Columbia Sportswear’s focus on taking a more sophisticated approach to sales and marketing helped lead to record gross margin in the first quarter.
At the same time, Tim Boyle, president and CEO, said the activewear and outerwear maven has its eye on expanding its China business, which he said was the company’s “highest profit margin” country or region.
Last week, Columbia reported that first quarter gross margin was up 210 basis points to 51.4 percent. Boyle told analysts on a conference call that the record results were “driven by Project CONNECT benefits, higher full price product sales mix in our wholesale channels, favorable foreign currency hedge rates and higher DTC sales mix.”
Project CONNECT, launched in 2017, is aimed at managing the accelerating structural change in retail by driving brand awareness and sales growth in wholesale and direct-to-consumer channels, and enhancing consumer experience and digital capabilities.
Jim Swanson, senior vice president and chief financial officer, credited Project CONNECT with “well over half” of the margin performance “and that’s the great work that the teams have done over the course of one and a half years that’s encompassed the work we’ve done around assortment optimization, designed to value some of our retail-based initiatives.” Swanson also cited currency and sales mix as contributing to the margin expansion.
“We believe that as we continue to invest in our brand acceleration and demand creation, that we’re creating more power for pricing through the Columbia brand,” Boyle said. “We’ve also seen the effects of the innovation that we’ve been still heavily invested in, which gives us the opportunity to sell products.”
Columbia products, like Omni-Heat; OutDry, a new method of waterproof breathable construction; and the Omni-Shade Sun Deflector product, are a few of those sales-driving innovations, Boyle said.
“These give us the opportunity for pricing power to improve our business,” Boyle said. And that gives the company the ability to invest in additional inventory “to flatten out some of the peaks that have previously been in our construction schedules to give ourselves the opportunity to have a higher margin and for our factory partners to also make more money on the company’s products.”
Columbia’s net sales for the first quarter ended March 31 increased 8 percent to a record $654.6 million. The Columbia brand generated double-digit growth in the U.S. across DTC and wholesale distribution channels, and the Sorel brand–acquired by Columbia in 2000–grew 28 percent, globally. Net income for the quarter rose 64 percent to $74.2 million.
Looking at China, Boyle said as new general manager John Soh immerses himself in the business, “we look forward to sharing additional updates on our go-forward strategy.” While the company expects a mid-single digit percent decline in China net sales for 2019, Boyle said China represents one of Columbia’s biggest regional growth opportunities.
“There’s enormous opportunity there, especially when you consider that the Chinese government would like to overinvest in the Winter Olympics, they’re going to be opening something like 300 ski resorts for the local Chinese sportspeople to be involved in,” he said, referring to the 2022 Winter Olympics in Beijing. “So we expect that over time that would be a spectacular part of the business. But we think in addition to the outerwear opportunities, there are very significant footwear and sportswear opportunities in China for the company. We just need to get it right and we’re continuing to invest to make sure that happens.”
On why he thinks China represents a high-margin market, Boyle said it’s because the company entered the market there at a premium space, which offers pricing power in that market.
“So we’re pretty pleased that it gives us the ability to invest pretty heavily in new stores, and store remodels and openings,” he said.
Elsewhere, U.S. sales grew 14 percent in the quarter, driven by mid-teens percent growth in DTC and low double-digit growth in wholesale. Favorable winter weather helped and DTC stores drove end-of-season fall product sales.
Sales outside of the U.S. grew 3 percent in the quarter, led by growth across Japan, Europe, South Korea and international distributors. Japan’s mid-teens growth in the quarter reflects the long-running success of the Columbia brand in that market, Boyle noted.
Looking at the Columbia brand globally, sales increased 9 percent in the period thanks to strong DTC performance and wholesale growth in the U.S., reflecting continued market share gains. Sorel sales surged 28 percent in the quarter, reflecting robust growth across wholesale and DTC distribution channels.
“Sorel’s ability to be a year-round fashion footwear brand is evident in the sales trend of our spring 2019 product line, including the expanded kinetic sneaker line in the Ella and Joanie sandal and wedge collections,” Boyle said. “We remain committed to Sorel becoming recognized as a year-round fashion footwear brand globally.”