Andrew S. Burns - Columbia Sportswear Co. Gertrude Boyle - Columbia Sportswear Co. Timothy P. Boyle - Columbia Sportswear Co. Jim A. Swanson - Columbia Sportswear Co. Thomas B. Cusick - Columbia Sportswear Co..

Robert Drbul - Guggenheim Securities LLC Jonathan R. Komp - Robert W. Baird & Co., Inc. Rick B. Patel - Needham & Co. LLC James Vincent Duffy - Stifel, Nicolaus & Co., Inc. Christopher Svezia - Wedbush Securities, Inc. Laurent Vasilescu - Macquarie Capital (USA), Inc. Krista Zuber - Cowen & Co. LLC Pallav Saini - Canaccord Genuity, Inc. Susan Anderson - B.

Riley FBR, Inc..

Greetings, and welcome to the Columbia Sportswear Company Third Quarter Fiscal Year 2018 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. As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations. Please go ahead..

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's third quarter results and updated outlook. In addition to the earnings release, we furnished an 8-K containing detailed CFO commentary explaining our results and assumptions behind our outlook.

This CFO commentary is also available on our Investor Relations website, investor.columbia.com.

With me on the call today are Chairman of the Board, Gert Boyle; President and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Operating Officer, Tom Cusick; Senior Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrative Officer, Peter Bragdon.

Gert will start us off by covering the Safe Harbor reminder..

Thank you very much. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated result of operation. Please bear in mind this forward-looking information 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 Annual Report on Form 10-K and subsequent filings with the SEC.

Forward-looking statements in this conference calls are based on our current expectation and belief and we do not undertake any of the duties to update any of the forward-looking statement after the date of this conference call to conform the forward-looking statements to actual results or changes in our expectations..

Thanks, Gert.

I'd also like to point out that during the call we may reference certain non-GAAP financial measures including non-GAAP results, which exclude the effects of new accounting requirements associated with ASC 606, an insurance claim recovery benefit, program expenses and discrete costs associated with Project CONNECT, income tax charges associated with Tax Cuts and Jobs Act, as well as constant currency sales growth.

You'll find a reconciliation of these non-GAAP financial measures to comparable measures reported under U.S. GAAP in supplemental financial tables that accompany our earnings release along with an explanation of management's rationale for referencing these non-GAAP financial measures.

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..

driving sales growth through our brand portfolio, expanding gross margins, increasing demand creation investments and expanding operating margin.

Based on favorable initial fall 2018 sell-through, advanced orders and distributor's orders for spring 2019, early feedback from customers regarding our fall 2019 product line and plans for continued growth in our D2C business, we anticipate high single-digit percent net sales growth in 2019 compared to expected 2018 GAAP net sales.

When assessing our 2019 business, it's important to note that our plans include Project CONNECT initiatives designed to materially reduce the number of lower volume styles, as well as increase our focus on key wholesale partners. We believe the outcome of this and other work will result in improved product margin performance.

Project CONNECT, which is now part of our sustained go-forward operational strategy, will have meaningful financial benefits in 2019 and beyond. These financial benefits will be most evident in our planned gross margin and enable us to continue to significantly invest in the business to support our strategic priorities.

Based on these assumptions, we believe low double-digit percent net income growth compared to our expected 2018 non-GAAP results is achievable. We will provide additional 2019 guidance detail when we announce financial results for the fourth quarter and full-year 2018 in February.

Before I conclude my prepared remarks, I'd like to highlight that this year we celebrated our company's 80th anniversary, as well as our 20th anniversary as a publicly-traded company. I'm proud of our company's long heritage, as well as our shareholder returns since the 1998 IPO.

Without splits, the share price has risen from the $18 IPO price to approximately $260 today. Including dividend reinvestment, this equates to over 1,600% return and a 15% annual equivalent return, which compares to a 7% return for the S&P 500.

As we look forward, I believe that the combination of our global multi-brand, multichannel business, our sound strategic plan and our teammates around the world form a solid foundation for expanded profitability and increased total return to shareholders in the years ahead. Thank you, and we'll now take questions.

Operator, if you could help us?.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Bob Drbul with Guggenheim. Please proceed with your question..

Good afternoon, guys..

Hey, Bob..

Hi, Bob..

Hi, Gert..

Hi.

How are you?.

Good. Good. Good to hear you. I was wondering, Tim, on the China business. Can we just expand a little bit on what's happening there? You've investing in store experience; you're making some changes there, looking for a new GM.

Can you just give us some bigger picture, like category perspective of what's happening in China, the Columbia brand? You said you pulled back on the value customer.

Could you just give us a little bit more take on what you're seeing and what's materializing in that market right now for Columbia brand, please?.

Absolutely. Well, I can tell you that we consider China to be our biggest single geographic opportunity. So regardless of the quarter, the disappointment there, we believe that that's – there's significant opportunity for us there.

The bulk of our change in revenue was the result of an issue with a finite grouping of customers, and we believe that our strategies are correct there. Although I have to admit we haven't probably kept investing on the in-store experience, as heavily as we should have been.

Things in China change more rapidly than in the U.S., and consumers are used to getting served – an improvement in the facilities and the experience on a more rapid basis than here in the U.S. So, if there's anything we've learned, we need to be increasing our investment there on a more rapid basis.

We've got good momentum throughout the rest of Asia and the brand is strong, and we're convinced that we're in a position we can capitalize on the opportunities there in the future..

And, Bob, this is Jim. I'd add as well, while we saw a decline in sales in China in the third quarter, we are anticipating growth back there in the fourth quarter. And obviously, we're in an important period here with the Double 11 sale and in the presales activity currently..

Okay. Great. And then if I could shift gears, on the inventories, I guess like within the inventory commentary that you made, the first one I have is, within the U.S. business, have you had any cancellations or – and you said there was a shift out of Q3 into Q4.

But I guess a bigger-picture question that I have is when you look closely at like sales growth versus inventory growth, you had been trending negative for I think all of 2017 and slightly positive for the first half of the year, and you just told us that at the end of this year you're going to end up 20%.

Can you just help us understand what's happening with your inventories a little bit more in detail?.

Yeah, let me give you just a slight overview, and then I'll ask Tom and Jim to maybe add additional comments. But one of the things that the company has in its favor is an enormously strong balance sheet. Frankly, we can have a higher return on the balance sheet by investing in inventory where it's appropriate.

So, we've done a lot of work-around Project CONNECT to level-load our factories, which is going to increase a certain percentage of the inventories that we carry at certain times of the year when comparing. And to answer your question about cancellations, actually, it's been quite the opposite.

So, we're very comfortable with the inventories the way they are. And we believe we're in great shape to keep the business growing..

Yeah, Bob, and I would just add when we look at our inventories at the end of the September, the aging on, it's really clean. All of the increase in our inventories at September 30 is all current season spring and fall inventory the aged inventory, anything that's greater than a year old, is actually down as of September 30.

So, as Tim mentioned, feel pretty comfortable from that perspective. And obviously with the demand that we see and we anticipate continuing into the fourth quarter we would anticipate with clean inventory exiting the year as well.

As it relates to the end of year projected inventory, it is noted, we have made some earlier buys and we anticipate early receipts for our spring 2019 products. We're just bringing that product into the market a bit earlier to get out in front of certain manufacturing supply constraints and then also to deliver cost efficiencies.

And I think those cost efficiencies you'll begin seeing that in our spring 2019 in our product margins, as we provide further detail on our outlook out to next year.

And then, with regard to just the uptick in inventory in general, I would just describe that as we came through 2016/2017 at a lower rate of growth and then certainly as the business picks back up there's additional inventory to support that and we made some opportunistic purchases for our fall 2018 really to take advantage of some of the demands that we're seeing in the market..

Okay. Great. Thank you very much..

Our next question comes from the line of Jonathan Komp with Robert W. Baird & Co. Please proceed with your question..

Yeah, hi. Thank you. I was hoping just to get a little bit more color, I know the U.S. looks very strong, and I think you raised the outlook implying a good fourth quarter, part of that maybe the timing of shipments year-over-year. But can you just talk about from a wholesale perspective what you see in the U.S.

environment? And then, separately, it looks like your D2C business also is very strong.

So, if you could comment more on some of the drivers there?.

Yeah, certainly. Well, we believe that the company and its brands are taking market share. So, we're seeing an acceleration in terms of liquidation. You may remember that the company monitors about 85% of our wholesale partners' sales and inventory so we can be helpful if necessary.

But we're seeing very strong liquidations on the company's products at wholesale. We would expect that as the winter kicks in that we'll continue to see that. We've had similar good news in our D2C business as well. So, we're actually quite bullish on North America because we have more visibility there than really any place else in the world..

And, Jon, I think as relates to the timing shift you had mentioned, our rate of growth for our U.S. wholesale business in the third quarter was up a low single digit percent adjusted for on the timing shifts, as we see those shipments into the fourth quarter.

Our revenue for the wholesale business would have been up, more in line with the full season at a mid-single digit rate, and we'll see that as we complete the fourth quarter and we report results where our wholesale business we are anticipating being up to a greater extent as we report results.

And then, I'd also indicate we'll continue to see that strength from a D2C standpoint both within the brick-and-mortar and e-com channels..

And I assume if you're talking maybe like a week or two shift in deliveries this year, or maybe you can comment on kind of the state of your deliveries sitting here today versus where you might have been last year..

I don't think there's any meaningful shift in that, so nothing specific to call out..

Okay. Great. And then, Jim, maybe a bigger picture question on the margin that you're contemplating for next year, certainly the gross margin I know you called out some benefits from the initiatives there.

Could you just talk about any product cost pressures that you see on the horizon that you're embedding in your initial outlook? And then, separately, kind of what you're thinking about the expense rate for G&A and any opportunity to get leverage there on a high-single digit sales growth..

Yeah. Sure. I think specifically as it relates to the input cost, certainly we're seeing some inflationary pressure as it relates to raw materials and that will have an impact, as well as the labor rates that we're seeing in Asia.

Having said all of that, and obviously, we spent a fair amount of time communicating with regard to the Project CONNECT benefits and the Project CONNECT efforts that we've been working on for the better part of the last year-and-a-half.

And as we get into next year, we anticipate that those efforts around design to value, around the assortment optimization and just the efficiencies we're going to see, our product line are going to drive improved gross margin beginning with our spring 2019 season and should carry into the fall season as well.

So, I would fully anticipate that our gross margins are up nicely next year.

Now with that said, and as you're seeing in the latter part of this year as you look at our results in Q3 and what's implied in our Q4 outlook, our rate of SG&A growth is up and we'll see that ultimately when we provide more detailed outlook for 2019, but really at this stage it's early in our planning process. We've just kicked off our budget cycle.

We want to provide some initial indicators in terms of what we're planning for in our business with what Tim shared. And maybe just to reiterate on that briefly, we're planning a high-single digit rate of growth off of our GAAP net sales, and important to just kind of pick up a note around GAAP net sales.

And then also planning the net income up on a low double-digit percent off of our non-GAAP net income. Beyond that, there's not a lot to share in terms of the underlying composition from a gross margin SG&A perspective aside from the qualitative comments that I just shared..

Understood. That's helpful color. Thank you..

Our next question comes from the line of Rick Patel with Needham & Co. Please proceed with your question..

Thank you. Good afternoon and congrats on the strong execution..

Thanks..

It looks like wholesale in the third quarter was negatively impacted by timing shifts.

I'm curious if that shift was anticipated or if it reflected customers delaying their initial purchase plans and any way to quantify that as we think about the benefit to 4Q?.

Again, nothing all that significant.

In fact, I think when we reported our second quarter results we really weren't anticipating much of a timing shift, but I think as our overall fall forecast and outlook has increased, and we look at the proportions of what we shipped third quarter versus the fourth quarter that there's a lit bit of a proportional shift between the two quarters.

But effectively, maybe just to recap briefly here as we're talking about our U.S. wholesale business, it's about a $10 million shift between the third quarter and the fourth quarter. And then similarly, within our distributor business, we shipped in our fall 2018 product a bit earlier so that shipped into the second quarter..

Got it. And hoping you can talk about your outerwear business.

Is there any way to distill growth for that classification in the third quarter and what your expectations are for 4Q based on your order book?.

Certainly. Well, the company in many parts of the world is considered really, only an outwear company even though we have significant business both in footwear and in sportswear. But I would say our outerwear is performing probably among the best of the categories right now.

We've had some cold weather and there was certainly cold weather at the tail end of last winter where people were not able to buy new merchandise. So, I think it's been one of the stellar performers and the expectations as we continue through this season, our wholesale outerwear was one of the drivers of our raise of guidance this year.

So, we're excited about the potential there..

Thank you. Good luck this holiday..

Thanks..

Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question..

Hello, everyone..

Hey, Jim..

Hi, Jim..

Gert and Tim, to start, the 15% annual return over your public company history is really phenomenal. Congratulations on that. That's impressive..

Well, thank you. I wish the two of us could take all the credit, but there's obviously a significant amount of efforts from the entire employee base..

Clearly. Yes. Tim, a change of behavior from you to offer a view to the out-years so early. Just a few years ago, you'd reserve that until you had fall orders in hand. From a macro standpoint, you've got a lot of elements of uncertainty.

Why were you compelled to put those numbers out for 2019 at this juncture?.

Well, we wanted to make sure that we had a hand in setting guidance or setting the tone for 2019. We just thought that we'd avoid analysts or the investing public to get in an area where we thought that might be outside of where we would expect them.

And we frankly see so much good stuff happening in the business right now that we wanted to be able to talk about it. And those two are the primary drivers..

Yeah. Jim, I might add just a couple of comments as well. Certainly, we're seeing momentum in our business. And so part of providing the outlook from a top line perspective is we just – we're seeing the fall 2018 early sell-through results which is encouraging. We've sold in our spring 2019 season.

So we've got some visibility in terms of the order book and beginning to show our fall 2019 product as we go to market with that as well. But more importantly and probably one thing to touch on is over the last several quarters we've made some remarks with regard to Project CONNECT and the financial benefits.

Certainly we're seeing those in a pretty meaningful way, even in 2018 we're seeing meaningful benefits from that, and we continue to anticipate and have confidence to be able to drive those benefits into next year.

On the same token as we've described, we've accelerated investment in our business from an SG&A perspective, knowing that we're trying to drive sustainable profitable growth.

And so, in light of our past communications around this to one of the caller, really how we were thinking about the out-year here from both the top line and bottom line perspective..

Got it. And then, Jim, you clearly have a confident tone on gross margins looking into 2019. You've touched on some of the inflationary pressures.

Can you elaborate on some of the things you're doing in the supply chain with the cost value assessment and so forth to improve the margin picture? Maybe it's SKU rationalization, and SKU concentration, and mix, and so forth? Help us with a little more detail there if you don't mind..

No. No problem. I'd probably ask Tom to comment as well, but frankly it begins with the SKU rationalization and focus on a smaller number of products where we can have real meaningful business relationships with factories.

It also includes design to value, where we do a lot of work with consumers to find out whether or not they appreciate the features that we've been putting into the garments. And then, lastly, just efficiencies around our sourcing base.

And again, as we said, some of the inventory growth that we expect is a function of level loading factories, so we can – we don't have the spikes.

So, Tom?.

Yeah. I guess, the only thing I would add to that, Jim, is we've obviously priced and costed the spring 2019 line, and we've done essentially the same for fall 2019. So, we've got pretty clear visibility on margins as we sit here today for 2019..

Great. Thank you, guys..

Thank you..

Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question..

Good afternoon, everyone, and thanks for taking my questions. Nice job on the quarter..

Thanks..

I've got a couple of questions. I guess first how much of, when you look at fourth quarter, is a function of timing shifts, which you called out on the U.S.

wholesale side? And how much of it is just feeling better about whether it's DTC or sort of a initial sell-through as you go into the fourth quarter, just maybe segment two of them if you could, how much is one versus the other?.

In terms of the timing shift itself, as I had indicated, it's about $10 million that's shifting out of Q3 into Q4. So, that's going to be a low single-digit percent impact when you look at the overall growth rate that's anticipated for the fourth quarter. And our outlook for the fourth quarter on a non-GAAP basis is 7.5% to 9.5% revenue growth.

And by far the key drivers in there, similar to what we saw in the third quarter is really the growth that we're seeing in the U.S. business. And that's going to be a combination of the U.S. wholesale business, which has a part of this timing, but our fall 2018 season as a whole for the U.S.

wholesale business was anticipated, planned up, and then continued productivity gains and growth out of our D2C business both from a brick-and-mortar and e-com perspective. And I'd share that we're what, three weeks into the month of October.

We've continued seeing that momentum in the business, both from a D2C perspective and with regard to the sell-through that we're seeing amongst our wholesale customers..

Okay. That's good to hear. I wonder, just on Europe, I'm just curious. Others have mentioned some pockets of weakness. So, I'm just curious how you look at your subsidiary European businesses, sort of the trajectory and just any thoughts as you look further down the road in terms of what's going on there..

Sure. Well, for people who've followed the company and the shares for a number of years, you know that Europe, which at one time was an enormously profitable business for the company went into a period of somnambulation. And it took us a long time to get the right team together to get that business reinvigorated.

So I would say that Europe, while it's as a percentage of the growth been significant, and frankly, it's coming along nicely is nowhere near what our opportunity is there. So, our strongest markets still are France, Germany, Spain and Switzerland, and so the giant markets of the U.K. and Germany, we're still very much behind there.

And I can't – I wish I could blame it on pockets of weakness, but frankly, it's been in areas where we just haven't – we haven't grown as rapidly as we should. But frankly, we've got the right team there now and we're very excited about the results we've been seeing..

Okay.

So, in your view, Tim, there continues to be a market share and execution opportunity, regardless of the macro backdrop or some other things going on, but there's just a lot of low-hanging fruit?.

Yeah, we've improved our offerings there. We've improved our teams and we've focused heavily on the larger retailers that can drive the business, but there's still an enormous opportunity for the company. We're larger than virtually all of our competitors there because they're all generally local market leaders.

And so, we just need to be – we need to be leveraging our strengths and continuing to take advantage of the opportunities that we have in that market..

Got it.

Just on the SKU rationalization, have you ever disclosed or discussed in more detail about percentage of what that reduction is or what it's like or any color around categories or anything like that?.

Well, we really haven't gone into that kind of granular detail, but I can tell you it's a significant reduction in the amount of styles that we've been offering and call it, north of 15%. And then, we've also been organizing our sales teams and the focus on customers that are larger and can help us.

And so there's also been an adjustment in the number of customers we're calling on to focus on the big, big opportunities..

Got it. Okay. Last two things for me, real quick here. Just on the thought process for 2019, high single-digit revenue growth, if I caught you correctly, you said the revenues are based on GAAP. The net income is based on non-GAAP.

And if the revenue is based on GAAP, if I have this correctly – just correct me if I'm wrong – that's if you hit the high end of your guidance for this year it's $27.50 million (00:46:59) or thereabouts. Is that what the revenue growth is, high singles based off of? I just want to be clear about that..

Yes. You've got it. You've got it..

Okay. And the net income is based off of non-GAAP. And does that include the – I'm being cute here, but the minority interest....

Yes, it does. Yes..

Okay..

I'm tracking with you, Chris, that's correct..

All right. All right. Got it..

You got it..

Okay. Just wanted to double check. All right. Thank you very much. I appreciate. All the best..

Thanks..

Yeah. Appreciate it..

Our next question comes from the line of Laurent Vasilescu with Macquarie Group. Please proceed with your question..

Oh, good afternoon. Thanks for taking my question. I wanted to ask about the gross margin guide raised by 25 bps. I would assume over the last 90 days FX has become a bigger headwind. Maybe you can talk a little bit about what your expectation was for FX as a headwind for the overall year gross margin guide relative to what it is now..

Yeah, Laurent. I'll cover that. And really, where we've seen the pressure from a currency standpoint with the strengthening of the dollar's been a lot more from a translation perspective when you look at our revenue. I think coming into the year, dated back earlier, we felt we had about 1.5 points of benefit from foreign currency.

And as we sit here today, it's probably closer to 0.5 points. So, we've steadily taken our top line up throughout the year despite the currency headwinds. With that said, to your question around gross margin, we hedged most of the production that we buy for our international businesses dated back to last year.

So, we were in a good hedge position coming into the year. And currency has actually been favorable to us. And I think in my CFO commentary you'll see a note in there. It's about a $0.10 EPS tailwind to the full year. And as we get out to next year I'd say it's probably more of a slight positive to neutral impact.

We're hedged quite a ways out into 2019 as well..

That's great to hear, thank you. And then, correct me if I'm wrong but I think your global direct-to-consumer sales were about 40% of FY 2017 revenues and just maybe some dumb math here, but it looks like it might go up to 44% for the year.

Is that fair? And then, do you have any high level thoughts of what that percentage rate could be for next year?.

Yes. In terms of your indications there, it's definitely trending in that direction. We'll see and we'll report as part of our Q4 and year-end call we'll provide an update in terms of where we've landed both from an overall D2C perspective and our e-commerce business.

And as it relates to 2019, it's a bit early, we're still in our planning phase and making those determinations..

Okay. Very helpful. Okay.

And then maybe on e-commerce, I don't know, did you make any comments about how e-commerce did this quarter or any thoughts for the year?.

I think with regard to the third quarter in particular and specifically focused on our U.S. business, we've indicated that it grew a high 20%. So, we're seeing nice improvements there really across the brand portfolio.

And I don't believe within our detailed guidance that we've got something in there on a full-year basis, but continuing to see nice gains there, generally the metrics have been good with that business..

Okay. Great to hear. Best of luck..

Our next question comes from the line of John Kernan with Cowen and Co. Please proceed with your question..

Good afternoon. This is Krista Zuber on for John. Just a couple of questions. Thank you again for the prelim fiscal 2019 guidance.

And just, if I'm looking at the revenue growth kind of how do you see the various parts of your portfolio channels and sort of regions falling out within that high single digit guide?.

Well, we've really got an enormously complex business. So, we have obviously geographies we're dealing with, categories of merchandise, distributors, channels on those areas that we control. And to make all that stuff add up to the right number, it requires an enormous amount of time and effort.

So, without speaking specifically about any category, I would just say I think in general most of the categories are going to be, we expect, performing at the average of the growth rate we've talked about..

Okay. Great, thanks. And then just my follow-up question. You're seeing the returns on the strategic investments that you mentioned.

And just to follow up on a prior question on the SG&A, just to sort of frame it for me, how are you thinking about the longer term run rate for the SG&A?.

Well, I would just tell you that in my opinion we have under invested in a couple of key categories of the business. One would be, obviously, we've talked about it at length, the demand creation spend. We need to be increasing that.

And then, as the company grows and the sophistication of our wholesale base and our consumer base increases, we need to be investing more heavily in logistics and the ability to manage the business, as well as I guess more specifically the e-com business.

So, I would expect those large buckets have been over time under invested and we're catching up now.

So, Jim, maybe you have more comments?.

No, Tim, I'd just add that if we look back over the course of the last year-and-a-half, we initiated this Project CONNECT effort really to help us enable transition over to a brand-led consumer-focused operating model.

As a part of that effort, we'd undertaken several initiatives that were driving financial benefits that really enabled us to ensure that we're able to continue investing back into the business, positioning it for long-term sustainable growth.

And so certainly, as you look at our results and our plans for 2018 and going into 2019, there's a more significant and accelerated rate of investment from an SG&A perspective.

And so, we feel like those investments are going into the strategic priorities that Tim has articulated and our long-term objective is to continue growing the top line and put more dollars into demand creation and at the same expanding our operating margin and managing the business with discipline..

Got it. Thank you..

Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question..

Hi. Thanks, guys. This is Pallav Saini on for Camilo. Congratulations on the quarter. My first question is as it relates to the brand performance in Q3, were there any deviations from your plan? And I don't think you provided any updated guidance by brand for the year.

Is there any change there from the last time that you provided brand-specific items? And then I have a follow-up..

Yes. So, with regard to the third quarter, by brand, nothing stands out to me. I think in terms of – as we look at the third quarter results relative to where we – our internal expectation coming into the quarter, really the major drivers of it and we beat by, call it, $15 million relative to our internal outlook.

And two-thirds of that was really what we saw in our U.S. D2C business via our stores and e-commerce and the balance of it was effectively the performance we saw in our European business. But how that breaks down by brand, I think it's probably pretty ratable or predominately – it's probably a bit more weighted to the Columbia brand, frankly.

And then as it relates to the full year outlook from brand standpoint, with – our top line planned up double digits at the top end of our range.

I think it's fair to say that between Columbia, SOREL and prAna, that they're all at or around that double digit rate of revenue growth, and then the hardware brand is probably – is down a double digit rate, as we're working through our continued turnaround efforts within our (00:55:32) brand..

Thanks. And my second question is around your DTC business. It's a substantial part of your mix, and more and more brands are focusing on elevating their in-store and online experiences, strengthening their connection with the consumer.

Can you talk about some of the initiatives you are undertaking to do that? Any measurable impact that you can share in that regard?.

You're talking about – I just want to make sure I answer your question properly, our D2C business in terms of how we – how we look at it, or frankly....

Right..

Do I have that right?.

Anything that you're doing in-store to differentiate yourself from your competitors to strengthen that emotional connection with the consumer..

Yes. So, we've said many times before that this business has a low barrier to entry. So, we have lots of competitors and really successful brands. It's an incumbent upon them to differentiate themselves.

So for us, the focus to differentiation has been on our innovations, and I would point out especially those that are visible like Omni-Heat and like our OutDry Extreme product in rain gear.

Additionally, again, when we talk about the emotional connection, we're fortunate to have the star of our ad campaign here in the room with us, my mom, who – that allows us a point of differentiation, which few other brands can accomplish.

And so whether it's a store that we own or operate or whether it's one of our valued wholesale partners where we install point of sale materials that help the sales of our products, they're really concentrating on those points of differentiation which, again, I would say would be innovation, as well as our emotional connection with her..

Thank you, and good luck..

Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question..

Hi. Good evening. Really nice job on the quarter. Good to see the momentum continue..

Thank you..

I guess I wanted to follow up a little bit just on the SKU rationalization front. I think you said it was going to – it's as much as 15%.

So, I guess curious, is this in your initial 2019 guidance? Like how should we think about the impact to top line and is it across all the product categories?.

Yeah, I guess I should be more specific. The comment was really about the Columbia brand in terms of its reduction of SKUs. And really you'll see almost all of that, the results of that heavy lifting in our expectations on gross profit margin improvement.

So, this gives us the ammunition to reinvest in demand creation and the other areas of the business where we've historically under invested..

Got it..

So I think the....

Okay. And then I guess on Europe, I may have missed this, but did you talk about where you guys are at from a profitability level? Now we've seen, a couple years at least of double-digit growth there.

So just curious where you're at in terms of getting back to profitability versus the core company?.

Yeah, I would say this is – and Jim will correct me if I'm wrong, but I think this is the second full year that we've had profitable operation in our Europe-direct business. Our EMEA region has always been profitable based on the significant businesses we have in that region, which are distributor markets.

But our Europe-direct business has been profitable, it's growing. And the expectation is, frankly, that should be one of our larger markets. And we're not back to what historical profitability was in that market, but we're well along, and we've got the right team and the right strategy, I believe, to get us continue growing and much more profitable..

Yeah. I think that's right. We've made phenomenal progress over the course of the past couple of years, but that said, to Tim's point, we've got the infrastructure in place to support a much larger business in terms of the distribution capability, the back office functions, we implemented the SAP platform into Europe in the first half of this year.

So, we should be poised to deliver leverage in that market for years to come, assuming top line growth..

Great. Okay. And then one last one. I guess on Mountain Hardwear, I think earlier this year you were talking about the brand finally stabilizing and maybe even getting back to growth next year.

Maybe just kind of give us an update where you're at with that?.

Certainly. Well, you saw the shortfall in sales for the quarter, which frankly was a function of the final liquidation of inventories in prior periods. So, we just were up against a real comp on full price sales. The team there, which continues to impress us, I believe has got the right approach to the business.

And even though they're new to the company, they're very experienced in this business. And our expectation is that that brand will be leading the profitability of the company at some point in the future. It's very well thought out. And it's really mostly a product issue. So, Joe Vernachio and his team there are focused on the right stuff.

And we're expecting to see great things come out of that brand..

And Susan, I'd add, we're beginning to see some encouraging signs. Our fall 2018 U.S. wholesale order book for the Mountain Hardwear brand is actually up. I know we reported a sales decline this year. And as Tim touched on, it's largely a function of liquidating excess inventory. But the overall season should be up.

We should see much better results as we report fourth quarter sales, and we've got visibility through spring 2019 order book of Mountain Hardwear brand, I'd anticipate with that order book in hand that we'll be up in that season as well. So, some good times..

Great. That sounds good. Thanks so much, you guys. Good luck next quarter..

Thank you..

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks..

All right. Well, thank you all for listening in. We look forward to talking to you about Q4, and some more information on 2019 in February. Thank you..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..