This quarterly report contains forward-looking statements within the meaning of
federal securities laws. Forward-looking statements include any statements
related to our expectations regarding future performance or market position,
including statements regarding consumer demand, capital outflows, operating
expense, our ability to manage credit risk, sales volumes, inventory production
and fulfillment, marketing strategies, income from operations, net sales,
profitability, cash and our ability to meet our cash needs. Forward-looking
statements often use words such as "will", "anticipate", "estimate", "expect",
"should", "may", and other words and terms of similar meaning or reference
future dates. Our expectations, beliefs and projections are expressed in good
faith and are believed to have a reasonable basis; however, each forward-looking
statement involves a number of risks and uncertainties, including those
described in Part II, Item 1A, Risk Factors in this quarterly report. We caution
that forward-looking statements are inherently less reliable than historical
information. We do not undertake any duty to update forward-looking statements
after the date they are made or to conform them to actual results or to changes
in circumstances or expectations. New factors emerge from time to time and it is
not possible for us to predict or assess the effects of all such factors or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
Our Business
As one of the largest outdoor, active and everyday lifestyle apparel and
footwear companies in the world, we design, develop, market, and distribute
outdoor, active and everyday lifestyle apparel, footwear, accessories, and
equipment primarily under the Columbia, SOREL, Mountain Hardwear, and prAna
brands. Our products are sold through a mix of wholesale distribution channels,
our own direct-to-consumer ("DTC") businesses and independent international
distributors. In addition, we license some of our trademarks across a range of
apparel, footwear, accessories, equipment, and home products.
The popularity of outdoor activities and active lifestyles, changing design
trends, consumer adoption of innovative performance technologies, variations in
seasonal weather, and the availability and desirability of competitor
alternatives affect consumer desire for our products. Therefore, we seek to
drive, anticipate and respond to trends and shifts in consumer preferences by
developing new products with innovative performance features and designs,
creating persuasive and memorable marketing communications to generate consumer
awareness, demand and retention, and adjusting the mix, price points and selling
channels of available product offerings.
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry,
including seasonal weather and discretionary consumer shopping and spending
patterns. Our products are marketed on a seasonal basis and our sales are
weighted substantially toward the third and fourth quarters, while our operating
costs are more equally distributed throughout the year. In 2019, approximately
60% of our net sales and approximately 75% of our operating income were realized
in the second half of the year, illustrating our dependence upon sales results
in the second half of the year, as well as the less seasonal nature of our
operating costs.
We generally solicit orders from wholesale customers and independent
international distributors for the fall and spring seasons based on seasonal
ordering deadlines that we establish to aid our efforts to plan manufacturing
volumes to meet demand. We typically ship the majority of our advance spring
season orders to customers beginning in January and continuing through June.
Similarly, we typically ship the majority of our advance fall season orders to
customers beginning in July and continuing through December. Generally, orders
are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the
results to be expected for any future period.
Impacts of COVID-19
COVID-19 was first identified in China in December 2019 and a global pandemic of
respiratory disease caused by COVID-19 was declared by the World Health
Organization in March 2020. In response to this pandemic, many regional and
local governments worldwide implemented travel restrictions, business shutdowns
or slowdowns, and shelter-in-place or stay-at-home orders.
Lower consumer demand related to the COVID-19 pandemic began to impact our
financial performance in China in late January, Korea and Japan in early
February and North America and Europe in March, due to store closures, reduced
operating hours and decreased retail traffic. In addition, many of our wholesale
customers and international distributors experienced a similar timeline and
closed stores or reduced operating hours, resulting in lower than expected
sales, cancellation of orders and a slowing of receipt of shipments of our
products.
The vast majority of our stores closed due to the pandemic and reopened in China
and Korea by late April and in the U.S., Europe, Japan, and Canada predominantly
within the May and June timeframe. Throughout the third quarter 2020, while
there were isolated temporary store closures from local regulations or safety
concerns, the vast majority of our owned stores remained open. Overall, our
store retail traffic trends remain well below prior year levels. We continue to
restrict store capacity to accommodate social distancing measures, which is
impacting the performance of our retail operations. Stores in destination
locations and tourist-dependent markets remain some of the most severely
impacted stores within our fleet.
Throughout the first nine months of 2020, our global DTC e-commerce business
remained operational, supported by the employees in our distribution centers and
call centers. During the third quarter, our DTC e-commerce business grew 55%
year-over-year and represented 12%
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of our global net sales during the quarter. We anticipate our global e-commerce
sales growth to remain high for the remainder of the year compared to 2019.
While work has been done throughout the pandemic to mitigate its effect on our
inventory supply, the combined effect of retail stores closures and the
resulting decrease in consumer demand, as well as actions taken by our wholesale
customers to preserve their capital and liquidity, caused higher than normal
inventory levels. We received significant order cancellations during the first
half of 2020, and, simultaneously, curtailed planned inventory purchases. Our
unsold inventory as of September 30, 2020 was slightly elevated compared to
September 2019. Nonetheless, it has declined sequentially compared to June 30,
2020. We anticipate profitably selling the remaining inventory in current and
future seasons by leveraging our wholesale customers, DTC e-commerce platforms
and stores, the majority of which are outlet stores. We expect earlier holiday
marketing and promotional activities as retailers seek to mitigate social
distancing and shipping capacity constraints to encourage consumers to stretch
holiday shopping over a longer time period.
The COVID-19 pandemic also impacted our distribution centers, call centers,
retail stores, third-party manufacturing partners and other vendors, due to the
effects of facility closures, reductions in operating hours, labor and equipment
shortages, port congestion, and real time changes in operating procedures to
comply with local government guidelines, while maintaining enhanced health and
safety protocols. Our work-from-home policies continue in many regions,
including the United States.
In response to the uncertainty of the pandemic described above, we enhanced our
liquidity position during the year by taking various actions, including:
•increasing our total available committed and uncommitted credit lines and
facilities to provide approximately $665 million of borrowing capacity, of which
$530 million is committed and available;
•suspending the quarterly dividend and share repurchases; and
•reducing planned capital expenditures.
We have initiated numerous cost containment measures across the organization,
including lowering personnel related expenses, reducing demand creation spend,
and minimizing discretionary expenditures. These measures reflect our effort to
lower 2020 operating expenses by more than $100 million compared to last year,
before expenses related to the COVID-19 pandemic. We are executing cost
reduction and resource allocation actions that will impact our cost structure
for 2021 and beyond. While certain of these cost containment actions will result
in permanent expense reductions, a significant portion of these costs will
likely return in 2021, including incentive compensation expense and certain
discretionary expenses, such as travel costs. We are executing these actions to
ensure the business is structured for sustainable and profitable growth in the
face of the evolving market landscape.
See the Liquidity and Capital Resources section below for additional
information.
Business Outlook
The ongoing business disruption and uncertainty surrounding the pandemic makes
it difficult to predict our future results. Although our financial performance
has been impacted by the pandemic, we anticipate 2020 profitability to be
heavily concentrated in the second half of the year. Absent further
deterioration in trends due to the pandemic, we anticipate continued sequential
improvement in our fundamental operating and financial performance in the fourth
quarter. We anticipate sales volumes to remain below prior year levels in the
fourth quarter. We expect future material financial impacts associated with the
COVID-19 pandemic, including, but not limited to, lower global net sales, the
delay of inventory production and fulfillment, and costs associated with the
COVID-19 pandemic.
Factors that could significantly affect our full year 2020 financial results
include:
•lower consumer demand as a result of effects from the COVID-19 pandemic and/or
related governmental actions and regulations;
•growth, performance and profitability of our global DTC operations, including
depressed consumer traffic in our retail stores and recent elevated DTC
e-commerce growth trends;
•our ability to staff and operate our distribution centers to fulfill DTC
e-commerce demand while providing a safe working environment with adequate
social distancing and other safety precautions;
•equipment and labor capacity of third-party logistics providers to service the
demands of our business and the retail industry generally;
•increasing consumer expectations and competitive pressures related to various
aspects of our e-commerce business, including speed of product delivery,
shipping charges, return privileges and other evolving expectations;
•impairment of long-lived assets, operating lease right-of-use assets,
intangible assets and/or goodwill;
•unseasonable weather conditions or other unforeseen factors affecting consumer
demand and the resulting effect on cancellations of advance wholesale and
distributor orders, sales returns, customer accommodations, replenishment orders
and reorders, DTC sales, changes in mix and volume of full price sales in
relation to promotional and closeout product sales, and suppressed customer and
end-consumer demand in subsequent seasons;
•our ability to effectively manage our inventory, including liquidating excess
inventory timely and profitably through closeout sales in our wholesale and DTC
businesses, in a market with elevated inventory;
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•the stability of our DTC e-commerce platforms and continued optimization of our
North America retail information technology systems;
•difficult economic, geopolitical and competitive environments in certain key
markets globally, coupled with increasing global economic uncertainty; and
•economic and industry trends affecting consumer traffic and spending in brick
and mortar retail channels, which have created uncertainty regarding the
long-term financial health of certain of our wholesale customers, and, in
certain cases, may require cancellation of customer shipments and/or increased
credit exposure associated with any such shipments.
Strategic Priorities
We are committed to driving sustainable and profitable long-term growth and
investing in our strategic priorities to:
•drive 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 improving global DTC operations with supporting processes and
systems; and
•invest in our people and optimizing our organization across our portfolio of
brands.
Capital Allocation
We are committed to maintaining a strong balance sheet in order to provide
ourselves with maximum strategic flexibility and access to additional liquidity,
if warranted. In response to the COVID-19 pandemic, we immediately shifted our
capital allocation strategies to reduce capital outflows. As our business
recovers from the pandemic and cash flows become more reliable and predictable,
we will review our strategy to return value to shareholders. This includes
management's review of resuming our share repurchase program and our Board of
Directors' review of reinstating quarterly dividends.
Experience First ("X1")
During 2018, we commenced investment in our X1 initiative, which is designed to
enhance our e-commerce systems to take advantage of the changes in consumer
browsing and purchasing behaviors towards mobile devices. It encompasses
re-implementation of our e-commerce platforms to offer improved search,
browsing, checkout, mobile payment tenders, and customer care experiences for
mobile shoppers. In 2019, we implemented X1 across 10 countries in Europe-Direct
and for the prAna brand in the U.S. In the third quarter of 2020, we implemented
X1 in North America for the Columbia, SOREL and Mountain Hardwear brands. Going
forward, we are focused on optimizing the X1 platform.
Results of Operations
The following discussion of our results of operations and liquidity and capital
resources should be read in conjunction with the condensed consolidated
financial statements and accompanying. Notes that appear in Part I, Item 1,
Financial Statements in this quarterly report. All references to quarters relate
to the quarter ended September 30 of the particular year.
To supplement financial information reported in accordance with accounting
principles generally accepted in the United States ("GAAP"), we disclose
constant-currency net sales information, which is a non-GAAP financial measure,
to provide a framework to assess how the business performed excluding the
effects of changes in the exchange rates used to translate net sales generated
in foreign currencies into United States dollars. Management believes that this
non-GAAP financial measure reflects an additional and useful way of viewing an
aspect of our operations that, when viewed in conjunction with our GAAP results,
provides a more comprehensive understanding of our business and operations. In
particular, investors may find the non-GAAP measures useful by reviewing our net
sales results without the volatility in foreign currency exchange rates. This
non-GAAP financial measure also facilitates management's internal comparisons to
our historical net sales results and comparisons to competitors' net sales
results. Constant-currency financial measures should be viewed in addition to,
and not in lieu of or superior to, our financial measures calculated in
accordance with GAAP.
The following discussion includes references to constant-currency net sales, and
we provide a reconciliation of this non-GAAP measure to the most directly
comparable financial measure calculated in accordance with GAAP below.
Highlights of the Third Quarter of 2020
Lower net sales and profitability in third quarter 2020 compared to third
quarter 2019 primarily reflect the ongoing negative effects of the COVID-19
pandemic.
•Net sales decreased $205.7 million, or 23%, to $701.1 million from $906.8
million in the third quarter of 2019.
•Income from operations decreased $66.4 million, or 44%, to $85.6 million from
$152.0 million in the third quarter of 2019.
•Net income decreased $56.5 million, or 47%, to $62.8 million, or $0.94 per
diluted share, from $119.3 million, or $1.75 per diluted share, in the third
quarter of 2019.
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Table of Contents The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations:

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