Good afternoon, ladies and gentlemen, and welcome to the Columbia Sportswear First Quarter 2022 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Andrew. Sir, the floor is yours.

Good afternoon, and thank you for joining us to discuss Columbia Sportswear Company’s first 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 our 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 and Chief Administrative Officer, 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 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 first quarter 2022 earnings release and 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.

Thanks, Andrew, and good afternoon. I hope everyone is well. Before reviewing our financial performance, I'd like to take a moment to focus on the Russian government's tragic and unjustified invasion of Ukraine. Our hearts go out to the people of Ukraine and those impacted by this humanitarian crisis. Since the invasion, we have made it a priority to work with multiple aid organizations to deliver products and other support to refugees from Ukraine, as well as displaced persons within Ukraine. We have also matched all employee donations to non-profits delivering humanitarian aid. Columbia Sportswear does not have any direct operations in Russia and has operated in that market through a contract with a third party international distributor on an advanced order basis. During the first quarter, we paused taking any new orders from this distributor. Turning to our financial performance in the quarter, 2022 is off to a great start. First quarter net sales increased 22% year-over-year and diluted earnings per share increased 23%. Our strong financial performance demonstrates that our brands are resonating with consumers and our strategies are excelling. I'd like to thank our worldwide employees; their diligent work and perseverance has enabled the company to navigate operational challenges and achieve another quarter of record net sales performance. Business momentum was broad-based, with growth across all brands, channels, and geographies. SOREL in Colombia led the charge, growing 37% and 22%, respectively. SOREL's compelling new sneaker styles and a resurgence in the wedge category contributed to phenomenal demand. Columbia's success is rooted in the brand's differentiated innovation, value proposition, and authentic outdoor heritage. During the quarter, Columbia continued its long history of innovation with several new product technologies, including the ODX Mesh fabric in outerwear and tech-light plush cushioning in footwear. For the purpose of our revised financial outlook, we have removed any future sales to our Russia-based distributor. Despite removing these sales, we are reiterating our net sales forecast. Since our last call, our fall 2022 order book has strengthened in many other global markets. Based on our encouraging start to 2022 and lower share count, we are increasing our full-year earnings and diluted earnings per share outlook. We remain focused on unlocking the tremendous growth opportunities we see across our brand portfolio, while mitigating the impact of inflationary pressures and supply chain constraints. We are also investing back into the business to drive favorable long-term results. I'll provide more detail regarding our updated outlook later in the call. The confidence we have in our business is reflected in our elevated share repurchase activity. During the quarter, we repurchased $217 million of common stock, representing a 4% reduction in shares outstanding since December 31. At the April board meeting, our board approved a $500 million increase to our share repurchase authorization. Even with this elevated share repurchase activity, our fortress balance sheet remains intact. We exited the quarter with cash and short-term investments of $610 million and no bank borrowing. Now I'll quickly review our first quarter 2022 financial performance in more detail. Our first quarter net sales were generally in line with our internal plan. When combined with strong gross margin performance and lower-than-planned SG&A expenses, diluted earnings per share exceeded our expectations. First quarter net sales growth was broad-based. Both our DTC and wholesale businesses increased 22%. Within our DTC business, brick-and-mortar increased 22% and e-commerce increased 21%. Gross margin contracted 170 basis points, with the largest driver being higher freight expenses. Gross margin performance was ahead of our internal plan, primarily driven by a favorable full-price selling environment. SG&A leverage was able to partly offset gross margin pressure, resulting in only a 30 basis point decline in operating margin compared to the first quarter of 2021. Diluted earnings per share increased 23% to $1.03. I will now review first quarter 2022 financial performance and reference year-over-year comparisons versus the first quarter of 2021, unless otherwise noted. US net sales increased 23%, with our DTC and wholesale businesses, both increasing low 20%. Favorable weather early in the quarter fueled strong late-season cold weather product sales. As the quarter progressed, the combination of lean spring 2022 inventories at retail and the anniversary of prior year government stimulus resulted in sales growth moderating in March. Our US DTC business comped positively across all channels. Traffic levels in our brick-and-mortar stores continued to improve as consumers return to in-store shopping. We achieved an important milestone in the first quarter with our US outlet stores traffic returning to pre-pandemic levels. US wholesale growth reflects higher shipments of our robust spring 2022 order book. Sales growth would have been even higher had it not been for later receipts and shipments of spring 2022 products. Overall, these delays were largely in line with our expectations. It's too early in the season to get a good read on spring 2022 sell-through at our retail partners as many are still processing our shipments. With that said, we've been pleased with our recent DTC sell-through. We anticipate being well positioned with merchandise to meet consumer demand during the important spring holidays and summer sales months. From our review of international markets, I'll reference constant currency net sales growth rate. During the first quarter, most regions continued to see favorable recovery trends. Latin America, Asia Pacific region or LAAP, net sales increased 14%. China was flat in the quarter as favorable cold weather sales were offset by the impact of recent mandatory quarantines related to the continued COVID-19 outbreak in that region. While the recent surge in virus cases creates near-term uncertainty, long-term, we remain focused on driving growth and enhancing the consumer experience in this important market. Japan increased mid-teens percent reflecting favorable weather this year and the lapping of state of emergency declarations, which hindered sales in the prior year. Korea grew high-teens percent, reflecting favorable weather and strong outerwear performance. LAAP distributor markets were up mid-60%, driven by shipment of higher spring 2022 orders. Europe, Middle East, Africa region or EMEA net sales increased 42%. This was driven by robust growth in both the Europe Direct and EMEA distributor business. Europe Direct grew high-30%, fueled by a strong recovery in consumer demand across our wholesale and DTC businesses. Our performance in Europe Direct markets has been encouraging, and we've seen minimal impact from the Russia-Ukraine conflict in these markets to date. Our EMEA distributor business was up low-60%, driven by shipments of higher spring 2022 orders. The bulk of our spring 2022 shipments to our Russia-based distributor occurred in the fourth quarter of 2021. A small portion of these Spring 2022 shipments occurred in the first quarter of 2022 prior to the onset of the conflict. Canada net sales increased 27% with broad-based growth across DTC and wholesale. Growth was led by our DTC brick-and-mortar business, which benefited from the anniversary of prior year temporary store closures. Looking at performance by brand, I thought I'd break from tradition and start with SOREL this quarter, given its outstanding performance. Net sales increased 37% despite supply challenges, driven by strong wholesale and DTC performance. In addition to favorable cold weather product sales, we continue to see year-round styles gain traction. The Connecticut impact lay sneaker was the number one style in terms of units sold on sorel.com, highlighting the brand's growing presence in the multibillion-dollar sneaker category. As consumers return to in-person social activities, SOREL has seen a tremendous resurgence in their wedge category led by the out and about collection. SOREL recently partnered with LA-based Alfred Coffee to create a limited edition collection; both SOREL and Alfred keep people moving forward and this collaboration was designed to support those people on the go. The collection is inspired by Alfred's two most popular beverages. We see a clear path for SOREL to be a billion-dollar brand, and we are investing in demand creation and product to fuel that growth. Turning to the Columbia brand, net sales increased 22% in the first quarter. Growth was broad-based across outerwear, footwear, and sportswear. On the innovation front, our spring '22 product line includes the launch of several new differentiated technologies and products. We introduced OutDry Extreme mesh fabric, which features next-to-skin comfort, ultimate breathability, superior waterproofness, and no added PFCs. In footwear, we launched Techlite Plush, our pinnacle cushioning experience. This responsive, extra-light foam provides long-lasting cushioning while an elevated midsole design improves heel-to-toe transition and maximizes comfort over uneven terrain. We've also combined two of our top warm-weather technologies in the new PFG terminal deflector Ice Hoodie. It utilizes omni-shade sun deflector to deflect some light and omni-freeze zero ice to cool and wick moisture away from the body. Applied to our new lightweight fabric, these two technologies deliver game-changing sun protection and cooling performance. On the product partnership front, Columbia partnered with a New York-based boutique to launch an exciting spring collection in select US and international markets. The collection featured iconic Columbia products and technologies, interpreted through the design lens of the partnering boutique. The collaboration honored our outdoor heritage while engaging a younger audience. Several of the top styles sold out online within an hour, attesting to the equity of the Columbia brand in that space. Columbia celebrated International Women's Day by highlighting women who inspire us, from the employees and our women's leadership initiative to our founder, Tough Mother, Gert Boyle. Gert's fearless spirit, no-nonsense humor, and high standards still guide us to this day. Columbia continued our partnership with a non-profit organization that aims to unite black women by creating opportunities for them to walk together. In February, Columbia-sponsored athlete Bubba Wallace kicked off the NASCAR season with a second-place finish at the Daytona 500. At the event, Columbia hosted an interactive booth showcasing Bubba's number 23 car wrapped in an Omni Infinity paint scheme, as well as our recently released Bubba Wallace collection. Bubba collaborated with our product team to select fabrics, colorways, and design details to create a distinct collection inspired by his lifestyle and race team. The booth also featured a life-sized replica of intuitive machines, Lunar Lander, which utilizes Omni-Heat Infinity technology. The Lunar Lander will carry that technology and Columbia branding to the moon in the coming months. Columbia will be the primary sponsor on Bubba's car in three races this year. At the recent Bristol Motor Speedway's Dirt Race, Bubba's car featured a retro-inspired theme, capturing the essence of iconic Columbia styles with neon colors and bold color blocking. Congrats to Bubba on the strong start to the season. We would also like to congratulate another of our Columbia ambassadors, Luke Combs, who recently won Country Artist of the Year at the iHeart Music Awards. Luke and his wife are avid outdoors people, and we're excited to partner with him on an upcoming hunting collection. I'd like to congratulate Columbia-sponsored athlete Kashi Sharp, who won silver in the women's halfpipe competition at the Winter Olympics. This is an especially incredible achievement as Kashi spent most of the last year recovering from an injury. Our sponsorship of the USA Curling team is off to a tremendous start. The Columbia uniforms and our logo were prominent throughout several weeks of Olympics competition, and the events captured the attention of new and avid curling fans alike. I would also like to announce the hiring of Pri Shumate as the Chief Marketing Officer for the Columbia brand. Pri has extensive background in driving demand creation in multiple consumer categories, and we're excited to have her leading the marketing efforts of the largest brand in our portfolio. Shifting back to our emerging brands, Corona net sales increased 4%. Sales growth in the quarter was constrained by late receipt of spring 2022 inventory. Recently, Prana and SOREL teamed up for an apparel and footwear collaboration. This new collection includes sneaker and sandal styles that feature the iconic design and comfort that SOREL is known for and an elevated active apparel collection with Prana's sustainability ethos. Mountain Hardware net sales increased 5%, impacted by a late receipt of spring 2022 inventory, resulting in some shipments moving into the second quarter. As a result, we anticipate Mountain Hardware's second-quarter net sales growth to exceed first-quarter performance. For spring 2022, Mountain Hardware introduced the new core air shell collection. This ultralight, ultra-packable stretch layer keeps wind and water out, while its super breathable fabrics provide a near weightless feel. I'll now discuss our updated 2022 financial outlook. This outlook and commentary includes forward-looking statements. Please see our Form 8-K and CFO commentary and financial review presentation for additional details and disclosures related to these statements. The operating environment remains dynamic with significant growth opportunities as well as ongoing supply chain and inflationary pressures. We are reiterating our 16% to 18% year-over-year net sales growth outlook. We have removed any future sales to our Russian-based distributor from our outlook. This equates to about a 2% headwind to full-year consolidated net sales. We were able to offset this headwind given that our fall 2022 order book has strengthened in many other global markets since our last call. As we noted when we gave our initial 2022 financial outlook, we have calibrated the forecast we are giving you today to reflect ongoing supply chain bottlenecks, as well as economic and market uncertainties. To the extent we can mitigate these supply chain constraints or market conditions allow, we see potential upside to our financial outlook. Gross margin is expected to contract approximately 130 basis points to approximately 50.3%. We expect SG&A expenses to grow at a slightly slower rate than net sales, inclusive of strategic investments we're making to drive long-term profitable growth. We expect operating margin to be in the range of 13.2% to 13.6%, compared to 14.4% in 2021. Based on our year-to-date share repurchases, we now expect our diluted share count for the year to be 63.6 million shares. This results in a diluted earnings per share outlook of $5.70 to $6.00, up $0.20 from our prior outlook. For the second quarter, we anticipate mid-single-digit net sales growth and near breakeven earnings. This lower level of sales growth reflects the removal of fall 2022 shipments to our Russia-based distributor, as well as the impact of the rise of COVID-19 cases in China. Quarantines and closures across several regions in China have reduced near-term consumer demand in that market. As we highlighted in our last call, we will be hosting an Investor Day at our campus here in Portland this fall. The date has been set for September 22. We look forward to showcasing the brand, the strategies, and exciting products that are fueling our growth. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. And we're investing in our strategic priorities. That will drive brand awareness and sales growth through increased focused demand creation investments; enhance consumer experience and digital capabilities in all 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. That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, could you help us with that?

Absolutely. Thank you. Okay. The first question is coming from Bob Drbul with Guggenheim. Your line is live.

Hey, Bob.

Tim, can you provide some details on the improvement in the order books since our last discussion? Additionally, could you share your perspective on inventory flow, specifically regarding the inventories you currently hold and where you see retail inventories? It would be helpful to have more insight on that.

Certainly, we take the bulk of our orders for seasons well in advance. So as an example for fall 2022, we took the bulk of the orders in, call it, October, November, December and to a certain extent, January, but we take orders beyond that period, clearly during the season itself. So we have visibility to the order book all the way through, and it was quite strong and strengthened all the way through the order taking cycle. So we feel very comfortable where we are with the book. We also know that based on the amount of inventory we were able to deliver for fall '21 and the late winter weather in early '22 that we're going to have a very receptive group of retail partners and consumers looking for winter merchandise.

And Bob, geographically, that growth in the order book, I'd say there's a high concentration of growth that's focused in North America where we've been stronger as well as in our European direct business.

Got it. Okay. And I guess just in the inventory that you have on hand, can you just tell us like with the increase in the order book, how are you approaching your DTC, your outlet stores a little bit more on the inventory as you think about the rest of the year?

Yeah. We're buying what our customers want from us, what our wholesale customers want from us, and we're buying merchandise also for the stores. But we have the ability to put that merchandise if it was required into the outlet stores later in the season. So we have a number of levers we can pull in the event that we've got inventory backup for whatever reason.

Got it. Thank you very much.

Okay. Up next, we have Jim Duffy with Stifel. Jim, your line is live.

Thanks. Hi, guys. I want to start with the question on the footwear business, first off, congratulations on the SOREL momentum. Can you speak to the gender mix within SOREL, and how that's changing? Is it one gender or the other that's really driving the momentum? And then the strong footwear outlook for the year, is that led by SOREL, or is it balanced, and Columbia is participating as well? And then lastly, I guess, what's the impediment to securing more capacity? Is it simply that the larger brands are getting the priority as capacity comes online?

Certainly. Well, let me tell you the - it's led quite evenly across the two brands, but SOREL is by far the fastest growing. And it is primarily women's product. I have the numbers wrong, but the scale is about right. This is probably in the neighborhood of 70%, 75% women's product in SOREL. And especially in the first quarter, we had the benefit of some winter merchandise, but it's really the sneakers and the wedges that are leading for SOREL, what's happening here. So we're very excited about that brand and the possibilities for it. Columbia's product line has been led with the new bridge, which is a hiking style, one that's been very popular throughout the pandemic and before. It's one of our mainstays. And it's a terrific style and done very, very well for the company across the board. And then as it relates to enough inventory, we're concerned specifically in the wedges for SOREL, there are specialty factories that need to build that merchandise. So it's more narrow for the company than we'd say, the opportunities for the sneaker business, which is factories are much more - there are more factories able to make that kind of product. But we're building relationships and strengthening our relationships with our Asian partners on footwear production, and we expect that in '23, we'll have as much as we want, which is frankly more than today.

Yes, Jim, and just one other comment. As it relates to our full-year outlook for footwear, the mid-20% growth, and it's relatively balanced across both Columbia footwear and SOREL. In the prior quarter, when we reported, I think we indicated that SOREL would be up at or near the 30%. That's come down a little bit, and that's mostly - or that's entirely supply-side effects with the anticipation of some of our fall 2022 production being a little bit late relative to the market; if it happens to get in a little bit earlier. Certainly, what we're seeing from a consumer demand standpoint, and you see it in the first quarter, where demand is quite strong, but balanced growth between the two brands.

Thank you, guys.

Operator?

The next question is coming from Laurent Vasilescu with Exane. Your line is live.

Good afternoon. Thank you very much for taking my question. I wanted to ask about China. China is a mid-single-digit percentage of your overall sales. What are you baking into the 2Q guide of mid-singles for China? And maybe for overall for the year in your revised guide? And then I would love to hear if you're seeing - I know China is an important hub for the supply chain. If you're seeing any disruptions, or are you seeing that the factories remain open with the strict COVID policies in China?

Certainly. Well, we all know that there's been quite a number of closures of almost everything in certain sections of China. And so we're not immune from that. Our headquarters are in Shanghai and our distribution center is in Shanghai. So we've been hampered there certainly of late by the zero-tolerance posting. We expect that China still will be a very important marketplace for the company, and we are treating it as such. Although the current opportunities that we expect to happen in that market are baked into the guidance we've given you today. As it relates to the supply chain, we have a very small amount of finished goods merchandise that enters the US from China. But China is still a significant provider of componentry and raw materials for the company to be used in construction and other markets around the world. So we have some visibility on the supply side for our factories. And what we've given you today would indicate where we expect the final deliveries of merchandise to be.

Yeah. And then as it relates specifically to Q2, that's the one quarter where I would anticipate China being the most impacted. As you look at the first quarter on a constant currency basis, we were flat. We had a really solid January and February. So we were really encouraged by consumer demand early in the year, but as the quarantines and lockdowns began to take effect, that had a pretty detrimental impact on parts of our business in different geographies. So we've taken the Q2 down quite significantly. And then obviously, there's a fair amount of uncertainty, and we've baked that into our outlook as well as best as we can.

Okay. Very helpful. And then with 2Q, you're guiding revenues mid-singles, gross margins down 200. So on a year-over-year basis, it looks like gross profit will be equal to last year. And then last year, 2Q is about $0.61 in EPS. I am just trying to understand why you would have minimum EPS contribution in 2Q. Is there something like one-time expense that you're baking into the SG&A, or just outsized profitability from China? Just trying to figure that out to understand the 1H EPS guide?

I think, Laurent, it's effectively - when you look at our Q2 outlook at plus 5% on the top line, this is really a function of the top line change in our outlook relative to what we've previously provided, because we previously indicated that the first half would be up high teen to low 20% and pretty balanced between the first and second quarter. And with us having removed sales to our Russian distributor from our outlook, coupled with what we just spoke of related to the downward revisions to our China business. Those are fundamentally the two most significant changes we've made to our outlook. Aside from that, in the first half, we've actually increased our outlook from a gross margin standpoint, as we've seen slightly lesser effect from ocean freight relative to what we previously estimated and continued strong oil price environment in which we're not as promotional. So I think it's really a function of that top line and fixed operating costs of the business that create that breakeven point that you see in the second quarter.

Very helpful. Thank you, Jim, and looking forward to the Investor Day in September.

You bet.

The next question is coming from Jonathan Komp with R. W. Baird. Your line is live.

Yeah, thank you. Maybe more of a near-term question when you look at the US or your Europe direct business. Any insight into what you're seeing from consumer behaviors more recently? And then when we think to the back half and the higher sales growth rate relative to Q2, could you maybe just bridge some of the pieces to think about the higher overall revenue growth rate?

Yes, it relates specifically to the US, Europe from a direct-to-consumer standpoint more recently. We saw solid demand throughout the first quarter. As we began to lap certain of the economic stimulus, certainly, you'd expect that growth would be a little bit more subdued than it was for us, but we didn't go backwards. It was relatively on par with the elevated levels we achieved last year, which we're incredibly pleased by. Europe, likewise, very strong demand throughout the quarter in the D2C business. And then as we've planned it for the balance of the year, and as we've previously discussed, we've moderated some of that growth that's factored into the outlook that we've provided, and how we thought about that from in the back half of the year.

Yes. And I just might comment that the growth in the outdoor business during the pandemic was very significant, and we expect that that's going to continue to grow. People will spend more time outdoors, as well as the casualization of the workplace. So I know we're out here handle on the West, but there's not many neckties in our building.

Yes, there's a lot fewer here as well. But maybe as a follow-up question for the Investor Day, since it will be your first, I know you've signaled the pathway to $1 billion or more of sales for SOREL. But are you planning to sort of lay out longer-term financial targets for the whole business? And when we think of the Columbia brand, can you share the main drivers that you foresee for some of the growth drivers after 2022?

Yeah, certainly, we'll be much more expansive when we get to the Investor Day, but we will have presentations from all of the brands during that period. And they will be focused primarily on the products that we're providing and how we expect our products to evolve and go forward with the consumer. We're also going to talk about specifically as it relates to the Columbia brand, the increased demand creation spend and focus that we're going to be talking about. So we've talked for every quarter really about the increased investment in demand creation, and we'll be able to show you our plans as it relates to that. We believe that we've got the right product and the right investment in infrastructure to provide a very large growth for the company. We just need to supercharge the brand awareness on all brands, but specifically on the Columbia brand.

Yeah. And then, John, I think to your question on long-term, certainly, we look to include in that Investor Day our point of view on how we're driving growth across each of the brands and what that equates to from an overall growth and earnings algorithm perspective.

Great. Looking forward to that. Thanks again.

Thank you.

All right. Next, we have John Kernan with Cowen. Your line is live.

Good afternoon. This is Krista Zuber on behalf of John. I wanted to revisit the SG&A topic and then ask a follow-up. As I understand, the previous guidance indicated that first-half SG&A would increase at a slightly slower rate than sales, but it has now been updated to a pace that is somewhat faster than sales growth. Can you provide insight into the possibility of achieving some leverage in the second half of 2022 in order to align with the full-year guidance, which anticipates moderate leverage for the entire year?

Yeah. We do have modest SG&A leverage planned for the full year. There's a slight increase in our SG&A outlook for the year. And that's going to be mostly related to inflationary pressure. And with inflationary pressure, that's impacting many facets of our business and not the least of which is wage pressure, and we've made wage adjustments in the business. And certainly, you're seeing that as it relates to ocean freight, and we've also seen increases in oil prices that are equating to fuel surcharges. Much of that is up in our gross margin, but it's effectively the inflationary pressure that's impacting that SG&A line.

Okay. Great. Thanks. And then just on the pricing actions, I think I recall that for the first half, you were looking for, at least for Spring 2022, was sort of a mid-single-digit pricing increase, and then planning sort of high-single to low-double for fall 2022. I guess any sort of pushback? Or what's the reception been so far? And do you anticipate further increases in 2023 as you start to build orders initially for spring 2023? Thank you.

We don't have any consumer feedback for fall 2023 yet, but our dealers' reactions, which we consider indicative of consumer opinions, have been quite positive, and that is shown in the strength of our order book. For Spring 2022, the small increases have not had a significant impact yet. We expect consumers to anticipate inflation across the product categories they purchase, and they have been responsive so far.

Okay. Next we have Mitch Kummetz with Seaport Global. Your line is live.

Thank you for taking my questions. I have a couple. First, regarding gross margin, you've raised your outlook for the first half. Jim, you mentioned that this was mainly due to improvements in ocean freight and full-price sales being better than initially anticipated. I haven't calculated the implications for the second half yet. Are there any changes to your gross margin outlook for the second half? Also, do you have any thoughts on how you view full-price sales promotions and ocean freight in the second half compared to your expectations from last quarter?

I think the changes in the back half are going to be pretty modest. Most of what we changed in the gross margin outlook is going to be in the first part of the year due to the two factors I talked about in terms of the ocean freight and the less promotional effect. And as we look out at the balance of the year here, we're normalizing the effect of promotions and building in a bit promotions as we lap those. We also, in the last month or so here, finalized our ocean freight contracts. So that gives us some confidence in expectation of not only securing allocation directly with the same ship lines, which is a bit inverted relative to the freight forwarders that we had to book through last year. So it should be more efficient for us. And then with regard to the rate in those negotiations, we've been, over the course of the last several months, our ocean freight rate has been four times what you would consider kind of normal or prior levels. And with the negotiations, we'll be in much better shape. We certainly won't be back down to pre-inflationary rate increases, but much further below where we are today. So that will provide a gross margin tailwind, particularly as we get out into the fourth quarter. And that's essentially where we've looked at it when we last gave an outlook in February.

I think your prior thinking on pricing for fall was that the increases would offset the cost, with ocean freight being one of them. I assume the pricing hasn't changed. So are you now thinking that you more than offset those costs? Or are you now seeing maybe more inflationary pressures on wages and raw materials that are maybe offsetting any benefits from ocean freight versus kind of your prior thoughts?

As you know, we're seeing increases across the board in the SG&A functions as well as the cost of labor, et cetera, so...

Yes. When we focus solely on product input costs, not including freight, we have successfully offset those increases with our pricing. As freight costs decrease in the later part of the year due to our new ocean contracts, we expect this to provide a slight benefit. Although we anticipate that the third quarter will still present some margin challenges, by the fourth quarter, with the improved ocean freight situation, our gross margins will actually show a year-over-year improvement compared to last year.

Okay. And then just a quick question on SOREL. Tim, you highlighted, obviously, you led with it with your brand discussion. You talked about it being a $1 billion opportunity. You highlighted wedges and sneakers. Is there any way you can say what the split is these days between kind of spring, summer versus fall holiday in terms of the mix and what that opportunity might be over time?

I certainly - the winter product that SOREL is so famous for and has historically been the exclusive product that they've made is so expensive that we can't offset completely with spring with the pricing on those sneakers. But the opportunity globally really to increase the revenue on SOREL is going to be led by the sneaker and the more fashion styles. So today, I have to get back to you with a more accurate split. But certainly, the future will be much higher women's component and much higher sneaker and fashion footwear.

Okay. Thanks, guys. Good luck.

The next question is coming from Camilo Lyon with BTIG. Your line is live.

Hi, this is Mackenzie Boydston on for Camilo. Thanks for taking our question. My first question is just on supply chain. I know you talked about ocean freight costs kind of alleviating in the back half. But in terms of actual capabilities you're seeing at the ports, can you kind of talk about where that kind of stands today? Has it improved? Has it worsened since relative to last quarter?

There's been modest improvement, but it's still far and away overall logistics lead times are far greater than they were relative to where we were just over a year ago. And the way we've thought about that as we look out at the balance of the year, it's really keeping it relatively stable with maybe some modest improvement, which is part of the reason why when we think about our outlook for the year and the order book that we've taken from our wholesale customers and the revenue forecast we put out there, we have adjusted that in part just due to certain of the uncertainty and risk associated with the supply chain and just overall economic environment.

Perfect. Thanks. And then in terms of, I think I saw in the CFO presentation, $20 million of incremental exit investments that we're making. Can you just kind of talk about in detail what those would be? I think there'll be some digital, but just any color there would be helpful.

Yeah. There's a handful of investments that are included in that $20 million, and it's going to be comprised of the combination of digital incremental demand creation as we bring our demand creation up to 6%. Then we've got some retail stores, branded stores that we're opening in the year that are also contributing to that. From a digital perspective, I would say that digital kind of far reaching across the company. But predominantly, we want to make sure that we're focused on the product, on the marketing, and on the consumer. So amongst the tools and capabilities is capturing an improved level of information around the consumer and being able to have data and analytic capabilities to be able to feed that back into our product engineering and marketing team. So that's an example of one of many digital-based investments that we're focused on.

Thank you so much.

Next, we have Mauricio Serna with UBS. Your line is live.

Thank you for taking my question. I wanted to inquire whether you have discussed or provided a figure regarding the revenue impact from supply chain constraints, particularly in the US wholesale business. Additionally, I would like to ask about the gross margin outlook. In the CFO's commentary, it was mentioned that one factor contributing to the decline in gross margin is an unfavorable regional mix shift. I am trying to understand where that may be coming from, as I recall that the US and Canada are expected to outperform in terms of sales growth. Thank you.

Yes. I think on the region and mix or region and channel mix side of your question, part of that is due to the fact that our wholesale business is growing at a faster rate than our direct-to-consumer business on the year, and that's implied in the outlook, and that's a little bit lower of a gross margin. So that's going to be part of the channel component of that. And then as you think about the region, I think our - as we look at our region mix, our highest gross margin region is going to be in the Latin America, Asia Pacific region. And that's just given the higher concentration of retail-based businesses there, relative to North America and Europe. And with North America and Europe growing at a faster rate, again, that's going to create a little bit of a mix shift. And then on the front part of that question as it relates to the supply chain, Mauricio, you asked that in more time - kind of mis the context of it.

Yes. If you gave out any figures, what was the revenue impact from supply constraints in the US...

Yes, there is nothing specific to mention. If there are any timing shifts, they are due to spring deliveries arriving significantly later than last year. This delay is attributed to longer logistics timelines and factory closures in Vietnam last year. As a result, revenue is shifting from the first quarter to the second quarter. We previously indicated that our spring order book was up around 30%, and we've delivered over 20% in the quarter, which highlights some of this shift. Regarding our second quarter outlook, it is projected to be up 5%, but you won't necessarily see a catch-up due to the reduced outlook for the combination of our Russian operations and the adjustments made in our China business.

Got it. Understood. And sorry, just one quick last follow-up. On China, is your guidance? I mean, just trying to understand the guidance implies that at some point in Q3, things normalize? Or like what is the time frame that the company is considering in its guidance?

We view the second quarter as the most challenging period, primarily due to the inability of many of our wholesale dealers to operate. Consequently, we do not expect to ship most of the remaining wholesale orders. As we move into the third and fourth quarters, there is significant uncertainty ahead. While we do anticipate a recovery in that market, it may not align with our initial expectations for the year.

Got it. Thank you and congratulations on the results.

Okay. Up next, we have Alex Perry with Bank of America. Your line is live.

Hi. Thank you for taking my question. I wanted to ask about the sales guidance phasing. The first quarter exceeded expectations, but the guidance for Q2 shows a significant decrease. It appears that the second half of the year sees an increase. Is the decline in Q2 mainly due to Russia and China, or are there other factors involved? Additionally, what are the assumptions surrounding the anticipated rebound in the latter half of the year?

So as it relates to Q2 take down, it's almost entirely related to those two factors between Russia and China. To a lesser degree, there might be some timing shifts as we begin receiving and shipping our fall season in that June timeframe, but that would be much smaller. And then as it relates to the back half of the year, we do anticipate that our fall deliveries or fall inventory receipts and shipments are much earlier than they were last year, albeit not back to what we would consider normal levels. But with that in mind, that would skew revenue growth pretty heavily to the third quarter, still growing in the fourth quarter. And that's really going to be the acceleration of growth, if you will, in the back half of the year. A lot of that is just going to be driven by the strength of the overall wholesale order book, and our D2C business has grown up at a more modest rate in the back half of the year.

I also might point out that Q2 is our lowest quarter of the year from a revenue standpoint. So any slight changes in the mix will be impactful.

Great. And then could you just give us a little more color on maybe how the DTC business has trended in the quarter? I think you may have called out some moderation in growth in March. Was that mostly sort of stimulus comp? And then what is sort of embedded in the Q2 guidance in terms of DTC? Are you sort of assuming that sort of trend rate, the moderation you saw in March sort of continues? Or what's sort of embedded in terms of DTC, I guess, both for the second quarter and for the balance of the year?

Yeah. Well, as you know, we consider ourselves to be a wholesale company. So we don't provide many of the matrix details that a retailer would provide. But we're seeing solid numbers out of our own DTC business, and it's impacted as well by the delivery issues that we've been talking about during the call. So the expectation is that the business will continue to grow. And when we present our merchandise in our own stores the way we'd like to have it presented everywhere, we see great results.

Certainly. January and February were outstanding months, largely due to the cold weather. Specifically speaking about our US direct-to-consumer business, we did not experience a decline in March despite the reduction in stimulus. We maintained our position during that period, which is encouraging given the increase in volume. In the last two weeks, as we have moved further away from the timing of the stimulus checks, our business has remained strong and healthy. This reflects our recent success in getting our spring products onto retail floors for consumers.

Perfect. That's incredibly helpful. Best of luck going forward.

Thanks.

Up next, we have Paul Lejuez with Citigroup. Your line is live.

Hey, thanks, guys. Can you just quantify what the size of the Russia business was in the second quarter of last year? And is that business typically greater in 2Q versus the quarters in the back half and any quantification you can provide there? And then also, I think you mentioned in the presentation there's some year-over-year unfavorable changes to debt. And just curious if you can talk a little bit more about what drove that? Thanks.

Yeah. As it relates to Russia, we'll get down in a quarterly breakdown of that. There was an indication that Tim provided in the prepared remarks that it equates to 2% impact on our full-year outlook, on a full-year basis. I would say that the second quarter is typically the most significant shipping quarter into the Russian distributor because that's when we ship the bulk of our fall product, so it will have a disproportionate impact, which you see that in the outlook that we're providing. And then as it relates to the unfavorable comparisons on bad debt, that’s going to largely relate to the fact that in 2020, we booked up reserves for bad debts in light of the risk from the credit environment in the midst of the pandemic. In '21, we released some of those reserves because things didn't pan out as bad as we thought they would. So we're just lapping against more difficult comps having released reserves last year and a more kind of normalized environment, if you will, this year.

And where are your current reserves relative to like a pre-pandemic sort of level?

They're on par with where we were from a pre-pandemic perspective, and that will be in our - maybe I think it's in the release stock. And if you go back into the balance sheet there, you'll see it on par with where we were back in '19.

Got it. Great. Thanks and good luck, guys.

Thank you.

Okay. We have no further questions in queue. I'd like to turn the floor back to management for closing remarks.

Well, thank you all for listening in. We're very anxious to show you the products and plans for the future of the business in September right here in Portland. So we hope you can all make it. Thank you for your attention.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.