COLM - NASDAQ

Greetings. Welcome to the Columbia Sportswear Third Quarter 2025 Financial Results Conference Call. [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 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 do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and the appendix of our CFO commentary and financial review. Following our prepared remarks, we will host a Q&A period during which we will limit each caller to 2 questions so we can get to everyone by the end of the hour. Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon. Overall, third quarter results reflect sustained momentum in international markets, led by double-digit percent sales growth in our Europe direct business. Our strong financial performance in these markets demonstrates our ability to effectively reach younger and more active consumers and highlights the growth potential of the Columbia brand. In the U.S., we're working to restore growth and revitalize the Columbia brand through our ACCELERATE Growth Strategy. The third quarter was an important milestone in this journey. In August, we launched our new global brand platform, Engineered for Whatever, which celebrates the extremes of outdoor adventures and harkens back to the brand's irreverent spirit of the '80s and '90s. It revives the humor and gritty gear testing that made Columbia a beloved brand around the world. The early response to this campaign has been overwhelmingly positive with millions of consumers already engaged since the launch. We intend to build upon this momentum with an always-on marketing strategy, including a robust pipeline of differentiated activities planned for the months ahead. Revitalizing the brand in the U.S. will take time, but I'm encouraged by the brand energy that we're just beginning to create. Turning to the topic of tariffs. We estimate the 2025 direct impact of the incremental tariff rates will be approximately $35 million to $40 million prior to any mitigation actions. Please note that we did not make meaningful price changes to our fall '25 product line and still expect to absorb much of the incremental tariff cost this year. Applying the new tariff rates on an annualized basis, we estimate the unmitigated impact would be approximately $160 million. For 2026, we continue to take actions to mitigate the financial impact through a combination of price increases, vendor negotiations, resourcing production and other mitigation tactics. We will balance these actions with our growth strategy, seeking to minimize the impact to consumer demand. For spring '26, we increased U.S. pricing by a high single-digit percent, and we are maintaining similar price increases for the fall. When combined with our other mitigation tactics, our goal in 2026 is to offset the dollar impact of higher tariffs. Longer term, our goal is to restore our product margin percentages to historic levels. I will now quickly review third quarter financial performance. Net sales increased 1% year-over-year to $943 million. This was ahead of our outlook, driven by earlier-than-planned shipments of fall '25 wholesale orders. Overall, wholesale net sales increased 5%, while direct-to-consumer was down 5%. Gross margin declined 20 basis points to 50% as higher tariff expenses and foreign exchange headwinds were partially offset by lower clearance and promotional activity. SG&A expense increased 5%, including investments in demand creation to launch Columbia's new brand platform Engineered for Whatever. During the third quarter, we incurred $29 million in noncash impairment charges related to prAna and Mountain Hardwear. The impairment was largely attributable to the impact of tariffs, and I remain confident in both brands' growth strategies. We are committed to unlocking their full potential. Including the impairments, which impacted earnings by $0.46, third quarter diluted earnings per share were $0.95. Looking at net sales by geography. U.S. net sales decreased 4%. The U.S. wholesale business was flat as earlier timing of fall wholesale shipments offset the impact of lower fall wholesale orders. U.S. DTC net sales declined high single-digit percent in the quarter. Brick-and-mortar was down high single-digit percent, reflecting the closure of temporary clearance locations and lower sales productivity, partially offset by contributions from new stores. We exited the quarter with 8 temporary clearance locations compared to 42 exiting third quarter of last year. E-commerce was down low double-digit percent, primarily reflecting soft traffic and demand trends. Results were partially impacted by ongoing efforts to refine and evolve our online promotions and marketing investments. Overall, U.S. Columbia brand Fall '25 sell-through has started slowly as we await the arrival of cold weather. The sell-through challenges we are facing reinforce our focus on reenergizing the Columbia brand through the ACCELERATE Growth Strategy. While overall trends are tough, we are encouraged by initial sell-through of new product lines such as the Amaze Puff jacket and ROC pants. 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 performance in each market. LAAP net sales increased 6%. China net sales increased mid-single-digit percent. Sales in the quarter were impacted by a warm September, which reduced demand for fall season products. Our team in China continues to do an exceptional job bringing young active consumers into the brand by celebrating iconic styles like the Interchange Jacket and premium localized product offerings like the Transit and Hike 365 collections. During the quarter, Columbia hosted Hike Party 2.0, a well-attended hiking and music event. In addition to thousands of participants, over 100 Columbia brand influencers were in attendance. Their online content generated millions of impressions. I'm pleased to announce that Columbia China received an award from the prestigious ROI Festival as one of the most creative and influential businesses in the Asia region. The ROI Festival is known as the Oscars of the marketing and creativity Industries in China. Great job China team. Japan net sales decreased low single-digit percent as DTC growth was offset by later shipments of fall '25 wholesale orders, which shifted into the fourth quarter. Our team in Japan continues to deliver a compelling mix of localized product offerings and global franchises like Omni-MAX, which was the top-selling footwear style in the quarter. Korea net sales were flat year-over-year. Our team in Korea is making progress, stabilizing the business and revitalizing the marketplace. The team's focus on accelerating digital sales, elevating the brand presentation in DTC and reenergizing marketing is building a healthy foundation for growth. During the quarter, the Korea team launched the Engineered for Whatever campaign with localized creative content that resonated with the Korean consumer. LAAP distributor markets delivered mid-teens percent growth. Healthy growth across both our distributor regions underscores the enduring strength of the Columbia brand in these markets. Our distributor teams are successfully engaging young active consumers through localized marketing activities and elevated brand retail experiences that showcase our best products and innovations. EMEA net sales increased 10%. Europe-direct net sales increased low double-digit percent with strength across both DTC and wholesale. We're thrilled that our European team continues to deliver above-market performance, driven by the expansion of our DTC business and growing wholesale through strategic retail partners and brand authenticators. We have immense market share opportunities in Europe, and our team has been unlocking this potential each and every season. Our EMEA distributor business was down slightly as healthy order book growth was offset by earlier shipments of fall '25 orders, which shifted into the second quarter. Canada net sales increased 7% in the quarter, driven by earlier shipment of fall '25 wholesale orders, partially offset by a decline in DTC sales, reflecting a soft consumer environment. Looking at third quarter performance by brand. Columbia net sales increased 1% as international growth offset ongoing challenges in the U.S. As we've discussed in prior calls, elevating the style of Columbia's product is an important aspect of the ACCELERATE Growth Strategy. This fall, we took a major step forward with the introduction of the new Amaze Puff women's insulated jacket and men's and women's ROC pant. We supported these launches with elevated in-store presentations, enhanced photo and video assets and breakthrough influencer campaigns. I'm encouraged by early sell-through, and I believe we are well positioned to continue growing these franchises in the seasons ahead. Columbia is also celebrating iconic styles with the rerelease of its first-ever footwear product the Bugaboot 1. The original Bugaboot was the result of landmark collaboration between Columbia Founder, Gert Boyle, myself and legendary footwear designer, Peter Moore, who created the original Nike Dunk and Jordan One silhouettes. The rereleased Bugaboot 1 honors the original 1993 design with its iconic retro style and pairs it with our latest innovations such as Omni-Grip traction and TechLite cushioning. This limited edition boot was only available to select specialty retailers and online at columbia.com, selling out in hours on the website. During the quarter, we launched our newly redesigned columbia.com website. This freshly enhanced site mirrors our evolving brand, allowing us to tell compelling stories about our products while offering unique and personalized experiences for our consumers. We've significantly enhanced product discovery with search and merchandising features, upgraded product photography and our reverent voice. The feedback from our consumers has been very positive, and we are already witnessing early signs of increased engagement. On the ambassador front, Columbia announced a new partnership with rising global icon, Robert Irwin, son of legendary wildlife conservationist Steve Irwin. Robert continues the legacy of his dad as a passionate wildlife warrior. He also has a deep connection with the Columbia brand. Robert's mother is from Oregon, and he still remembers meeting Gert Boyle when he visited our headquarters as a young child. Through his work as a TV presenter, producer, author and photographer, Robert aims to act as a global advocate for the natural world. We are also cheering him as he takes the stage in the current season of dancing with the stars. We are absolutely thrilled to be officially joining forces with Robert and look forward to sharing his adventures in the outdoors with Columbia Gear. As part of our Engineered for Whatever launch, we have executed several unique brand activations this fall that are getting people talking about Columbia again in the U.S. Advertising takeovers across digital, social and Thursday Night Football on Amazon remind consumers of Columbia's irreverent roots and superior product quality. This new advertising spotlights outlandish outdoor product tests and celebrity cameos in situations featuring crocodiles, human snowballs and even the grim reaper. These stories are being shared online, in-store and out of home, and we're seeing increases in organic brand search since the launch. We recently activated a breakthrough guerilla marketing stunt in New York City. We launched a scavenger hunt inviting New Yorkers to find our extreme mannequins hidden in hundreds of locations across the city, picture a mannequin wrestling a bear in Bryant Park or an angler catching a shark in the Hudson River. Each mannequin had a QR code that consumers could scan to enter to win an outdoor adventure for 2. Over 3,000 New Yorkers participated in our scavenger hunt, and we created buzz in the city, reaching over 3 million New Yorkers across earned media and social. In this crowded and competitive environment, Engineered for Whatever stands out. We're showing people that our products are made to handle the extreme and unpredictable with a healthy dose of humor and joy. Turning to our emerging brands. SOREL net sales increased 10%, aided by earlier timing of fall '25 wholesale shipments. This fall, the SOREL team is building product and brand momentum through new collections and refreshed marketing. The new Callsign Horizon and Daystrom Horizon collections infused the iconic CARIBOU boot design language into new categories and silhouettes. The team is also creating brand heat through highly successful collabs with London-based streetwear brand, Aries and Japanese streetwear brand, NEIGHBORHOOD. prAna net sales increased 6% in the quarter, reflecting growth across DTC and wholesale. The prAna team's brand refresh is well underway, and we're seeing positive momentum. New customer acquisition trends are improving and consumers are responding to the new marketing and product collections. Mountain Hardwear net sales decreased 5%, driven by lower clearance activity compared to elevated levels in the prior year. Healthy full price sales growth during the quarter reflects underlying business momentum. The brand is seeing a notable sell-through lift with specialty retailers where we've invested in brand in-store environments. On the product front, Mountain Hardwear introduced its most capable snow sport kit to date. The new Mythogen kit pinnacle of the brand snow sport line built for max durability, mobility and style in demanding Alpine environments. I'll now discuss our fourth quarter and full year financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentations for additional details and disclosures related to these statements. For the fourth quarter, we expect net sales to decline 5% to 8% year-over-year and diluted earnings per share to be in the range of $1.04 to $1.34. This brings our full year net sales outlook to $3.3 billion to $3.4 billion or flat to down 1% year-over-year. Full year diluted earnings per share is expected to be $2.55 to $2.85, including the $0.46 impact from impairments in this quarter. Looking to 2026, we have concluded our spring season order taking. Our forecast is for flat to low single-digit wholesale growth in the first half of '26, and it's unchanged from our last call. This forecast contemplates sustained international growth across our direct and distributor markets, partially offset by a decline in the U.S. We are planning to share more on our 2026 outlook when we report our fourth quarter results in February. Overall, I'm excited to see our ACCELERATE Growth Strategy come to life. Consumers are responding to new product collections with more on the way. Engineered for Whatever has reenergized our unique brand voice, helping to set us apart in a competitive environment. I know that elevating consumers' perception of the Columbia brand will take time, but I'm confident we have the right strategy in place to unlock the significant long-term growth opportunities ahead. We remain committed to investing in our strategic priorities to accelerate profitable growth; create iconic products that are differentiated, functional and innovative; drive brand engagement with increased focused demand creation investments, enhance our consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that's 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 hour. Operator, can you help us with that?

At this time we will be conducting a question and answer session. [Operator Instructions] The first question comes from Bob Drbul with BTIG.

Just have a couple of questions. I guess, first, on the product side, you talked about the sell-through or the sellout of the Bugaboots rerelease. Did you or your mother have more of an impact on that boot when you worked on it with Peter Moore, Who gets the credit for that one?

Well, I can tell you, I did the work on the product. My mom did the work on the name.

That's a good collaboration. I guess a couple of other questions around product, Tim. Just on the Amaze Puff and with this like Bugaboot 1, do you have more products lined up for sort of into next year? When you think about the success that you're seeing with both of these products, can you just talk about the pipeline on the product side a little bit more?

Certainly. Yes, the thing about the Amaze Puff first of all, is that it's one of the most expensive items we've ever offered for sale. And the velocity is just incredible. So we've got more products in that Amaze family, including we're going to be offering men's version. This was a women's-only launch for fall '25, and that will be just an incredible opportunity. And based on the velocity that we're selling these things today, we're expecting really great things. And then as it relates to footwear, we've got more of the original Peter Moore designs that we're going to be launching over time, which will be really good as well as some other early '90s product that was so successful for the company that we're going to be offering in a way that sort of out of the archives opportunity. And this is going to really be, I think, part of how we differentiate ourselves from others when we're talking about the Engineered for Whatever launch and the way our products are uniquely differentiated from others.

Sounds good. And I guess the other question I have, I know it's early, and I know it's going to take time, but the Engineered for Whatever campaign, when you think about any of the early feedback that you've got that the company has received. Can you just talk about what you've learned so far, any takeaways and sort of what your thoughts are as you sort of continue this?

Yes, certainly. Well, it's -- when we first began discussing the Engineered for Whatever launch, it was really a function of 2 parts. One was to get us back to the historical irreverent way that we approached ourselves not taking ourselves too seriously. Our products are made to have a good time outside and our advertising should reflect how much fun it is to be outdoors. Secondarily, there's really no other brand that can pull this off. There are many brands that are so serious and perhaps rightly so. But when we're talking about being different and separating ourselves from others, it's all about how we approach what we're doing and how we want to be heard. So it's been really gratifying that both our consumers and wholesale customers are talking about how different it is and how refreshing it is to see us sort of back in the -- having a good time.

The next question comes from John Kernan with [ EB ] (sic) [ TD ]

Tim, $160 million unmitigated tariff impact next year is a big multiple of the unmitigated impact this year. Obviously, some of the higher cost inventory is going to start flowing through the model more next year, but just your confidence in the ability to offset that and with your confidence in the high single-digit price increases as we look into spring.

Yes. I guess I would suggest that the company -- if the company has one strength, it's ability to navigate tariff environments. So just as some background, in 2024, the company was the 81st largest duty payer in the United States of all companies. And that's because our commodities are so heavily tariffed, not only in the U.S. but globally. So we have a large team that does nothing but help us make products in locations that can be advantaged from a duty standpoint, that can have the characteristics, that can allow for a reduced tariff to be built with particular characteristics that can help us navigate this stuff. We are quite good at it. I mean this is a daunting task, But we think we're up for it, and we think we'll be able to navigate it. We have some significant strengths in our balance sheet that will allow us to navigate this stuff in really a proper way. So I'm convinced we can grow the business and grow our profitability as well.

John, not only are there the price increases that are being implemented in the marketplace, but there are other mitigation factors as well, not the least of which is discussions that we've had with our strategic factory partners. And we believe that, that will help deliver and mitigate part of the cost here. And then in addition to that, there are certain instances where we'll be successful in resourcing part of our production. So the combination of those things is really what gives us the confidence that we'll at least be able to mitigate the absolute dollar impact of the incremental tariffs.

That's helpful, Jim. Just one quick follow-up. Obviously, the SG&A rate has been a source of deleverage for a few years now. And it looks like most of the deleverage in Q3 was the increase in the marketing rate year-over-year. How long do you -- can you just describe the timing and the magnitude of the SG&A rate recovery and the top line type growth you need to lower that rate? It's obviously been the biggest source of the operating margin pressure the last few years.

Yes. Well, certainly, one of the most significant factors that we've had consistently throughout this year is the strategic investment that we've made behind the Columbia ACCELERATE strategy. So I would just emphasize that point. That was a step function increase in our overall SG&A to fund that. And our intent at this early stage would be that we're sustaining that investment over time. But to put that in order of magnitude, I think our marketing spend last year was just under 6% and will probably be at or just above 6.5% this year. So it's a pretty meaningful portion of that SG&A deleverage that we're seeing this year. I think as we approach next year, and certainly, we're not providing earnings guidance here today. But our goal going into next year would be to get the business growing and achieve leverage and SG&A leverage, in particular, if not operating margin leverage knowing that we've got to overcome the impact of the tariffs. So we're hard at that. We've been working over the course of the last several months and quarters on our profit improvement plan. We've implemented a series of cost reductions that will yield benefit over time here.

The next question comes from Paul Lejuez with Citigroup.

Curious if you could talk about the lower promotions that you saw during the quarter. Curious if you saw that across both DTC and your wholesale partners. Maybe talk also promotional levels across regions? And what do you build in, in terms of year-over-year promos in the fourth quarter guidance?

As it relates to promotions, I keep in mind on this, Paul, we're lapping last year in which we were heavily liquidating inventory coming off of the excess inventory levels that we had, combined with -- you'll recall that with [ PFAS ] chemistry that we were also transitioning out of our product line from a year ago. So the combination of those 2 things led to a fair amount of liquidation effort within our own DTC business, including outlet stores and clearance stores, which we believe to be a more profitable mechanism. And then likewise, wholesale customers needed to move through that same inventory. So a lot of this is effectively lapping that. And essentially, what we're seeing here in the third quarter and then going into the fourth quarter as we're most of the way through October, is the overall margins out in the marketplace are pretty healthy. When we look at overall dealer margins in the U.S., they're up on a year-on-year basis. And as it pertains to how we're thinking about that in the fourth quarter, it will still be a tailwind for us just given the magnitude of kind of that continued liquidation effort in the fourth quarter last year. So nothing meaningful to call out. And I think, by and large, from what we see thus far early in the holiday season, retailers, there's not an overexcitement or an overload on being promotional and discounting at this point in the season.

Got it. And then within the comments about your order book being flat to up for spring, was that -- I just want to confirm that, that is in dollars? And then curious if those order books already include the high single-digit price increases that you mentioned.

Yes. The price increases are included in the order books, specifically in the U.S. We didn't raise prices very significantly in the markets outside the U.S. But yes, they do include those price increases.

Yes. And of course, that will mean that units are down with the flat to up is in revenue dollars. And so with those price increases in the U.S., that is going to result in a decrease in the overall units.

The next question comes from Peter McGoldrick with Stifel.

I wanted to ask on the quarter-to-date performance for U.S. Columbia. You pointed to a slow start due to cold weather, which has taken a while to develop, holding back sell-through. I remember the fall/winter 2024 was also -- had a slow start due to weather. And I was curious if you can make any like-for-like comparisons for the quarter-to-date period and help us think about what's contemplated in guidance as we progress sequentially through the quarter.

Well, we build our plans assuming a normal weather year. And normal is an average of January's weather and December's weather and November, et cetera. So we're confident that we've got our plans built in the right area. And we've seen some uptick when weather hits a certain geography. So I think we're in the right spot here. And so it's not abnormal for there to be slight warming in some periods, some years. But generally, winter arrives and we're just assuming we've got a normal winter ahead of us.

Yes, Peter, I'd just add, demand out in the marketplace has been a bit lumpy. We saw a pretty nice July, August, September softened a little bit. That extends itself a little way into the month of October. Frankly, what we've seen over the better part of the last week or 2 has been pretty encouraging as we've seen a pickup in the demand that's offsetting some of the early season softness that we saw.

Okay. And then on SOREL, I get this is a smaller part of the business, but we did see an inflection to growth after several years of decline. So I was curious if you could help us think about the new collections and refreshed marketing. And as we think back to Investor Day a few years ago, is SOREL again going to become an outsized growth driver as you plan the business on a multiyear basis? I'm just curious on that brand.

Yes. So if you remember, going back to the origins of the SOREL brand, it was almost exclusively. In fact, it was an exclusively winter brand. And over time, we've been able to move that from just winter and frankly, just men's to have a very large portion of women's and a growing portion of non-winter product. We've had great successes over time with things like wedges, which have fallen out of favor as during the pandemic and when people were not back in office as much. But what we've seen over the last few weeks -- excuse me, the last season or so is a growth in the sneaker business, which is going to give us the opportunity to be year-round, which is frankly what our international partners want in that brand. They're ready to make investments in that brand in stores and other institutions as long as we can get it to year-round. So the plan is to get -- to spend focus, time and effort on non-winter product while still harvesting the winter business.

The next question comes from Laurent Vasilescu with BNP Paribas.

Jim, I was hoping to understand just the small tick down on the [indiscernible] guide is about 1%. You mentioned to Peter and the audience that weather has been a slow start in the U.S., but also China has been impacted by China -- by weather, excuse me. Is that the reason why you're taking down the top end of the range for the guide for top line?

Yes. Let me touch on that, Laurent. So if you look at the third quarter, we had a revenue beat that was in the mid-$20 million range. That was really driven by our wholesale business and earlier shipment of wholesale orders to the tune of nearly $40 million. So you're seeing a little bit of softness in the third quarter in our direct-to-consumer business. That was predominantly in the U.S. And we essentially looked at that trend in Q3 and applied many of those same assumptions to our fourth quarter, and that's the predominant reason for the 1% adjustment in our revenue guide. Far less of a factor in terms of thinking about China. In fact, we've got our China business plan up quite meaningfully in the fourth quarter. We're in the early stages of the Double 11 presales activity and anticipate nice growth in that market. So I think China was a little bit of a blip with some warmer weather. We still have a lot of confidence in the direction of that business.

Very helpful. And then I was hoping to unpack a little bit more of the commentary about 1H '26 wholesale revenues being slightly up. As you mentioned on the prepared remarks and in your CFO commentary, North America or at least the U.S. will be down and international will be a driver. Can you potentially unpack that a little bit more about just the magnitude of what we should consider for the U.S.? Can it be down mid-single digits? Just to understand a little bit more about elasticity of demand as you're taking pricing up high single digits for 1H '26.

Yes. We've had, as you mentioned, great success outside the U.S. where we have a much more predictable business. We've got multiple topics in play here in the U.S., the least of which is the price increases that we've all seen and are passing along to consumers and the uncertainty about how that's going to be accepted. So we have much more confidence in our business outside the U.S. That having been said, our U.S.A. business is a very large component. And our expectation is that we've set the business up in the right way for spring. And our retailers are cautious, but we believe there's great opportunities for us as we get into the business -- into the season.

Yes. We'll provide more detail on that certainly in February, Laurent. A lot of this is just due to the sell-through season for spring '25 was a bit soft in the U.S. and the order book is more or less reflective of that.

The next question comes from Tom Nikic with Needham.

I want to ask about gross margin. I'm not sure if you said like how we should think about gross margin versus SG&A in Q4. And when we kind of think the next couple of quarters, obviously, there's tariffs and there's pricing, but are there any other meaningful good guys or bad guys on the gross margin line?

Yes. As it pertains to the fourth quarter from a gross margin standpoint, no, we've not provided a lot in my CFO commentary. However, you will note that we did provide the estimated tariff impact. So it's a bit north of what we saw in Q3. Q3 was $15 million. We're estimating that at $20 million to $25 million in the fourth quarter. So a bit heavier of an impact. And then the same offsets would come into play, most notably would be the lower closeout and liquidation sales. So I think the gross margin in Q3 was down 20 basis points. I think we'll see it be down a bit more than that in the fourth quarter, but nothing overly meaningful in that regard. And then thinking out to next year, the big offsets certainly are going to be with the incremental tariffs will be what we're doing from a pricing standpoint. That's certainly the most meaningful variable that I would call out at this stage other than that, I can't think of anything offhand.

The next question comes from Jonathan Komp with Baird.

I want to ask if you could share a little more insight when you look in the channel and inventory levels. And I know it's a challenging fall here, and you highlighted units ordered down for spring. So could you share any more perspective on what units look like in the channel? And could there be a situation come fall of next year where you see normalization from a positive perspective to get back to more normalized levels?

No, I think the channel inventories are actually pretty good right now. If they were building up, we would probably have seen some sort of adjustment in our fall order book, which we have not seen. Retailers are anxious to get merchandise, which is part of why the inventory was shipped a little bit earlier this year than prior periods. But we're -- yes, I think the inventories are in the right spot. And certainly, we've got a couple of items, including the Amaze Puff jacket that's selling very well as well as newly designed and distributed pant program called the ROC pant. So those 2 areas are doing well, and we've had no pushback at all from retailers, right? I think the channels are quite good.

Okay. That's helpful. And maybe a broader question on the margin recovery. If I look over the last 3 years or so, it looks like your global revenue is down low single digits over that period and your total SG&A spend is still up roughly mid-teens percentage. So I'm wondering if there's any further opportunity to look for efficiencies. And as we think about exiting 2025 with a 5% operating margin, what's a reasonable time line to get back to more normal or reasonable levels for a healthy brand?

Well, certainly, our -- like I said to an earlier response, we would target an improvement in our SG&A cost structure looking out to next year. There's a lot of actions that we've taken to date, but you're not necessarily seeing them manifest themselves in the P&L because of other strategic investments, the marketing investments we're making from an ACCELERATE standpoint. There are some onetime costs that we're incurring in the P&L this year as it relates to severance, professional fees related to our profit improvement program and so forth. So as we begin to lap those cost savings combined with certain of these costs, I would certainly expect that we put ourselves in a position to leverage on that line, Jon. It's not lost on us. I do think there's some additional opportunities as we look out to next year, certainly getting our U.S. business back to growth and how do we run that business more efficiently across our wholesale and DTC businesses. So that's an area of focus for us. And then there's other organizational costs that are in consideration for the company.

The next question comes from Mitch Kummetz with Seaport Research.

Tim, I think it was in your prepared remarks, you mentioned that U.S. DTC was down high single digits on the quarter. I'm curious, is there any way to parse out the negative impact from fewer temporary stores year-over-year versus maybe any early benefits that you're seeing from the new global platform? I would think that, that would hit DTC before it hits wholesale. So any help there?

Yes, I was going to just suggest that by far, the largest component is the lack of the temporary clearance stores. And then as it relates to our digital DTC business, we've taken the approach that the #1 method for consumers to get the best visibility for our brands is digitally, and we believe that we were slightly over promotionally active in prior periods. So we've taken an approach that we're going to rein back in the promotional activity and invest heavily in how the products look digitally. So I would think those 2 things would be the largest impacts.

Yes. I think, Mitch, just a clarifying remark on that stat shape more of detail. That high single-digit decrease in our U.S. D2C brick-and-mortar business, 90-plus percent of that relates to these temporary clearance stores. And then we're not getting a lot of benefit from new stores because if you can look at what we've added in new stores, just 3 new stores year-over-year. And so the productivity side of the existing stores, that's down, but it's down just slightly.

Okay. That's helpful. And then, Tim, on the ACCELERATE strategy, sounds like from a marketing standpoint, like you guys have the campaign that can really help drive this. But I'm curious, like where do you think you are from a product standpoint? When you look at like fall '25, what inning are you? And how much are you advancing that for spring '26?

Yes. I would say the ACCELERATE program as it relates to the marketing, I think, is dramatically different and dramatically larger investment for the company. The fact that we're selling products like the Amaze Puff at prices which we've never been able to sell before is an indication that I think we've got the right equation to really get growing. The company offers a democratic level of product across multiple channels and categories of merchandise. We often don't get -- we don't get no respect for our expensive products, and I think this is going to help us in that area. And I think when you look at what we've done with the ROC pant and with the Amaze Puff in terms of their performance, I think it shows that we can definitely get there. So I'm excited about it.

The next question comes from Mauricio Serna with UBS.

Just wanted to ask if you could clarify maybe on the comment on price increases. You mentioned high single digit for price increases for spring '26, and then you mentioned something about fall. So for fall '26, is there an increment like another round of price increase that you're looking at? Just wanted to understand that.

Yes. So for spring, we increased our prices perhaps, as we said, in the high single-digit range, about the same for fall. Frankly, inside the U.S., it's -- we don't really know what we're going to be paying for this merchandise based on the capricious nature of how the tariffs have been enforced. So we're taking our best shot at the business. Our prices outside the U.S. are more stable and more predictable. But inside the U.S., we're taking our best shot at what we believe the pricing will be.

And Mauricio, the pricing is not stacking. Keep in mind, we've got a seasonal business, right? So it's high single digit for each season, but not stacking cumulatively.

Okay. Yes. Okay. That's what I wanted to understand. Okay. And then on the shift from wholesale that benefited Q3, is that mostly U.S.? Or how should we think about that shift?

I think 80% of it, give or take, is U.S.-based. So it's predominantly there. I think there was also some over in our European direct business as well.

Okay. Very helpful. And then just lastly, on SG&A dollar growth in Q3 was like 5%. Like -- is that like an underlying number that we should think into like for the Q4? Or is there also like an impact from the shift in the wholesale that maybe means that could be 3% to 4% or somewhat lower?

Well, I indicated earlier, our gross margin is going to be down a shade more than what we saw in Q3. And then I think if you back into the SG&A, it's up a low single-digit percent -- low to mid-single-digit percent in the fourth quarter. I would keep in mind, when you think about the rate of SG&A growth in the third quarter at plus 5%, half of that was an investment in demand creation that we believe is absolutely the right thing to do to support the ACCELERATE Growth Strategy is making a difference in elevating and increasing the perception of the brand. So I think it's just incredibly important to keep that in mind as we're looking at the SG&A.

We have reached the end of the question-and-answer session, and I will now turn the call over to Tim Boyle for closing remarks.

Well, thanks, everyone, for listening in. It's really, frankly, great to see the ACCELERATE Growth Strategy transition from just planning to activation. The brand platform engineered for whatever is bringing brand-new energy to the marketplace. And frankly, we're just getting started. We'll build on the momentum with new products and marketing activations in the seasons ahead. So I look forward to sharing our progress when we report in February.