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 inChina inDecember 2019 and a global pandemic of respiratory disease caused by COVID-19 was declared by theWorld Health Organization inMarch 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 inChina in late January,Korea andJapan in early February andNorth America andEurope 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 inChina andKorea by late April and in theU.S. ,Europe ,Japan , andCanada 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% 23
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Table of Contents 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 ofSeptember 30, 2020 was slightly elevated compared toSeptember 2019 . Nonetheless, it has declined sequentially compared toJune 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, includingthe 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; 24
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Table of Contents •the stability of our DTC e-commerce platforms and continued optimization of ourNorth 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 theU.S. In the third quarter of 2020, we implemented X1 inNorth 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 endedSeptember 30 of the particular year. To supplement financial information reported in accordance with accounting principles generally accepted inthe 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 intoUnited 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. 25
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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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