Welcome to the Columbia Sportswear First Quarter 2025 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. 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 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, everyone. First quarter net sales and earnings exceeded our guidance range. Globally, our wholesale business was better than planned, driven by late season demand for winter products and early spring product shipments. Our business outside of North America, which represents approximately 40% of annual sales, remains strong. During the quarter, we generated healthy growth in nearly all of our international markets with double-digit percent growth in the LAAP region and high single-digit percent constant currency growth in the EMEA region. Before the April 2nd tariff increases were announced, our solid first quarter performance put us on track to achieve our full-year targets. I'd like to begin this call by outlining our view on global trade and our plans to mitigate the impacts associated with the recent U.S. tariff increases. Let me start by stressing the unprecedented level of public policy uncertainty that our industry is facing in the United States. We have been in business since 1938 and have navigated successfully through many incredibly challenging environments. But our industry has never faced a period where the rules and regulations around trade with the United States are simply unknown and unknowable. I have never been more excited than I am today about our brands, our strategies, and the overall strength of our company. We have a diversified supply chain and a team of experts with deep international trade experience. We began this year with a fortress balance sheet, healthy inventories, and building momentum in the Columbia brands accelerate growth strategy. These factors give me confidence in our ability to emerge from this period as a stronger company with an improved position in the marketplace. When the rules around trade are unknown, it's impossible for any company to predict with confidence what the cost of U.S. products will be, what the returns on certain investments in the U.S. will be, and ultimately, how the U.S. marketplace will be impacted overall. Quite simply, companies are unable to confidently plan and invest in their U.S. businesses until there is clarity with respect to U.S. trade policy. History has shown that tariffs are designed to raise the price of imported goods. In the U.S., well over 90% of all apparel and footwear is imported and is already heavily taxed under legacy trade laws. The additional 10% universal tariff is on top of already existing high duties. The magnitude of the additional proposed country-specific tariffs has the potential to profoundly impact our industry and significantly raise prices for U.S. consumers. For many consumers, the affordability of apparel and footwear will increasingly become a household issue. This will be further exacerbated if higher tariff rates go into effect. To date, we have taken several actions. Prior to the April 2nd tariff declarations, we domesticated all on-hand U.S. inventory through our own long trade zone distribution centers, saving us millions in potential tariff funds. For products that are impacted by the reciprocal tariffs, we are accelerating shipments to the extent possible in order to receive products during the 90-day tariff window. Because it's not practical at scale nor affordable, we do not intend to utilize airfreight as a solution to accelerate inventory receipt. China remains a strategically important country for us, and we intend to continue leading its opportunities for increased product creation and manufacturing in China, not only for our China direct business but for other markets around the globe. We have very little direct exposure to tariffs on products from China; a low single-digit percent of our finished good products imported into the U.S. are manufactured in China. Given the exorbitant tariffs on these goods, we will be diverting the vast majority of this product to other markets where it can be sold profitably. While much of our fall 2025 product has been ordered and sold, we are rationalizing inventory buys where possible to reduce the risk of excess inventory in a challenging environment. We're also taking actions to restrain discretionary spending and where appropriate, positive capital investments in the U.S. until we have clarity. For fall 2025, we're focused on maximizing our marketplace opportunity. We're working with our retail partners to deliver value to consumers and keep inventory and dealer margins healthy. As a result, we expect to absorb much of the incremental tariff costs in 2025 at the current incremental 10% universal rate. For 2026, we're contemplating strategies to offset the impact of higher U.S. tariffs on our business. We have a team of experts exploring possibilities to mitigate the impact of increased tariffs, including redesigning, redeveloping, resource allocation, and repricing products among other mitigation factors. Overall, we're taking a multipronged approach to managing the business during this period of uncertainty. On one hand, we're taking decisive actions to preserve capital and to mitigate the impact of higher U.S. tariffs. On the other, we believe that our brands and strong financial position can enable us to gain market share. The Columbia brand's exceptional value will be a competitive advantage in this period of rising prices for U.S. consumers. As part of the Columbia brand's accelerated growth strategy, we remain committed to increasing our investment in demand creation to bring our new highly differentiated marketing campaign and enhanced product assortment to life. We have a long history of irreverent, entertaining, and downright hilarious brand advertising, often featuring Gert herself. Columbia's marketing has always been distinctive from the rest of the outdoor category. In recent years, that has been less present in our markets. With the Columbia Accelerate growth strategy clearly defined, this is the moment to embrace our roots and write a new chapter for our iconic brand. Starting this August, we will begin to roll out our new global marketing platform that will be the Columbia brand character and voice for years to come. We will scale our new distinctive voice through our full funnel strategy with greater emphasis on a consistent year-round share of voice in the market. Not only are we planning to invest more in marketing, we're also leveraging modern digital and social-first strategies to be more efficient and effective with our demand creation investments. In this period of tariff turmoil, we have the opportunity to set ourselves apart. Turning to our financial outlook. Given the heightened uncertainty regarding tariff rates and the impact this will have on product costs and consumer demand, we are withdrawing our full year 2025 outlook. With that said, I'd like to provide some details on how we're approaching the balance of the year. Prior to the tariff increases, we were on track to deliver our full year financial targets. For the second quarter, we anticipate net sales to grow 1% to 5% year-over-year. This is in line with the first half net sales outlook we provided in February. As of the date of this release, the incremental 10% universal tariff and the higher tariffs for China are in effect. Applying these tariff rates to the product that we have yet to receive in the U.S. for the fall 2025 season would add between $40 million to $45 million to the cost of sales as the underlying inventory is sold. Given our focus on delivering exceptional value to consumers and maximizing the marketplace opportunity, we do not expect to offset these higher tariff costs in 2025. Our tariff mitigation strategy will evolve in response to trade policy changes. We continue to make progress on our profit improvement plan and have identified cost savings and profit-enhancing opportunities beyond the $150 million three-year target we set out in 2024. We expect the U.S. market to be challenging in the back half of the year. Consumers will be paying higher prices for many of the goods they buy, and we expect this to negatively impact consumer demand. Our fall order book has not meaningfully changed since our call in February, but we anticipate retailers will be cautious with their inventory intake amid this uncertainty. As a result, we're planning our U.S. business conservatively to minimize inventory risk and preserve profitability. We haven't seen a meaningful change in trends in most of our international businesses, which were quite healthy in the first quarter. It's not possible to predict the extent to which U.S. tariff actions will impact international economic growth and consumer demand for our products globally. I'll now quickly review first quarter financial performance. Net sales increased 1% year-over-year to $778 million. Wholesale net sales increased 2%, while direct-to-consumer was flat. Gross margin expanded 30 basis points to 50.9% and SG&A expenses increased 1%. This performance resulted in diluted earnings per share of $0.75, up 6% year-over-year. Looking at net sales by geography, U.S. net sales decreased 1%. U.S. wholesale business was relatively flat. Spring 2025 shipments were up modestly. During the quarter, winter weather boosted late season fall product sales but hindered early spring season sell-through. In addition to weather, challenging outdoor category trends and consumer uncertainty affected seasonal demand. U.S. DTC net sales declined low single-digit percent. U.S. e-commerce net sales were down high single digits. We had an excellent winter clearance sale in February, but it was not enough to offset challenging market conditions. U.S. brick-and-mortar net sales were up low single-digit percent driven by contributions from new stores. We exited the quarter with eight temporary clearance locations, down from 28 in the fourth quarter. For a review of first quarter year-over-year net sales growth in international geographies, I will reference constant currency growth rates to illustrate underlying performance in each market. LAAP net sales increased 14%. China net sales increased low teens percent, led by strong e-commerce growth. Through our product offerings, marketing activations, and marketplace strategies, we're working to create a more premium Columbia brand experience for Chinese consumers. Building off the prior season's success of our transit line, we continue to expand our localized product offering designed to meet the unique needs of younger Chinese consumers and the growing outdoor market. This quarter, we opened our first high street store in China on Huaihai Road in Shanghai. This celebrates Columbia's deep heritage and drives consumer engagement through both online impressions and in-store events. We remain committed to investing in our business in China. Japan net sales increased mid-teens percent, benefiting from strong demand for late season and winter products with growth across all channels. Our localized product in Japan blends style, functionality, and performance to create wear-anywhere products. Our team in Japan has done a great job building successful franchises that resonate with consumers. Some local product highlights for this quarter include our sideline winter boots, updated waterproof footwear, and backpack offerings to support the back-to-school season. In May, we'll be opening a Columbia high street location in the center of Harajuku, one of the premier retail areas in Tokyo. I'm excited to see this premium expression of the brand come to life. Korea net sales increased low single-digit percent, aided by late winter weather. LAAP distributor markets were up low 20s percent, primarily reflecting robust Spring 2025 order growth. In both our LAAP and EMEA distributor markets, Omni-MAX footwear has continued to be an incredible success story, demonstrating our great product, marketing activations, and retail presentation. The Columbia brand is strong, and our partners are investing in retail door expansion. EMEA net sales increased 7%. Europe direct net sales increased high single-digit percent, with growth across all channels led by DTC stores. For Spring 2025, Europe's key marketing campaign positions Columbia as a leader in outdoor endeavors. The team is focused on bringing active consumers into the brand through local activations as well as social content. Across the European marketplace, our team is doing a great job evaluating the consumer experience with in-store marketing and brand-managed spaces in concept with strategic partners. Our EMEA distributor business was down slightly despite strong Spring 2025 orders, as the timing of shipments is more heavily weighted to the second quarter. Canada net sales were down 2% in the quarter, with sales down modestly across wholesale and DTC. Looking at first quarter performance of our brands, Columbia net sales increased 3%. On the product front, we introduced our lightest shoe ever, the Omni-MAX Konos Featherweight, designed to perform on the trail and in the city with adaptive cushioning, flexible support, and a grippy outsole. The incredible versatility of this product is being highlighted to consumers with a new footwear marketing campaign, 'Every Surface is a Trail.' Marketing efforts to promote Columbia's new running shoes include title sponsorship of a trail race series in Arizona, which draws elite runners from across the Southwest and provides our teams with the opportunity to engage with this important audience at the grassroots level. Our new Reign No Shine jacket was awarded Condé Nast Traveler's Best Overall Pick for Lightweight Raincoats. This jacket is designed to keep dry in the wettest conditions and features our OutDry EXTREME waterproof breathable membrane in a new matte finish. In March, Columbia partnered with KIF, a Japanese clothing brand, to create a custom outdoor-inspired collection. Each piece blends KIF's design aesthetics with Columbia's utility and outdoor functionality. Our popular PFG fishing line had several collaborations and collections this spring. Our PFG Earth series features popular South Florida artist Bentley and highlights original work inspired by Miami's graphic artists and local fish species. We activated this collection with an in-store event at Dick's Sporting Goods in Miami. For the Homestead-Miami NASCAR race, we ramped up PFG graphics inspired by the collection. During the quarter, we also partnered with Columbia brand ambassadors, Luke and Nicole Combs, to create their own collections. We collaborated with Nicole to create a PFG Special Edition of apparel and accessories designed to take her from the boat to the beach and beyond. We worked with Luke to create a PFG Special Edition Turkey Hunting collection featuring dense camouflage and premium field-ready features. These incredibly successful collections and collaborations validate Columbia brand's authenticity and connect the brand to regional consumers. I'd also like to congratulate the Columbia team for earning the top apparel and footwear brand score in Newsweek's America's Best Loyalty Program survey. Newsweek takes input from thousands of loyal program members to uncover which offerings consistently deliver the most rewarding experience. It measures customer satisfaction, perceived value, customer support, trust, and overall benefits. Columbia's greater rewards program delivers a meaningful portion of our DTC sales and is an important component of our overall consumer retention strategy. Well done, team. Shifting to our emerging brands, Mountain Hardware net sales decreased 14% in the first quarter. While full price selling was healthy across channels, we had lower closeout sales compared to elevated clearance activity last year. We remain committed to investing in the Mountain Hardware brand, including elevating our presentation at wholesale. For Spring 2025, we opened a handful of branded retail environments in the specialty outdoor channel. Initial sell-through trends have been promising at these locations, and we plan to open more. prAna's net sales decreased 10% in the quarter, reflecting challenging e-commerce performance and lower sales activity compared to elevated levels in the prior year. I remain excited about prAna's product and marketing direction. As we head into the fall season, new product collections and a refreshed brand image will be increasingly evident to consumers. During the quarter, we updated retail locations to better highlight key product franchises and elevate our brand story. Initial store performance indicates that prAna's improved product assortment and presentation at retail is resonating with consumers. SOREL net sales decreased 8%. The team is making great progress refreshing the product line with new styles like the owner sneaker and the Roman Clog, which have the potential to become important product franchises in the seasons to come. SOREL's evolution will continue into the fall season with new women's styles and expanded selections, high-energy collaborations, and refreshed brand imagery. In closing, Columbia Sports is a strong company that has weathered many challenges. We have an amazing portfolio of brands, decades of international trade experience, and a fortress balance sheet. I'm confident we have the strength to navigate near-term uncertainty and unlock significant long-term growth opportunities. We remain committed to 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 driven by our core values. That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, can you help us with that?

Certainly. At this time, we will be conducting a question-and-answer session. Our first question comes from Laurent Vasilescu with Exane BNP Paribas. Please proceed.

Afternoon. Thank you very much for taking my question and thank you Tim for all your thoughts on the tariff situation. It sounded from the prepared remarks that your fall order book did not meaningfully change if I heard correctly. I note, Tim and Jim, I know you're not guiding for today, but should we assume that wholesale for 2H should be similar to what you expected in early February, which I think was somewhere up low single-digits? And longer term – yes, sorry. And then second part of that question is just longer term, I believe there's a lot of private label offering in the U.S. that comes from China. Are there any opportunities to take market share near-term and longer term just because of the situation? Thank you.

Certainly. Well, again, the category headwinds, we really don't know what the consumer is going to be doing in the back half of the year. On the tailwinds, there's so much product that comes from China, both from private label and from smaller brands where we believe there's an opportunity for the company to gain market share and we'll be focusing on making sure that, as it's available to us, we are going to take advantage of it. We think that there will be an opportunity for us to grow the business from a market share perspective just based on what you pointed out as it relates to China’s shortcoming in deliveries to the U.S.

And Laurent, as it relates to the fall order book, as we took that through February and March, there were no surprises in the wrap up of that order book relative to what we reported in February. And as Tim noted, we've not seen any meaningful cancellations to date.

Okay. Thank you, Tim and Jim. And I appreciate that. I know it's hard in this volatile environment, but I appreciate that you called out $40 million to $45 million of incremental COGS based on the tariff rates as of today. Should we assume that kind of split between 3Q and 4Q? And clearly, I think you called out that you're not offsetting that with pricing for fall order books, but could you raise pricing starting for Spring 2026? And if that's the case, like how much would you raise pricing globally or just in the U.S.? Thank you very much.

Certainly. Well, I think our plans for Spring 2026, which are in flux right now, because we really don't know what we're likely to pay for things in Fall 2025, let alone Spring 2026. But again, we will be surgically viewing the business, and when the opportunity arises for us to either take market share by keeping existing pricing or offering some incentives, we'll be doing that on an almost ad hoc basis as we begin to take orders for the season.

And then, Laurent, as it relates to the $40 million to $45 million in tariffs, by and large, we would expect that to be in the second half of the year. We don't ship a lot of the very little fall merchandise in the second quarter. There may be a bit that goes out. And then that $40 million to $45 million, that's incurred or realized sort of P&L that underlying inventory sold. So there's the potential that you could see some of that cost actually hit in 2026 as we haven't shipped it or sold through our own DTC channels at the end of the year.

Very, very helpful. Last housekeeping question here. Just the midpoint of guidance for 2Q revenue. I appreciate that you're giving that to us tonight, but the 3%. Any color around how we should think about that by the key markets that you report? And if you're seeing anything in terms of near-term sentiment in China, because you've done very well over the last several quarters in China. So, I'd just love to get some color there. Thank you very much.

Yes, I mean, from an overall standpoint, the guidance range that we provided of 1% to 5%, the 5% was essentially in line with the prior outlook that we provided back in February. And keep in mind that from a wholesale standpoint, we had an order book for the spring season that we last reported on that contemplated a mid-single-digit rate of growth. So this is generally consistent with that barring anything significantly changing from a wholesale customer standpoint, which we've not seen to date. Aside from that, Laurent, we're assuming that the trends that we've more recently seen in the business, which includes our international businesses, continue to be healthy. So, our outlook would contemplate that, and we would expect to continue that across Europe and China, and then some slowness that we've seen in our U.S. direct-to-consumer business.

Okay. Thank you very much and best of luck.

Next question comes from Peter McGoldrick with Stifel. Please proceed.

Hi. Thanks for taking our question. You pointed to opportunity to take market share in the current environment. And I was hoping you could elaborate on those comments if that's a global consideration and given the level of consumer uncertainty, could you share your internal expectations for market performance in the various regions you participate?

Certainly, let me answer the first one. As it relates to market share, many of the companies that we compete with – and as Laurent mentioned, many of our customers that have private label businesses centered in China will have a difficult time importing products at all, maybe paying very high prices for those. And we see opportunities to take share from these smaller brands and also take share potentially from our customers’ business. That's the primary reason we feel confident that there's going to be an opportunity for us just based on our balance sheet. And the fact that, frankly, we have a very structured, well-established expertise in navigating tariffs globally. The U.S., well, it's a crazy time right now for tariffs, we navigate tariffs around the world and are quite good at it, so the opportunities for us to be successful when others are not should be quite good.

Thank you for that. And then I was hoping you could talk about your plans to support demand creation. Previous guidance had considered a step up to 6.5% of sales. I recognize that you're no longer – you've withdrawn guidance, but I was hoping you could talk about your level of commitment to growing demand creation relative to the prior outlook?

Yes. We intend to continue to spend at a higher level than we have in the past on projects and campaigns starting really in August of this year. And we think it's going to be quite good for the company for a couple of reasons. First of all, we're going to spend more. Second of all, we're going to be more efficient with our spend; we're changing strategically how we spend the money. And lastly, the campaigns created are very different. We'll have an opportunity to show you that, and you'll see much more of the company's marketing assets being distributed. But I think those three things will give us a very big leg up, especially in a time when competitors will not be able to be investing as heavily as we will.

And Peter, while we're not providing a full-year outlook, he will note in the CFO commentary that we've published, if you look at the SG&A analysis that's in there. Our marketing spend as a percentage of sales for the first quarter was 6.4%. So, that's somewhat indicative of that intent that we've got in terms of putting more dollars behind marketing and the ACCELERATE strategy.

All right. Appreciate the perspective and I look forward to the advertising campaign.

Next question comes from John Kernan with TD Cowen. Please proceed.

Good afternoon. This is Krista Zuber on for John. Just first on the SG&A cost savings. On the last call, you really spoke to achieving sort of the $90 million in cost savings for 2024. And you're now tracking, I believe, the 8-K suggested roughly $150 million annualized for fiscal 2025. What have you since identified in your cost structure review of potential areas that's driving this spend reduction? And ultimately, kind of what do you view with the optimum SG&A rate longer term for the company, excluding the current period? Thank you.

Yes, Krista, this is Jim. Yes, so what we described, the $150 million, keep this in mind, those are annualized cost reduction plans that we've got to encompass both what we set out and we achieved in FY 2024 so the $90 million and then the incremental amount that we intend to execute on this year that would bring that cumulative amount up to the $150 million by the time that we exit this year, by and large, is reflective of the components that we've described so far in terms of operational cost savings. We've described some work that's going on within our supply chain, that's encompassed distribution costs and whether that be third-party logistics and distribution savings that we achieved in the last year, including labor optimization. There's automation efforts that are ongoing. We did execute a reduction in force last year. Certainly, that's also on the table in terms of factors that we need to consider for the balance of this year as well. And then, in addition to that, all forms of other spending, including capital spending; we're scaling back on that a bit in the U.S. given the uncertainty of the trade environment that we're operating in and all other forms of discretionary spending. So we feel like we've got a good beat on achieving that $150 million as we exit this year. To your question regarding the longer-term goal here, without getting down to specifics on this, certainly, our expectation would be that we make progress towards driving leverage in our SG&A and pushing that back in the direction where it has historically been, as well as in the case of our operating margin and seeing our operating margins return into the double digits and beyond. But it's going to take time given the uncertainty of the environment that we're operating in here today.

Thank you for that. I have a second question regarding China. The improvement in your business there has been quite encouraging. I would like to hear more about what you are observing in that market. I believe you reported low teens growth in constant currency in Q1. Can you elaborate on the recent trends, particularly the positive developments in the outdoor category, and how these factors are influencing your outlook for the remainder of this year and the long-term potential in the market? Thank you.

Yes. So, I mean, it's good to remember that we are quite small in China compared to many of our competitors. So the opportunity for us to grow rapidly is significant. The expansion opportunities are also good as well because there's an established retail operation there with not only our own stores but stores that our customers would operate under our franchise agreement. The outdoor market is strong there. The brand is strong, and we're seeing lots of opportunity for expansion. We're also going to continue to invest in localized design and production, which we believe can give us an advantage against many of our competitors.

Thank you.

Next question comes from Mitch Kummetz with Seaport Global. Please proceed.

Hi thanks for taking my questions. Tim, as you think about the consumer or maybe some of your wholesale partners, have you seen any preemptive buying or any pullback in spending? And then also maybe just from a top – well, as far as sales and margins, what is your kind of FX outlook? How has that changed given what we've seen with the dollar over the last – since you guys last reported?

Yes, I can take the FX portion of that, Mitch. We're not providing a full year outlook here today. In terms of what's embedded in our Q2 outlook that we provided, I think it's on the conservative end of the range knowing that the dollar's weakened a fair amount. So, that should be a bit more of a benefit relative to what we anticipated coming into the year. But I can't speak to it any further than that on the full year, but I will back my comments at this stage.

Yes, I think for us, even though we're once or so into this tariff situation, our customers are looking to us for guidance on much of this. And unfortunately, we're not going to be able to do much other than tell them the company is strong, and they can rely on us from a balance sheet perspective. We will provide as much information as we can frequently. I was in touch with virtually every one of our major customers at a high level to tell them, here's our approach. We don't know much. But as we know, we will fill you guys in. We believe there is an opportunity to take market share from weaker competitors. The consumer, I think, clearly is keeping an eye on what's going on, and we've seen that across all different kinds of commodities. So again, it's just too difficult to be speculative right now.

And then as a follow-up, you guys mentioned that there hasn't been any change to the order book. But Tim, I think you said that you expect retailers to be cautious. Are you going to be building the order book? Are you going to be pairing that back, assuming that there are some cancellations? And how are you thinking about your willingness to hold inventory? Are you more likely to pack and hold knowing that stuff that you have in inventory now you've bought at maybe a lower cost than might be available down the road?

Yes, we sold the bulk of this inventory back in November of last year. We bought it, and we have not received it yet. So depending on when the merchandise actually shows up, I think we've got something like half of our products with the new tariffs applied. But basically half of our inventories in the U.S. is here in-house. And we're going to continue to receive inventory. Hopefully, it will be at some reasonable tariff charge. But between a potential shortage from other vendors and our strong balance sheet, we believe we can be a provider of product as it's required to our retail partners and consumers for our own DTC business beyond where others will be able to provide that.

Yes, maybe just a couple of added remarks related to that. So, over the Fall 2025 season, we've purchased the lion's share of our inventory, which is in the 85%, 90-plus percent range of Fall 2025 that is in HOD. So certainly, the final buys we're making as we finish up the season, we are rationalizing those inventory purchases relative to any given number of scenarios from a demand standpoint. And with regard to holding inventory, we've had a strong preference in the past to ensure that we do that in the least disruptive way and profitable way of leveraging the fleet of outlet stores that we have. So that will be top of mind as we get to that point and we need to make those decisions in the latter part of the year.

Yes, we operate as a global business. To the extent we can move products around the world to take advantage of markets that don't have the crazy tariff implications, we'll do that.

Great. Thanks again.

Next question is from Paul Lejuez with Citigroup. Paul, please proceed.

Thanks guys. On that $40 million to $45 million of tariff pressure that you talked about in the second half, I'm curious if that already considers the sharing of some of the burden by your vendors or if that's an opportunity to work that $40 million to $45 million lower? And then second, can you just remind us your top three customers? And what percent of sales they represent within the host business? Thanks.

Yes, so as it relates to our vendors, we have a well-established grouping of large vendors to the company, which we consider to be partners, and we will work together to the extent possible to mitigate as much of this additional tariff cost that we can. It may not be through discounts; it may be through some other help that they may provide us on where we're shipping merchandise or shipping merchandise over a longer period of time, et cetera. So we consider the fact that we have strong relationships with the vendors to be another example of a high-quality company with a great balance sheet that can weather storms like this. And as it relates to our customers, we don't really provide top customers. We do not have a 10% customer. We have customers all over the globe. So, we think we're quite well set to await the storm.

That's the direct tariff cost to us on the universal 10% incremental tariffs for the Fall 2025 season.

In the U.S., we don't really know if it goes to 175% on every country in the world, it may be a different number.

And do you think that you have the success with getting the vendors to share in some of that burden?

Well, again, these are partners of ours. We will work together to do what we can in that regard. Moving in order to a different time, moving order to a different shipping location in the country. It's not the U.S.A.; there are myriad ways we can work together to help both parties move through this stormy period.

Thank you. Good luck.

Next question comes from Jonathan Komp with RW Baird. Jonathan, please proceed.

Yes, hi. Good afternoon. If I could just follow up to ask further on the China and the U.S. sourcing. It sounds like you're shifting a lot of that product. So essentially, you don't have exposure on that piece, U.S. sourcing this year. Could I just ask, will that also be the case going forward? Or is that just unique to the fall period? And then any risk from that that you see in terms of suboptimal assortments or any potential shortages here in the U.S. based on some of those shifts?

No. The company has been moving away from China for various reasons, primarily because it has become less competitive for sourcing the products we sell. We have successfully reduced our intake from China to a very low single-digit percentage. This year, we managed to lower that percentage further by reallocating products globally to maintain orders in our factories while still achieving profitable sales worldwide. I don't anticipate any negative impact on our ability to deliver high-quality products in areas outside of China. However, we will continue to manufacture products for local consumption in China and for markets where Chinese products are exempt from tariffs.

Okay, great. That's really helpful. And then one more follow-up just on the unmitigated exposure of the $40 million to $45 million this year. It looks like effectively that's more than a 300 basis point hit in the second half to your U.S. gross margin structure. Are there any other potential offsets you're contemplating for this year? And is that sort of a one-time step down? Or are you thinking about looking to recapture some of that next year depending on all the scenarios? Just trying to get to how you're thinking about that margin impact this year?

Right. Well, that's based on an assumption that the President does not increase the size of the current 10% additional tariff. So that's our assumption. That's how we're modeling the business; it’s just that simple.

And Jon, we believe it's a one-time issue. We're absorbing the lion's share of that $40 million to $45 million this year. Our belief and expectations is that next year, we would look to various decisions to absorb and recover any incremental tariffs we incur.

Okay, great. Best of luck. Thanks again.

Next is Paul Kearney with Barclays. Please proceed.

Hi, good afternoon. Thanks for taking my question. You mentioned that you're pulling in inventory during the pause period and rationalizing buys for the back half. Can you clarify if that is on a dollar basis? And can you talk about your expectations on the cadence of ending inventory for Q2 through Q4? And any details on region would be helpful.

Well, it relates to rationalizing inventory. That is looking at that both in dollars and units. And of course, we're not providing specifics on that. And as it relates to pulling in inventory, certainly, what we're seeking to achieve there is, knowing that July 9th and the risk of these incremental tariffs being put in place, we want to pull forward as much as we can from a production standpoint, being able to receive that inventory and pay the duties at the current known universal 10% incremental rate. So, to the degree we can work closely with our factory partners and their logistic partners, we're doing everything we can to pull that inventory in from that vantage point.

Great. Thank you. And then with regards to pricing, obviously, you're making the decision to not raise prices for the fall. Are you seeing other non-private label competitors take up prices? Or do you anticipate that they will in the fall? And is that potentially an opportunity to take further share?

Yes. I mean, again, I think we're more in the first reporting companies. But we know that many small competitors that we deal with, and also many of our customers' private label products, emanated from China. So those products, we believe, will be – if they're successfully imported into the United States, we believe we can easily compete with them, and our expectation is that we'll be taking share on that.

Yes, they're started a little known today in terms of what either our competitors or customers, private label, what everybody is doing with their own pricing. So that's to be determined.

All right. Thank you very much. Best of luck.

Next, we have Alex Perry with Bank of America. Please proceed, Alex.

Hi, thanks for taking my questions here. I guess just to ask sort of in a different way, the decision to pull guidance was that more of a factor of the uncertainty in the demand environment or cost environment? Like are you seeing volatile trends in DTC, in particular, that make it hard to predict? It sounds like the wholesale business is relatively stable with a similar view as the last time you guided. But what's sort of going on in the demand environment that makes it hard to predict? Thanks.

I'll just say this, Alex; what we're indicating to you, and we've provided a Q2 outlook that, by and large, is maintaining the prior first half outlook that we would have provided. Pulling the full year guidance, nobody knows. There are so many uncertainties with regard to how the consumer and retailer behave and act in the second half of the year for that reason. We've made the decision to withdraw the guidance, not to mention the numerous variables when you think about it from an overarching earnings standpoint. But we're not seeing anything today in the trend of our U.S. business, either from a wholesale or DTC business perspective, that would suggest a downtrend.

Yes, that's really helpful. And then can you just sort of remind us of sourcing penetration by country and where you have the most exposure as it stands today just as we're thinking about reciprocal tariffs? Obviously, there is the ability to shift. But as it stands today, where do you have the most exposure?

Yes, I just recommend, Alex, you look to our 10-K. It's pretty detailed; we just filed that a month or two ago, and it has all of the relevant data points that are included there. Obviously, we've provided quite a bit of clarity here on the call regarding our China exposure specifically.

Yes. And Alex, I would just point out that we believe we're among the most distributed from a sourcing perspective. So we have – we're sourcing from many, many countries, and we're quite adept at moving production around the world to take advantage of tariffs and specialties in certain markets.

Perfect, really helpful. Best of luck going forward.

Next question comes from Mauricio Serna with UBS. Please proceed.

Hey, good afternoon. Thanks for taking my question. I joined a little bit late, so pardon me if I ask something that you may have already answered, but first on the guidance for Q2, I know it implies like the first half is you're keeping the guidance stable. I just want to understand like for Q1, does that mean there was like some type of pull forward that happened there? And then on gross margin, on Q1, I see it was up 30 basis points. Was that like in line with your expectations? Or was there anything that would reprice you to the upside or downside?

Yes. As it relates to the guidance for the second quarter, the first half, we've held; we've widened the range out just given the risks associated with what's going on from a trade standpoint. There was our Q1 beat that was a combination of things. There is some pull-forward where we delivered slightly earlier on our Spring 2025 wholesale orders relative to what was in our outlook at the time. And then, to an extent, we also had some favorable cold weather in many geographies that helped aid in the top line. So, that gives you a bit of an overview on that. And as it relates to Q1 gross margin, it was only up 30 basis points for the quarter, and that's more or less in line with where we thought it would come in, maybe slightly under. There are no significant drivers one way or the other, but there are several items that have contributed to the improvement there. So nothing significant to call out.

Got it. And then just a quick follow-up. Just thinking about the guidance that you provided for the first half, you only talked about the sales outlook. Just wondering, given that the tariffs look like a second half impact, why not keep a full EPS guide for the first half? And with that in mind, I mean, should it still be fair to see a better gross margin expansion in Q2 relative to Q1 just given the much easier compares that you have?

Yes, I don't want to get into a ton of details on that. But suffice to say that the reason we haven't provided first-half or Q2 earnings is that there are far too many variables once you start getting down into the P&L. And whether that's tariff costs that you incur, there are a lot of unknowns with regard to the health of the retailer, and whether there's downstream bad debt risk that we need to book provisions on. There are just countless variables and outlook for any period of time right now that I would caution against, and that's the reason we haven't done it. We will provide updates along the way to the group again, but there's just too much risk out there right now, too many uncertainties.

Makes sense. Understood. And then very last, you said like $40 million, $45 million impact cost on the second half. So, is it fair to assume that the first half of next year, that number should just be lower because by that time you're implementing some mitigation strategies, right? I just want to clarify.

We have been focused on July 9th, but we are uncertain about July 10th and 11th. Therefore, it's challenging to project results for a large global business.

Thank you so much.

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

Thank you. Thank you for joining us today. We faced many challenges during the company's 87-year history, and every time we persevered and become stronger. I'm confident we can weather the storm and emerge with an improved position in the marketplace. So, we look forward to talking to you next quarter.

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