Greetings. Welcome to the Columbia Sportswear Third Quarter 2023 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 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 the 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. Third quarter results reflect a continuation of the trends we've experienced throughout 2023. Our international-direct markets continued to outperform the U.S. Within our DTC business, brick and mortar stores are performing better than the e-commerce channel.

Economic and geopolitical uncertainty remains top of mind for consumers and retailers. Overall, we were able to generate 3% net sales growth in the third quarter. Canada, Europe-direct and China all delivered high-teens percent or better year-over-year growth.

In the U.S., retailers continue to take a cautious approach to managing inventory levels and placing orders. Consumer demand for soft goods, including apparel, footwear, remains weak. I'm pleased to report the inventory exiting the quarter was down 16% year-over-year. Throughout the year, we've been executing our inventory reduction plan.

The combination of lower inventory buys, shipment of Fall '23 orders, and increased excess inventory sales in our outlet stores has yielded substantial progress towards our goal. We've done this while generating healthy gross margins, which is a testament to the evergreen nature of our products.

We have a clear path to achieving our goal of reducing year-end inventory by over $200 million compared to last year. As we head into our peak sales period, I'm excited about the brand activations in place for this holiday season.

For Columbia, Omni-Heat Infinity continues to be one of the fastest growing parts of our business and is prominently featured in our marketing campaigns this season.

In addition to our innovative warming technologies, the Columbia brand is executing several collabs, including the recently launched 100th anniversary Disney Collection inspired by Disney's vintage artwork.

In the coming days, we will launch our latest Star Wars collection featuring Luke Skywalker's iconic flight suit reimagined as a fully equipped ski collection. To promote the launch, we will be leveraging Columbia Brand Ambassador Bubba Wallace as well as a top Jedi Master. You'll be able to find the content on our social media channels.

To celebrate the 50th anniversary of the iconic Caribou Boot, SOREL recently opened 20 shop-in-shops at Nordstroms, featuring key fall styles and unique 3D SOREL Polar Bears created by local artists in each market. SOREL also recently opened a bold new Brooklyn pop-up store, featuring exclusive styles and interactive branded experiences.

This fall, Mountain Hardwear launched its Seek Wilder Paths campaign, which reflects a comprehensive brand refresh. mountainhardwear.com has been redesigned and enhanced to bring the brand's unique identity to life. To celebrate the brand's 30th anniversary, Mountain Hardwear released the Heritage Collection, celebrating its most iconic styles.

Mountain Hardwear also released a highly sought after collab with the iconic streetwear brand Stussy. As you can see, we have a great line-up of brand and marketing activations planned to engage consumers and drive sales this season. We now await the arrival of cold weather.

The last several weeks have been unseasonably warm, resulting in a slower start to the fall selling season. Based on third quarter performance and a more cautious forecast for the remainder of the year, we are lowering our net sales outlook.

Despite this net sales reduction, our diluted earnings per share range is moving slightly higher, reflecting a relatively unchanged margin outlook and a lower effective tax rate. I'll provide more details on our 2023 financial outlook and initial 2024 commentary later in the call. I'll now review our third quarter financial performance.

Net sales of $986 million were up 3% year-over-year. Net sales growth was balanced across our direct-to-consumer and wholesale businesses. Within wholesale, the approximate impact of timing shifts resulted in a $30 million benefit to net sales when compared to the third quarter of last year.

This was relatively in line with our expectations heading into the quarter. Gross margin expanded 70 basis points as lower inbound freight costs and favorable channel mix more than offset our inventory reductions across both wholesale and DTC.

SG&A expenses increased 10%, primarily driven by expense growth across our DTC business, demand creation investments, and supply chain. Diluted earnings per share decreased 6% to $1.70. I'll now review third quarter year-over-year net sales growth by region. For this review, I'll reference constant currency growth rates. U.S. net sales increased 5%. U.S.

wholesale increased mid-single-digit percent driven in large part by on-time Fall '23 shipments relative to late deliveries last year. U.S. DTC net sales increased low-single-digit percent.

Brick and mortar was up mid-single-digit percent, driven by the contribution from new stores opened over the last year as well as incremental sales from temporary outlet stores. The U.S. e-commerce net sales were down high-single-digit percent. The online environment remains competitive and promotional.

Latin America-Asia Pacific region, or LAAP, net sales increased 4%. China net sales increased mid-20%, reflecting strong consumer demand across all channels. Our team in China has done an excellent job of driving engagement with consumers in new ways that are authentic to Columbia.

During the quarter, we introduced new fall styles to our popular Transit product line, our premium China-specific product collection. The Transit line was prominently featured in our latest brand campaign in China, which included a new brand ambassador and in-person and online brand experiences.

In October, we built an entire Columbia brand nature exploration experience at Shanghai's Grand Gateway mall. The installation featured four specific sectors, beach, cloud, glacier, and jungle. Within each of these micro climates, consumers were able to learn about Columbia's warmth, dry, cool, and protected innovations and experienced them in action.

Our digital team brought the outdoors to consumers digitally by launching a Columbia brand virtual reality homepage on Tmall. This immersive outdoor visual experience drove great traffic and consumer brand engagement on the site. I believe the investments we've made in China to elevate talent and drive operational improvements are yielding results.

China is expected to be one of our fastest growing markets this year, and we're well positioned looking into the future. Japan net sales increased low-teens percent, aided by earlier shipments of Fall '23 orders and DTC growth. This fall, our team in Japan is [connected] (ph) to consumers to reinforce our heritage through right collections and events.

They're also driving energy through locally relevant partnerships, like to recently launch collab with Tokyo-based clothing brand BEAMS. Inspired by one of PFG's first products, the iconic multi-pocketed fishing vest, the collection fuses technical fishing aesthetics with BEAMS style.

The launch has garnered promising pre-order results and is generating extensive media coverage. Korea net sales declined low 30% as we continue to reset the business for long-term growth in challenging market conditions.

As we outlined on the last call, management is focused on several multi-year initiatives across talent, distribution, marketing and product. This process includes closing unprofitable doors and non-brand enhancing wholesale accounts as we work to elevate distribution.

We believe these efforts will drive a deeper connection with consumers and fuel sustainable growth. LAAP distributor markets were down mid-teens percent reflecting on-time Fall '23 orders, which shifted the timing of sales into the second quarter. Europe, Middle East and Africa, or EMEA, net sales decreased 21%.

Europe-direct net sales increased 20%, benefiting from earlier shipment of Fall '23 product and robust DTC growth. Direct-to-consumer performance was driven by the addition of seven new brick-and-mortar doors over the past year as well as strong e-commerce performance.

As part of our strategy to elevate the Columbia brand experience at retail, we've opened 10 new shop-in-shops with Intersport in France and Germany this year. These enhanced in-store displays secure space for the brand at an important strategic retail partner while elevating the assortment presentation.

Europe-direct has been one of the top-performing markets throughout 2023. Despite the positive momentum we're saying, we anticipate external headwinds will be more impactful to growth in the quarters ahead.

Our EMEA distributor business declined high 80%, reflecting the anniversary of shipments to Russia, as well as a greater portion of Fall '23 orders shipping in the second quarter. Canada net sales were up 38%, driven by earlier shipment of Fall '23 orders as well as strong DTC brick and mortar performance.

Looking at performance by brand, Columbia brand net sales increased 4% during the quarter, including the benefit of earlier Fall '23 shipments. This fall, Columbia's lead innovation story is Omni-Heat Infinity, which remains one of the fastest growing parts of our business.

We're building on last year's momentum with an expanded assortment, including a new innovative Double Wall Elite construction. Double Wall Elite provides enhanced performance with two layers of Omni-Heat Infinity, which helps block wind and traps warmth. We are also expanding the assortment of Omni-Heat Helix, our disruptive poly fleece technology.

Our fall marketing campaign is establishing -- excuse me, is highlighting these differentiated innovations and continue to establish Columbia as the leader in keeping people [indiscernible].

The campaign features support across paid media, PR, social, and e-commerce, including spots on Thursday Night's Football and the first-ever NFL Black Friday game. On the partnership front, we helped Disney celebrate their 100th anniversary with a new special edition collection featuring Columbia gear inspired by vintage Disney artwork.

Sell-through of this collection has been outstanding with key styles quickly selling out. In the coming days, we'll launch our latest Star Wars collection, which I believe will be our most exciting yet. Columbia and Lucasfilm's creative teams work closely together to reimagine Luke Skywalker's iconic flight suit as a fully equipped ski collection.

The styles incorporate our proprietary technologies, so you can withstand the elements in this galaxy or one far, far away. The promote our collection, we're leveraging our sponsorship of NASCAR team 23XI and driver Bubba Wallace.

Bubba has had a career year in '23 advancing to the round of 12 in the playoffs and generating significant coverage for the Columbia brand. Fans of Bubba, NASCAR, and Star Wars will be particularly interested to tune into the NASCAR Cup Series Championship on November 5.

In preparation for the race, Bubba had listed the help of the top Jedi master who will make a surprise appearance in advance of the race. In footwear, we launched the Facet 75 Alpha this fall. This modern waterproof hiker with trail running DNA received a Men's Health 2023 sneaker award along with a PFG pro sports shoe.

Footwear remains the largest category opportunity for the Columbia brand and I'm excited about the product pipeline we have heading into next year. Before moving to our emerging brands portfolio, I'd like to welcome Woody Blackford back to the Columbia brand team as our Chief Product Officer. Woody previously spent almost 14 years at Columbia.

Woody spearheaded teams that brought to market some of Columbia's most innovative products and technologies. He invented Omni-Heat Reflective in 2010, which has been the foundation for billions in sales across the Omni-Heat collection.

I believe his comprehensive understanding of Columbia and our consumers as well as his passion for product creation can help accelerate Columbia's growth around the globe. Welcome back, Woody. Drifting to our emerging brands. SOREL brand net sales increased 9%, primarily driven by earlier Fall '23 shipments and higher wholesale closeout sales.

This fall, the SOREL team is engaging with consumers and bringing products to life in new ways. The brand recently opened 20 shop-in-shops at Nordstrom to celebrate 50 years of the iconic Caribou Boot and the launch of new Caribou X collection. Early season sell-through at these shop-in-shops has been very encouraging.

SOREL's new pop-up shop in Brooklyn includes an augmented reality experience where consumers can stand in front of a special mirror and see how they look in SOREL's unique styles. The brand also collaborated with the singer Chloe Bailey on an exclusive Caribou X that was only available for purchase at the [indiscernible].

Mountain Hardwear net sales decreased 9% driven by Fall '23 wholesale shipments partially offset by DTC growth. This fall, Mountain Hardwear is celebrating its 30th anniversary. As part of the celebration, Mountain Hardwear launched its Seek Wilder Paths campaign, which reflects a comprehensive brand refresh.

mountainhardwear.com has been redesigned and enhanced to bring the brand's unique identity, purpose, and tone of voice to life. Mountain Hardwear also released a heritage collection celebrating its most iconic styles, including the Exposure Parka, Windstopper Tech Jacket, and Sub-Zero Down Jacket.

These products pay homage to the brand's early style, updated with today's fit and fabric technology. Mountain Hardwear's collab with iconic streetwear brand Stussy featured several co-branded products, including jackets, trousers, and beanies, as well as sleeping bags.

The collection quickly sold out and immediately boosted traffic to Mountain Hardwear's website. prAna net sales decreased 18% in the quarter. The prAna team remains focused on re-positioning the brand for growth in future seasons.

Our new brand President, Tricia Shumavon, is quickly assessing promise opportunities and charting a path to unlock the brand's growth potential. I'll now discuss our 2023 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 sales to decline 5% to 10%, reflecting the wholesale sales shift into the third quarter compared to last year, partially offset by modest DTC growth.

Our fourth quarter net sales outlook incorporates a slow start to the fall selling season we have experienced and a more cautious view on sales trends for the balance of the year. We're forecasting fourth quarter diluted earnings per share to be in the range of $1.93 to $2.18.

For the full year, we now expect net sales growth to be in the range of 1.5% to 2%. Inclusive of a lower tax rate assumption, we forecast diluted earnings per share to be in the range of $4.45 to $4.70. We anticipate strong operating cash flow of approximately $500 million in 2023 as our inventory levels normalize.

While it's early in our 2024 planning process, I'd like to provide some commentary on how we're thinking about the year ahead. I'm excited about the product pipeline and growth initiatives we have planned to fuel demand in 2024. For Spring 2024, we launched Omni-Max, our latest performance innovation in footwear.

This new platform provides versatile cushioning, enhanced stability, and increased traction for hikers, trail runners, and explorers. In apparel, we continue to build out an industry-leading portfolio of cooling and sun protection technologies.

This spring, we'll introduce Omni-Shade Broad Spectrum Airflow, offering exceptionally breathable sun protection with Omni-Wick Evaporation for fast drying next-to-skin comfort. We will continue to invest in Omni-Freeze Zero Ice, our industry-leading cooling and moisture management technology.

The sweat-activated cooling technology is featured in a number of styles and activity categories helping to keep our consumers outdoor longer for all their pursuits. In our quest to find better ways to help humans enjoy the outdoors, we look to nature to discover new innovations.

For Fall '24, we're launching an exciting new warming technology, Omni-Heat Arctic. This new biomimicry insulation system is inspired by how polar bears keep warm in extreme conditions. Omni-Heat Arctic starts with a translucent outer layer that lets solar energy in.

Heat is then transmitted to an insulation layer close to the body for maximum warmth, mimicking the polar bear's warmth protection system. The result is lightweight, high-efficient warmth boosted by solar power. We're also investing in key franchises like PFG, which pioneered the fishing apparel category and remains the leader today.

Through product enhancements, marketing investments, and reaching new consumers, we're focusing on expanding our leading role -- leading market share in the fishing category. To drive e-commerce growth and enhance the consumer experience, we're investing in capabilities to enrich content, increase personalization, and optimize our membership program.

We can make these types of investments during turbulent periods because of the strength of our diversified global business model and fortress balance sheet. We can invest in long-term growth opportunities at a time when financially-constrained competitors cannot do so.

Even with all the exciting product and growth initiatives planned for '24, we know there will be challenges, particularly in the first half of the year. Retailers continue to take a cautious approach to managing inventory levels and placing orders.

Fears of slowing consumer demand as well as the persistence of higher interest rates create lingering economic uncertainty. The effect of these headwinds is most pronounced in the U.S., and we're starting to see similar conditions emerge in our Europe-direct markets and Canada. Geopolitical unrest is adding to this uncertainty.

As previously communicated, we're phasing out products designed with PFAS chemicals across our global product line in 2024. Our intent is to stop manufacturing any apparel or footwear with PFAS prior to our Fall '24 season.

In the U.S., we anticipate some retailers will choose to de-stock PFAS styles in the first half of the year before loading in the new styles designed with PFAS-free chemistry in Fall '24. This transition is expected to impact the flow of our wholesale business and how we and others manage through existing inventory.

We also expect our footwear business to remain challenged through the first half of 2024. Outdoor footwear category trends remain soft and inventories remain high. Our Spring '24 order book reflects the culmination of these challenges.

As a result, we expect our global wholesale business to be down by a low-double-digit percent in the first half of the year. We expect this wholesale decline will be partially offset by continued growth in our global DTC businesses, resulting in total first half net sales declining a mid-single-digit percent.

For the full year, we believe generating net sales growth is achievable as retail inventory levels normalize and retailers seek to restock products designed with PFAS-free chemistry. In the environment -- excuse me, in this environment, our objective is to modestly improve full year operating margin in '24.

We plan to provide more detail on the '24 outlook when we announce fourth quarter results next February. Overall, I'm confident in our team, our strategies and our ability to achieve the significant long-term growth opportunities we see across the business.

We're investing in our strategic priorities to accelerate profitable growth; create iconic products that are differentiated, functional, and innovative; drive brand engagement with increased focus, demand, creation, and investments; enhance consumer experiences by investing in capabilities to delight and entertain consumers; amplify marketplace excellence that is digitally-led, omni-channel and global; and empower talent that is driven by our core values.

That concludes my prepared remarks. We welcome your questions for the remainder of the hour.

Operator, could you help us with that?.

Absolutely. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Bob Drbul with Guggenheim. Bob, please proceed..

Thank you. Good afternoon, Tim and guys..

Hey, Bob..

I guess, Tim, I have two questions that I have for you.

I think the first one is, so when you think about the next few months of this -- the holiday season and sort of what's upon us, can you just like -- with the order book where it is, your sell-ins where it is, can you elaborate a bit in terms of how you see inventories at wholesale -- I mean, at retail, your wholesale partners? And then I guess the second piece of this is when you think about your DTC business sort of in the fourth quarter but also sort of in the '24, just how you're approaching it given a lot of the headwinds that are out there and sort of some of the uncertainty? Thanks..

Yeah, thanks, Bob. Well, as you know, this year has been really about inventory management for the company, but that's been the focus for us. And so, we're prepared to have a great fourth quarter. As usual, with Columbia, it's going to be a weather story. So, we're expecting weather to be normal, and frankly, that's a global norm.

So, we've got places in the world where it will likely be colder than normal and some places where it may be warmer. But I would expect them to -- we've planned the business for basically an average year. Our partners -- our retail partners are well set up.

We delivered earlier this year than we did last year, so our expectations are that we're going to have a solid sell-through [winter] (ph) products for '23. As it relates to '24, we've basically been operating a business that we grew nicely with local talent or talent that spent with the company for quite some time.

We've added a professional to help us run the business in a better way, David Theiss, who we talked about last quarter. And our expectations are that as we continue to improve the way we operate DTC stores for the balance of '23 and into '24, we're going to see some quite outstanding results. Frankly, we're doing quite well with the existing fleet.

We know we can only improve..

And Tim, as you think about this the early spring order book, just any more color in terms of -- is pricing or anything in terms of, is it all just sort of macro do you think that's impacting what you've seen from your wholesale partners at this point?.

Yeah. Well I think there's some for larger operations, more Pan-American operations, there are concerns that they want to manage their inventory levels that contain PFAS out of their business inventories and we want to do the same thing. So, there's a certain cautiousness there.

And the expectations I think are going to be quite good for the rest of the year. Our expectations are that as we continue to roll out these innovations and excel on these marketing activities that we talked about earlier today, that we're going to have a solid year..

Hey, Bob, and I might add, a couple of the factors that are contributing to that order book being down, certainly the outdoor footwear trend that we've seen this year, and our business has been a little bit soft in the footwear category, that's holding back the order book. Tim touched on the PFAS transition, that's having an impact.

And then, to a degree, particularly with smaller customers that may have more liquidity constraints, given the environment that we're operating in, that part of our business has been more impacted than when we look at certain of our larger strategic accounts..

Great. Thank you very much..

Okay. The next question comes from Mauricio Serna with UBS. Please proceed..

Yeah. Thanks so much for taking my questions. I guess I wanted to ask, I think you mentioned at the end of your remarks, you saw some signs of headwinds emerging in Europe-direct and Canada. I just want to -- maybe you could provide more details into that.

And then, talking about the PFAS impact on the wholesale order book, is there any way you can explain a little bit more like which regions should be more impacted? Maybe as I think about like maybe some regions have retailers who are farther along in that road into transitioning out of PFAS, that would be very helpful to understand as well.

Thank you..

Certainly. Well, yeah, we're seeing -- as it relates to Europe and Canada, we're seeing similar constraints that Jim mentioned on the capital -- the lower capitalized retailers that we have in those two markets. And again, the geopolitical disruption, including the war in Ukraine, specifically as it relates to Europe are having an impact.

As it relates to PFAS, there's really only two geographies in the world that have a prohibition beginning in 2025 on PFAS. So, it's possible to navigate these and sell product where these two -- where the products are prohibited.

But large multi-state USA operations that want to have a common inventory across their entire fleet, those are the areas where they're being quite cautious on building inventories..

Yeah. And then just to double back, Mauricio, as it relates to Europe and Canada, I'd also note when you look at our third quarter results, consumer demand within our direct-to-consumer businesses in each of those geographies is still plus 20% local currency terms.

So, from a consumer and demand standpoint, still very healthy in most, if not all -- or close to all of our international regions, where we're beginning to see some of that softness is looking out into the order book and just given the overall conservative nature of how retailers are placing orders at this stage..

Got it. That's super helpful.

And I guess just very quickly, when you talk about the -- in your presentation about the number of stores, just want to make sure, does that number include the temporary stores that you're opening? And also, how long are these temporary stores will be operational? Just I guess, I mean, the purpose of it is to get rid of excess inventory, so I just want to make sure like how should we think about those stores once -- now that the team have [pursued a good place] (ph)?.

Yeah, the temporary stores are not reflected in the store counts that we provided. And we haven't provided those for a variety of reasons. These come in all different forms and shapes and sizes. And so, they're really not comparable to looking at the existing store fleets. That's why the store count is not included.

We've begun to extend certain of those leases through much of next year, knowing that -- we still have work to do in terms of getting our inventory cleaned up. As much progress as we anticipate making by the end of this year, there's still continued efforts next year coupled with, I think, the point around some of the PFAS inventory.

Certainly to the degree we have remaining unsold PFAS inventory, we would look to move that through our outlook in a profitable manner similar to what we're doing this year..

All right. I guess, very quickly, what are the two regions that you mentioned for the -- regarding the PFAS? Maybe I didn't hear it, but I just want to make sure I got those two.

What were those two regions?.

New York and California..

Oh, okay..

Just those two states. Those are the only two states that require PFAS-free chemicals, and the effective date of that regulation is January 1 of '25. So, we have between now and then to work through the transition. We're well down the tracks on this.

We'll -- beginning with our Fall '24 season, which we've commercialized and we're going to market on, that product no longer -- we've designed it so that it no longer has PFAS chemicals intentionally put into that product.

And so, we'll be working through next year as retailers destock any on-hand inventories they have and then restock into the new merchandise.

That's going to create some of the challenges when you think about first half, second half from a rate standpoint, because part of that first half order book is soft as retailers begin to contemplate what they need in inventory and be able to sell down those PFAS styles.

And then our expectation is that they'll eventually begin to restock into that as our fall merchandise becomes available in the market. And to some degree, while this is specific to California, New York, we are making these conversions for our global product line.

And so, to some extent, while this is specific to New York and California, it does have a carryover impact into other geographies as they need to work through the same transition with all of their retailers..

Got it. Thank you so much..

Okay. The next question comes from Laurent Vasilescu with BNP Paribas. Please proceed..

Good afternoon. Thank you very much for taking my question. I wanted to ask -- sorry, I'm going to be the next person asking about PFAS, but I think Jim, you've been pretty clear about PFAS. You guys called it out at your Investor Day. I think you talked about it. It's in your 10-Q.

You guys been ahead of the -- ahead of this, but what do you think are the implications? I know you can't speak to other companies.

But what do you think the implications are for the industry? Where do you think you are in terms of phasing this out relative to the overall industry? Is this applicable to just outerwear? Or does it just go down all the way down to either the YKK zippers and this is more of a broad industry factor to consider?.

Yes. So, this is Tim. So, just to be clear, PFAS has been around in thousands and thousands of products all the way from food containers to medical devices, which are implanted in a human body. So, this is not just limited to outerwear.

This is an endemic across all sorts of stuff, including furniture and anti-stain paint, as you mentioned in the different thing. So these products are endemic and across all sorts of different products. But I think we're well ahead. In fact, I know we're well ahead of many competitors, especially those who are smaller.

So, if we think about the size of our business and the amount of opportunity we have and capacity to accept additional expenses as it relates to understanding the chemistry, applying the chemistry to our products, et cetera, and then managing where these products go after January 1, '25 so that we don't run afoul of these issues, we're well ahead.

There are other smaller companies who are quite far behind, and even some larger ones. So, I think we're managing our business to the best we can. And I think we're -- we've got it well organized, and I'm proud of what the team has done to manage this process..

Okay. Very helpful, Tim. And then, maybe I might have missed this just because we're all juggling up a bunch of earnings calls, but did you guys -- you talked a little about your spring order, the reflection of the challenges.

Maybe can you just kind of put a finer point on that? Like how do we think about that for -- as we think about 1H? And is that reflective of U.S.

wholesale challenges? Or are you also seeing that reflective of EMEA as well or other regions?.

Yeah, we commented on, Laurent, this. Given the spring '24 order book that we've now fully taken, we anticipate our wholesale business globally be down a low-double-digit percent. Within that, as you think about it from a geographic standpoint, knowing that the U.S.

is where we've seen most of the softness and then you have some of the discrete activity that we're talking about on the conversion of PFAS, the U.S. wholesale business will decline at a faster rate than the overall global rate.

To a lesser degree, are we seeing that in the case of our European business and then our Asia businesses, we're actually still quite well performing. Those index a little bit more DTC channels.

Taking that outlook for our wholesale business being down low double digit, and when we combine that with the expectation that our DTC business continues to grow in the first half of next year, we believe that from an overall standpoint through the first half of the year, our business is likely to be down a mid-single-digit percent.

We're still very early in our 2024 planning processes. So, we've not gone any further than that in terms of what that might mean from an operating income perspective. I would expect at least some pressure knowing there's going to be and the top-line is going to be down to the first half of the year.

And of course, it's too early for us right now to comment on the full year..

Okay. No, that's helpful. And then maybe, yeah, to your point, it's super early, but maybe you could just talk, Jim, about just the degree of flexibility around the P&L? What could you do in terms of pulling back? I think you've got a 5% marketing spend.

Anything that you would be willing to just -- are there no sacred cows kind of approach to hold the profitability for -- as we transition through this PFAS transition?.

Yes, Laurent, I think -- I'd just like to make the comment that the company has been historically known as an incredibly conservatively run and a very focused, efficient company.

And I think you can expect that, that will continue, and that there are lots of levers for the company to use to manage our SG&A spend, and we'll be using every one of them to maximize the return for our investors..

And not the least of which, Laurent, as you'll recall, one of the areas that's impacted our P&L in a meaningful way this year is the elevated inventory and how that's added to our SG&A in terms of carrying costs and impacted our gross margin as well.

So that is easily the top area that we're focused on getting those inventories back down and getting our labor productivity within our operations at a more efficient level because we know that, that can drive meaningful improvement in the operating structure of the business going into next year..

Okay. Very helpful. Thank you. Thank you both, and best of luck for this holiday season..

The next question comes from John Kernan with TD Cowen. John, please proceed..

Hi. This is Alex Douglas on for John. Thank you for taking our question. I actually, Jim, had a quick follow-up on something you said in response to the last question.

As it relates to kind of the flow of those elevated inventory costs and what you might get back over the next couple of quarters, how should we think about the magnitude and the timing of that? Any additional color you could provide there would be extremely helpful..

Yeah, it's going to be difficult to provide specific guidance in terms of how we think about that in FY '24. What I would indicate is, last quarter, we indicated that the impact of the elevated inventory on our operating profits here in '23, it's had about a 200 basis point impact on our operating profits.

And that's a combination of SG&A with the likes of outside storage, labor costs and then, of course, the gross margin with the mix of excess product and SMU product that we do specifically for our outlets. And so, there's a -- looking out to 2024, there is 200 basis points of improvement over time.

To what extent we're able to capture all of that is dependent upon continuing to make progress on inventory. I wouldn't think that we're going to get all of that back.

And then certainly, there's so many other variables that play when we think about '24 from a profitability standpoint between revenue, other investments and other factors impacting the business. I don't want to get into magnitude and flow of what that could potentially look like..

Okay. That's very helpful. Thank you..

Okay. The next question comes from Jim Duffy with Stifel. Jim, please proceed..

Thank you. Hello, guys. A lot of questions have been asked already. I wanted to ask just about the trend that you're seeing in your outlet stores. And I'm curious how the stores are performing, given the mix has shifted towards clearance inventory versus made-for product.

So if you could comment on traffic and conversion in the stores, what you've seen thus far, that would be great. Thanks..

Yeah, Jim, we still see nice growth coming out of our outlet channel. It's difficult to comment on the traffic side of things, in particular, only from the perspective of -- to the degree we've opened up -- in many cases, we've opened up temporary stores in locations where we have existing outlets, so there is some cannibalization.

And we're only keeping traffic on the existing store fleet. So it's tough for me to answer that question because we know that there's some puts and takes across that. But on the whole, we're still seeing in the quarter, we've seen nice growth in that brick-and-mortar business.

I'd say that it's decelerated from an overarching standpoint, when you look at Q3 -- or sorry, Q1 to Q2 to Q3, but still driving nice growth in that part of our business..

Very helpful. Thanks, Jim..

Next question comes from Abbie Zvejnieks with Piper Sandler. Abbie, please proceed..

Great. Thanks so much for taking my question. I understand that inventory is expected to be down over $200 million at the end of the year, but it seems like with the order book down low double digits for the first half, the goal will likely be to reduce inventory more.

So, what of that will be reducing inventory receipts, which I know you commented that you did, versus how long will the impact of increased promotions weigh on gross margin? Thank you..

Well, we're still well on track to get that $200 million reduction in inventory exiting the year. Our primary focus there has been -- that should be less of a -- should be less of a factor as it relates to the timing of Spring '24 inventory receipts in production.

As we begin to lap Spring '23 when we made progress with regard to the lead times within our supply chain, as we look forward, our supply chain has now caught up. So year-on-year, that really shouldn't be the factor.

This is really much more a function of continuing to work through the inventory that we're carrying over from prior seasons in our Fall '23 inventory and leveraging our outlets to profitably work through that inventory here in the fourth quarter.

And we've been really pleased with the margins that we've seen as we've sold through that excess inventory in our outlets through the third quarter and into the fourth quarter here..

Okay. Got it. Thank you..

Okay. The next question comes from Alex Perry with Bank of America. Alex, please proceed..

Hi. Thanks for taking my questions here. I guess just first, what are your current expectations for holiday? Do you sort of expect both you and the industry to lean heavier into promos during this holiday given what you're seeing from a consumer behavior standpoint? I guess, how do you think the overall promotional environment will play out? Thanks..

Yeah, I think we can expect to be at sort of an average promotional year this year. Just to reiterate, excuse me, Columbia is very weather-sensitive company in terms of our product offering, which is heavily weighted to outerwear and winter footwear. So that will be an important catalyst for growth and high margins as it relates to our company.

And then, you have to remember that Columbia is a global company. So, we can't just look at the weather in North America, it's going to be important everywhere. So, our expectations are that there's going to be an average weather year somewhere in the world and hopefully across the world..

Perfect. And then I just wanted to ask a similar question for sort of the puts and takes for 4Q gross margins. And then, Jim, any sort of help on how we should start to frame calendar '24 gross margins? I know that freight has been a big benefit as we exited this year, offset by some heavier promos given the elevated inventory.

Just any color on sort of how we should be framing at least gross margins as we move through next year? Thanks..

Yeah, let me speak to the fourth quarter first. So, our gross margins were up 70 basis points in the third quarter. We would expect our gross margin to be up slightly better than that in the fourth quarter. And it's essentially the same drivers that are going to underlie that.

We know that we're going to continue to have or expect to have the freight benefits. Those freight benefits the last couple of quarters have been north of 300 basis points. We should see that same or similar benefit here in the fourth quarter.

Channel mix will be positive for us as we've got more of those wholesale shipments that we got out in the third quarter. So, the business will be a bit more heavily weighted to our DTC business. So combined, that's a pretty strong tailwind in the gross margin going into the quarter.

The offset to that would be an increase in our promotional cadence, promotions and markdowns by and large, reflecting moving through that excess inventory through our outlets. So, we feel good about the margin plans that we put forward. Our margin in the third quarter came through a little bit stronger than how we planned coming into the quarter.

So, we think we're well set there. Looking out to next year, I think the factors I'd be thinking about without getting into specifics, this inbound freight benefit that we've been seeing this year, that will carry through at least the first quarter of next year.

That's probably about the time that, that would transition and be comparable for the balance of the year. The costing environment has generally been favorable as we've finalized our product costing for Spring '24 and Fall '24.

And with the favorable -- neutral to favorable costing environment, we, by and large, [Technical Difficulty] inventories back down into more normalized levels and a better balance on the full price to close out or clearance activity that should provide a margin benefit.

So, now the challenge with that is going to be -- we need the top-line as well to offset some of those margin pressures..

That's incredibly helpful. Best of luck going forward..

[Operator Instructions] The next question comes from Jonathan Komp with RW Baird. Please proceed..

Yeah, good afternoon. Thank you. I just want to follow up just to clarify on the PFAS topic.

Did I miss or maybe could you quantify the impact that you're talking about, is that across sort of all product lines and all seasons? And then, are you willing to sort of talk about the impact from destocking that you're embedding in the first half?.

Yeah, we're having a difficult time with the audio, but I think you're asking about PFAS.

Is that correct?.

Yeah, hopefully, you can hear me.

I was asking if it's really applicable to all product lines? And then, are you able to quantify the drag that you're building into the first half commentary?.

Yeah. So, the PFAS, as I said earlier in the call, is endemic across thousands of products. And so, ours are no exception. Many of our products contain PFAS, and as we're building newer products and getting out of those, we're changing, and we don't intend to have any PFAS products that we're manufacturing after Fall '24. So that's where we're headed.

We've got a clear plan to sell the remainder of our PFAS inventory, almost all of it has been sold. And so, we're expecting that the final liquidation will have minimal impact on the business in the future..

And then, John, as it relates to the first half, it's exceptionally difficult to quantify the impact of what we're talking about from a PFAS transition perspective. There are so many other variables that are impacting the business. We couldn't even really estimate what that could look like. It's meaningful enough though.

As we took in our order book, it was a common conversation that we've had with our sales team with certain customers, particularly in the U.S., but to some degree, it is touching on earlier globally as well because this is a change in our global product line..

Okay. That's helpful. Thank you. And one follow-up, just on SOREL.

If you could talk a little bit more about what's contributing to the lower growth outlook for this year? And as we think longer term, I know a year ago at Investor Day, you highlighted SOREL is having the opportunity to grow 20% or higher year in and year out and having a $1 billion revenue opportunity.

So, can you just maybe frame out how we should be thinking about low single-digit growth this year for SOREL in terms of the broader opportunity and how you still see it?.

Yeah. We are still very bullish on the SOREL brand and the opportunities there is clear. I would say that the opportunity for us to continue to grow it into a year-round brand has been slightly more challenging than we thought.

And so, it's still dependent heavily on winter product, whereas as an incredible reputation, our plan is to continue to focus on expanding with the seasonal nature of the products to take advantage of the incredible brand that SOREL has. We're also going to be expanding gender to get more men's product and children's product in the offering.

But right now today is still a very famous winter..

That's very helpful. Thank you..

Thanks, Jonathan..

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

Well, we thank you for listening to us today, and we'll talk to you soon in February when we have results from our fourth quarter. Thank you..

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