Greetings. Welcome to the Columbia Sportswear First Quarter 2024 Financial Results Conference Call. Please note that this conference is being recorded. I will now turn it over to your host, Andrew Burns. You may begin.

Good afternoon, and thanks 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 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 at our CFO commentary and financial review. Following their prepared remarks, we will host a Q&A period. During which, we will limit each caller to 2 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'm pleased to report that 2024 has started out broadly in line with our expectations. We are reiterating our full year net sales outlook while modestly raising our diluted earnings per share range. In this challenging environment, we continue to take a disciplined approach to expense management. Our commercial teams are working to maximize sales across all channels. Our fortress balance sheet enables us to take a thoughtful approach to unlocking the long-term growth and profit improvement opportunities we see across the business. During the quarter, we made meaningful progress on our top priorities. Our inventory reduction plan has yielded substantial benefits. Inventory was down 37% year-over-year exiting the quarter. I'm proud of our team's efforts to navigate the supply chain challenges over the last several years while generating healthy gross margins. We are now shifting our focus towards longer-term supply chain goals, including improving inventory turns and enhancing the speed and efficiency of our operations. Growth is vital for our success. We are implementing strategies across the portfolio to accelerate the business. For Columbia, we're focused on bringing younger active consumers into the brand through a reinvigorated product line that further emphasizes innovation, performance, and style. On the marketing front, we're targeting a more balanced full-funnel approach to drive consideration from new customers. We are also focused on elevating our product assortment and enhancing our in-store retail presentations across all channels. We have several proof points across the globe that this strategy is successful. We've driven meaningful growth in recent years in China and several markets across our Europe-direct and distributor businesses. We know that when we target the right consumers with our innovative products, we win in the marketplace. In our emerging brands, we have new leaders at SOREL and prAna formulating the brand and product strategies that fuel their next phase of growth. Mountain Hardwear has strong momentum from its recent brand refresh, and the team is thinking bigger as they map out paths to meaningfully scale the business. Turning to our profit improvement program. We're on track to deliver between $125 million and $150 million in savings by 2026, including $75 million to $90 million in cost savings this year. We are eliminating expenses associated with carrying excess inventory and driving cost efficiencies throughout our supply chain. We've also begun realizing indirect spend savings. During the quarter, we completed a reduction in force. It's never easy to lose valued members of our team, who have contributed to our company during their tenure. Our teams handled this process with respect and thoughtfulness, consistent with our core values. We remain confident that our fortress balance sheet, differentiated brand portfolio, and strategies position us to reaccelerate growth and capture market share over time. I will now review first quarter financial results. Net sales decreased 6% year-over-year to $770 million. This exceeded the high end of our guidance range, primarily driven by the earlier timing of spring wholesale shipments. Direct-to-consumer net sales increased 3%, led by brick-and-mortar growth. E-commerce sales declined as we anniversary last year's promotional activity. Our wholesale business declined 14% year-over-year, primarily reflecting lower spring '24 orders. Gross margin expanded 190 basis points as lower inbound freight costs and favorable channel mix more than offset promotional activity. SG&A expenses were essentially flat as higher DTC expenses were offset by lower supply chain and variable demand creation spending. Diluted earnings per share decreased 4% to $0.71. And I'll now review first quarter year-over-year net sales growth by region. With this review, I'll reference constant currency growth rates. Overall, North America remains our most challenging market. We are facing several headwinds in this market, including consumers continuing to grapple with inflationary pressures, which is impacting soft goods demand. Traditional outdoor category trends are weak, particularly in footwear, and retailers are taking a cautious approach in placing future season orders. Outside of North America, we have stronger trends in several markets, including China, Japan, and our Europe-direct businesses. In the U.S., net sales decreased 8%, driven by mid-teens percent decrease in wholesale sales resulting from lower spring '24 orders. U.S. DTC net sales were down slightly. Across all channels, we experienced strength in January, fueled by favorable winter weather followed by softer trends in February and March. U.S. DTC e-commerce net sales were down mid-teens percent. SOREL.com was particularly hard hit in the first quarter, and the overall e-commerce environment remains challenging. Since late last year, we have been proactively managing promotional activity on columbia.com to help establish the site as the best expression of the brand. We know that our site is already an important destination for our younger active consumers. We want to ensure that when they visit columbia.com, they see our latest products and innovations with enriched brand storytelling. U.S. DTC brick-and-mortar sales increased high single-digit percent driven by contributions from temporary clearance locations, new stores opened over the last year, and, to a lesser extent, improved store productivity. In 2023, we used our fleet of outlet stores and temporary clearance locations to profitably liquidate excess inventory. This year, we will continue to leverage these stores to manage inventory levels, including PFAS inventory, and to drive sales as consumers seek out value in the marketplace. Latin America and Asia Pacific region, or LAAP, net sales increased 7%. China net sales increased high 20%, led by exceptional e-commerce performance across our platform partners. In fact, the team was proud to receive special recognition from TikTok this quarter as one of the fastest-growing outdoor brands on the platform. The spring '24 Transit line, our premium China-specific collection, is outpacing last year's sell-through and clearly resonating with younger Chinese consumers. We expect China to continue being one of the fastest-growing parts of our business in 2024. Japan net sales increased low double-digit percent sales benefited from increasing foreign tourist activity, which is helping to offset softer domestic consumer spending. Korea net sales declined mid-single digit percent. LAAP distributor markets decreased high 20s percent, reflecting a greater portion of spring '24 orders driven in the fourth quarter of last year compared to the first quarter. Excluding the impact of shipment timing, LAAP distributor sales were relatively flat. Europe, Middle East and Africa region, or EMEA, net sales decreased 6%. Europe-direct net sales were essentially flat as healthy DTC growth offset the impact of lower spring '24 wholesale orders. The Columbia brand continues to perform well in the marketplace measured by healthy DTC and wholesale sell-through despite economic and geopolitical pressures. This quarter, we expanded our popular Hike Society program into France, following its successful launch in the U.K. last year. As a reminder, we have Columbia Hike Society programs across several European and Asia-direct markets. This series of events allows young hikers to meet like-minded people to explore the outdoors and learn about the Columbia brand's technologies. To further strengthen Columbia's presence in the important hike category, we're continuing our exclusive partnership with Megamarsch. This year, it includes a series of 23 hiking events that take place across Germany, Austria, and Switzerland, each of them typically fielding over 1,000 participants. Our EMEA distributor business declined low 40%, reflecting a greater portion of spring '24 orders shipping in the fourth quarter of last year compared to the first quarter. Excluding the impact of shipment timing, EMEA distributor sales were down only slightly despite several markets being impacted by geopolitical conflicts. Canada net sales declined 11% as lower spring '24 wholesale orders were partially offset by modest DTC growth. Similar to the U.S., Canadian consumers are seeking out value in the marketplace, which is driving healthy performance at our outlet store. Looking at performance by brand. Columbia brand net sales decreased 6%, reflecting lower spring orders, partially offset by DTC brick-and-mortar growth. The delivery of our spring shipments is well underway, and we're excited for consumers to gain access to our newest product innovations. Our industry-leading cooling and sun protection innovations like Omni-Freeze and Omni-Shade Sun Deflector differentiate Columbia from the competition. This spring, we launched Omni-Shade Broad Spectrum Air Flow, offering exceptionally breathable sun protection with Omni-Wick evaporation for fast-drying next-to-skin comfort. We're also focused on reenergizing PFG with new products like the PFG Uncharted collection. This new assortment features a younger, more active fit, tech pack performance, and new fabrications. In footwear, we launched the Omni-MAX system which combines versatile cushioning, enhanced stability, and increased traction. Omni-MAX is available in a variety of hiking, trail running, and fishing styles. In our DTC stores, we supported the launch with in-store and window displays, helping to drive encouraging sell-throughs of higher-price point Omni-MAX styles like the Konos. I'm encouraged by the consumer response to several of the new footwear apparel offerings that I referenced. These are early indications that the Columbia brand strategies to attract new consumers and drive long-term growth are on the right path. We look to build on these successes in the coming seasons and years as we expand our consumer base. In February, Columbia's innovative spirit was on full display as our Omni-Heat Infinity technology helped protect Intuitive Machines' lunar lander on its historic mission for the Moon. Columbia Sportswear is a proud scientific partner of Intuitive Machines. Our thermal reflective technology helped protect the Nova-C lunar lander from the extreme temperatures of outer space. This partnership brings Columbia's technology full circle. We're sending a product to the Moon that was inspired by NASA's space blankets. The mission was featured in hundreds of media outlets, creating billions of impressions worldwide. We are proud to share that we've signed on to Intuitive Machines' next mission scheduled for later this year. In April, we partnered with Academy Sports and Outdoors to host a special Bubba Wallace meet-and-greet in Dallas ahead of the NASCAR race at Texas Motor Speedway. Both Columbia PFG and Academy have a long history with NASCAR, and this event created a unique opportunity to further connect Bubba's energetic fan base with our brand. The week was capped off with Bubba driving an Academy and PFG-wrapped car on his way to a seventh-place finish. As we have mentioned before, the wholesale channel remains a top priority for the Columbia brand. And we're excited to leverage our ambassadors to create brand heat with our key strategic partners. This spring, we launched our latest collaboration with a New York-based boutique featuring apparel, accessories, and footwear designed for outdoor camping. The collection blends functionality with style while appealing to a younger audience. Shifting to our emerging brands. As a reminder, our emerging brand portfolio sales mix is predominantly in North America, which is our most challenged market. The headwinds we outlined earlier on the call are evident in our emerging brands performance. SOREL brand net sales decreased 24% with challenging trends across DTC and wholesale. With new leadership now in place, the SOREL team is focused on revitalizing the brand, building a compelling product range, and driving long-term sustainable growth. I remain confident in the future of the SOREL brand. Mountain Hardwear is building on the momentum from its recent brand refresh. In the quarter, net sales increased 17%, reflecting earlier timing of spring shipments and DTC growth. The product line and brand positioning are on track. The team is focused on accelerating growth. prAna net sales decreased 4% with a decline in wholesale, partially offset by modest DTC growth. The prAna team remains focused on building brand awareness, refining the product assortment, and unlocking the brand's growth potential. We're encouraged by fall '24 orders and the potential to return to growth in the second half of the year. I'll now review our 2024 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. Looking to fall '24, our teams are continuously working to minimize any shipment delay resulting from disruptions we may see. At this time, delays appear manageable. The vast majority of our product line is expected to be delivered on time and in full. We are reiterating our net sales outlook of a 2% to 4% decline. While there are modest changes across our portfolio, our overall net sales expectations have not meaningfully changed. Gross margin is now expected to expand approximately 80 to 120 basis points to 50.4% to 50.8%. We were expecting modestly higher clearance and liquidation activity as consumers seek value, and we will continue to opportunistically work down inventory levels and maximize sales. The SG&A is expected to be 43% to 43.4% of net sales, leading to an operating margin of 7.7% to 8.5%. Our diluted earnings per share outlook has increased modestly to $3.65 to $4.05 driven by higher interest income, licensing income, and a lower share count. We expect strong operating cash flows of at least $350 million in the year. Overall, I'm confident in our team, our strategies, and our ability to achieve the significant long-term growth opportunities we see across the business. We are 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, omni-channel and global, and empower talent that's 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?

The first question comes from Bob Drbul with Guggenheim.

I guess, Tim, on my 2 questions, the first one is inventory is down. Was it 37%? Is this the leanest that you've run inventories and heading into a fall season? Can you just talk about sort of your comfort level with the composition and sort of how you're positioned for the rest of the year? And I guess the second piece is can you talk a little bit more around the European business, the order book, the trends, just the health of the business in Europe and what you're seeing and expect in that region specifically?

Certainly. We are very proud of the 37% reduction, especially considering the gross margin we achieved. This reduction came from effectively utilizing our outlet store fleet to manage our inventories. We believe there is still more potential for improving our inventory utilization. We have updated our inventory turns to about 3, and we see significant opportunities through the automation we currently have for estimating and actualizing our demand. There is more to come, and we believe there is still a lot of room for improvement in inventory management. This is close to our best performance, but we can still do better. The European business has been strong. I will be traveling there at the end of June to celebrate our company's 30th anniversary in Europe. While we occasionally hear from partners and team members that our brand is not widely recognized in Europe, I am really pleased with the visibility we are gaining through our global marketing initiatives, including the Hike Society and the lunar lander. I see great opportunities for us in Europe and believe we will continue to grow rapidly in that market.

The next question comes from Laurent Vasilescu with BNP.

I wanted to ask about the first quarter and the top line performance. In January, you mentioned previous positive weather conditions, but it seems that the weather became quite difficult for the outdoor category in February and March. I'm curious about the unexpected positive results compared to your guidance for February. Was there anything noteworthy on the international front? Did we see any sales that were anticipated for the second quarter coming in during the first quarter? Any insights you could provide would be very helpful.

Yes. The improvement was somewhat unexpected due to the January winter weather in North America. We had just experienced a very warm winter in the third and fourth quarter of last year. It was pleasing to see that the weather was suitable in January. Our business relies more on weather conditions than on economic factors, so when the weather is right, our performance excels. This significantly impacted our results, making the January numbers a pleasant surprise.

Laurent, I might add when we had our earnings call in February, we indicated that the upside that we were seeing from a weather standpoint through the month of January, that was reflected in our Q1 outlook. So when you look at the quarter, we're about $17 million better, I think, on the top line relative to the high end of our outlook. And you can attribute most of that to slightly earlier shipments in the U.S. business. We don't expect an upside. Most of the quarter, I think, was right in line with where we thought it would be in either shift. So just days, not anything of any meaningful nature at least at this stage.

Okay. Tim and Jim, that's super helpful. And then because as you mentioned, Tim, that it is weather-dependent because there was better weather, it came late, but it did arrive. How do we think about that in the context of the U.S. business guided down mid-single digits? I don't know if you have any comment about what your order book on the U.S. wholesale side and how it's shaping up in terms of maybe reorders, cancellations? I mean, it looks like you're calling for the U.S. business to be kind of flattish on the back half. Any comment there would be super helpful.

Yes. Well, remember, we take our order book primarily in November, December, and to a certain extent in January. So it reflects the mood of our retail partners in that period. It will have some additional inventory in the event that the weather is much colder than a normal early winter. But for all intents and purposes, we based this on an average winter weather year.

Laurent, maybe just to add in a couple of extra points. Our U.S. business, we'd contemplate that being down mid-single digit percent year-over-year for the full year. That's not different than where we thought we would be 90 days ago. And when you look at the wholesale business, the wholesale business will still be down in the second half of the year. That's more than, by and large, or partially offset, I should say, by the direct-to-consumer business through a combination really led by our brick-and-mortar business. So we continue to annualize new stores that have opened coupled with these temporary clearance stores that have been operating.

Excellent. That's very clear. My last question is a two-part question. Jim, could you comment on the adjustments to the gross margins for the year? Can you provide a range for what the second quarter gross margin might be? Additionally, regarding the $75 million to $90 million in savings, how should we consider that over the upcoming quarters? Did you recognize anything in the first quarter, and could the savings be distributed evenly across the next three quarters?

Yes, Laurent. In our CFO commentary that we published, we did provide some detail on our Q2 outlook. So we do contemplate our Q2 gross margin being down 190 to 230 basis points. That's, by and large, a reflection of a year-over-year comparative difference with some sales and inventory-related provisions that were onetime in nature and favorable last year that we're anniversarying against. If you set those aside, our gross margins in the second quarter are essentially going to be even to where we were last year. And then as it pertains to our profit improvement program, from an overarching standpoint, we're making great progress on that. And first and foremost, I'd say, with the great work that our operations and supply chain team and just collectively across the business that we've had in terms of getting our inventories back down into a more normalized level, that's certainly going to benefit the elevated carrying costs we incurred a year ago. In fact, our U.S. distribution third-party logistics costs next quarter, Q1, were down $10 million. We took some actions that Tim had referred to in the prepared remarks with regard to a reduction in force. That was executed late in the quarter, late March. So we would anticipate beginning to see the benefits of that until Q2. But we're very much on track in terms of being able to achieve that $75 million to $90 million that's built into our outlook.

The next question comes from Jim Duffy with Stifel.

I wanted to start on the U.S. market. Your comments on the U.S. remain quite silver. Can you speak to what you're seeing from the U.S. consumer activity early in the spring season, as you see spring begin in earnest in certain U.S. regions? Are there any signs of life to be hopeful? And then I'm curious how all this kind of relates to the outdoor category as a whole in the U.S. Are we getting any indications that the COVID hangover is lessening?

Yes. There are several brands in the marketplace today, and we are competing with many of them. They might have been overly optimistic in their business expansion. With our strong balance sheet, we are confident that we will be present when the situation stabilizes. Consumers are eager to enjoy outdoor activities again, and as I mentioned, the weather significantly affects our operations. A large portion of our sales comes from Mother's Day and Father's Day gifts, so we anticipate that these events will continue and become even more vibrant.

Tim, I would like to know about your efforts to attract new and younger consumers to the brand, specifically regarding the Hike Society initiative in Europe. It seems like you are pleased with the progress and traction it is gaining. Could you provide some insights on how you are successfully engaging younger consumers in the United States?

Certainly. Our PFG styles, which are among the newest segments of our business, have historically been quite generous in their sizing. As we introduce new components to our PFG line with more active fits, the response has been surprisingly positive. It seems that more people are engaging with the PFG styles in a more meaningful and robust manner. Additionally, with our footwear expanding to include trail running styles designed for a more active consumer, we are seeing a significant increase in interest. I believe there is a strong opportunity in this area, and we expect to keep developing and designing styles that align with these trends.

And should we expect Hike Society to come to the U.S.?

It is definitely likely. I mean, it's been a really sort of a global uptick. We have Hike Society across Asia and the European uptake was super, and it's certainly a candidate for inclusion in our marketing efforts.

The next question comes from Jonathan Komp with Baird.

Can I just follow up on the gross margin? I want to ask about the competitive environment. And I may have missed the reasons to take down the gross margin guide slightly for the year, just given the progress you've made on inventory. Could you share a little more perspective there? And just related to that, can you comment on the temporary stores? I think you're up to 44 in the U.S. Any way to size up how much volume that's driving this year or last year, just to give more perspective there?

Yes. I can start and then let Tim jump in and add some color. As it relates to our full year outlook and the revision we've made to the gross margin, there's some puts and takes in terms of our revenue, and it withheld the revenue constant with our prior outlook. But when you get into the underlying composition of it, there's been some shifts in parts of the business. We took down our SOREL outlook slightly. We took down our e-commerce business down slightly. The area of our business that we took up was in the case of our brick-and-mortar with our outlet and clearance stores, and we continue to operate those through the balance of the year. And so as a result of that change in the mix of our business and with an increased dependence on the outlet and clearance locations, that's effectively what's driving a portion of the margin coming down. And then as it relates to the temp stores, you saw in the quarter, we're operating about 44 stores. We're operating at just under 2% of sales, I think, in the quarter. And then for the year, it will be a light amount. It will be slightly above that 2% of sales. And from an overall profitability standpoint, these stores are contributing very little to the overall operating margins. But they're obviously a great vehicle for us to liquidate inventory at a much more profitable vehicle and less disruptive than going through the wholesale closeout or value channel.

Our usual practice for selling off-price merchandise has been to sell to T.J. Maxx or Marshalls, but those outlets are currently overwhelmed with inventory. Therefore, the most effective strategy for us was to sell directly through our temporary stores. As we've managed to reduce inventory at healthy margins compared to other liquidation options, we will start closing these temporary stores and return to our regular operating model. This approach allows us to effectively clear inventory without causing significant disruption in the marketplace, unlike a significant discount through our e-commerce platform.

Makes sense. Looks like a good brand move there. Just one follow-up on your Columbia brand for the year, the revenue of about flat globally. Could you just comment, it looks like you're assuming something positive, maybe mid-single digits in the back half? So I'm hoping you could maybe share the visibility that you see and maybe the key drivers as we think about Columbia and whether you're baking in benefits from some of the newer growth initiatives or if those have a longer tail?

Yes, regarding the full-year outlook, we're expecting to remain approximately flat. In the second half, we anticipate growth, particularly in the apparel category, while the outdoor footwear trends are still facing challenges. We expect those issues to continue in the short term, but we have strong confidence in our longer-term footwear strategy. The growth we are planning for the latter half of the year is partly based on our wholesale order book. For Columbia apparel, we expect modest growth in the fall '24 wholesale business, which is encouraging. Additionally, the brand continues to perform well internationally, and this will particularly benefit our brick-and-mortar operations as we expand our store fleet.

The next question comes from Mitch Kummetz with Seaport Research.

I guess my first question, just on the order book. I think when you guys reported 4Q, you mentioned that fall orders were down low to mid-single digits. I'm wondering if there's any change in that now that we're a little bit further into that process. And then also on the SOREL guide change, I'm just wondering if that's order book related. Or are you changing other assumptions around SOREL? And I have a follow-up.

Yes. The biggest change in the case of SOREL, more a reflection of what we saw in the e-commerce business in the first quarter in which the business had been down a bit more sharply than we had anticipated. And so with that in mind, it's been a tough environment. We revised the outlook down to reflect being down mid-20s. Obviously, we've got order book in hand for fall '24 that would also be indicative of those declines. And we've got new leadership in place and looking forward to the updates that they make to the brand, the product line, and really looking forward to reinvigorating growth. But it's going to take some time and obviously challenging in the near term.

Is the consolidated order book still in the low to mid-single digit range? Has that changed at all?

I think on a global basis, our order book for the fall '24 season is expected to decrease by a low single-digit percentage, around 1% to 2%.

And then just a second question on the gross margin. So you guys showed nice gross margin in the first quarter, but you expect to be down pretty substantially in 2Q. From a kind of puts and takes standpoint, what's the main reason for that big swing?

The main point I was mentioning relates to a previous question. In the second quarter of last year, we had some exceptional provisions concerning sales and inventory that positively impacted our gross margin. There were one-time adjustments last year that worked in our favor, which we do not have this year. Excluding those factors, our margins in the second quarter are essentially neutral. Looking ahead to the latter half of the year, we have planned an increase in our gross margin, which will primarily be driven by our improved inventory position. Even though we are still operating additional outlet clearance locations, the variety of merchandise available in those stores is better, and we anticipate this will contribute to a stronger margin outlook.

The next question comes from John Kernan with TD Cowen.

This is Alex Douglas speaking for John. My first question is about the gross margin factors for fiscal '24, particularly regarding the decreased inbound freight costs. I know you mentioned this in previous earnings calls, so I was curious about the timeline for when you will start experiencing those lower freight costs. Would it be reasonable to expect that by the end of the year, this could lead to either a neutral impact or a negative headwind?

Yes. The more meaningful impact that we've experienced each of the last several quarters as it relates to inbound freights coming off the highs in terms of what we're seeing in inbound ocean freight charges from over a year ago. And as you look back on our last 4 quarters, our gross margin has benefited in the tune of, on average, 300 basis points per quarter. Q1 was plus 200 basis points. So as we move forward from here, beginning in the second quarter, we would expect that to be far less of a benefit. Having said that, just given lower overall demand and supply being built overall, the freight negotiations that we're in currently would indicate to us that there's continued opportunity, where we see those freight rates come down a bit more but certainly not on the order of magnitude of what we've seen over the course of the last year.

That's very helpful. And then my next question was on one of your comments on inventory turns. Just more of a clarifying question. You mentioned the goal of 3x. Is that more of a long-term goal or end of fiscal '24 goal? Just if you can help clarify that for modeling purposes, it would be very helpful.

Yes. That will improve our inventory turns over prior periods. But to get to 3, which is a good goal for the company, and other companies achieve this, we believe is attainable, but it would be more of a long-term goal.

Yes, certainly not in 2024. Our expectation is that, while we don't want to provide a specific inventory forecast for the end of the year due to various complexities, we believe we will be able to manage inventory down year-over-year compared to where we finished in 2023. Therefore, we anticipate seeing improved inventory efficiency and better turnover rates.

The next question comes from Paul Lejuez with Citigroup.

Curious within the U.S. DTC bricks-and-mortar business. Can you maybe talk about how much of that business is being driven by traffic versus ticket? I don't know if you could share what comps were, excluding the additional temporary clearance locations. And just one point of clarification on those. Did you say 2% of total sales in the second quarter? That's what those represented? And then how many do you plan to have in the back half?

Yes. We see ourselves primarily as a wholesale company, so we don't disclose much information about our retail business's key performance indicators. However, I can share that overall, traffic has been strong in the markets where we're running outlet stores, and the conversion rates have been outstanding, indicating a high demand for our brand. Our main focus is on these temporary stores to reduce our inventories while maintaining high gross margins for the company. We aim to manage our suite of stores in alignment with our long-term inventory liquidation plans as we work towards achieving an efficient turnaround for our inventories.

Yes. And then just a follow-up point on there. You asked about the comps. And as Tim touched on, we don't provide specific retail KPIs of our business. Having said that, in Tim's prepared remarks, we did indicate that the growth from a direct-to-consumer brick-and-mortar perspective was a combination of the temporary new stores but also included productivity gains. So you can take away from that, that it's a positive comp, and some of Tim's comments with regard to traffic and conversion help contribute toward that. And then, yes, my prior comment was with regard to our temporary clearance stores, but those represented just slightly less than 2% of consolidated net sales for the first quarter. And on a full year basis, we plan for that to be slightly greater than 2%. But again, back to my point, these are modestly profitable. And as we think out to 2025, we begin to ramp down and exit out of the lion's share of these.

Got it. And then just one follow-up. Can you just give us an update on clearing through the PFAS product, where you are in that process?

Yes. We believe that by the end of this year, we will be virtually finished with PFAS products, and it will hopefully be a topic that's behind us.

Yes, we've made great progress. We feel good about being able to work through the balance of what inventory we do have. Most of which is already sold and allocated to a customer that we intend to sell through our own direct-to-consumer business. And to the degree there's excess that remains there, certainly, when you look at the clearance capability we have from an outlet standpoint, this is perfectly salable, high-quality inventory. We don't envision that being a challenge and being able to move through that profitably.

The next question comes from Alex Perry with Bank of America.

I wanted to ask about China actually. Can you talk about what's driving the outperformance there versus a lot of your peers? Is it strong new product reception? Are you doing any distribution expansion there? And then maybe just remind us on how the margins of the China business compare to the other regions?

Sure. Well, just as a reminder, we've been doing business in China for about 20 years, operating the business directly ourselves for near 5 to 6 years. And we underperformed there for many years. Even though we were first in the marketplace, we were underperforming. So when you look at our business by comparison to others, we're smaller. And the fact that we've turned the business around, it may have some outsized results when you compare it with the rest of the business. I would say that the bulk of the improvement is a function of just cleaning up our operations and making them much more relevant for the local market. We haven't really expanded our distribution. It's a great way, but we've been focusing on improving our monthly performance and store productivity by utilizing a number of different ways, including key retail operations as well as directly designing merchandise, which has been improved for the local market, more focused on the local market's requirements. And lastly, the management team that we have is exceptional. It's been really instrumental in making the business much better.

Yes. I'll just double down on Tim's talking points there. From a distribution standpoint, we're operating no fewer. In fact, we may be operating a door or two less than we were a year ago. So this is all coming through productivity gains within our existing store fleet and online dealers that we work with. And then one other follow-up point to your question, Alex, with regard to the margins in China. We'll provide specifics on it, but I can share that it's among the most profitable parts of our business from an overall contribution perspective, certainly far above the overall corporate operating margin.

Perfect. That's really helpful. And then I just wanted to parse out the DTC guide a bit more. I think sort of the implied guide for DTC brick-and-mortar is for it to be up quite a bit. I guess, what's the driver there? Is that just year-over-year door count? And then I think it implies some acceleration in DTC dot-com as you move through the year. Can you maybe talk about what would be driving that?

Yes, that's a great question. Regarding the brick-and-mortar aspect of the business, we opened new stores last year and have plans for this year, along with the temporary clearance stores we ramped up throughout last year. This year, you'll see the benefits of having those stores opened all year. For example, we operated 44 temporary clearance stores in the first quarter of this year compared to 8 last year, and we'll continue to see the benefits of that. Additionally, we are considering some productivity improvements. Last year, we dealt with excess inventory in our outlets, which limited the variety of colors available to customers at different times. This year, as we have a better assortment in our stores, we believe we can recover some revenue that we missed out on last year. That's the main focus for the brick-and-mortar side. Additionally, our international business, especially in Asia and China, will also contribute to growth. As for our e-commerce business, we expect some improvement in the latter half of the year. Last year, we made changes to our U.S. website, particularly around promotions, where we were very promotional earlier in the year. Moving into the latter part of the year, we've reduced those promotions to better reflect our brand online. This means that in the second half of the year, we will be comparing against a different performance level, which is incorporated into our outlook. Furthermore, we have been making strategic digital investments over the past few years, enhancing our membership program and working to personalize our website and marketing efforts. As we enter the latter part of this year, we expect to begin seeing positive returns from those investments.

The next question is from Mauricio Serna with UBS.

Could you discuss the sell-through you've observed in the U.S. and European markets? I'd be very interested to hear about that. Regarding the sales guidance, I noticed that you exceeded the midpoint of your Q1 guidance by around $30 million. However, your outlook remains largely stable, so I'd like to understand what contributed to that outperformance and where that might be balanced in the upcoming quarters. Additionally, if you analyze the SG&A, it appears to have decreased by approximately $10 million compared to the previous guidance. I'd like to gain clarity on the changes in SG&A relative to the earlier guidance, especially since you're maintaining the savings plan.

Yes. Mauricio, I can tell you that in the North America market, our sell-through is about an average year, where it is on an average year. So we're pleased with that. It looks like the liquidations through our stores and our retail partner stores are about on average. In Europe, they're slightly ahead of where they would typically be. So we're pleased with how that's performing, which looks like it's going to be a positive for us. You can carry on.

Yes, I can jump in on the other couple of questions. So first, as it relates to the Q1 revenue beat, that, Mauricio, is by and large earlier wholesale shipments. That can be days or within a couple of weeks different, so that's just a timing difference between the first quarter and second quarter. And hence, you're not seeing any changes to our full year outlook. So that came out of Q2. And then with regard to SG&A, there's slight adjustments that we're making in fine-tuning the SG&A forecast where we brought that down slightly. I think it's going to be a reflection of the efficiency of what we're capturing from a cost reduction standpoint and just being able to manage the business with discipline. So nothing of specific note outside of that.

Got it. And just a quick follow-up on the temporary outlet stores. Essentially, you're using them this year to clear out a lot of merchandise. But what will the approach be next year as you wind them down? Will it be gradual or all at once in Q1? I want to understand how this might affect consumer perceptions of the pricing in the company's stores.

Yes. The temporary locations are really going to be timed as a function of how effective we are at liquidating the inventory. So they're month-to-month, so I would expect that we'll be gradually closing these stores over the next really year, to the point where they'll virtually all be gone. Or there may, in fact, be one or two or some small number that are converted to permanent stores if we like their performance. But basically, these are established to help us liquidate that cloud of inventory that we had around 18 months ago.

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

Well, thank you all for listening in. We're excited about the potential for the business, and the future looks very bright. We will talk to you next quarter.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.