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Edited Transcript of COLM earnings conference call or presentation 25-Jul-19 9:00pm GMT

Q2 2019 Columbia Sportswear Co Earnings Call

PORTLAND Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Columbia Sportswear Co earnings conference call or presentation Thursday, July 25, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Shuler Burns

Columbia Sportswear Company - Director of IR & Competitive Intelligence

* Jim A. Swanson

Columbia Sportswear Company - Senior VP & CFO

* Thomas B. Cusick

Columbia Sportswear Company - Executive VP & COO

* Timothy P. Boyle

Columbia Sportswear Company - President, CEO & Director

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Conference Call Participants

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* Alexander Thomas Perry

BofA Merrill Lynch, Research Division - Equity Research Analyst

* Christopher Svezia

Wedbush Securities Inc., Research Division - SVP of Equity Research

* James Vincent Duffy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* John David Kernan

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Susan Kay Anderson

B. Riley FBR, Inc., Research Division - Analyst

* Tracy Jill Kogan

Citigroup Inc, Research Division - VP

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Presentation

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Operator [1]

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Greetings, and welcome to Columbia Sportswear Company Second Quarter Fiscal Year 2019 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Burns, Director of Investor Relations. Thank you, Mr. Burns, you may now begin.

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Andrew Shuler Burns, Columbia Sportswear Company - Director of IR & Competitive Intelligence [2]

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Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company second quarter results and 2019 outlook. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and the assumptions behind our 2009 (sic) [2019] outlook. The CFO commentary is also available on our Investor Relations website, investor.columbia.com.

With me today on the call are 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 is not available to join us today, so I will start off by covering the safe harbor reminder. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations. Please bear in mind that 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 call are based on our current expectations and beliefs, and 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 non-GAAP results for 2018. 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 second quarter 2019 earnings release.

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 everyone by the end of hour.

Now I'll turn the call over to Tim.

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [3]

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Thanks, Andrew. Welcome, everyone, and thanks for joining us this afternoon. 2019 is shaping up to be an excellent year for Columbia Sportswear Company with record second quarter and first half financial performance. Based on strong first half results, current business momentum and onetime tax benefits, we are raising the low end of our net sales outlook and raising our operating margin and earnings per share outlook for the full year. Overall, our brand-led, consumer-focused strategy is delivering profitable growth, market share gains and enabling continued investments in our strategical priorities. In the second quarter, net sales increased 9%, driven by strong spring 2019 sales performance and to a lesser extent, early shipments of advanced fall 2019 orders and increased closeout sales. Excluding the effect of exchange rates, net sales increased 11% with double-digit growth realized for Columbia, SOREL and Mountain Hardwear brands. Project CONNECT financial benefits continued in the second quarter helping to drive 70 basis points of gross margin expansion. Diluted earnings per share more than doubled to $0.34. It's also important to note that diluted earnings per share includes $0.11 of onetime tax benefits, primarily related to the passage of the Swiss tax reform package. Because the second quarter is our lowest volume sales quarter, I'm going to focus my remarks on our first half results as they more accurately reflect underlying business trends. For the first half, net sales increased 8% or 10% excluding the effect of exchange rates. Diluted earnings per shares of $1.41 increased 83% compared to 2018 GAAP first half results and increased 52% compared to 2018 non-GAAP first half results. Regionally, U.S. net sales increased 13% comprised of mid-teens percent growth in wholesale and low double-digit percent growth in DTC, driven by brick-and-mortar store performance and a low 20% increase in e-commerce. Consumers responded well to our innovative spring 2019 assortment, led by the Columbia and SOREL brands in the U.S. wholesale and e-commerce channels. From our review of international markets and brand performance, I will reference constant currency growth rates, which we believe best reflect the underlying business trends. Net sales outside the U.S. grew 6% in the first half with the EMEA, LAAP and Canada regions all reporting net sales growth. Looking more closely at growth trends in our international markets, our international distributor business was up high single-digit percent with growth from the EMEA distributors partially offset by a modest decline in our LAAP distributor business. Japan's high single-digit percent growth in the first half reflects the Columbia brand's strong market position with healthy growth noted across both wholesale and DTC channels. Europe-direct was up mid-single-digit percent driven by DTC and wholesale growth. Given economic pressures, the retail environment is challenging in several of our largest European markets, resulting in growth rates below what we've seen in recent years. That said, given our relatively low market share today, we continue to see tremendous long-term growth opportunities in Europe. Korea was up mid-single-digit percent in the first half as our business continues to stabilize despite a declining Korean outdoor market. China was up low single-digit percent in the first half. After a decline in the first quarter, net sales returned to growth in the second quarter driven by our decision to work down excess inventory. In 2019, new General Manager, John Soh, was focused on resetting the marketplace by optimizing distribution and investing in our consumer experience. The Columbia brand has a strong market position in China and we believe new management and the investments we're making will reinvigorate growth in this market, which remains one of our largest geographic growth opportunities. In Canada, after a difficult first quarter, the arrival of warmer weather in the second quarter helped boost spring 2019 product sell-through resulting in mid-single-digit percent growth for the first half of the year.

Turning to margin performance for the first half. Gross margin was up 150 basis points to 50%, largely reflecting Project CONNECT benefits, including our design to value, assortment optimization and manufacturing efficiency initiatives. SG&A expenses grew 9% compared to last year's non-GAAP SG&A expenses, resulting in SG&A as a percent of sales of 41.7% compared to non-GAAP SG&A as a percent of sales of 41.6% in the prior year. The biggest drivers of SG&A growth were planned investments to support our expanding global DTC operations, higher personnel and project-related expenses and increased demand creation spending.

Looking at the Columbia brand globally, sales increased 11% in the first half, led by our U.S. DTC and wholesale businesses. We believe this growth is indicative of market share gains. Our spring 2019 sell-through has been quite positive across all categories as consumers responded to our innovative product lines. Once again, PFG was a top performer and is quickly approaching annualized sales of more than $200 million. We are committed to investing in PFG to unlock its full potential. In 2019, we've released several PFG digital stories as well as launched a new dedicated PFG Instagram channel. In June, country singer and brand ambassador, Luke Combs, was invited to be the newest member of the Grand Ole Opry. Luke received this prestigious honor wearing his signature black PFG Bahama shirt. Congratulations, Luke, it is well deserved. On the product front, Columbia received several media call-outs and awards during the quarter. In rainwear, the Evolution Valley Jacket was included in Forbes' roundup of the best raincoats for stylish and productive man and Digital Trends featured the OutDry Extreme ECO jacket in their article on sustainable outdoor gear for Earth Day. Omni-Shade Sun Deflector products, including the PFG Tidal Deflector and Terminal Deflector were featured in articles on sun protective clothing from Outside Magazine, Gear Patrol and Yahoo Lifestyle. In footwear, Runner's World featured a strong review of our new lightweight trail running shoe, the Alpine FTG. Our newest collaboration with Opening Ceremony, which continues to resonate with younger consumers was covered by several media outlets, including Esquire, Russell, Complex, [Tight Piece] and Nylon. We're excited to launch a new footwear platform innovation next month called Shift, which targets younger adults, who are not willing to compromise city-inspired style and athletic comfort for outdoor function. Shift provides them with a modern aesthetic, athletic comfort and is engineered with Columbia's technologies for uncompromising performance on the trail. We'll be launching this product August 9, with a select number of retail partners around the world, including some very limited production styles with influential retailers. We will support this launch with a coordinated marketing campaign, including launch events, influencers, digital, in-store and out-of-home advertisements. This is just a first of many new Columbia footwear product introductions that you'll see in the coming years as we realize the brand's full potential in this important category. As part of Columbia's mission to unlock the outdoors for every one, we recently announced a new campaign and donations to support the National Park Foundation's Open OutDoors for Kids initiative, which helps today's youth trade screen time for green time. This collection of T-shirts features 9 limited edition designs with images from our national parks. We also continue to support the U.K. national park system as their official outfitter for park rangers and staff.

During the quarter, we continued to enhance our consumer experience globally by investing in Columbia's in-store presence with key retail partners. This season, we've added additional shop-in-shops and fixtures at top sporting goods retailers, which resulted in improvement -- improved sell-through performance of targeted categories at those stores. In the second half of 2019, we will be executing key city attack plans in New York City and Denver. Evidenced by the success of our Houston and Chicago key city attack plans last year, this strategy has proven to be a valuable tool to boost brand awareness and drive increased sell-through across our wholesale partners, Columbia stores and columbia.com. We look forward to sharing updates on these important activations in the coming quarters.

SOREL net sales increased an impressive 31% in the first half of the year, led by growth in U.S. wholesale and DTC. Spring 2019 product was well received with strong performance noted across our Ella Sandals, JOANIE collection and Kinetic Sneakers. Looking to the second half of the year, we're positioned to capitalize on this momentum during the higher volume fall and winter seasons. In recent calls, we have highlighted that we're investing in SOREL demand creation in 2019, and I look forward to sharing some of the exciting marketing and product stories that will be unveiled this fall on our next conference call. prAna net sales declined 1% in the first half. In order to maintain the brand's premium position and raise brand awareness, we reduced promotional activity and made changes to marketing and catalog programs. While this impacted near-term sales growth, the prAna team is hyperfocused on the product assortment and market position in order to drive long-term growth.

Mountain Hardwear sales declined 1% in the first half, but we are encouraged to see full price sales up year-over-year during this time period. In the second quarter, Mountain Hardwear reported year-over-year growth for the first time since 2017 and is poised for continued growth in the second half of the year. I congratulate the Mountain Hardwear team for its tremendous work in building a foundation for long-term growth and in reinvigorating the Mountain Hardwear brand.

I'll now quickly review our balance sheet and cash flow. Total inventory exiting the year was up 33% to $756 million, primarily reflecting earlier receipts of fall 2019 product to improve manufacturing efficiencies and to a lesser extent to support our business growth. Our inventory is in line with our expectations and consistent with the commentary we provided on the last call. We remain confident in the quality and aging of our inventory position and expect inventory growth to moderate in the second half of the year with projected mid-teens percent year-over-year inventory growth at the end of the third quarter. We continue to view our diversified supplier base as a competitive strength and looking at our spring '20 assortment and beyond, the product source in China is expected to represent a low double-digit percent of total imported value into the U.S. If the U.S. seeks to impose additional tariffs on China products, the potential impact would be primarily felt in 2020 and beyond. Our balance sheet remains extremely strong with cash balances of over $500 million, exiting the second quarter. We continue to have no long-term debt.

During the first half, the company repurchased over 1 million shares of common stock for approximately $100 million at an average price of $0.9722 (sic) [$97.22] per share and paid $33 million in shareholder dividends. Exiting the quarter, we had 236 million remaining under the current stock with purchase authorization.

Before reviewing our 2019 financial outlook, I'd like to provide an update on current areas of investment. On the technology front, we've begun implementation of our new retail platform, Consumer-First or C1 in North America. Currently, we are in the pilot phase of this implementation with a limited number of stores and plan to roll out C1 across the North America store fleet in the second half of this year. During the quarter, we also implemented our new mobile platform, Experience First or X1, in our Europe-direct and prAna e-commerce businesses. We're pleased with the performance of these systems to date. We still expect the remainder of the excellent North America implementation to occur in 2020. We're also continuing to make strategic investments across our supply chain to enable growth, improve productivity, enhance service levels and add capacity throughout our distribution and fulfillment networks.

I'd now like to provide some detail on our updated 2019 financial outlook. Based on first half performance, we now anticipate 7% to 8.5% full year net sales growth. Compared to 2018 results, we continue to expect gross margin to improve by approximately 80 basis points with the largest driver of year-over-year improvement coming from Project CONNECT benefits. We expect operating margin to be between 12.9% and 13% compared to 2018 non-GAAP operating margin of 12.9%. Our full year financial outlook now contemplates a full-year tax rate of approximately 20% due to the onetime tax benefits and a reduce share count. Together with the benefit of full ownership of our China business, we expect diluted earnings per share of $4.65 to $4.75, up 16% to 18% from 2018 non-GAAP results. Our capital expenditures outlook has also increased to $145 million, reflecting the opportunistic purchase of property close to our corporate headquarters as well as larger technology investments. For the third quarter, we anticipate low double-digit percent net sales growth and mid- to high single-digit earnings per share growth compared to 2018 non-GAAP third quarter diluted earnings per share of $1.41. Please note that our third quarter earnings release and conference call will be on Wednesday, October 30.

In summary, our record first half performance is evidence that our brand-led, consumer-focused strategy is working. Our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence from which we will continue investing in our strategic priorities to drive global brand awareness and sales growth through increased, focused demand creation investments, enhance consumer experience and digital capabilities in all of our channels and geographies, expand and improve global direct-to-consumer operations with supporting processes and systems and invest in our people and optimize our organization across our portfolio of brands. You can find more detail on our Q2 results and our 2019 financial outlook in Jim's CFO commentary available on our website.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bob Drbul with Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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Tim, on the sales outlook for the remainder of the year, you talked a lot about the Shift footwear. You look at the performance of footwear versus apparel first half of the year. Can you just give us an idea in terms of the expectations on the footwear business in the back half of the year?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [3]

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Certainly. Well, as you know, we've got new leadership in our footwear department division with Peter Ruppe starting here. He didn't have the opportunity to impact much of spring 2019 and we're just beginning to see the fruits of his work. And we've been very pleased so far with the reception of the product by retailers and consumers and so the expectation is that we're finally going to have -- we're finally going to end up resolving the question about whether or not footwear can be the largest product category of the company, which I've been talking about for some time. So I'm very pleased with what we're seeing so far. The Shift product is only narrowly winter related, so will be a smaller percent of the total business that we expect in winter, but as you know the winter product that the company has been so famous for, especially in the Columbia product has been really winter-related footwear. So we should have a good result in 2019 winter. And then you add on the Shift opportunity and further the continuation of our PFG footwear and the expectations are high.

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [4]

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And Bob, this is Jim. I would just add with regard to the cadence between first half and second half, we'd anticipate an acceleration in the footwear business as we get into the second half of this year and that comment is combined between the Columbia brand footwear and with SOREL. So we should see nice growth there in the latter part of the year.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [5]

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Got it. Okay. And then, just the second question is on the inventory levels. I think you've been talking about this for a little bit. But can you break that down a little bit more in terms of within that increase, is there a speculative position in that number? And I guess just curious on terms of the regional breakdown of the inventory and -- in China, you -- [Mark], you went through some clearance sales. Is the supply/demand part in China for the brand at a healthy level at this point?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [6]

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Bob, from an overall standpoint, I would indicate that our inventory, we're very comfortable with the position that we have. When you step back and look at the underlying aging of the inventory, by and large, the inventory is comprised of current and future season inventory, comprised of our spring '19 and fall '19. When we step back and look at the aged inventory or older season inventory, it's up modestly. It's up single-digit millions of dollars. So you look at that coupled with the growth that we got planned in the latter part of the year, we feel comfortable with where we will be and as Tim had indicated, we exit the third quarter we anticipate inventory growth coming back down into the mid-teens level. Now certainly within there, you know that we have some pockets of excess inventory. In the case of China, we have. We have liquated some of that through the first half of the year. We'll continue to manage the situation for the balance of the year. And I think finally, as it relates to your question on speculative purchase, I think last year, we've made an opportunistic purchase should we see incremental demand. We've done that to a lesser extent this year and keep in mind we've got a relatively significant replenishment business as a part of our wholesale business that inventory is intended to fulfill as well.

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Operator [7]

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Our next question comes from the line of John Kernan with Cowen.

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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [8]

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Jim, could you talk about the benefits of Project CONNECT from a margin standpoint in the second quarter? And what your expectations are going into the back half of the year they're embedded in the gross margin guidance?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [9]

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Yes, certainly. So if you look at the first half of the year in which we've delivered 150 basis points of gross margin expansion, the lion share of that 150 basis points of margin expansion is effectively Project CONNECT. And so as it relates to the second quarter, we continue to see well over 100 basis point improvement related to Project CONNECT. There are some offsets, however, and the 2 offsets in the quarter, one of them was the channel sales mix with wholesale business outpacing the growth in the B2C business. And then the other component is we've liquidated some excess, the whole full price closeout mix had an impact as well. And then as it relates to balance of the year, we would continue to anticipate nice improvement from Project CONNECT, similar to what we have to the first half of the year. There are some offsets, however, in the back half of the year as well, as we've previously noted just given the favorable selling environment that we had in the fourth quarter of last year, that's a part of that offset. And then there's other smaller components that would include everything from freight cost and mix with the footwear business outpacing the apparel business in the back half of the year. So there's another component like that, but we certainly have confidence in the hard work that the team has put in to deliver the Project CONNECT benefits.

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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [10]

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Excellent. That's helpful. I guess my follow-up question is just on the back half top line outlook. It feels like inventory levels in the wholesale channel are very clean, sell-throughs are high. We can see that in your numbers for the first half of the year. You called out advanced fall 2019 orders as being a benefit to the second quarter and just -- can you go back to a time where the last time inventory levels were this clean and the product cycle was this strong? It just feels like when you called out advanced fall orders, there were some shipments that did pull through, just wondering how that affects your overall top line outlook particularly in the U.S. as we go into the back half of the year?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [11]

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Yes. I think we've reflected all those factors into the outlook that we've provided for the back half. And the first half we grew 8.5%. The back half also contemplated to grow 8.5% if you look at the cadence and flow between Q3 and Q4 given the strength of the fall '19 wholesale order book. We are anticipating low double-digit growth and have the confidence in order book and be able to deliver that in the third quarter. And then obviously the fourth quarter is growing at a slightly lower rate and that part reflecting that we've planned the business on more of a normalized basis relative to the favorable environment that we saw in the fourth quarter last year.

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Operator [12]

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

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [13]

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I want to follow up on Project CONNECT. It sounds like it's actually becoming a bigger benefit in the second quarter to the gross margin. Without getting into specifics for FY '20 guidance, Jim, is this Project CONNECT benefit only for these 4 quarters or should we kind of think about it continuing into FY '20.

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [14]

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I think the way I would look at it is, certainly the step function improvement that we see in our gross margin when you look at the 170 basis points of gross margin expansion that we achieved in 2018 and in the incremental 80 basis points of gross margin lift that we'll see in 2019, that's where you are going to see the substantial step function lift from a Project CONNECT standpoint. That said, as a part of that project, we put a lot of time and effort into ensuring that we develop sustainable processes. So the margin achievement that we've accomplished in the past couple of years, we're able to sustain that. And certainly, our product creation teams and others throughout the business are very focused on continuing to drive gross margin improvement and other elements of the business that will hopefully drive EBITDA margin expansion as well.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [15]

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Okay. Very helpful. And then, I want to follow up on Shift. Can you possibly talk about the price point ranges you are targeting? And are you working with key like national retail partners or the more specialty stores? Any comments or additional color would be very helpful.

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [16]

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Sure. So we've talked about the company having a focus on footwear for quite some time. And most of our largest customers are big sellers of footwear. So we know there's an opportunity from a channel perspective. As it relates to the Shift launch, we launched with our most important large customers who have footwear businesses and that would include sporting goods guys such as DICK'S Sporting Goods. And then we layered in energy accounts, which would include sneaker-specific accounts that in the past typically have not purchased Columbia's footwear, but also even at a mature state will not likely impact the total volume very significantly. So we've had a strategic view of how we're going to launch it both here in the U.S. and in Europe and the expectations are that this will be a momentum-building event, which can help us really get our true cadence in footwear.

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Operator [17]

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Our next question comes from the line of Alex Perry with Bank of America.

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Alexander Thomas Perry, BofA Merrill Lynch, Research Division - Equity Research Analyst [18]

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Congrats on a great quarter. Just first for Tim. Can you just talk through what drove the overall momentum in the U.S. wholesale business. And then, just as a follow-up on that, can you help us think through how much of the growth was driven by advance fall 2019 order shipment?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [19]

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Sure. Well, let me talk about the momentum items. First of all, the biggest single category was probably PFG. It's an area where we don't have a lot of competition from our traditional -- brands that we traditionally compete with. The area of fishing apparel is enormously strong in the southern part of the United States. It's the single biggest outdoor activity and in an area where we've worked diligently over the last 30 years to build a business that can help us to counteract our heavy involvement in outerwear. So I would say that's probably the lever. Additionally, we had great footwear sales. We have a really strong footwear product, which is now getting stride called the Newton Ridge, which is a heritage product for the company as well as very solid rainwear, which just based on the amount of rain that the United States had. So those were the primary drivers of the good results in fourth -- excuse me, in the first half. And maybe I'll ask Jim to talk a bit about the specifics numerically as it relates to advance orders in fall.

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [20]

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Yes. I think in terms of timing and certainly to Tim's point, the lion share or a good chunk of the U.S. wholesale revenue growth on the quarter related to spring '19 and the order conversion. There is, however, a shift there as well as you are referring to. So for fall '19, earlier deliveries from Q3 into the first -- or latter part of June, it's a mid- to high single-digit millions of dollars number. And so, if you neutralize for the effect of that, the wholesale business was a low double-digit high single-digit percent on the quarter, which by and large reflects the spring '19 order conversion.

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Alexander Thomas Perry, BofA Merrill Lynch, Research Division - Equity Research Analyst [21]

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And then just a follow-up, can you talk to the -- the SOREL growth is really strong this quarter on top of strong growth last year. Can you talk about the momentum you see in there, specifically in the sort of spring, summer styles?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [22]

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Certainly. Well, the SOREL management team has been highly focused on pivoting the business to be winter plus. So for us to be successful in that product category, in that brand internationally as well as really in the U.S., we need to have products year-round so our retailers can keep the brand on the floor year-round. And that's going to mean emphasizing spring product and unique differentiated merchandise for spring. And that's what the SOREL team has delivered and the results have been really gratifying. Now albeit, it's a smaller base, but we really believe that the opportunity to make SOREL a $1 billion brand at some point in time is really there. But it's going to have to be a year-round brand and so if we were able to pull off this winter plus strategy, which we're certainly playing that forward now, we have a great opportunity with that brand.

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Operator [23]

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Our next question comes from the line of Paul Lejuez with Citigroup.

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [24]

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It's Tracy Kogan filling in for Paul. I had a question on your DTC business in the U.S. I guess can you first just clarify what you're saying in your -- at least that the bricks-and-mortar comp was positive and maybe you could quantify that? And then secondly, if you could just talk about the performance of your outlet store versus your full price store?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [25]

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We -- as we said in the past, we really consider ourselves to be a wholesale company. We don't really report on typical retail comps or any of those specific metrics, but I can tell you that we're pleased with the results of the business and we believe that there's a large opportunity for us just based on the brand's strength. So...

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [26]

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Yes. And I'd just add. As part of Tim's prepared remarks, through the first half of the year, the U.S. B2C business grew a low double-digit percent. It was at the high single-digit percent when you look at just the second quarter alone. Certainly similar to other retailers that have reported with some of the warmer or colder weather rather in April and May, we saw some slowness through those 2 months and returned to nice growth as weather turned to our favor in the month of June and that's specific to the outlet stores.

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Operator [27]

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

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [28]

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I guess I wanted to maybe touch on Mountain Hardwear a little bit, nice to see the increased sales there. And I guess what's the feedback you're getting from your wholesale customers? Are they getting more excited about the product as it improves? And I guess any chance that they're willing to take on more product? And do they see maybe potentially some space gain for the brand over the next year or 2?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [29]

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Well, thank you. Yes, it's gratifying to see that brand finally starting to grow again. And it's really a function of the improvement in the product. And so the business there will really rise and be fulfilled based on our wholesale business. So the traditional specialty stores that have been buying Mountain Hardwear and hope that it will continue to perform well, but really happy to see the improvements that we've made in the product category -- in the product with the best is yet to come in winter. The new team there was really only 18 or 20

(technical difficulty)

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Operator [30]

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I believe that came from their line. One moment.

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [31]

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Okay.

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Operator [32]

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Our next question comes from the line of Jonathan Komp with Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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I want to just start off following up on the beat for the quarter. It's a pretty sizable beat versus where you had projected. It looks like maybe you're flowing maybe about 2/3 of that through to the full year. So just wanted to ask kind of what the offsets you see are when you look out to the balance of the year?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [34]

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Yes, Jon. This is Jim. So just to talk through the components of the beat on the quarter, it effectively boiled down to 3 things. One, the top line came in a bit better than our internal outlook to the tune of call it $15 million, a good chunk of that, as I was describing earlier, as it relates to our wholesale business with the fall '19 and the earlier delivery is really what's driving that. And so by and large, that's the timing effect and that's why you're not seeing an increase in our full year revenue outlook. The other 2 components are the SG&A underspend in the quarter relative to the outlook in the income tax. And of course, in the case of income tax, we've lowered the full year tax rate to 20% from 22%. And so really the delta in here is on the SG&A. And so we underspent by somewhere north of $10 million, half of which we've approved the outlook on the full year. The other half of which is effectively project-related spend and other phasing of expenses planned for the latter part of the year. So when you look at it taken altogether, $0.34 beat and we passed $0.20 of that onto the full year, a good chunk of that being tax, SG&A and then to a lesser degree given some of the share purchases that we execute on the quarter is the other component.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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Okay. And maybe as a follow-up, I think you touched on some of the factors, but looking at your cadence of your guidance for the year, the first half at least operating profit that you delivered would represent a pretty high portion of the full year or maybe higher than it's been in recent history. So is that -- do you think that's all the shifts going on? Do you think it's change in the seasonality of your business? Or is it conservative and more appropriately in the back half; how would you characterize that?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [36]

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Yes, I mean certainly, we plan that more normalized effect in the fourth quarter, I mean that could be some of what you've seen and so that's all dependent upon a lot of factors, whether you're talking weather, macroeconomic and whatnot. So we plan that as best as we can based upon our historical norms, if you will. If you set that piece aside and look at how we planned the year, certainly we anticipate the third quarter growing at a faster rate just given the wholesale order book that we have and being able to ship that in. I think the reason you're not seeing the operating margin expansion at the back half of the year because certainly we're anticipating continued gross margin expansion with the CONNECT benefit in the latter part of the year. Our SG&A rate however -- our SG&A grew call it 9% in the first half. I think if you look at our outlook for the back half, you'll find it in the 11% to 12% range, and that partially related to project spend. There is nothing new in the way of new initiatives or projects, but just the phasing of that. And in particular, as we've recently gone live with C1 and X1 projects. There is a cost as we've taken those online, coupled with some of the strategic hires that we've made to get after the SOREL business as we want to continue driving sustainable profitable growth there. And then likewise, as Tim discussed in terms of the Columbia brand footwear opportunity and really making sure that we are investing in talent to continue to drive that business forward.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Okay. Great. Then maybe last one for me. In terms of the gross margin drivers for the year, I think you took out B2C mix, which had been a positive call-out. I think you removed that now from the current outlook, so just wanted to maybe clarify the drivers there. And maybe you could just remind us on the e-commerce side, what the main drivers you see are sustaining some of the momentum there?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [38]

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I think on the full year as it relates to gross margin, it really boiled down to a couple of factors. One, it's obviously going to be the favorable impact of Project CONNECT that will carry through the year. And then the most significant offset to that is just us planning on a more normalized basis relative to last year in which we were a lot less promotional and the effects of a positive environment. On the channel mix question, you've got -- the channel mix is probably slightly favorable, but it's not that meaningful and that's really being a function of the growth that we're seeing in the wholesale business. Our fall '19 order book is strong so that the net positive in our mind. And then, Jon, your -- latter part of your question?

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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It's just as you start to cycle better e-commerce performance, what you see is the ongoing drivers for that business?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [40]

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Well, it's going to be us continuing to increased our sophisticated use of digital channels to increase the business size and efficiency. So again, we want to reiterate that we are a wholesale company primarily and that the e-com business is used as really an additional marketing tool. We end up having great results and really is a function of the brand's strength. So we're really focused on wholesale distribution of our company's products.

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [41]

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Yes, Jon, I'd just add. We went live with the X1 platform in Europe and our product business here in the U.S. during the quarter. And certainly, our expectation over time is that's a mobile first platform and with consumers increasingly shipping -- transitioning over to more mobile device shopping, that are to improve conversion and improve performance within the e-commerce business. So we're making the right investments really to drive that business going forward.

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Operator [42]

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

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

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I want to ask a couple of questions. I want to ask a couple of questions specific to the overseas markets. Tim, can you give us an update on the European marketplace. You've guided mid-single-digit constant currency growth. I know that's not new, but that's lower than we've been accustomed to. The prepared remarks, you spoke to challenges broadly across markets. Are there any markets that are worse than others? Any that might be bright spots? Anywhere you're seeing prospects for return?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [44]

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Certainly. Well, overall I'd like to make sure everybody understands how important Europe is for the company and basically how small our business is by comparison to others and the fact that there's big opportunity for us in Europe. I think we probably have been most impacted in France and in the U.K., between the yellow vest movement and the Brexit discussions. Although, we do have very strong performance in Spain and great connections with our customer there of course in place as well as a strong business in Germany. But we were underperforming what my personal expectations are, and the plan is to continue to reinvest there, increase the brand awareness and to take advantage of the opportunities in the European market.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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Great. And then, in China you cleared through some inventory this quarter and that certainly feels like part of the reset operation. What are some things that we in the investment community should be watching for in China to kind of benchmark your progress on the turn?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [46]

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Certainly. Well, it's again, probably the single largest geographic opportunity for the company. We have very strong footwear business there and a new management team. And the focus is going to be for us on refreshing our stores, continue to improve the merchandise offering and continuing the expansion of our e-com business. So I believe that we've got the right people in place to make sure the business grows. We just need to make sure that we've got the proper investments in brand in the demand creation and the brand focus to allow us to take advantage of that. So I would expect that we're going to have modest growth there this year, but next year we should have more significant growth and in the future.

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Operator [47]

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

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [48]

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Great job on the quarter. I guess first question I have is just on the direct business versus -- global direct versus global wholesale. Any color or context you can provide as we go into the back half of the year. I guess this is Q3, Q4. I guess Q4 in direct-to-consumer I guess will be a little bit more maybe modest in the fourth quarter just given the comparison and then Q3 maybe a little bit stronger on global wholesale. Am I thinking about that right?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [49]

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Yes. That's right, Chris. I think on an annual basis, we would provide an update in terms of percent of total business that B2C and e-com represent of our total. But as you're thinking through the cadence and flow, as we look at the fall '19 order book that was taken across our wholesale and distributor businesses, we'll definitely see a stronger growth rate in third quarter for that portion of the business. And then with B2C, certainly given the more challenging comps that we've got in the fourth quarter, we've normalized for that. So I would anticipate that just in terms of thinking through cadence, we feel a lighter growth rate there relative to normal run rate.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [50]

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Okay. And just so I'm clear about something, if by any chance, there is favorability in weather maybe similar to something last year. I know last year you had some speculative inventory that you sold through it at better price. Just as you think about it this year, you still have that ability to maybe fulfill that demand whether it's in DTC, outlet, online, if whatever reason that came to fruition in the fourth quarter?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [51]

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Yes. I think there's certainly -- there is -- we'll have the inventory up to a certain level to deliver a better top line and a profit figure, but as we sit here today, we've provided the best outlook that we can in light of all factors and the order book that we've got in hand and the trends that we're seeing in the business.

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [52]

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We really haven't materially changed our focus that we've had for the last 25, 30 years, which is modest approach to inventory purchases on a speculative basis. So we have some, but they are by no means extravagant or significantly different from prior periods.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [53]

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Okay. Understood. And in the context of 7% to 8.5% revenue growth on the year, just any color between the core brands, SOREL, Columbia, prAna, I know Mountain Hardwear, just how it falls in the context of that 7% to 8.5% by some of the brands, if you could provide that?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [54]

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Yes. From an overall standpoint, the positive, we anticipate growth from all 4 brands. And so we saw Mountain Hardwear return to growth in the second quarter and anticipate that to continue to accelerate into the back half of the year. In terms of where we see the lion share of the growth, I mean it certainly going to be with the Columbia brand and with SOREL, in particular, when you look at that from a percentage standpoint. And then prAna, as Tim pointed out in the prepared remarks, we're going to -- we intend to grow, but it will be a lower rate of growth. So I'd probably leave it at that.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [55]

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Okay. Fair enough. But last few things I have real quick, just on the gross margin cadence, is there anything you're expecting improvement both in Q3 and in Q4? I mean obviously Q4 is significantly less than you've seen throughout the year, but is it fair to say in both quarters or is it more heavily skewed to the third quarter at this point?

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Jim A. Swanson, Columbia Sportswear Company - Senior VP & CFO [56]

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It's in both quarters. Certainly, the third quarter will be stronger than the fourth just given those comps that we've talked about with regard to fourth quarter. So -- but we are anticipating gross margin expansion in each of the 2 quarters.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [57]

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Okay. And finally, just on C1, I'm just curious, just what are you anticipating in terms of maybe some of the benefit, whether a better POS system, maybe talk about loyalty opportunities, and just maybe anything that you can provide if you go sort of into the back half, any further thoughts about the development and maybe the benefit potentially this year? Or is that more really thinking about 2020?

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Thomas B. Cusick, Columbia Sportswear Company - Executive VP & COO [58]

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Yes. It's probably more 2020. Chris, this is Tom. We're using a 20-year-old system, so this is really modernizing the ERP across the application base.

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Operator [59]

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(Operator Instructions) Our next question comes from the line of Michael Kawamoto with D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [60]

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Just first off, you anniversaried the city attack plan with PFG footwear in Houston, how are you thinking about the longevity of the benefits of those attack plans. It sounds like you're maintaining momentum within those markets. Would you expect it to normalize a little bit going forward?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [61]

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Yes. So we didn't reinvest in Houston to the level we did last year. Although we had some modest residual impact on the business. So we were continuing to roll them out. As you might -- just a reminder, we had a fairly sizable city attack plan in Chicago last year. And then we'll be using that plan both in New York City and the surrounding area as well as Denver for 2019 fall. So we're pleased with how those strategies work and the fact that there is residual momentum after the heavy up in those markets. So we'll be continuing to do that, and we'll be rolling them out probably internationally as well.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [62]

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Yes, that was my follow-up question, do you have some cities in mind internationally that you are looking at or is that still kind of more further down the line?

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [63]

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Yes, still under negotiation right now for our European markets. Although, we've had some focus in China on specific markets including Shanghai and Shenzhen.

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Operator [64]

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There are no further questions in the queue. I'd like to hand the call back over to Tim Boyle for closing remarks.

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Timothy P. Boyle, Columbia Sportswear Company - President, CEO & Director [65]

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Well, thanks very much for your attention today. We look forward to talking to you again in October. And again I might note that we have moved the date for our conference call in October to 30. So look forward to hearing -- talking to you about our third quarter results then. Thank you.

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Operator [66]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.