COLM - NASDAQ

Welcome to the Columbia Sportswear First Quarter 2025 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. You may begin.

Good afternoon and thanks for joining us to discuss Columbia Sportswear Company's first quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available 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 we -- 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 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, everyone. First quarter net sales and earnings exceeded our guidance range. Globally, our wholesale business was better than planned, driven by late season demand for winter products and early spring product shipments. Our business outside of North America, which represents approximately 40% of annual sales remain strong. During the quarter, we generated healthy growth in nearly all of our international markets with double-digit percent growth in the LAAP region and high single-digit percent constant currency growth in the EMEA region. Before the April 2nd tariff increases were announced, our solid first quarter performance put us on track to achieving our full year targets. I'd like to begin this call by outlining our view on global trade and our plans to mitigate the impacts associated with the recent U.S. tariff increases. Let me start by stressing the unprecedented level of public policy uncertainty that our industry is facing in the United States. We have been in business since 1938, and have navigated successfully through many incredibly challenging environments. But our industry has never faced a period with the rules and regulations around trade with the United States are simply unknown and unknowable. I have never been more excited than I am today about our brands, our strategies and the overall strength of our company. We have a diversified supply chain and a team of experts with deep international trade experience. We began this year with a fortress balance sheet, healthy inventories and building momentum in the Columbia brands accelerate growth strategy. These strikes give me confidence in our ability to emerge from this period as a stronger company with an improved position in the marketplace. When the rules around trade are unknown, it's impossible for any company to predict with confidence what the cost of U.S. products will be with the returns on certain investments in the U.S. will be and ultimately, how the U.S. marketplace will be impacted overall. Quite simply, companies are unable to confidently plan and invest in their U.S. businesses and until there's clarity with respect to U.S. trade policy. History has shown that tariffs are designed to raise the price of imported goods. In the U.S., well over 90% of all apparel and footwear is imported and is already heavily taxed under legacy trade laws. The additional 10% universal tariff is on top of already existing high duties. The magnitude of the additional proposed country-specific tariffs has the potential to profoundly impact our industry and significantly raise prices to U.S. consumers. For many consumers, the affordability of apparel and footwear will increasingly become a household issue. This will be further exacerbated if higher tariff rates go into effect. To-date, we have taken several actions. Prior to the April 2nd, tariff declarations, we domesticated all on-hand U.S. inventory through our own long trade zone distribution centers, saving us millions in potential tariff funds. For products that are impacted by the reciprocal tariffs, we are accelerating shipments to the extent possible in order to receive products during the 90-day tariff. Because it's not practical at scale nor affordable, we do not intend to utilize airfreight as a solution to accelerate inventory seats. China remains a strategically important country for us, and we intend to continue leading its opportunities for increased product creation and manufacturing in China, not only for our China direct business but for other markets around the globe. We have very little direct exposure to tariffs on products from China. A low single-digit percent of our finished good products imported into the U.S. are manufactured in China. Given the exorbitant tests on these goods, we will be diverting the vast majority of this product to other markets where it can be sold profitably. While much of our fall 2025 product has been ordered and sold, we are rationalizing inventory buys where possible to reduce the risk with excess inventory in a challenging environment. We're also taking actions to restrain discretionary spending and where appropriate, positive capital investments in the U.S. until we have clarity. For fall 2025, we're focused on maximizing our marketplace opportunity. We're working with our retail partners to deliver value to consumers and keep inventory and dealer margins healthy. As a result, we expect to absorb much of the incremental tariff costs in 2025 at the current incremental 10% universal rate. For 2026, we're contemplating strategies to offset the impact of higher U.S. tariffs on our business. We have a team of experts exploring possibilities to mitigate the impact of increased tariffs, including redesign, redevelop, resource and reprice products among other mitigation factors. Overall, we're taking a multipronged approach to managing the business during this period of uncertainty. On the one hand, we're taking decisive actions to preserve capital and to mitigate the impact of higher U.S. tariffs. On the other, we believe that our brands and strong financial position can enable us to gain market share. The Columbia brand's exceptional value will be a competitive advantage in this period of rising prices for U.S. consumers. As part of the Columbia brand's accelerated growth strategy, we remain committed to increasing our investment in demand creation to bring our new highly differentiated marketing campaign and enhanced product assortment to life. We have a long history of irreverent, airing and downright hilarious brand advertise, often featuring Gert [ph] herself. Columbia's marketing has always been distinctive from the rest of the outdoor category. In recent years, that has been less present in our markets. With the Columbia Accelerate growth strategy clearly defined, this is the moment to embrace our roots and write a new chapter for our iconic brand. Starting this August, we will begin to roll out our new global marketing platform that will be the Columbia brand character and voice for years to come. We will scale our new distinctive voice through our full funnel strategy with greater emphasis on a consistent year-round share of [indiscernible] in the market. Not only are we planning to invest more in marketing, we're also leveraging modern digital and social first strategies to be more efficient and effective with our demand creation investments. In this period of tariff turmoil, we have the opportunity to set ourselves apart. Turning to our financial outlook. Given the heightened uncertainty regarding tariff rates and the impact this will have on product costs and consumer demand, we are withdrawing our full year 2025 outlook. With that said, I'd like to provide some details on how we're approaching the balance of the year. Prior to the tariff increases, we were on track to deliver our full year financial targets. For the second quarter, we anticipate net sales to grow 1% to 5% year-over-year. This is in line with the first half net sales outlook we provided in February. As of the date of this release, the incremental 10% universal tariff and the higher tariffs for China are in effect. Applying these tariff rates to the product that we have yet to receive in the U.S. with a fall 2025 season would add between $40 million to $45 million to the cost of sales as the underlying inventory is sold. Given our focus on delivering exceptional value to consumers and maximizing the marketplace opportunity, we do not expect to offset these higher tariff costs in 2025. Our tariff mitigation strategy will evolve in response to trade policy changes. We continue to make progress on our profit improvement plan and have identified cost savings and profit-enhancing opportunities beyond the $150 million 3-year target near sale in 2024. We expect the U.S. market to be challenging in the back half of the year. Consumers will be paying higher prices for many of the bids they buy, and we expect this to negatively impact consumer demand. Our fall order book has not meaningfully changed since our call in February, but we anticipate retailers will be cautious with their inventory intake in this uncertainty learn. As a result, we're planning our U.S. business conservatively and minimize inventory risk and preserve profitability. We haven't seen a meaningful change in trends in most of our international businesses which were quite healthy in the first quarter. It's not possible to predict the extent to which U.S. tariff actions will impact international economic growth and consumer demand for our products globally. I'll now quickly review first quarter financial performance. Net sales increased 1% year-over-year to $778 million. Wholesale net sales increased 2%, while direct-to-consumer was flat. Gross margin expanded 30 basis points to 50.9% and SG&A expenses increased 1%. This performance resulted in diluted earnings per share of $0.75 up 6% year-over-year. Looking at net sales by geography. U.S. net sales decreased 1%. U.S. wholesale business was relatively flat. Spring 2025 shipments were up modestly. During the quarter, winter weather boosted late season fall product sales but entered early spring season sell-through. In addition to weather, challenging outdoor category trends and consumer uncertainty at [indiscernible] season demand. U.S. DTC net sales declined low single-digit percent. U.S. e-commerce net sales were down high single-digits. We had an excellent winter clearance sale in February, but it was not enough to offset challenging market conditions. U.S. brick-and-mortar net sales were up low single-digit percent driven by contribution from new stores. We exited the quarter with eight temporary clearance locations down from 28 [indiscernible] in the fourth quarter. For a review of first quarter year-over-year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying performance in each market. LAAP net sales increased 14%. China net sales increased low teens percent, led by strong e-commerce growth. Through our product offerings, marketing activations and marketplace strategies, we're working to create a more premium Columbia brand experience for Chinese consumers. Building off the prior season success of our transit line, we continue to expand our localized product offering designed to meet the unique needs of the younger Chinese consumers and the growing outdoor market. This quarter, we opened our first high street store in China on Huaihai Road in Shanghai. This celebrates Columbia's deep heritage and drove consumer engagement through both online impressions and in-store events. We remain committed to investing in our business in China [indiscernible]. Japan net sales increased mid-teens percent, benefiting from strong demand for late season and winter product with growth across all channels. Our localized product in Japan blends style, functionality and performance to create wear anywhere product. Our team in Japan has done a great job building successful franchises that resonate with consumers. Some local product highlights for this quarter include our sideline winter boots, [indiscernible] waterproof footwear, and backpack offerings to support the back-to-school season. In May, we'll be opening a Columbia High Street location in the center of Harajuku of premier retail areas in Tokyo. I'm excited to see this premium expression of the brand come to life. Korea net sales increased low single-digit percent, aided by late winter weather. LAAP distributor markets were up low 20s percent primarily reflecting robust Spring 2025 order growth. In both our LAAP and EMEA distributor markets, Omni-MAX footwear has continued to be an incredible success story, demonstrating of our great product, marketing activations and retail presentation. The Columbia brand is strong and our partners are investing in retail door expansion. [indiscernible] EMEA net sales increased 7%. Europe direct net sales increased high single-digit percent with growth across all channels led by DTC stores. For Spring 2025, Europe's key marketing campaign positions Columbia as the leader in height. The team is focused on bringing on active consumers into the brand through local acervatios like the Columbia High Society as well as social content with [indiscernible]. Across the European marketplace, our team is doing a great job evaluating the consumer experience with in-store marketing and brand managed spaces in concept of strategic partner. Our EMEA distributor business was down slightly despite strong Spring 2025 orders as the timing of shipments is more heavily weighted to the second quarter. Canada net sales were down 2% in the quarter, with sales down modestly across wholesale and DTC. Looking at first quarter performance of our brands. Columbia net sales increased 3%. On the product front, we introduced our lightest shoe ever, the Omni-MAX Konos Featherweight designed to perform on the trail and in the city with adaptive cushioning, flexible support and grippy outsole. The incredible versatility of this product is being highlighted to consumers with a new footwear marketing campaign, Every Surface is a Trail. Marketing efforts to promote Columbia's new running shoes include title sponsorship of the [indiscernible] trail race series [indiscernible] Arizona. The event draws elites runners from across the Southwest and provides our teams with the opportunity to engage with this important bodies at the grass roots level. Our new Reign No Shine jacket was awarded Condé Nast Travelers Best Overall Pick for Lightweight ratios. This jacket is designed to keep dry in the wettest conditions and features our OutDry EXTREME waterproof breathable membrane in a new matte finish. In March, Columbia partnered with KIF a Japanese clothing brand, South to West to eight create a custom outdoor inspired collection. Each piece blends KIF and South to West eight with Columbia's utility and outdoor functionality. Our popular PFG fishing line had several collabs and collections to spring. Our PFG Earth series featured popular South Florida artist Bentley. This limited edition collection highlights original work inspired by Miami's graphic artists and its local fish species. We acted into this collection with a [indiscernible] in-store event at Dick's Sporting House of Sport in Miami. For the Homestead-Miami NASCAR race, we ramped bonus car and PFG graphics inspired by the collection. During the quarter, we also partnered with Columbia brand ambassadors, Luke and Nicole Combs to create their own collections. We collaborated with Nicole to create a PFG specialized edition of apparel and accessories designed to take her from the boat to the beach and beyond. We work with Luke to create a PHG Special Edition Turkey Hunting collection, featuring a premium yield -- premium field-ready features, a dense and his favorite Mossy Oak Greenleaf camouflage. These incredibly successful collections and collaborations validate Columbia brand's authenticity and allow the brand to regional consumers. I'd also like to congratulate the Columbia team for earning the top apparel and footwear brand score in Newsweek's America's Best Loyalty Program survey. Newsweek takes input from thousands of loyal program members to uncover which offerings consistently deliver the most rewarding experience. It measures customer satisfaction, perceived value, customer support, trust and overall benefits. Columbia's greater reward program delivers a meaningful portion of our DTC sales and is an important component of our overall consumer retention strategy, well done team. Shifting to our emerging brands. Mountain Hardware net sales decreased 14% in the first quarter. While full price selling was healthy across channels, we had lower closeout sales compared to elevated the FRS clearance activity last year. We remain committed to investing in the Mountain Hardware brand, including elevating our presentation at wholesale. For Spring 2025, we opened a handful of branded retail environments in the specialty outdoor channel. Initial sell-through trends have been promising at these locations, and we plan to open more for [indiscernible]. Net sales decreased 10% in the quarter, reflecting challenging e-commerce performance. [indiscernible] lower finance activity compared to elevated levels in the prior year. I remain excited about prAna's product and marketing direction. As we head into the fall season, new product collections and refreshed brand image will be increasingly evident to consumers. During the quarter, [indiscernible] retail location to better highlight key product franchises and elevate brand story. The immediate with store performance and increased that prAna's improved product assortment and presentation at retail is resonating to consumers. SOREL net sales decreased 8%. The team is making great gross refreshing the product line with new styles like the owner [indiscernible] sneaker and the Roman Clog, which have the potential to become important product franchises in the seasons to come. SOREL's evolution will continue into the fall season with new women's styles and expanded and selection, high-energy collabs and refreshed brand imagery. In closing, Columbia Sports is a strong company that has weathered many challenges. We have an amazing portfolio of brands, decades of international trade experience and a fortress balance sheet. I'm confident we have the strength to navigate near-term uncertainty and unlock significant long-term growth opportunities. We remain committed to investing in our strategic priorities. Two, accelerate profitable growth, create iconic products that are differentiated, functional and innovative, drive brand engagement with increased focused demand creation investments, enhanced consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that is digitally led omnichannel and global and empower talent that is driven by our core values. That concludes my prepared remarks. We welcome your questions for the remainder of the hours. Operator, can you help us with that?

Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Laurent Vasilescu with Exane BNP Paribas. Please proceed.

Afternoon. Thank you very much for taking my question and thank you Tim for all your thoughts on the tariff situation. It sounded from the prepared remarks that your fall order book did not meaningfully change if I heard correctly. I note, Tim and Jim, I know you're not guiding for today, but should we assume that wholesale for 2H should be similar to what you expected in early February, which I think was somewhere up low single-digits? And longer term -- yes, sorry. And then second part of that question is just longer term, I believe there's a lot of private label offering in the U.S. that comes from China. Are there any opportunities to take market share near-term and longer term just because of the situation? Thank you.

Certainly. Well, again, the category headwinds, we really don't know what the consumer is going to be doing in the back half of the year. On the tailwinds, there's so much product that comes from China, both from private label and from smaller brands where we believe there's an opportunity for the company to gain market share and we'll be focusing on making sure that as it's available to us, we are going to take advantage of it. And we think that there will be an opportunity for us to grow the business from a market share perspective, just based on the what you pointed out as it relates to China's shortcoming shortfall in deliveries to the U.S.

And Laurent, as it relates to the fall order book, as we took that through February and March. There were no surprises in the wrap up of that order book relative to what we reported in February. And as Tim noted, we've not seen any meaningful cancellations to-date.

Okay. Thank you, Tim and Jim. And then I appreciate that. I know it's hard in this volatile environment, but I appreciate that you called out $40 million to, I think, $45 million of incremental COGS based on the tariff rates as of today. Should we assume that, that kind of split between 3Q and 4Q? And clearly, I think you called out that you're not offsetting that with pricing for fall order books, but could you raise pricing starting for Spring 2026? And if that's the case, like how much would you raise pricing globally or just in the U.S.? thank you very much.

Certainly. Well, I think our plans for Spring 2026, which are in flux right now, because we really don't know what we're likely to pay for things in Fall 2025, let alone Spring 2026. But again, we will be surgically viewing the business and when the opportunity arises for us to either take market share by keeping existing pricing or offering some incentives. We'll be doing that on an almost ad hoc basis as it begins -- as we begin to take orders for the season.

And then, Laurent, as it relates to the $40 million to $45 million in tariffs. By and large, we would expect that to be in the second half of the year. We don't ship a lot of the very little of the fall merchandise here in the second quarter. There may be a little bit that goes out. And then that $40 million to $45 million, that's incurred or realized sort of P&L that underlying inventory sold. So there's the potential that you could see some of that cost actually out in the 2026 to the grid. We haven't shipped it or sold through our own D2C channels at the end of the year.

Very, very helpful. Last housekeeping question here. Just the midpoint of guidance for 2Q revs. I appreciate that you're giving that to us tonight, but the 3%. Any color around how we should think about that by the key markets that you report? And if you're seeing anything in terms of near-term sentiment in China because you've done very well over the last several quarters in China. So, I'd just love to get some color there. Thank you very much.

Yes, I mean, from an overall standpoint, the guidance range that we provided of 1% to 5%. The 5% was essentially in line with the prior outlook that we provided back in February. And keep in mind that from a wholesale standpoint, we had an order book for the spring season that we last reported on that contemplated, a mid-single-digit rate of growth. So this is generally consistent with that barring anything significantly changing from a wholesale customer standpoint, which we've not seen to date. Aside from that, Laurent, we're assuming that the trends that we've more recently seen in the business, which includes our international businesses continue to be healthy. So, our outlook would contemplate that continue to be the case across Europe and China, and then continued some slowness that we've seen in our U.S. direct-to-consumer business.

Okay. Thank you very much and best of luck.

Next question comes from Peter McGoldrick with Stifel. Please proceed.

Hi. Thanks for taking our question. You pointed to opportunity to take market share in the current environment. And I was hoping you could elaborate on those comments if that's a global consideration and given the level of consumer uncertainty, could you share your internal expectations for market performance in the various regions you participate?

Certainly, let me answer the first one. As it relates to market share, many of the companies that we compete with and as Laurent mentioned, many of our customers that have private label businesses that are centered in China will have a difficult time importing products at all, maybe paying very high prices for it. And we see opportunities to take share from these smaller brands and also take share potentially from our customers' business. That's the primary -- why we feel confident that there's going to be an opportunity for us just based on our balance sheet. And the fact that, frankly, we have a very structured, well-established expertise in navigating tariffs globally. The U.S., well, it's a crazy time right now for tariffs, we navigate tariffs around the world and are quite good at so the opportunities for us to be successful when others are not should be quite good.

Thank you for that. And then I was hoping you could talk about your plans to support demand creation. Previous guidance had considered a step up to 6.5% of sales. I recognize that you're no longer -- you've withdrawn guidance, but I was hoping you could talk about your level of commitment to growing demand creation and relative to the prior outlook?

Yes. We intend to continue to spend at a higher level than we have in the past on projects and campaigns starting really in August of this year. And we think it's going to be quite good for the company for a couple of reasons. First of all, we're going to spend more. Second of all, we're going to be more efficient with our spend, we're changing strategically how we spend the money. And lastly, the campaigns created is very different. We'll have an opportunity to show you that [indiscernible] artist when you'll see much more of the company's marketing assets being distributed. But I think that those three things will give us a very big leg up especially in a time when competitors will not be able to be investing as heavily as we will.

And Peter, while we're not providing a full year outlook. He'll note in the CFO commentary that we've published, if you look at the SG&A analysis that's in there. Our marketing spend as a percentage of sales for the first quarter was 6.4%. So, that's somewhat indicative of that intent that we've got in terms of putting more dollars behind marketing and the ACCELERATE strategy.

All right. Appreciate the perspective and I look forward to the advertising campaign.

Next question comes from John Kernan with TD Cowen. Please proceed John.

Good afternoon. This is Krista

Yes, Krista, this is Jim. Yes. So what we described, the $150 million, keep this in mind, those are annualized cost reduction plans that we've got to encompass both what we set out and we achieved in FY 2024 so the $90 million and then the incremental amount that we intend to execute on this year that would bring the cumulative amount up to the $150 million by the time that we exit this year, by and large, is reflective of the components that we've described at to this point in terms of operational cost savings. We've described some work that's going on within our supply chain, that's encompassed distribution costs and whether that be third-party logistics and distribution savings that we achieved in the last year, including labor optimization. There's automation efforts that are ongoing. We did execute a reduction in force last year. Certainly, that's on the table in terms of factors that we need to be considering for the balance of this year as well. So -- and then in addition to that, all forms of other spend and whether that's capital spend, we're porting back on that a bit in the U.S. given the uncertainty of the trade environment that we're operating in and all other forms of discretionary spend. So we feel like we've got a good beat on achieving that $150 million as we exit this year. To your question regarding the longer-term goal here, without getting down to the specifics on this, certainly, our expectation would be that we make progress towards driving leverage in our SG&A and getting -- pushing that back in the direction where it has historically been as well as in the case of our operating margin and seeing our operating margins return into the double digit and beyond zone. But it's going to take time given the uncertainty of the environment that we're operating in here today.

Got it. Thank you for that. And just one -- my second question, just on China. The turnaround in your business there has been very encouraging. And what you're seeing, just like to get some insight into what you're seeing there. You're up low teens, I believe, constant currency in Q1. Can you talk more to the recent trends, the positive outdoor category trends, the elevation that you've really been able to achieve in that market and kind of how that's shaping your view more or less for the balance of this year and the longer-term opportunity in the market? Thank you.

Yes. So, I mean, it's good to remember that we are quite small in China but compared to many of our competitors. So the opportunity for us to grow rapidly is quite -- is there. The expansion opportunities are good as well because there's an established retail operation there with not only our own stores, but stores that our customers would operate for all intents and purposes under our franchise agreement. So, outdoor is strong there. The brand is strong, and we're seeing lots of opportunity for expansion. We're also going to be continuing to invest there in localized design and production, which we believe can give us a leg up against many of our competitors.

Thank you.

The next question comes from Mitch Kummetz with Seaport Global. Please proceed.

Hi thanks for taking my questions. Tim, as you think about the consumer or maybe some of your wholesale partners, have you seen any preemptive buying any pullback in the spending? And then also maybe just from a top -- well, as far as sales and margins, what is your kind of FX outlook? How has that changed given what we've seen with the dollar over the last -- since you guys last reported?

Yes, I can take the FX portion of that, Mitch. We're not providing a full year outlook here today. In terms of what's embedded in our in our Q2 outlook that we provided, I think it's on the conservative end of the range knowing that the dollar's weakened a fair amount. So, that should be a bit more of a benefit relative to what we anticipated coming into the year. But speaking to it any further than that on the full year, but I will back my comments at this stage.

Yes, I think for us, even though we -- once or so into this tariff, even have to describe the tariff world. Our customers as it relates to the retail customers looking to us for guidance on much of the stuff. And unfortunately, we're not going to be able to do much other than tell them the company is strong, you can rely on the from a balance sheet perspective, that we will be stronger than many of your vendors and we provide as much information as we can frequently. I was in touch with virtually every one of our major customers at a high level to tell them, here's our approach. We don't know much. But as we know, we will be filling you guys in. And we think there's an opportunity to take market share from weaker competitors. The consumer, I think, clearly, is screen what's going on, and we've seen that across all different kinds of commodities. So again, it's just too difficult to be speculative right now.

And then as a follow-up, you guys mentioned that there hasn't been any change to the order book. But Tim, I think you said that you expect retailers to be cautious. Are you going to be building the order book? Are you going to be pairing that back, assuming that there are some cancellations might hit? And how are you thinking about your willingness to hold inventory? Are you more likely to kind of pack and hold knowing that stuff that you have in inventory now you've bought it maybe at a lower cost than might down the road? Is there more willingness to kind of hold on to things, especially if it's kind of like basic kind of carryover product?

Yes. So, we sold the bulk of this inventory November of last year, we bought it and we have not received at all. So depending on when the merchandise actually shows up, I think we think we've got something like half of our products. We've seen some of the new tariffs, but basically half of our inventories in the U.S. is here in house. And we're going to continue to receive inventory. Hopefully, it will be at some reasonable tariff charge. But between a short -- a potential shortage from other vendors and our strong balance sheet, we believe we can be a provider of product as it's required to our retail partners and consumers to our own DTC business beyond where others will be able to provide that.

Yes, maybe just a couple of added remarks related to that. So, over the Fall 2025 season, we've purchased the lion's share of our inventory is in the 85%, 90-plus percent range of Fall 2025 that is in bot. So, certainly, these final buys that we're making as we finish up the seats we're rationalizing those inventory purchases relative to any given number of scenarios from a demand standpoint. And then with regard to holding inventory, we've had a strong preference in the past to ensure that we do that in the lease disruptive way and profitable way of leveraging the fleet of outlet stores that we have. So that will be top of mind as we get to that point and we need to make those decisions in the latter part of the year.

Yes, I might add -- a global business. And so to the extent we can move product around the world to take advantage of markets that don't have the crazy tariff implications, we'll do that.

Great. Thanks again.

Next question is from Paul Lejuez with Citigroup. Paul, please proceed.

Thanks guys. On that $40 million to $45 million of tariff pressure that you talked about in the second half, I'm curious if that already considers the sharing of some of the burden by your vendors or if that's an opportunity to work that $40 million to $45 million lower? And then second, can you just remind us your top three customers? And what percent of sales they represent within the host business? Thanks.

Yes. So as it relates to our vendors, we have a well-established grouping large vendors to the company, we consider them to be partners, and we will work together to the extent possible to mitigate as much of this additional tariff costs that we can. It may not be through discounts and maybe through some other help that they may give us on where we're shipping merchandise or shipping merchandise over a longer degree of time, et cetera. So we consider the fact that we had the strong relationships with the vendors to be another example of a high-quality company with a great balance sheet that can weather storms like this. And as it relates to our customers, we don't really provide top customers. We do not have a 10% customer. We have customers all over the globe. And so we think we're quite well set to await the storm.

Typically, the $40 million to $45 million that already includes some vendor sharing that in tariff burden or now?

That's the direct tariff cost us on the universal 10% incremental tariffs for the Fall 2025 season.

In the U.S.A. Then we don't really know if it goes to 175% on every country in the world, it may be a different number.

And do you think that you have the success with getting the vendors to share in some of that burden?

Well, again, these are partners of ours, we will work together to do what we can in that. Moving in order to a different time, moving order to a different ship to location in the country. It's not the U.S.A., [indiscernible] if there's all these myriad ways we can work together to help together move through this stormy period.

Thank you. Good luck.

Next question is from Jonathan Komp with RW Baird. Jonathan, please proceed.

Yes, hi. Good afternoon. If I could just follow up to ask further on the China and the U.S. sourcing. It sounds like you're shifting a lot of that product. So essentially, you don't have exposure on that piece. China, the U.S. this year. Could I just ask, will that also be the case going forward? Or is that just unique to the fall period? And then any risk from that, that you see in terms of suboptimal assortments or any potential shortages here in the U.S. based on some of those shifts?

No. We -- the company for years has been moving from China for a number of different reasons, not the least of which China has for a while been the least competitive sourcing operation for products that we sell. So we were able to reduce the company's intake into the U.S. from China to a very low single-digit. We were able to further reduce that this year because we moved product around the globe so that we would keep the orders in our factories there and still providing profitable sales around the world. I don't see any impact on the company's ability to provide high-quality products across our offerings, areas outside of China. But we will continue to produce products in each one for local China production and for consumption around the world where the China's products are considered to be not have tariffs.

Okay, great. That's really helpful. And then one more follow-up just on the unmitigated exposure of the $40 million to $45 million this year. It looks like effectively that's more than a 300 basis point hit in the second half to your U.S. gross margin structure. Are there any other potential offsets you're contemplating for this year? And is that sort of a one-time step down? Or are you thinking about looking to recapture some of that next year depending on all the scenarios? Just trying to get to how you're thinking about that margin impact this year?

Right. Well, that's based on an assumption that the President does not increase the size of the current 10% additional tariff. So that's our assumption. That's how we're modeling the business. Who knows, the guy made -- we got tomorrow and the world has changed, but we're providing the information we [indiscernible].

And Jon, we believe that a one-time -- we're absorbing the lion's share of that $40 million to $45 million this year. Our belief and expectations we plan for next year. It's premature in terms of all the steps, but Tim touched on all the different levers that we have available to us. And as we begin that planning for next year, certainly, we would look to make various decisions to absorb and recover any incremental tariffs that were net occurring.

Okay, great. Best of luck. Thanks again.

Next is Paul Kearney with Barclays. Please proceed.

Hi good afternoon. Thanks for taking my question. You mentioned that you're pulling in inventory during the pause period and rationalizing buys for the back half. Can you clarify if that is on a dollar basis? And can you talk about your expectations on the cadence of ending inventory for Q2 through Q4? And any detail on region would be helpful.

Well, it relates to rationalizing inventory. That is looking at that both in dollars and units. And of course, we're not providing specifics on that. And as it relates to pulling in inventory, certainly, what we're seeking to achieve there is knowing that July 9 and the risk of these incremental tariffs then be coming in place. We want to pull forward as much as we can from a production standpoint, being able to receive that inventory and pay the duties at the current known universal 10% incremental rate. So, to the degree we can work closely with our factory partners, with their logistic partners. We're doing everything we can to pull that inventory in from that vantage point.

Great. Thank you. And then with regards to pricing, obviously, you're making the decision to not take pricing up for the fall. Are you seeing other nonprivate label competitors take up prices? Or do you anticipate that they will in the fall? And is that potentially an opportunity to take further share?

Yes. I mean, again, I think we're more in the first reporting companies. But we know that many small competitors that we deal with and also many of our customers' private label products emanated from China. So those products, we believe, will be -- if they're successfully imported the United States switches a question, we believe we can easily compete with them and our expectation is that we'll be taking share on that.

Yes, they're started a little known today in terms of what either our competitors or customers, private label, what everybody is doing with their own pricing. So, TBD.

All right. Thank you very much. Best of luck.

Next, we have Alex Perry with Bank of America. Please proceed Alex.

Hi, thanks for taking my questions here. I guess just to ask sort of in a different way, the decision to pull guidance was that more of a factor of the uncertainty in the demand environment or cost environment? Like are you seeing volatile trends in DTC in particular? That make it hard to predict. It sounds like the wholesale business is relatively stable and with a similar view as the last time you got it. But what's sort of going on in the demand environment that makes it hard to predict? Thanks.

I'll just say this, Alex, what we're indicating to you and we've provided a Q2 outlook that, by and large, is maintaining the prior first half outlook that we would add -- have. Pulling the full year guidance, nobody knows. There are so many uncertainties with regard to how the consumer and the retailer behaves and acts in the second half of the year for that reason. We are -- we've made the decision to withdraw the guidance. Not to mention the numerous variables when you think about it from an overarching earnings standpoint. But we're not seeing anything today in the trend of our U.S. business, either from a wholesale or D2C business perspective that would suggest a down trend, if you will.

Yes, that's really helpful. And then can you just sort of remind us of sourcing penetration by country and where you have the most exposure as it stands today just as we're sort of thinking about reciprocal tariffs. Obviously, there is the ability to shift. But as it stands today, where do you have the most exposure?

Yes, I just recommend, Alex, you look to our 10-K. It's pretty -- we just filed that a month or two ago, and it's got all of the relevant data points that are in there. Obviously, we've provided quite a bit of clarity here on the call as it relates to our China exposure specifically.

Yes. And Alex, I would just point out that we believe we're among the most distributed [indiscernible]. So, we have -- we're sourcing from many, many countries, and we're quite adept at losing production around the world to take advantage of tariffs and specialties in certain markets.

Perfect, really helpful. Best of luck going forward.

Next question comes from Mauricio Serna with UBS. Please proceed.

Hey, good afternoon. Thanks for taking my question. I joined a little bit late, so pardon me if I ask something that you may have already answered, but first on the guidance for Q2, I know it implies like the first half is you're keeping the guidance stable. I just want to understand like for Q1, does that mean there was like some type of pull forward that happened there? And then on gross margin, on Q1, I see it was up 30 basis points. Was that like in line with your expectations? Or was there anything that would reprice you to the upside or downside?

Yes. As it relates to the guidance for the second quarter. So first half, we've more or less held. We've widened the range out, just given the risk associated with what's going on from a trade standpoint. There was our Q1 beat was a combination of things. There is some pull where we delivered slightly earlier on our Spring 2025 wholesale orders relative to what was in our outlook at the time. And then to an extent, we also had some favorable cold weather in many geographies that helped aid in the top line. So, that gives you a bit of overview on that. And as it relates to Q1 gross margin, it was only up 30 basis points for the quarter. That's more or less in line with where we thought it would come in, maybe slightly under. There's no significant driver one way or the other and there are several items that are -- have contributed to the improvement there. So nothing significant to call out.

Got it. And then just a quick follow-up. Just thinking about the guidance that you provided for the first half, you only talked about like the sales outlook. Just wondering, like, given that like the tariffs looks like a second half impact, why not keep like a full EPS guide for the first half? And with that in mind, I mean, should it still be fair that to see like a better gross margin expansion in Q2 relative to Q1 just given the much easier compares that you have?

Yes, I don't want to get into a ton of details on that. But suffice to say that the reason we haven't given first half or Q2 earnings, there's far too many variables once you start getting down into the P&L. And whether that's tariff costs that you incur, there's a lot of unknowns with regard to the health of the retailer, the deeper we get into this and whether there's downstream bad debt risk that we need to book provisions on. There's just countless variables and outlook for any period of time right now that I would caution. That's the reason we haven't done it. And we'll provide updates along the way to the group again, but there's just too much risk out there right now, too many uncertainties.

Makes sense. Understood. And then very last week, you said like $40 million, $45 million impact cost on second half. So, is it fair to assume that first half of next year, that number should just be lower because by that when you're implementing some mitigation strategies, right? I just want to talk.

Well, we've been very focused on July 9th, I think it is on the pause [indiscernible], but we have no idea what July 10th is going to be or July 11th for that matter. So, it's very difficult to be projecting a large global business results.

Thank you so much.

We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.

Thank you. Thank you for joining us today. We faced many challenges during the company's 87-year history and every time we persevered and become stronger. I'm confident we can weather the storm and emerge with an improved position in the marketplace. So, we look forward to talking to you next quarter.