Earnings Transcript for COLM - Q4 Fiscal Year 2024

Operator: Greetings. Welcome to the Columbia Sportswear Fourth Quarter 2024 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.

Andrew Burns: Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth 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 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, 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 in the appendix of our CFO commentary and financial review. Following our prepared remarks, we will host a Q&A period during, which we will limit each caller to two questions, so we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.

Tim Boyle: Thanks, Andrew, and good afternoon. As we begin 2025, I'm encouraged by the continued momentum we see in our international business and the fact that we are returning to growth in North America. I'd like to thank our global workforce whose hard work and dedication allowed us to overcome challenges throughout the year. I'm proud of the many accomplishments our teams were able to achieve, including exiting the year our inventories were down 7% and we are rapidly closing our temporary clearance locations. Inventories are healthy, supporting our outlook for gross margin expansion. Our Profit Improvement Program delivered $90 million in cost savings and we're actively pursuing additional ways to lower our cost structure. We also returned meaningful cash to shareholders with $318 million in share repurchases and around $70 million in dividends paid. We also maintained our fortress balance sheet, exiting the year with $815 million in cash and equivalents and no debt. While we made progress in many areas, our 2024 financial performance was short of my personal growth and profitability goals. Overall, 2024 net sales decreased 3%, $3.4 billion reflecting challenging marketplace conditions in North America. The net sales decline and ongoing cost pressures resulted in operating margin contraction and a decline in earnings. On the last call, we introduced the Columbia brands ACCELERATE Growth Strategy. This strategy is intended to elevate the brand and attract younger and more active consumers while continuing to serve existing customers with accessible outdoor essentials. During 2024, we laid the foundation for the ACCELERATE Growth Strategy including a refreshed marketing direction, enhanced consumer segmentation, and a new product construct. I'd like to provide some updates on the progress we're making. Our product teams are focused on creating products and driving growth with our targeted consumers who value innovation and style. For fall 2025, we're expanding our innovation led offerings like our premium Titanium product line. We are also bringing new collections to market with elevated style like the amaze puff insulated jacket and rock pant. We are expanding our Omni-MAX footwear collection, which delivers consumers lightweight, ultra comfortable performance. The Columbia brand is fun, irreverent, and authentic and our refresh marketing strategy will bring this to life. You will begin to see the new brand voice in our fall marketing campaigns. To amplify our refreshed marketing, we are increasing our targeted demand creation spend to 6.5% of sales compared to 5.9% of sales in 2024. To activate the brand and product strategies, we will be elevating the brand storytelling and consumer experience across the marketplace. We're investing alongside our strategic retail partners to enhance in-store presentations. In our direct-to-consumer business, we've already begun to evolve columbia.com to be the best expression of the brand. In brick-and-mortar, we're opening a small number of branded stores in high traffic centers in North America. These new branded stores feature elevated product assortments that showcase Columbia's apparel and footwear innovations. These North American stores will join the hundreds of Columbia branded stores that raise the image of the brand in important international markets. Taken together, we're thoughtfully evolving how the Columbia brand is perceived by consumers and how we show up in the marketplace. We're being thoughtful about how, when, and where we utilize promotions across all channels and consumer segments. Overall, it's great to see the energy and alignment around the ACCELERATE Growth Strategy across the organization. I'm excited to bring it to life in the seasons ahead. Our initial 2025 net sales outlook contemplates modest growth in addition to Columbia brand growth; our outlook contemplates a return to growth for prAna and continued momentum at Mountain Hardwear. While we expect the SOREL business to remain down in the spring, efforts to reinvigorate the brand will be more evident in the fall. Our initial 2025 operating margin outlook contemplates similar performance compared to 2024, with healthy inventories entering the year. We anticipate less clearance activity and that will contribute to gross margin expansion. This is expected to be offset by SG&A deleverage resulting from demand creation investments and ongoing cost pressures. When we announced the profit improvement program last year, we targeted $125 million to $150 million in annual cost savings by 2026. This program has meaningfully slowed SG&A spending growth, but it has not been enough to align our cost structure with current sales levels. With this in mind, we're expanding the review of our cost structure as we pursue additional savings and enhanced profitability. It is too early to quantify the financial impact of this review and our outlook does not include additional cost savings or potential charges that may occur. We will update you on our efforts as our plans are formalized. Turning to fourth quarter financial performance, we were able to overcome a slow start to the winter season with strong December performance resulting in fourth quarter results within our guidance range. Net sales increased 3% year-over-year to $1.1 billion, driven by a 7% increase in wholesale net sales and 1% direct-to-consumer growth. Gross margin expanded 50 basis points to 51.1%, driven primarily by lower closeout sales at improved margins compared to elevated clearance activity in the prior year. SG&A expenses increased 6%, primarily reflecting higher incentive compensation and DTC expenses. This performance resulted in operating income and diluted earnings per share within our guidance range. Looking at net sales by geography, U.S. net sales decreased 1%. The U.S. wholesale business declined low-single-digit percent, reflecting our lower fall 2024 order book and challenging outdoor category trends. Even though sell-through was down year-over-year, our retail partners are exiting the season with clean inventory levels. This is helping to fuel our positive order book for both spring and fall. U.S. DTC net sales declined low-single-digit percent with lower e-commerce sales partially offset by modest brick-and-mortar growth. U.S. e-commerce net sales were down mid-single-digit percent, reflecting challenging market conditions, as well as lower planned promotional activity and a shift in digital marketing strategies on columbia.com. December trends significantly improved, as colder weather arrived, and we invested in marketing to spur demand. Brick-and-mortar net sales were up low-single-digit percent driven by the contribution from new stores and temporary clearance locations. With improved inventory health, we will be closing most of our clearance locations in the first half of the year. A small number will remain open as we assess their potential as permanent stores. For my review of fourth quarter year-over-year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying performance in each market. Latin America, Asia-Pacific region or LAAP net sales increased 7%. China net sales increased mid-teens percent with healthy growth across wholesale and DTC. For the year, China grew over 20% in constant currency. The outdoor industry is experiencing a powerful growth trend in China fueled by growing consumer interest in outdoor activities and outdoor brands. We are capitalizing on this trend by connecting with consumers through meaningful brand activations, localized product collections, and a robust digital strategy. E-commerce was China's fastest growing channel in 2024. During the year, we expanded Columbia's TikTok platform, adding new stores for women and footwear. We had amazing brand activations during peak sales periods like Double 11 and participated in successful Super Brand Day events with both Tmall and TikTok. Columbia's premium transit product line designed specifically for Chinese consumers continues to perform incredibly well. To build on this momentum, we will further expand our localized product assortments in China this year. Across our product offerings, marketing activations, and marketplace strategies, we are working to create a more premium Columbia brand experience for Chinese consumers. We expect China to once again be our fastest growing market in 2025. Japan net sales increased mid-single-digit percent with continued strength in international tourism. Despite high inflation and sluggish domestic spending, our team in Japan continues to deliver growth through compelling localized product offers, unique marketing activations, and strong digital and in-store execution. Korea net sales decreased mid-single-digit percent in the quarter. 2024 was a challenging year in Korea, including macroeconomic headwinds and political unrest. Despite these challenges, the team made meaningful progress, resetting the marketplace and laying the foundation for future growth. In 2025, our team in Korea is focused on accelerating digital sales, revitalizing the DTC store fleet, and optimizing marketing investments. LAAP distributor markets were up low-double-digit percent primarily reflecting spring 2025 order growth. Europe, Middle East and Africa region or EMEA net sales increased 21%. Europe Direct net sales increased high-teens percent led by robust DTC growth. Europe Direct was a top performing market in 2024. The European team is doing an exceptional job expanding our DTC businesses and growing wholesale sales with key strategic retail partners. Our EMEA distributor business increased over 30% primarily reflecting spring 2025 order growth. Canada net sales were up modestly in the quarter. The Columbia brand remains well-positioned in Canada and we forecast constant currency growth for this geography in 2025. Looking at fourth quarter performance by brand, Columbia net sales increased 6% this fall our top innovation stories were Omni-Heat Infinity, our newest -- and our newest cold weather innovation Omni-Heat Arctic. These differentiated innovations and technologies were prominently featured by numerous media outlets. Columbia products were named in over 20 best of lists from top media outlets including Esquire, Men's Journal, Travel + Leisure and SKI Magazine. Product awards and reviews from trusted editors validate and bring awareness to the innovation and value we deliver to consumers. Omni-Heat Infinity remained one of the fastest growing parts of our business and our top marketing story globally. Omni-Heat Infinity will once again be featured on Intuitive Machines next lunar lander named Athena. In addition to Infinity, the lander will utilize a second Columbia technology Omni Shade Sun Deflector. This patented material, which is part of our Sun protection apparel line, uses titanium dioxide reflective dots to deflect sunlight and mitigate heat generation. The launch window for Athena begins later this month, so stay tuned for more details. On the collaboration front, we turn to the dark side with our largest Star Wars collab to-date, the Vader Collection. This was the first Star Wars launch where Columbia Greater Rewards member got early access to the product. The consumer response was incredible, resulting in the highest demand hour we have ever had on columbia.com. Early access is just one of the unique benefits of our new enhanced membership program. Since the re-launch of Columbia Greater Rewards this past June, our active membership continues to grow. I'm especially encouraged by the engagement of our titanium members who spend more than $300 annually. We will continue to expand our membership benefits and deepen our connections to this key customer base in 2025. I'd like to congratulate two of Columbia's athlete ambassadors on their recent halfpipe skiing wins. This past Sunday, Alex Ferreira, won gold in the Freeski World Cup in Aspen, continuing the success of his unprecedented perfect season last year. Cassie Sharpe won the X Games gold medal in the SuperPipe event and a triumphant return from a two-year break from competing following the birth of her daughter. Congratulations to Alex and Cassie. Shifting to our emerging brands, Mountain Hardwear net sales increased 5% in the fourth quarter led by e-commerce growth. Consumers responded well to Mountain Hardwear's fall assortment including new snow sports offerings and an expanded Ghost Whisperer collection. In November, Mountain Hardwear released another highly sought after collab with iconic streetwear brand Stüssy. The collection featured expedition quality gear including jackets, beanies, bibs and shells. I'm confident in Mountain Hardwear's product line and refreshed brand positioning. To further elevate Mountain Hardwear in the marketplace and attract new consumers, we're investing in the brand. This includes demand creation investments to supercharge its e-commerce business as well as partnering with outdoor retailers to elevate in-store presentations. I believe these investments will lay the foundation for growth acceleration in the years ahead. We expect Mountain Hardwear to continue to grow in 2025, including strong fall 2025 wholesale orders. prAna net sales decreased 2% in the quarter. In 2024, the prAna leadership team made amazing progress reinvigorating the brand. This will come to life in 2025 with exciting new product collections and creative brand activations. prAna is also expanding its wholesale account base with new brand rise specialty retail partners. We're very excited to get prAna's new product and marketing direction in front of consumers in the seasons ahead. prAna is expected to return to growth in 2025, including robust fall 2025 wholesale order growth. SOREL net sales decreased 16% driven by lower wholesale and DTC sales. During the quarter, SOREL created brand heat with its first collab with streetwear brand Supreme. The limited edition caribou boot came in two colorways, introducing SOREL's iconic style to Supreme's fashion conscious consumer base. 2024 was a challenging year for SOREL, but the team made meaningful progress refining future season product assortments and building strategies to reenergize brand marketing. 2025 is expected to be a year of stabilization, with modest growth in the second half of the year. I remain confident SOREL has meaningful long-term growth potential. I will now discuss our 2025 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. This outlook and commentary does not include any potential impact on the company as a result of the recent U.S. administration change other than the direct cost of tariff actions announced on February 1, 2025. It also does not include any potential impact from actions we may undertake as we review our cost structure and look to expand the profit improvement plan. For the full year, we expect net sales growth in the range of 1% to 3%. Based on current exchange rates, foreign currency is expected to be an approximate 140 basis point headwinds. This outlook also assumes most of our temporary clearance locations are closed in the first half of the year. Combined, the FX headwinds and temp store closures resulted in nearly a 3 point headwind to reported sales growth. Gross margin is expected to expand 80 basis points to approximately 51%. The improvement in gross margin is primarily driven by a healthier underlying inventory position and favorable input costs. SG&A is expected to grow in 2025, driven by investments in demand creation, higher incentive compensation, and DTC store growth. Based on these assumptions, we expect an operating margin of 7.7% to 8.3% leading to diluted earnings per share in the range of $3.80 to $4.15. I'd note that this range includes a $0.30 negative impact to diluted earnings per share due to changes in foreign currency exchange rates. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. We are 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 investments, enhance consumer experiences by investing in capabilities to delight and retain 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, can you help us with that?

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

Bob Drbul: I was just wondering if you could expand some more, I think you said in your comments, your order book for spring and fall was both positive. I was just wondering if there's any difference between the two seasons. Wonder if there's any geography, geographic commentary you can add. And then, just if you could spend some time on -- more time on China, what you're seeing in China, those numbers are pretty impressive. That would be helpful. Thank you.

Tim Boyle: Certainly. Well, as we said earlier, our order book for spring and for fall will be up, very excited about that to return to growth. I think the geographic component we're going to be led by China and Europe. Those two markets will be our fastest growing markets and we're very excited about that. We're also excited about the return to growth in the U.S. But specifically China, and really this applies to Europe as well. We've been quite clear that in those markets historically we've underperformed and again, this is a people business. We have great leadership running both businesses there and so we've seen terrific results. China specifically, once we encourage our teams in China to be more focused from a product standpoint on items that can be important in their markets; we've seen much better results. Additionally, from a business standpoint, we have a leader there that's very focused on highly productive stores. In the past, we had relied more on a sort of dual season approach and the leadership there really is focused on monthly performance per store and that's been a real improvement and allowed us to have real great success there.

Jim Swanson: Hey Bob, this is Jim. I'd just add a couple comments. One, as it relates to spring 2025 and we shared in October that our order book for the spring 2025 season for our wholesale business globally supported mid-single-digit rate of growth, nothing's meaningfully changed in that order book since that time. And then for fall 2025, it is a bit lower of a rate of growth than we're anticipating. It's in the low-single-digit percent terms and we're well into our order taking season or order taking for the season with about 90% of those orders in. So good visibility to the order book at this stage.

Bob Drbul: Great. And then, just one other question just on the demand creation commitment for 2025. I think you said a lot of the newness is going to kick in, in the fall. Will the spend be down in the first half and then magnified in the second half of the year? Just wondering if you can just talk about the plans there a little bit more. Thanks.

Tim Boyle: I guess, I would describe the first half spend to be more moderated. This still be a function of the percent of sales, but it'll be more moderated than fall forward tend to be quite aggressive and that's where the bulk of the new material will be seen and the budgets will be bigger.

Jim Swanson: Yes. I think that's fair, Bob. We wouldn't expect it to be down in the first half, but certainly more amplified when we get to the back half of the year. We're able to get certain of those accelerate marketing investments in front of the consumer.

Bob Drbul: Great. Thank you very much.

Operator: Okay. The next question comes from Jim Duffy with Stifel. Please proceed.

Jim Duffy: Well, thank you. A couple of questions. First on the U.S. D2C business, I want to ask is there a change in tactic on a year-to-year basis despite the increased number of stores, the U.S. DTC business in the fourth quarter up just a modest amount. And then you're also expecting growth next year despite closing some of the temporary stores. If you could reconcile that, that'd be great.

Tim Boyle: Sure. Well, there's a bunch of things going on in D2C. I would say the primary delta would be the closure of these temporary locations that we established in order to help liquidate inventory more profitably than we otherwise would have been able to reducing the value channel and et cetera. So we'll be closing a bunch of stores during this year. Additionally, we've really focused on columbia.com as being the really showcase of the brand and less promotionally driven than we had been in the past to give ourselves a more premium positioning in the marketplace. And then, lastly, we are experimenting with and opening a number of stores in full price high traffic malls, which will allow us to showcase the brand fully blown out, ACCELERATE strategies and especially footwear where we can have real opportunity to show consumers the products that we're putting together.

Jim Duffy: Thanks, Tim. And then, Tim, I wanted to ask on the marketing, are you seeing evidence of traction with the new marketing direction bringing younger and active consumers to the brand?

Tim Boyle: I would say we're right on the cusp in the beginning of it. We've got digital presentations which will begin appearing this spring, which I think will set a different tone, and we'll be excited to see how that works. But everything we've tested so far as it relates to fall is right on, and so we're excited that we're in the right position.

Jim Duffy: Thank you, Tim.

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

Laurent Vasilescu: Good afternoon. Thank you very much for taking my question. Jim and Tim, I was wanted to ask about revenues with regards to the first quarter. Why revenues would be down to 1% to 3%? Is there a dynamic in place like with regards to shift? Is there something that we should consider on by channel? And then, when it comes to, I think to Jim's question about DTC, I think you mentioned in the prepared remarks that the closures will be about 300 basis point headwind for this year. And I think you're guiding for DTC to grow up low-single-digits. So I think underlying it means like DTC should grow about mid-single-digits. Can you maybe parse that out a little bit? Like what's the anticipation? Is it e-commerce? Is it new stores? Love to get your take on the revenue front. Thank you very much.

Jim Swanson: Yes. Laurent, thanks for the question. And to start off with the first quarter, while you're seeing the projection in terms of the revenue being down in Q1, a few contributing factors to that one, keep in mind we're lapping very cold winter in the January, February timeframe of last year in which we had amplified demand and we're not anticipating a repeat of that here in Q1. And we've updated our outlook for what we've seen through the month of January. That's an element of it. There's also a component of which we had earlier shipments of spring 2024 wholesale orders a year ago in anticipation of our transition to PFAS free chemistry as we're seeking to get those ordered out to our wholesale customers sooner than they would ordinarily shift. So you're seeing some of that come into Q1 last year and this year being a more normalized trend. And then, finally, and Tim's touched on, with columbia.com being the best representation of the brand and reducing some of the promotions, there's some continued pressure that we're anticipating and at least through the beginning part of this year from that vantage point. And then, with regard to your second part of your question, you didn't get it all. But as it relates to the 3% headwind, if you will, that, that comment was specific to a combination of the temp store closures, about half of that is related to the ramp down of those temp stores and then the other half relates to the continued strength of the dollar in the impact on the rate of growth from a local currency standpoint. So we are anticipating, as Tim touched on continued strength internationally, particularly in China and Europe at the bit dampened just given the strength of the dollar relative to foreign currencies.

Laurent Vasilescu: Super helpful. I wanted to ask then on the second question here, could you see that gross margins are expected to be up 80 bps for the year? Can you give us some color on how you're thinking gross margins should shake out between 1Q and 1H? And then, on the SG&A front, I saw that you're stepping up demand creation to 6.5% of sales with the new marketing director, the new agency, Adam & Eve. But can you maybe unpack that, that pressure point on SG&A? Are there any other factors that we should consider on the SG&A front whether it's incentive comp or any other factors to consider for FY2025? Thank you.

Jim Swanson: Yes, sure. As it relates to the gross margin in the front half of the year, I think as it relates to the second quarter is going to be a stronger quarter in terms of gross margin from an expansion standpoint. Otherwise when you look at the full year, we provided full year gross margin expansion of 80 basis points, the second quarter is going to be naturally a bit higher because the proportion of full price revenue going into that quarter with the shifts in the wholesale business are naturally going to have a bit of an impact on that. And then conversely Q1 will be -- won't be quite as strong as that full year guide. As it relates to the SG&A, so aside from the marketing in terms of what's contributing to the deleverage, when you look at SG&A year-on-year, you pointed out incentive comp that continues to be among the pressure points that are in there. There are other strategic investments that we're making in the D2C business Tim touched on part of it as it relates to the brand of stores. What I would convey and what Tim touched on is, we're not satisfied with seeing our SG&A continue to deleverage and being in the upper 43% low 44% range and that's why we're in the process of initiating a continued review and assessment of our SG&A and seeking ways in which we can streamline the business to drive greater cost efficiency. So that's not in our outlook currently, but something that we'll be looking at over the coming weeks here and provide an update as we get deeper into the year.

Tim Boyle: Yes. As it relates…

Laurent Vasilescu: Yes. Sorry, Tim.

Tim Boyle: The new marketing efforts, we're being very focused on measuring and testing these messages to make sure we've got the right approach to these consumers that we want to track. So looking forward to launching that stuff in fall.

Laurent Vasilescu: Okay. Very helpful. Thank you very much and best of luck.

Operator: The next question comes from Jonathan Komp with Baird. Please proceed.

Jonathan Komp: Yes. Hi, good afternoon. Thank you. If I could just follow-up on that last point, as you think about the ramp and the incremental marketing that you're planning, could you just maybe go a little bit further on what you're hoping to accomplish and some of the key metrics that you'll be looking to show from those efforts?

Tim Boyle: Certainly. Well, as a company, we've been highly democratic in terms of how we've approached our customer base, our product orientation, et cetera. Even though we have among the most sophisticated products for keeping people warm, cool, dry and protected, we're often thought of as a highly valued line. And that value allows us to be producing large quantities of merchandise which we can use that leverage to build more expensive, more targeted products for younger and more again consumers that are more professionally oriented. So the approach will be to combine those new products and a marketing message, which is going to be compelling to that consumer to give us an additional boost of sales and consideration. So where we believe we have the strongest opportunity to do that is in the fall and that's where we're going to be focusing our time and effort.

Jim Swanson: And Jon, as it relates to KPIs, we don't get down into a lot of specifics around our D2C business, but where we certainly look for improvement is thinking about the conversion rate that we're achieving with our own online business and with the full funnel marketing approach that we've taken and shifting more of that marketing -- our performance marketing and into mid-funnel and upper funnel, we are seeing improvement in the traffic, but over time we need to see that improvement in the conversion. And the other piece, we launched a new membership loyalty program last year, which had success. Tim touched on the Titanium level member, but it's really about member retention, acquisition and retention as well.

Jonathan Komp: That's really helpful. Thank you. And then, just one separate follow-up on the profit recovery that you're projecting. And so we sort of step back and think you're well underway for your first profit improvement plan. You're talking about a normalized inventory environment and yet the margin profile of the business is well below historical. So just how are you thinking about the long-term view of the opportunity to get back to much higher profitability levels? Thank you.

Jim Swanson: Well, it's certainly why we're undertaking the work that we've described because our expectation is to get our operating margins back to more appropriate levels. And certainly the first milestone will be getting back to double-digit. But then longer-term, our expectation is to be in the upper quartile relative to our peer group, which would put you into the teens percent now, we've not defined the time frame that that would take place, but certainly there's some work that we collectively need to do in managing the cost base. I think to Tim's point, we need to grow. Part of the reason why you see some of that deleverage is, we've had a few years here running now where that top-line hasn't kept pace with inflationary pressure and other costs. And collectively we need to shore that up. So that's what this year is about is building that plant to ensure that we've got a scalable business that can drive margin leverage going forward.

Tim Boyle: Yes. This is the reason we really are making this very measured investment in marketing to get our products in front of consumers. We believe we have the right stuff and we just need to be very conscious and specific about how we market. And then we have to be very disciplined about our SG&A spend, which is something we know how to do and we'll undertake.

Jonathan Komp: Okay. Great. Thanks again.

Jim Swanson: Thanks, Jon.

Operator: Up next is Mitch Kummetz with Seaport Research. Please proceed.

Mitch Kummetz: Yes. Thanks for taking my questions. I want to start with the fourth quarter. Your sales were near the high end of your range, but the op margin I think fell a little bit below the mid-point. I'm just trying to understand that disconnect. Did you guys, given the slow start to the quarter, Tim, did you guys end up maybe being a little bit more promotional than you were expecting or did you ramp up the demand creation a little bit more than you were expecting once the weather turned and the sell-throughs improved, is there a reason for why the margins weren't better, such a strong sales quarter?

Jim Swanson: Yes. Mitch, a couple of things related to that. From a gross margin standpoint and the way we would characterize promotions, we weren't any more promotional than we would have been a year ago. Having said that, and as we touched on October and November, they were softer months from an overall demand standpoint. Those are typically months in which you're doing more full priced sales in advance of the promotional marketplace coming into the holiday season. And so business was soft during that timeframe and really picked up and we had healthy demand from Black Friday, Cyber Monday through the holiday sales period. You see a higher concentration of revenue done during that period where we're a bit more promotional. So that did have some effects as you think about gross margin. And then on the SG&A side of things, we haven't touched specifically on it, but you'll see some notes, I think in the CFO commentary that we've provided with regard to some SG&A severance cost that we incurred in the quarter, I think it was in mid-single-digit millions of dollars. So if you take those two things, those are going to be the meaningful drivers impacting that operating margin. And from a holistic standpoint, we're more or less in the range of the guidance that we provided. And of course, there's income tax valuation impact in there that also impacted earnings per share.

Mitch Kummetz: Thank you. And then, on the guide, I know Laurent asked about 1Q sales being a little bit light and Jim, you kind of went through the factors there. I guess, my follow-up to that is on 2Q, the implied sales growth rate, I think if my math is correct, like sales up 6% to 8%. And I know you talked about a more normal delivery schedule on the order book this year versus last year. And I'm wondering how much that's contributing to the strong 2Q sales growth or if there are other factors to consider there.

Jim Swanson: Yes. I think if you look at the shift between Q1 and Q2, I think it's in the $20 million to $30 million range on the wholesale business that's going to make up that difference where you get to that slightly higher rate of growth relative to the slight decline that we're anticipating in Q1. Setting that piece aside, Mitch, I don't think there's anything meaningfully different in how we plan the business.

Mitch Kummetz: Okay. Thanks. Good luck.

Tim Boyle: Yes. Thanks, Mitch.

Operator: The next question comes from Paul Lejuez with Citigroup. Please proceed.

Tracy Kogan: Thanks. It's Tracy Kogan filling in for Paul. I had two questions. I was wondering if you were seeing any difference in your order trends from your partners in the U.S. depending on whether it's the department store, specialty store, et cetera. And then, secondly, I was hoping you could break your CapEx down into stores, IT, DC, whatever else might be in there. And then is $60 million to $80 million a good run rate to use beyond 2025? Thanks.

Tim Boyle: Yes. I can talk a little bit about our customer base for our fall business, which we're still in a strong position with virtually all of our customers. Again, just as a reminder, we have a very established mature business in North America. We have basically, we're selling to every customer we want to sell to. We have great relationships with all of them. But we are finding that we're selling, we have a much stronger order book with those customers that reflect this new customer type that we're approaching with our product line and with our marketing. So the growth in those customers has been quite dramatic and quite exciting.

Jim Swanson: And then, Tracy, as it relates to your question on capital expenditures and the range that we provided, if you look back over the last few years, we've been at around the $60 million CapEx range. And so look at this year at $60 million to $80 million, I think that's a pretty fair estimate barring us providing any other updates as we look forward. Breaking that down into a lot more detail, I'd be hesitant to do that. Having said that, I'd say that, roughly a quarter of our CapEx is your traditional maintenance-based capital. Some of the reason why our CapEx has come down over the years because if you look back over a longer horizon, you'd see at the $80 million to $100 million range. We don't have any major ERP -- enterprise level ERP projects going on at the moment. And as we've shifted more and more of the cloud, there's less absolute hard capital expenditures that have made. So the most significant element that's in there relates to stores and expansion of stores. We've got a modest plan this year. I think we've got about a dozen stores that are planned in North America that are a combination of the branded stores Tim touched on as well as a few outlets.

Tracy Kogan: Great. Thanks very much.

Operator: Up next is Alex Perry with Bank of America. Please proceed.

Lucas Hudson: Hi, this is Lucas Hudson on for Alex Perry. The guidance assumes a stabilization in the SOREL business. Could you guys just give a little bit more color on what's driving that? I know you guys mentioned the Supreme collaboration, but any more color would be helpful.

Tim Boyle: Yes, we have -- I just actually am fresh off the review of upcoming seasons for SOREL, so I'm excited about what our opportunities are there. We've got a number of collaborations planned, some of which are, I can't really talk about, but those should drive meaningful progress and we have an opportunity to go beyond winter footwear, specifically in the SOREL business with an improved women's offering and a relatively brand new men's offering, which is going to give us a lot of opportunity to show what we can do to typical customers who have been buying SOREL over the years. So I'm excited about the opportunities, frankly.

Jim Swanson: Yes. Lucas, when you look at the two season business that we operate for the spring season, SOREL, we've got an order book that contemplated a decline, as we brought the new leadership team on and then they worked on some updates to the strategy and to the product line, we do anticipate, based on the order book that we have today, that we should return to growth in the latter part of the year through that wholesale business, as well as our plans in the direct-to-consumer area.

Lucas Hudson: Thank you.

Operator: [Operator Instructions]. The next question comes from Mauricio Serna with UBS. Please proceed.

Mauricio Serna: Great. Good afternoon, and thanks for taking my questions. First, I would like to hear more about the rationale of why the full order book is lighter than the spring for 2025. And then, just wanted to clarify, was there any pull-forward of demand in your Q4 results? And lastly, on free cash flow, you see the guidance is operating cash flow of at least $250 million and that seems well below fiscal year 2024, a little bit of around $490 million. You wanted to understand what's the rationale behind that it like EBIT will likely be up this year. Thank you.

Jim Swanson: Yes. Let me touch on those and Tim, if you want to jump in with the color. So as it relates to the fall 2025 order book being lower than the spring season, these are two very distinct and different seasons, right? And we just came through fall 2024. And from a U.S. standpoint, sell-through was lighter. Tim touched on that. We're encouraged despite that lower level of sell-through the work that we've done from an ACCELERATE perspective that retailers are responding favorably to that and we still anticipate modest growth in the fall season. So we look at that as a positive, despite the fact that it is a lower rate of growth in comparison to what you're seeing for the spring 2025 season. From a Q4 perspective, you were asking a question about pull-forwards. There's no pull-forward of revenue out of first half of 2025 into Q4 at all. It's all just the natural flow of our orders for the fall 2024 season. There was, however, I should mention, as a result of supply chain disruptions impacting the Red Sea and Bangladesh, there were some sales that shipped out of Q3 and into Q4, and that was to the tune of $60 million, I think I touched on in an earlier question. And then, finally, as it relates to operating cash flow and the lower projection that's there, essentially looking at operating income, which is more or less flat slightly up year-over-year. And then, when you think about the working capital equation over the course of the last two years, of course, we've been encouraged and pleased with the work we've done in reducing our inventory levels that have had an amplified effect on how you think about operating cash flow, as we get into this year, while we believe there's still continued opportunity to continue to drive inventory efficiency and working capital, it's certainly not at the level of magnitude that we would have achieved in each of the last couple years. So that's the underlying rationale for what you see in that cash flow projection.

Tim Boyle: Yes. As it relates to…

Mauricio Serna: Yes, yes, sorry. Go ahead, go ahead. Thank you.

Tim Boyle: I was going to talk a little bit about our full order book and it's reflecting, as I said, adoption by our customers of the new category of consumers that we're approaching. And I guess, I would emphasize that we've got products including the amaze puff which is a very popular, at least based on our customers adoption down jacket for women, as well as on Rock Pant, which is a men's and women's bottoms collection, just been incredibly well received. So those are the areas that where retailers are going to be trying our products and making sure that we've got the right connection to consumers. And then, as it relates to inventory, I think we all agree here at the company that we can operate the business with less inventory. So you'll be seeing the key focus on efforts to run the business with less inventory. So you should expect that over time your cash flow will significantly improve.

Mauricio Serna: Understood. And then, just very lastly as a follow-up in the guidance for gross margin, you talk about lower product costs. Just wanted to understand what was behind that. And you kind of mentioned also like and looking at the year you're going to see the highest gross margin expansion in Q2. So should we think about like the other three quarters being relatively expanding at a similar rate excluding Q2 or how should we think about that? Thank you.

Jim Swanson: On the lower product cost side of things, so we've gone out to our factories and worked with them and placing allocation and that's nothing more than what we're seeing in terms of just input costs generally being a little bit lighter or lower this year relative to last, particularly in the case of the spring season. And that's more I think in the effect of material, raw material, that, that sort of thing, Mauricio is opposed to any form of labor or duty aside from what we've touched on as it relates to China specifically. And then, as it relates to the gross margin, so as I was touching on Q2, the margins a little bit healthier just in light of the full price, sales, proportion relative to total. If you look at the balance of the quarters during the year, I think they're at or around the 80 basis points of expansion that's included in our outlook. Keep in mind, Q2 is an exceptionally at our smallest quarter from a revenue standpoint. So even though the gross margin might be greater than, it just doesn't have the same effect on the full year.

Mauricio Serna: Understood. Thank you so much.

Jim Swanson: Yes. Thank you.

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

Tim Boyle: Thank you, Operator. I just want to thank everyone for listening in. We're very excited to be returning to growth in 2025, and we're looking forward to the ACCELERATE Growth Strategy coming to life in the seasons ahead. Look forward to talking to you next quarter.

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