be important that we have the right -- the right approach to marketing that product as well.

Okay, thanks. Good luck.

Thank you. [Operator Instructions] The next question is coming from Jonathan Komp from Baird. Jonathan, your line is live.

Yeah. Hi good afternoon. I just want to follow up on the commentary around the wholesale outlook into the first half of 2025. I know the first half of 2024 was quite weak. So it looks like you'll still be down on a two year basis. So I guess I'm trying to understand your assessment of the marketplace and how the maybe the multi year performance compares to you know other reads across the industry.

Yeah again as I said that there's been a significant amount of consolidation in the retail trade in North America generally fewer large customers because they are solidated. So the expectation is that we continue to improve our marketing efforts, improve our spend. Improve our performance and appearance in the store which are all parts of accelerate. That we're going to have a much stronger business and a better a better performance. We've got you know unique positioning in our PFG. Fishing product which is one of the few brands that has a really honest and goodness spring business and you know those are. going to be areas where we need to emphasize our points of differentiation against our competitors and that will give us a better business in the wholesale trade in North America.

Okay, great. And then just one follow up related to the accelerate strategy. I'm just curious, you've obviously been in the mode of reducing costs and driving margin expansion through cost cuts. And how are you thinking about that balance? Is there any risk that you went too far in some of the cost actions? And I guess why does it make sense to target margin expansion while you're also now putting more effort behind accelerating the growth? Just want to hear the thoughts there. Thank you.

Yeah I guess I would -- as it relates to accelerate, it's a function of reducing spend across all categories as opposed to picking certain initiatives that the company had undertaken. And we we're going to postpone those or make it an adjustment in the company's spend level in certain areas in order to emphasize the marketing and promotional activities that we believe are going to be important to regain the strength of our brands.

Okay, much appreciated. Thank you.

Thank you. The next question today will be from Mauricio Serna from UBS. Mauricio, your line is live.

Great. Thanks for taking my questions. I wanted to just ask about the Q3 sales figure. Just want to make sure with the puts and takes that you mentioned on the wholesale shipments, was there like a net impact on wholesale shipments? I think there was like a pull forward from EMEA, but then some delays in the other like Europe direct. I just wanted to make sure there wasn't any impact from that front. And then maybe could you elaborate a little bit more on how you're thinking about the overall outdoor industry demand in the US going into 2025, just given that we're lapping a couple of years of tough dynamics? Thank you.

I can hit the first part of that, Mauricio, with regard to the timing shifts that we saw in the quarter. So this is the fall 2024 season, and we had intentionally when you look at the overall season or if you look at the quarter rather, the wholesale business was down 9%. Our projection for the full season is to be down for so you can see that some of that shifting into the fourth quarter, some of which was planned, some of which was not in the unplanned components a result of some of the supply chain disruptions that we had during the quarter. Relative to the plan we had, the guidance we provided in July, that timing shift is in the order of magnitude of about $15 million to $20 million, and that would have impacted our North America business and to a degree, our European business. Those are the two that were most impacted.

Thank you. And there were no other questions at this time. I would now like to hand the call back to Tim Boyle for closing remarks.

Thank you, Anthony [ph]. I want to thank everyone for listening in. We are very excited about the ACCELERATE growth strategy and what it means for our company. We know we're capable of growing rapidly. Now we're just waiting for cold weather and be thrilled once that happens. So thanks for listening in. We look forward to talking to you next quarter.