Greetings, and welcome to the Columbia Sportswear Second Quarter 2023 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. Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Burns, Vice President of Investor Relations. You may begin.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's second 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, 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 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's question by the end of the hour. Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon. Second quarter financial results reflect a dynamic environment, with varying trends across our global omnichannel business. Overall, we were able to generate 7% net sales growth in the quarter. This was ahead of our prior outlook due to earlier-than-planned fall '23 shipments, which more than offset slower growth in our U.S. DTC business. International net sales increased 34%, fueled by earlier international distributor shipments and continued recovery in China. In the U.S., sell-through trends softened, reflecting cautious consumer behavior. Additionally, elevated inventory levels, particularly in footwear, have contributed to heavier clearance and promotional activity. As I mentioned on the last call, reducing inventory is our top priority. Inventory exiting the quarter was up 21% year-over-year. As we progress through the second half of the year, the combination of lower inventory buys, shipment of fall '23 orders, and increased excess inventory sales in our outlet stores will reduce our inventory position. We expect inventory to be down year-over-year exiting the third quarter, and we remain on track to reduce year-end inventory by over $200 million compared to last year. Returning inventory to a healthy position is a vital step to improving our financial performance. Given our year-to-date performance and current trends we see across the business, we're taking a more conservative approach to planning the balance of the year. I'll provide more details on key drivers and assumptions influencing our updated financial outlook later in the call. I remain confident in our strategies and our ability to achieve the significant long-term growth opportunities we see across the business. With that being said, our brands are not immune to macroeconomic pressures and headwinds. In this environment, we're focused on what we can control, including expense discipline and executing our inventory reduction plan. We're also continuing to invest in the business to drive long-term profitable growth. In challenging times, our strong financial position is a strategic advantage. We exited the second quarter with over $300 million in cash and short-term investments and no bank borrowings. This position will strengthen further as we are on track to generate $550 million to $600 million of operating cash flow this year. I believe our diversified business model, financial strength, and operating discipline will enable us to navigate near-term challenges and emerge in a stronger position. I'll now review our second quarter financial performance. I'd like to remind everyone that the second quarter is our lowest sales volume quarter. Year-over-year changes in the timing of wholesale shipments can have a material impact on reported results. When reviewing second quarter results, it's important to note that on-time 2023 shipments resulted in sales shifting into the first quarter compared to last year when we delivered products late. This presented a headwind to the second quarter. Conversely, we are shipping fall '23 orders earlier this year, which created a tailwind to second quarter growth. These timing movements create a pronounced impact in regional and brand net sales results. Net sales of $621 million were up 7% year-over-year and up 9% on a constant currency basis. Gross margin expanded 140 basis points and was roughly in line with our outlook. As expected, the largest driver of expansion was lower inbound freight costs. This was partially offset by higher clearance and promotional activity as well as higher distributor shipments which generally carry lower gross margins. Overall, promotional activity is elevated compared to 2022 when promotions were exceptionally low. Within our DTC business, we have increased planned clearance activity as we focus our efforts on reducing inventories. SG&A expenses increased 11% and were primarily driven by increased expenses across our DTC business, supply chain, and enterprise technology. Diluted earnings per share increased 27% to $0.14. I will now review second quarter year-over-year net sales growth by region and brand. For this regional view, I will reference constant currency net sales growth rates. U.S. net sales decreased 3%. U.S. wholesale decreased high single-digit percent, driven in large part by on-time spring '23 shipments, which shifted sales into the first quarter. In the U.S., the Columbia brand's spring selling season performance is down slightly compared to last year. After a stronger start to the season, driven in part by better inventory availability, sell-through trends slowed in the second quarter. U.S. DTC net sales increased low single-digit percent. Brick-and-mortar was up mid-single-digit percent driven by the contribution from new stores opened last year as well as incremental sales from temporary outlet stores. U.S. e-commerce net sales were down mid-single-digit percent. The online environment has become more competitive and promotional as consumers seek out value in the marketplace. In the first half of this year, our U.S. DTC business grew low single-digit percent, reflecting a challenging environment. While wholesale shipments remain the priority for the Company, I believe there are long-term opportunities to accelerate our DTC growth and improve efficiency and profitability. Under the leadership of our new SVP of North America DTC, David Theiss, we are actively identifying growth opportunities and operational improvements that can further elevate the Columbia brand. David has experience building a balanced store fleet that's profitable and elevates brand performance across all channels. Turning back to the second quarter financial performance, I'll now review our international business. Latin America Asia Pacific region, or LAAP, net sales increased 35%. China net sales increased over 140%, reflecting strong consumer demand compared to last year, which included the impact of pandemic restrictions. Improved store productivity and enhanced marketing are among the key drivers enabling us to capitalize on growing consumer interest in outdoor activities in this important market. Our new premium China-specific collection named Transit is attracting new, younger consumers to the Columbia brand. Sell-through has been exceptional. We're building on the success of our initial launch with new styles for fall. Another bright spot is e-commerce where we drove strong results during the 6/18 event, across all our key platforms, including Tmall, JD, and TikTok. E-commerce has continued to perform very well as physical traffic returns and is indicative of the team's ongoing efforts to better serve consumers through digital channels. We continue to anticipate that China will be one of our fastest-growing markets in 2023. Japan net sales increased mid-single-digit percent led by healthy growth in our DTC brick-and-mortar stores. We continue to see encouraging traffic trends in our branded stores as the tourism industry recovers. In April, we opened a store in Kamikochi National Park. This top hiking destination in the Japanese Alps attracts over 1 million visitors per year. The store features unique Columbia products with designs from local artists. Korea net sales declined double-digit percent. As we mentioned last quarter, we are in the early phases of resetting our business in Korea. Management is focused on several initiatives across talent, distribution, marketing, and product. We've closed unprofitable doors in the first half of the year and are focused on improving the productivity of the remaining fleet. We believe these efforts to reposition the brand and elevate distribution will drive a deeper connection with the next generation of consumers and fuel long-term sustainable growth. LAAP distributor markets were up low 80%. This growth primarily reflects earlier shipments of fall '23 orders. Europe, Middle East and Africa region, or EMEA, net sales increased 75%. Europe direct net sales declined mid-single-digit percent as spring '23 shipments shifted to the first quarter. This was partially offset by healthy DTC growth which was strong across both e-commerce and brick-and-mortar. This quarter, Columbia Hike Society U.K. hosted several successful events, including special hikes led by Columbia brand ambassadors. These grassroots clubs help promote spending more time outside and attracting a younger generation of hikers. We believe these unique brand experiences as well as our exclusive partnerships with Mega Marsh hiking events that take place across Europe will help drive momentum in the important hike category. Our EMEA distributor business increased approximately 310% reflecting earlier fall '23 shipments. Canada net sales were down 16% as spring '23 shipments shifted into the first quarter. This was partially offset by healthy DTC growth, which was strong across both e-commerce and brick-and-mortar. Columbia was recently voted the number one trusted sportswear brand and number three trusted brand overall in Canada for the eighth consecutive year in the University of Victoria Brand Index. The survey included over 400 brands in 33 categories. Our high brand awareness and consumer trust provide a healthy foundation for growth in this market. Looking at performance by brand, Columbia brand net sales increased 11% during the quarter, including the benefit of earlier fall '23 shipments. The Columbia brand's differentiated cooling technologies and sun protection products have never been more important. We have a broad range of innovation in our product line, built from a platform of sun protection and cooling technologies, including Omni-Freeze Zero, Omni-Shade Sun Reflector, and our most recent addition, Omni-Shade Glove Spectrum. These innovations differentiate the Columbia brand in the marketplace and position us as a leader in sun protection. As we look forward to fall, we're building on the success of Omni-Heat Infinity with an expanded assortment of styles. This differentiated visible technology remains one of the fastest-growing parts of our product line and will be our top marketing story this fall. Another innovation story for fall is Omni-Heat Helix, our disruptive poly fleece visible digital technology. We're excited to build on this unique technology in fall '23 and beyond. We will also continue to invest in footwear, including the launch of the Facet 75 Alpha. Despite near-term category headwinds, footwear remains a key growth accelerator for the Columbia brand. Shifting to our emerging brands, SOREL brand net sales increased 32%, primarily driven by earlier fall '23 shipments and increased wholesale closeout sales. Overall, SOREL spring sell-through is up versus last year, largely reflecting higher clearance and promotional activity in a challenging footwear environment. Sandals have been a top-performing category this spring, led by popular styles like the Kinetic Impact Sandal. During the quarter, we announced Mark stepped down from his role as Brand President to focus on his health. Mark oversaw SOREL during a period of tremendous growth, and he helped transform the brand into a women's function-first fashion footwear brand. We thank Mark for his outstanding contribution to the Columbia and SOREL brands during his long tenure. Senior Vice President of Emerging Brands, Craig Zanon, will lead the brand until a new president is appointed. Mountain Hard Wear net sales decreased 19% driven in large part by on-time spring '23 shipments, which resulted in sales shifting into the first quarter. prAna net sales decreased 32% in the quarter with a decline in wholesale driven in part due to on-time spring '23 shipments, which resulted in sales shifting to the first quarter as well as a decline in DTC. We are excited to announce the appointment of Tricia Shumavon as the President of the prAna brand starting in September. Tricia brings vast experience in the apparel industry, having served in leadership roles for several global brands, including most recently as the Global VP of Sportswear for adidas. Tricia will be able to leverage her deep roots in design, product management, and merchandising to position the prAna brand for growth in future seasons. I'll now discuss our 2023 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. The current environment is making it difficult to achieve the long-term growth algorithm that I believe we're capable of. Given current trends we're seeing in the business, we are taking a more conservative approach to how we plan the second half of the year. We now expect full-year net sales to grow 2% to 3.5% year-over-year. Gross margin is expected to expand by 40 basis points to approximately 49.8%. Marketplace promotional activity continues to normalize, and we are anticipating a higher level of clearance activity as we opportunistically work down inventory levels. We expect the operating margin to be in the range of 9.8% to 10.3%. Operating margin performance will not be linear year-to-year, and we remain firmly committed to improving operating margin over time. This operating performance leads to a diluted earnings per share range of $4.40 to $4.65. We anticipate strong operating cash flows of $550 million to $600 million in 2023 as our inventory levels normalize. Before my closing remarks, I'd like to note that later this month we will be releasing our 2022 impact report, highlighting our efforts across environmental, social and governance matters. I'd encourage you to review the report, which will be available on our website, to learn more about the progress and accomplishments we've made empowering people, sustaining places, and promoting responsible practices. As we've previously said, we've been working to eliminate PFAS chemicals across our global product line. Our intent is to stop manufacturing any apparel or footwear with PFAS prior to our fall '24 season. New manufacturers for fall '24 are designed to be PFAS-free. We have been working on our alternate chemistries for some time and are making these changes in advance of regulatory restrictions in a small number of jurisdictions. We're very pleased with the technical performance of the new chemistry, but recognize that the transition has the potential to impact the floor of our wholesale business in 2024 and how we and others manage through existing inventory. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business. We're investing in our strategic priorities to accelerate profitable growth; create iconic products that are differentiated, functional, and innovative; drive brand engagement with increased focused demand creation investments; enhance consumer experiences by investing in capabilities to delight and retain consumers; amplify marketplace excellence that is digitally led omnichannel 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, could you help us with that?

And the first question today is coming from Bob Drbul from Guggenheim. Bob, your line is live.

A couple of questions for me. I guess just on the outlook, can you just talk through, I guess, your updated visibility, I think, on the lowered sales, if you could just talk through a little bit more how you're planning the wholesale business for the back half of the year. Like, are your orders all firmed up now? And I think you made some adjustments to your buys as well. If you could talk through that, I think that would be pretty helpful to us. And then I guess, just with some of the early shipments, is that just a function of you had the inventory and your partners wanted the product? So maybe you could just talk a little bit about sort of where you think things sit with the wholesale guys as you think about your business.

Yes. No problem, Bob. Well, yes, as you know, we have a firm order book and it's strong with fall product. Our partners are selling off the balance of their spring merchandise and looking forward to receiving spring, which some of them have already done so. We're planning for a normal winter. So, the variability of winter is impactful on our business, especially when we're selling outerwear and winter boots. And as it relates to the early shipments, I mean, frankly, as we've noted, we have too much inventory. A large portion of our SG&A spend this year was a result of having too much inventory, having merchandise stored in off-site locations, etc. So, it was great that we could both move the merchandise out to retailers and wholesale partners and distributors earlier than last year in order to free up some space and give us some relief on our extra spend for locations. But our retailers and partners were happy to receive the merchandise, especially knowing that in prior years, we've been late on this merchandise.

And Bob, just to add a little bit more color in terms of the change in the outlook. The lion's share of the change is due to the softness we've seen in the U.S. business. And that's been essentially across our U.S. wholesale business, which is roughly half of the overall change in our outlook and then, to a slightly lesser degree, U.S. e-commerce and then, to an even lesser extent, Korea. So those are the major moves. As Tim touched on, as it relates to the wholesale business, we haven't so much seen any significant changes, so to speak, as it relates to the fall order book, but what's led us to the change in the outlook is what we're seeing in terms of replenishment and reorder as there's been some softness in the market. So, that's contributed to that overall change in our outlook.

Thank you. The next question is coming from Laurent Vasilescu from BNP Paribas. Laurent, your line is live.

Jim, I want to follow up on your CFO slides. They're always super helpful. I think one of the pages notes that wholesale is expected to grow low single digits for the year, which implies that wholesale in the second half should be down low single digits to mid-single digits. Just curious to know how do we think about that. I know you don't guide explicitly by quarter, but just any dynamics as we think about 3Q, 4Q and especially how you're lapping the Russian distributor sales in the third quarter.

Yes, that's a good point. I would keep in mind, looking at the flow of our business even from a first half, second half perspective, the impact of the shifts in the timing of deliveries, because we're much earlier this year for both the spring and fall season, does create challenges in terms of the comparative differences year-over-year. As you pointed out, we do plan on the business being at a lower rate of growth on the wholesale side in the back half of the year. Keep in mind, there is a very material component of shipments from the fall '23 season, particularly for our distributor business, that shipped in the second quarter. That's to the tune of, across our global wholesale and distributor business, roughly $70 million. So if you adjust for that timing difference, coupled with, Laurent, you also mentioned the shipments that we made in the latter part of last year for Russia, which were orders we took pre-invasion, those equated about $45 million. So if you adjust for each of those two items, the rate of growth that we'd be seeing in our wholesale business would be in the mid-single-digit percent range. But from an overall standpoint, when you look at the full year, which I think is much more indicative of the trends we're seeing across the business, at least for the wholesale side, we're up a low single-digit percent on the year.

That was very helpful. I wanted to follow up on margins. I noticed in your 10-K that inbound freight had a 180 basis point impact on FY '22 gross margins. It seems from your CFO's slide deck today that you recaptured about 200 basis points this quarter. I'm interested in how much freight is expected to benefit your gross margin for the full year. Additionally, regarding SG&A, your last 10-Q showed about $18.8 million in logistics costs. I'm curious about the impact of that for the second quarter in dollar terms and what you anticipate it could affect for the full year.

Yes. Regarding the gross margin and the inbound freight headwind we experienced last year, which was 180 basis points, we are expecting an increase of more than 200 basis points in favorable gross margin this year due to a significant reduction in those freight costs. In terms of SG&A, as noted in the CFO commentary document, we are observing higher growth rates, with SG&A being driven up by our warehousing, distribution, and fulfillment costs, which are still significant contributors this quarter. We expect these costs to persist throughout the remainder of the year, although we believe they will be temporary. As we manage to decrease our inventories to more normalized levels next year, this should become more of a challenge. To quantify this, it’s estimated that the impact on this area of our business will be around $30 million.

Thank you. And the next question is coming from Mitch Kummetz from Seaport Research. Mitch, your line is live.

Jim, if I heard you correctly, it sounds like the biggest part of the change in the sales guide is replenishment, your thoughts around replenishment in the back half. I mean how do you guys come up with that? Are you just looking at kind of trends over the last month or two and extrapolating that? I'm just trying to get a sense as to how conservative you might be without an assumption.

Yes. The replenishment business for us is very helpful, and we are in the process of automating that process today. I just left a meeting where we talked about the increased accuracy around the replenishment business. So it's going to be important for us in the future, and it's something that we're getting much better at. But it is impactful this year, especially when you consider the potential impact of the PFAS product change. So it's going to be the Board part of our business, and we're getting much better at it all the time.

Yes. I think just further to that, Mitch, it's based on the statistical forecast and looking back at what we've seen in trends over the last several weeks. And I would say that's the case in terms of our wholesale replenishment business. That's also the case in terms of how we're thinking about DTC growth in the back half of the year. And so our outlook would contemplate DTC growth rates being similar to what our experience has been when you look at the first half of the year.

I have a question about the margins. I haven't calculated your revised guidance yet, but it appears that your sales and gross margins are decreasing. From a spending standpoint, it seems like SG&A hasn't changed much or might have increased slightly. If that’s accurate, I would have expected you to be actively seeking cost savings with the updated sales guidance. Are you doing that, or are there other expenses increasing that I should be aware of? How should I interpret the SG&A dollar amount, given that it indicates a significant amount of deleveraging this year?

Yes. I mean we're certainly, to your point, turning over every rock that we can in terms of executing on cost containment; in certain cases, even cost reduction actions internally as well. So, that's top of mind. I would agree, ordinarily you would expect a little bit more pass-through of variable-based expenses given the reduction in the top line. There are investments we're making along the way here to ensure, though, that as we look at the distribution and the third-party logistics side of our business, there are some professional fees and other costs that we're incurring that are incremental investments to ensure that we set those operations up going forward to be more streamlined and productive. So, there are certain one-time costs in there, Mitch. I won't get down into specifics in terms of each one individually, but they're offsetting some of what you otherwise believe to be a greater degree of variable-based expense savings.

Thank you. The next question is coming from John Kernan from TD Cowen. John, your line is live.

Just given some of the macro headwinds out there in your clearance, I'm just curious if you've seen any major reactions in the actual competitive environment? I know the Columbia brand has always really held more of an entry-level price point in the wholesale channel and versus some of your peers. Is there any change in the competitive environment? Or is it really just the difficult period being driven by a broader macro environment? Curious about some of your high-level thoughts there?

Yes, we encountered some audio issues, but I believe your question is about whether our status as a value brand is affected. We think that over time, this will actually strengthen the Company. We previously discussed the effect on our selling, general, and administrative expenses due to the costs associated with holding inventories. Despite having too much inventory, we were able to maintain a strong gross margin due to our solid sourcing capabilities. This excess inventory will have an impact on our expenses for the remainder of the year. However, we are confident because our strong balance sheet allows us to retain this inventory and sell it profitably during challenging times.

Yes, I know I have some background noise, if you can hear me, any thoughts on SOREL. Obviously, there's going to be new management coming in, any thoughts about how to position SOREL specifically in the U.S.?

Yes, I'm sorry. I'm having a real difficult time understanding the question. We'll be happy to capture that, if we can, at a later time if you're able to call in.

Thank you. And the next question is coming from Jonathan Komp from Baird. Jonathan, your line is live.

Jim, I just want to follow up a question on the updated guidance. It sounded like at least through June, the message was you really weren't assuming any improvement in the sales environment or the promotional cadence for the year. So I'm just wondering, should we assume that the environment has shifted pretty meaningfully over the last couple of months or any other color just going back to the change in the full year guidance and the drivers?

I think that's fair, Jon. When we had our earnings call in April, up to about that time, we were continuing to see the same trends that we saw in Q1, in which we reiterated the top line guidance we provided earlier in the year. The month of May was, I would describe it, exceptionally challenging. And things improved a little bit in June, and they've been better here in July. But in light of what we saw during the quarter, and particularly as we got into the mid- to latter part of the quarter, things were a bit more challenging, and that's led to the revision we made both on the wholesale side in terms of how we're thinking about reorder replenishment and then also in terms of e-commerce. And you'll recall, e-commerce was a channel of our business that we thought would be the highest rate of growth business coming into the year. And as we sit here through the first half, it's been the slowest growing part of our business at a low single digit. So we thought it was appropriate, prudent, to realign our outlook and derisk some of the trends that we're seeing in the business through the quarter.

And do you have any ability to tell if those risks or the adjustments to the business will be concentrated in the second half of '23? Or any perspective on when you might get some color on how wholesale trends and any destocking might carry into 2024?

Yes. The most significant factor affecting the second half of the year will be the global weather. Our retailers will have relatively low inventory levels, consisting mainly of leftover merchandise from the previous period. They will begin the year with new merchandise and full stock, which will likely play a more crucial role than the economy for the rest of the year.

I think, Jon, retailers are generally being more cautious. As we sit here today with where spring sell-through and Tim touched on it, spring sell-through has been a bit slower. I described inventory levels in the marketplace as being moderately elevated. So when you look at some slowdown in higher inventories, naturally, they're going to be a bit more cautious. So that's what we're reflecting in terms of the change in how we're seeing the revenue forecast for the balance of the year. And then I think in terms of getting a better read on that, the third quarter is typically the point in time where we're shipping an initial floor set, so it doesn't become until we get into the early fall where we start to see that sell-through through back-to-school and some of the early fall sales to get a better read on how things are progressing.

Okay. Great. And just last one for me, Jim. It looks like the guidance is assuming operating profit below 2019 levels through the third quarter followed by a pretty significant shift to positive in the teens in the fourth quarter comparing against the 2019 base. I don't know if that's the right comparison to think about, but just any more color on factors that would drive that profitability flip by the fourth quarter.

Yes. Trying to go back to fourth quarter and comparing it to a prior period like that, I would have difficulty doing it. What I would say, Jon, though, is certainly being at a 10%-ish operating margin this year, that's a disappointment from our perspective. We've got much higher expectations in terms of driving the right profitability and expanding operating margins over time. I think bear in mind, as Tim touched on, certainly, the most significant item that's impacting, and having a deleveraging effect on our operating profits, is the elevated inventories that we're carrying. We're not ready to provide an outlook as we think out to 2024 here today. Having said that, if you look at the pressure that that's putting on P&L and '23 across SG&A that we've touched on as well as the clearance type activity and lower margins as we move through certain of this inventory through our outlets, it's north of 200 basis points. So as we get that inventory back down into a more tolerable level and think about the potential to expand operating margin, all subject to how the top line plays out next year, that should be a tailwind for us.

Thank you. The next question is coming from Jim Duffy from Stifel. Jim, your line is live.

I want to ask about pricing in general, just given the pressures to consumer spending, what do you feel about your MSRP in the marketplace? Are you revisiting pricing at all, looking at making adjustments there? I recognize you have promotion as a tool, but how do you feel about your go-in pricing and the price-value equation?

Yes, Jim, I think we're in good shape actually. I don't believe that the reduction in our guidance is a function of our products being overpriced. I think we're in the right spot. And frankly, as the business normalizes from an inventory perspective, we intend to increase our marketing spend over time to give us a larger voice to the consumers. So no, I think we're in great shape. We've had a very efficient sourcing operation, and we expect to be able to continue to use that as a lever together with our balance sheet to make a better organized approach to the marketplace.

Yes. And then just looking at the composition of the inventory, Jim, at a high level, call it, around 50% of the inventories current season, 20% of it's aged and then the balance would be the carryover of the evergreen-type styles. That 20% that's aged, that's not too far off. It's more elevated than what we would like. But in light of the outlet stores that we have the leverage, we've opened up some temporary stores, we feel perfectly comfortable working that inventory down in the latter part of this year.

Thank you. The next question is coming from Abbie Zvejnieks from Piper Sandler. Abbie, your line is live.

I know it's a smaller piece of business, but can you just talk about kind of how you're thinking about the go-forward growth trajectory of both prAna and Mountain Hard Wear?

Yes. Mountain Hard Wear is a premium Alpinist brand, and we have the right team in place to manage it. Although it has faced challenges in the past, I believe we are currently positioned well with significant opportunities, particularly in the U.S., as we target specialized areas with a niche customer base. I am confident in our success with this brand and in the capabilities of our team.

Thank you. The question is coming from Mauricio Serna from UBS. Mauricio, your line is live.

I wanted to ask about the sales guidance. If I look at the 3Q outlook you provided, it seems to suggest that sales will decrease by 2% to 8% in 4Q. Can you clarify if this is mostly due to shifts in wholesale shipments between the quarters? From a regional standpoint, how should we interpret this? I would assume that a significant portion of this is related to our performance. Additionally, you mentioned challenges in the footwear category. Can you specify if these challenges are specific to outdoor footwear or if they are more widespread across the overall sportswear segment?

Tim, do you want to touch on the footwear one, then I'll come back around the sales?

Yes. I can talk about the footwear. The outdoor category has been softening a bit. And that's where the primary business for the Columbia brand is. The SOREL brand, on the other hand, is primarily a women's fashion brand. We've seen great successes in the sandal category with that brand. And the expectation for the balance of the year is solid growth in women's protective footwear as well as fashionable products. So, we're excited about that, but there is some softness in the outdoor category as it relates to the Columbia brand.

And, then Mauricio, as it relates to the sales guidance, so we've provided third quarter revenue growth of 4% to 6%. And then if you engineer that back to what would be contemplated in the fourth quarter, it'd be down a mid-single-digit percent. And to your question, there are still a lot of timing shifts each quarter. Last year, for the fall '22 season, we were awfully late getting inventory to the market. And so there was a higher proportion of our fall '22 wholesale orders that shipped in the fourth quarter. So, we're contemplating being much earlier, and we would expect our wholesale direct business to be up quite substantially in the third quarter. However, there's going to be an offset as we ship the international distributor fall '23 orders in the second quarter. So there is an awful lot of noise when you get into the overall timing impacts of our wholesale and distributor business. So keep that in mind when you look at quarterly flows. And then as it relates to the direct-to-consumer side of the business, I think we've planned it relatively stable in Q3, Q4, a mid-single-digit percent of growth.

Can you repeat that number, mid-single digit for DTC? Is that right?

Yes. That's right.

Thank you. And the next question is coming from Alex Perry from Bank of America. Alex, your line is live.

I just have one here. I just wanted to ask, can you talk about how you're thinking about gross margins in the third quarter? Should they be up year-over-year? And do you still expect a fairly promotional environment as we enter the back half? Like, I guess within the full year gross margin guide, what is sort of the expectation for promos in the back half? And any color on sort of 3Q versus 4Q gross margin would be super helpful.

Yes. As it relates to Q3 gross margin, we've not gotten down into specifics from our guidance standpoint, aside from providing revenue and operating income outlook. Having said that, we would expect gross margin to be up in the third quarter; we'll continue to benefit from the lower inbound freight costs. That should be a 300 basis point benefit in the third quarter. There's going to be some favorability as it relates to the region and channel mix as well with lower sales from our distributor business, which carries a lower gross margin. And so, there is an offset, however, and that's, to your point, in terms of what we're expecting from a promotional and clearance standpoint. So that's, by and large, offsetting a lot of that in the third quarter. And that's effectively as we move through this inventory through our outlets, we're more or less holding the promotions that you would see marketed. But as it relates to in-store and the aged or the excess inventory move through there from a clearance standpoint, those are marked down a bit more. And so that's essentially the offset that you see in the margin. And then the fourth quarter, we anticipate being up as well. It's really those same drivers that are going to be in play.

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

Thank you. There were no other questions at this time. I would now like to hand the call back to Tim Boyle for closing remarks.

Thank you very much. Thanks for listening in. Look forward to talking to you at the end of Q3.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.