Columbia Sportswear Co

NASDAQ:COLM

Earnings Call Analysis

Columbia's Mixed Performance and '24 Outlook

Columbia Sportswear Company's Q3 call depicted a mixed performance, navigating industry headwinds with proactive strategies. The EMEA distributor business saw a high 80% drop due to the Russian market exit, but Canada's net sales rose 38% from strong direct-to-consumer (DTC) sales. The Columbia brand grew by 4%, buoyed by key innovations like Omni-Heat Infinity. The brand celebrated Disney's 100th anniversary with a fast-selling collection and will launch a Star Wars-themed ski line. SOREL, an associated brand, grew 9%, while Mountain Hardwear and prAna grappled with a 9% decrease and an 18% decrease respectively. Next year's first half could see low-double-digit wholesale declines, offset by DTC growth, leading to mid-single-digit net sales dips. The company strategizes for modest year-end margin improvements in 2024, trusting its capacity to tackle long-term growth.

Columbia Sportswear's Ambitious Product Innovations Amidst Challenging Market

Columbia Sportswear's third quarter of 2023 showcased diversified strategies poised to enhance brand presence and consumer engagement. Sturdy direct-to-consumer (DTC) performance and proactive expansion via 10 shop-in-shops with Intersport boosted Europe as a top market, despite anticipating headwinds. An 80% drop in EMEA distributor business due to missing Russian shipments contrasted with Canada's 38% rise in net sales from earlier Fall '23 order shipments and strong brick-and-mortar presence. Columbia's innovative Omni-Heat Infinity line and strategic partnerships, such as the Disney 100th anniversary and Star Wars collections, spurred consumer excitement and sales. Additionally, the brand's recognition grew through NASCAR involvement and award-winning Facet 75 Alpha footwear launch.

Fiscal Performances and Future Focus of Emerging Brands

The emerging brands under Columbia Sportswear, each carving out its distinct market segment, recorded mixed results. SOREL celebrated the Caribou Boot's 50th anniversary with positive early sell-through indicating a successful product revival. On the other hand, Mountain Hardwear faced a 9% decline in net sales due to a slump in Fall '23 wholesale shipments. prAna's 18% sales drop triggered strategic repositioning efforts led by new leadership, suggesting a commitment to reviving the brand's growth trajectory. These variances reveal a portfolio balancing prudent risk management with new growth avenues.

Financial Outlook: Anticipated Slowdowns & Forward-Looking Investments

Looking ahead, Columbia Sportswear braces for a 5% to 10% Q4 sales decline and modest total net sales growth of 1.5% to 2% in 2023. These conservative projections, factoring in a slower fall season start, are aligned with a forecasted Q4 diluted earnings per share between $1.93 and $2.18 and an annual range of $4.45 to $4.70. The company anticipates solid operating cash flow of $500 million in 2023, leading to normalized inventory levels. Notwithstanding near-term hurdles like market uncertainty and geopolitical tensions, Columbia commits to innovation - exemplified by the launch of Omni-Max and Omni-Heat Arctic technologies - and e-commerce enhancements. Bolstered by solid finances, these investments aim to navigate and conquer the anticipated first-half 2024 challenges, including inventory adjustments precipitated by the PFAS chemical phase-out.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings. Welcome to the Columbia Sportswear Third Quarter 2023 Financial Results Conference Call.

[Operator Instructions]

Please note, this conference is being recorded. I will now turn the conference over to your host, Andrew Burns, you may begin.

[Andrew Burns, executive]

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's third 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 2 questions, so we can get to everyone by the end of the hour.

Now I'll turn the call over to Tim.

[Timothy Boyle, executive]

Thanks, Andrew, and good afternoon. Third quarter results reflect a continuation of the trends we've experienced throughout 2023. Our international markets continued to outperform the U.S. Within our DTC business, brick-and-mortar stores are performing better than the e-commerce channel. Economic and geopolitical uncertainty remains top of mind for consumers and retailers. Overall, we generated 3% net sales growth in the third quarter. Canada, Europe Direct and China all delivered high teens percent or better year-over-year growth. In the U.S. retailers continue to take a cautious approach to managing inventory levels and placing orders.

Consumer demand for soft to us, including apparel, footwear remains weak. I'm pleased to report, the inventory exiting the quarter was down 16% year-over-year. Throughout the year, we've been executing on our inventory reduction plan. The combination of lower inventory buys shipment of all 3 orders and increased excess inventory sales in our outlet stores has yielded substantial progress towards our goal. We've done this while generating healthy gross margins, which is a testament to the evergreen nature of our products.

We have a clear path to achieving our goal of reducing year-end inventory by over $200 million compared to this year. As we head into our peak sales period, I'm excited about the brand activations in place for this holiday season. For Colombia, Omni-Heat Infinity continues to be 1 of the fastest-growing parts of our business and is prominently featured in our marketing campaigns this season. In addition to our innovative warming technologies, the Columbia brand is executing several colabs, including their recently launched hundredth anniversary Disney collection inspired by Disney market.

In the coming days, we will launch our latest Star Wars collection, featuring Luke Skywalkers iconic flight suit reimagined as a fully equipped ski collection. To promote the launch, we will be leveraging Columbia Brand Ambassador Bubble Wallace as well as a top Jedi Master. You'll be able to find the content on our social media channels. To celebrate the 50th anniversary of the iconic Caribou boot, SOREL recently opened 20 shop-in-shops at Nordstroms, featuring key fall styles and unique 3D SOREL polar bears created by local artists in each market. SOREL also recently opened a bold new Brooklyn pop-up store featuring exclusive styles and interactive brand experiences.

This fall Mountain Hardwear launched its Seatwildeir pass campaign, which reflects a comprehensive brand refresh. mountainhardwear.com has been redesigned and enhanced to bring the brand's unique identity to life. To celebrate the brand's 30th anniversary, North Harbor released a heritage collection seeing its most iconic styles. Mountain Hardwear also released a highly sought after co-lab with the iconic streetwear brand [indiscernible].

As you can see, we have a great lineup of brand and marketing activations plan to engage consumers and drive sales this season. We now await the arrival of cold weather. The last several weeks have been unseasonably warm, resulting in a slower start to the fall selling season. Based on third quarter performance and a more cautious forecast for the remainder of the year, we are lowering our net sales outlook. Despite this net sales reduction, our diluted earnings per share range is moving slightly higher reflecting a relatively unchanged margin outlook and a lower effective tax rate. I'll provide more details on our 2023 financial outlook and initial 2024 commentary later in the call.

I'll now review our third quarter financial performance. Net sales of $986 million were up 3% year-over-year. Net sales growth was balanced across our direct-to-consumer and wholesale businesses. Within wholesale, the approximate impact of timing shifts resulted in a $30 million benefit to net sales when compared to the third quarter of last year. This was relatively in line with our expectations heading into the quarter. Gross margin expanded 70 basis points as lower inbound freight costs and favorable channel mix more than offset our inventory reductions across both wholesale and DTC.

SG&A expenses increased 10%, primarily driven by expense growth across our DTC business, demand creation investments and supply chain. Diluted earnings per share decreased 6% to $1.70. I'll now review third quarter year-over-year net sales growth by region. For this review, I'll reference constant currency growth rates. U.S. net sales increased 5%. U.S. wholesale increased mid-single-digit percent driven in large part by on-time fall '23 shipments relative to late deliveries last year.

U.S. DTC net sales increased low single-digit percent. Brick-and-mortar was up mid-single-digit percent driven by the contribution from new stores opened over the last year as well as incremental sales from temporary outlet stores. The U.S. e-commerce net sales were down high single-digit percent. The online environment remains competitive and promotional. Latin America, Asia Pacific region or LAAP, net sales increased 4%. China net sales increased mid-20%, reflecting strong consumer demand across all channels. Our team in China has done an excellent job of driving engagement with consumers in new ways that are authentic to Columbia.

During the quarter, we introduced new fall styles to our popular transit product line or premium China-specific product collection. The transit line was prominently featured in our latest brand campaign in China, which included a new brand ambassador and in-person and online brand experiences. In October, we built an entire Columbia brand nature exploration experience at Shanghai's Grand Gateway model. The installation featured 4 specific sectors, each cloud, glacier and Jungle. Within each of these mitral climates, consumers were able to learn about Columbia's warm, dry, cool and protected innovations and experience them in action.

Our digital team brought the outdoors to consumers digitally by launching a Columbia brand virtual reality homepage on Tmall. This immersive outdoor visual experience drive great end consumer brand engagement on the site. I believe the investments we've made in China to elevate talent and drive operational improvements are yielding results. China is expected to be 1 of our fastest-growing markets this year, and we're well positioned looking into the future. Japan net sales increased low teens percent, aided by earlier shipments of fall '23 orders and DTC growth. This fall, our team in Japan is connected with consumers to reinforce our heritage through high collections and events.

We're also driving energy through locally relevant partnerships like the recently launched CoLab with Tokyo-based quoting brand teams, inspired by one of PFG's first products, the iconic multi pocketed fishing vest, the collection fuses technical fishing aspects with beam style. The launch has garnered promising preorder results and is generating extensive media coverage. Korea net sales declined low 30% as we continue to reset the business for long-term growth in challenging market conditions.

As we outlined on the last call, management is focused on several multiyear initiatives across talent, distribution, marketing and product. This process includes closing unprofitable doors and nonbrand-enhancing wholesale accounts as we work to elevate distribution. We believe these efforts will drive a deeper connection with consumers and fuel sustainable growth. LAAP distributor markets were down mid-teens percent, reflecting on-time fall '23 orders, which shifted the timing of sales into the second quarter.

Europe, Middle East and Africa or EMEA, net sales decreased 21%. Europe direct net sales increased mid-20%, benefiting from earlier shipment of fall '23 product and robust DTC growth. Direct-to-consumer performance was driven by the addition of 7 new brick-and-mortar doors over the past year as well as strong e-commerce performance. As part of our strategy to elevate the Columbia brand experience at retail, we've opened 10 new shop-in-shops with Intersport in France and Germany this year. These enhanced in-store displays secure space for the brand at an important strategic partner, while elevating the assortment presentation. Europe Direct has been 1 of the top-performing markets throughout 2023. Despite the positive momentum we're seeing, we anticipate external headwinds will be more impactful to growth quarters ahead.

Our VA distributor business declined high 80%, reflecting the anniversary of shipments to Russia as well as a greater portion of fall '23 orders shipping in the second quarter. [indiscernible] net sales were up 38%, driven by earlier shipment of fall '23 orders as well as strong DTC brick-and-mortar performance. Looking at performance by brand. Columbia brand net sales increased, including the benefit of earlier fall '23 shipments. This fall, Columbia's lead innovation story is Omniheat Infinity, which remains 1 of the fastest-growing parts of our business.

We're building on last year's momentum with an expanded assortment including a new Innovate [indiscernible] of late construction. [indiscernible], let provides enhanced performance with 2 layers of our, which helps block wind and traps arm. We are also expanding the assortment of Omni Helix, our disruptive polyfleece technology. Support across paid media, PR, social and e-commerce, including spots on Thursday night football and the first-ever NFL Black Friday game.

On the partnership front, we helped Disney celebrate their 100th anniversary with a new special edition collection, featuring Columbia gear inspired by vintage Disney [indiscernible]. Sell-through of this collection has been outstanding with key styles when we selling out. In the coming days, we'll launch our latest Star Wars collection, what I believe will be our most exciting yet.

Columbia and Lucas films, creative teams worked closely together to reimagine Luke Skywalkers iconic flight suit as a fully equipped ski collection. The styles incorporates [indiscernible] and as well as his passion for product creation can help accelerate Columbia's growth around the globe. Welcome back, Wendy.

Shifting to our emerging revenue. Sorel brand net sales increased 9%, primarily driven by earlier fall '23 shipments and higher wholesale closeout sales. This fall, the SOREL team is engaging with consumers and bringing products to life in new ways. The brand recently opened 20 shop-in-shops at Nordstrom to celebrate 50 years of the iconic Caribou boot and the launch of new Caribou X collection. Early-season sell-through at the shop-in-shops has been very encouraging. SOREL's new pop-up shop in Brooklyn includes an augmented reality experience where consumers can stand in front of a special mirror and see how they look at Sorel's unique styles. The brand also collaborated a singer Chole Bailey on an exclusive Caribou, that was only available for purchase at the [indiscernible]. Mountain Hardwear net sales decreased 9%, driven by fall '23 wholesale shipments, partially offset by DTC.

This fall, Mountain Hardwear is celebrating its 30th anniversary. As part of the celebration, Mountain Hardwear launched its SEC Wilder Fast campaign, which reflects a comprehensive burning refresh. mountainhardwear.com has been redesigned and enhanced to bring the brands unique identity, purpose and tone of voice to life. Mountain Hardwear also released a heritage collection celebrating its most iconic styles, including the exposure [indiscernible], wind stopper [indiscernible] and subzero down jacket. These products pay homage to the brand's early style updated with today's fit and fabric technology. Mountain Hardwear co-lab with iconic streetwear brands [indiscernible] featuring several co-branded products, including jackets, trousers and beanies as well as sleeping [indiscernible]. The collection quickly sold out and meaningfully boosted traffic to Mountain Hardwear website. [indiscernible] net sales decreased 18% in the quarter. The product team remains focused on repositioning the brand for growth in future seasons.

Brand President, Trisha Humala, is quickly assessing promise opportunities and charting of that unlock the growth potential. I'll now discuss our 2023 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentations for additional details and disclosures related to these statements. For the fourth quarter, we expect sales to decline 5% to 10%, reflecting the wholesale sales shift into the third quarter compared to last year, partially offset by modest DTC growth.

Our fourth quarter net sales outlook incorporates a slow start to the fall selling season we have experienced a more cautious view on sales trends for the balance of the year. We're forecasting fourth quarter diluted earnings per share to be in the range of $1.93 to $2.08. For the full year, we now expect net sales growth to be in the range of 1.5% to 2%. Inclusive of a lower tax rate assumption, we forecast diluted earnings per share to be in the range of $4.45 to $4.70. We anticipate strong operating cash flow of roughly $500 million in 2023 as our inventory levels normalize.

While it's early in our 2024 planning process, I'd like to provide some commentary on how we're thinking about the year ahead. I'm excited about the product pipeline and growth initiatives we have planned to fuel demand in 2024. For Spring '24, we launched Omnimax, our latest performance innovation in footwear. This new platform provides versatile cushioning, enhanced stability and increased traction for hikers, trail runners and [indiscernible].

In apparel, we continue to build out an industry lead folio of cooling and sun protection technologies. This spring we'll introduce Omnichape broad-spectrum airflow, offering exceptionally breathable sun protection with Omni with evaporation for fast-drying Nextoskin comfort. We will continue to invest in Omni-Free Zero ICE, our industry-leading cooling and moisture management technology. The sweat-activated cooling technology is featured in a number of styles and activity categories, helping to keep our consumers outdoor longer for all their pursuits. In our quest to find better ways to help humans to the outdoors, we look to nature to discover new innovations. For fall '24, we're launching an exciting new warming technology, Omni-Heat Arctic. This new [indiscernible] insulation system is inspired by how polar bears keep warm and extreme conditions. Omni-Heat Arctic starts with a translucent outer layer with less solar energy in. Heat has been transmitted to an insulation layer close to the body for maximum warm, mimicking the polar bare once cushion system to result in slightly high efficient ones boosted by solar power.

We're also investing in key franchises like PFG, I 1 the fishing and apparel category and remains the leader today. Through product enhancements marketing investments and reaching new consumers, we're focusing on expanding our leading role -- leading market share in the fishing category. To drive e-commerce growth and enhance the consumer experience, we're investing in capabilities for which content, increased personalization and optimize our membership program. We could make these types of investments during turbulent periods because of the strength of our diversified global business model and fortress balance sheet. We can invest in long-term growth opportunities at a time when financially constrained competitors cannot do so.

Even with all the exciting product and both initiatives planned for '24, we know there will be challenges, particularly in the first half of the year. Retailers continue to take a cautious approach to manage inventory levels and placing orders. Here's a slowing consumer demand as well as the persistence of higher interest rates create led economic uncertainty. The effect of these headwinds is most pronounced in the U.S. and we're starting to see similar conditions in which in our Europe direct markets in Canada, geopolitical unrest is adding to this uncertainty.

As previously communicated, we're phasing on price design with PFAS chemicals across our global product line in 2024. Our intent is to stop manufacturing any apparel or footwear with PFAS prior to our full '24 season. In the U.S., we anticipate some retailers will choose to destock the PFAS styles for the first half of the year before loading in the new styles designed with PFAS free chemistry fall '24. This transition is expected to impact the flow of wholesale business and how we and manage through existing inventory. We also expect our footwear business to remain challenged through the first half of 2024. Outdoor footwear category trends remained soft in inventories remained high.

Our Spring '24 order book reflects the culmination of these challenges. As a result, we expect our global wholesale business to be down by a low double-digit percent in the first half of the year. We expect this wholesale decline will be partially offset by continued growth in our global DTC businesses, resulting in total first net sales declining a mid-single-digit percent. For the full year, we believe generating net sales growth is achievable as retail inventories inventory levels normalize and retailers seek to restock products, designed with PFAS for chemical. In the environment -- excuse me, in this environment, our objective is to modestly improve full year operating margin. We plan to provide more detail on the '24 outlook when we announce fourth quarter results in February.

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're investing in our strategic priorities to accelerate profitable growth, create iconic products that are differentiated, functional and innovative, drive brand engagement with increased demand creation investments, consumer experiences by investing in capabilities to delight and retain consumers, amplify marketplace excellence that is digitally led omnichannel and global and empower talent that is driven by our core values.

That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, can you help us with that?

[Operator]

[Operator Instructions]

The first question comes from Bob Drbul with Guggenheim.

[Robert Drbul, analyst]

I guess, Tim, 2 questions that I have for you. I think the first one is, so when you think about the next few months of this -- the holiday season and sort of what upon us. Can you just like with the order book where it is your sell-in is where it is, can you elaborate a bit in terms of how you see inventories at wholesale, I mean at retail, your wholesale partners? And then I guess the second piece of this is when you think about your DTC business sort of in the fourth quarter but also sort of into '24, just how you're approaching it, given a lot of the headwinds that are out there and sort of some of the uncertainty? .

[Timothy Boyle, executive]

Yes. Thanks, Bob. Well, as you know, this year has been really about inventory management for the company. I mean that's been the focus for us. And so we're prepared to have a great fourth quarter. As usual, with Colombia, it's going to be a weather story. So we're expecting weather to be normal and Frankly, that's a global one. So we've got places it will likely be colder than normal and some places where it may even be warmer. But I would expect it. We planned the business for basically an average year. Our partners -- our retail partners are well set up.

We delivered earlier this year than we did last year. So our expectations are that we're going to have a solid sell-through bigger products for '23. As it relates to '24, we've basically been operating a business that we grew nicely with local talent or talent that's been with the company for quite some time. We've added a professional to help us run the business in a better way. David These, who we talked about last quarter. And our expectations are that as we continue to improve the way we operate DTC stores for the balance of '23 and into '24, we're going to see some quite outstanding results. Frankly, we're doing quite well with the existing fleet. We know we can only improve.

[Robert Drbul, analyst]

And Tim, as you think about the early spring order book, just any more color in terms of is pricing or anything in terms of -- is it all just sort of macro do you think that's impacting what you've seen from your wholesale partners at this point? .

[Timothy Boyle, executive]

Yes. Well, I think there's some -- for larger operations, more and American operations, there are concerns that they want to manage their inventory levels that contain PFAS out of their business inventories, and we want to do the same thing. So there's a certain cautiousness there. And the expectations, I think, are going to be quite good for the rest of the year. Our expectations are that as we continue to roll out these innovation and excel on these marketing activities that we talked about earlier today that we're going to have a solid year.

[Jim Swanson, executive]

Bob, I might add a couple of the factors that are contributing to that order book being down. Certainly, the outdoor footwear trend that we've seen this year and our business has been a little bit soft in the footwear category. That's holding back the order book. Tim touched on the PFAS transition, that's having an impact. And then to a degree, particularly with smaller customers that may have more liquidity constraints given the environment that we're operating in, that, that part of our business has been more impacted than when we look at certain of our larger strategic accounts.

[Operator]

The next question comes from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

Yes. Thanks I guess I wanted to ask, I think you mentioned at the end of your remarks, you saw some signs of headwinds merging and Europe Direct and Canada. I just wanted to -- maybe you could provide more details into that? And then talking about the PFA impact on the wholesale order book, is there any way you can explain a little bit more like which regions should be more impacted maybe as I think about like maybe some regions have retailers who are farther along in that road into transitioning out of PFA? So that will be very helpful to understand as well.

[Timothy Boyle, executive]

Certainly, well, yes, we're seeing -- and as it relates to Europe and Canada, we're seeing similar constraints that Jim mentioned on the capital -- lower capitalized retailers that we have in those 2 markets. And again, the geopolitical disruption, including the war in Ukraine, specifically as it relates to Europe are having an impact. As it relates to PFAS, there's really all geographies in the world that will have a prohibition beginning in 2025 on PFAS. So it's possible to navigate these and sell product where these 2 -- where the products are prohibited. But large multi-state U.S.A. operations that want to have a common inventory across their entire fleet. Those are the areas where they're being quite cautious on building inventories.

[Jim Swanson, executive]

Yes. And then just to double back, Mauricio, as it relates to Europe and Canada. I'd also note, when you look at our third quarter results, consumer demand within our direct-to-consumer business in each of those geographies is still plus 20% in local currency terms. So from a consumer demand standpoint, still very healthy in most, if not all or close to all of our international regions where we're beginning to see some of that softness is looking out into the order book and just given the overall conservative nature of how retailers are placing orders at this stage.

[Mauricio Serna Vega, analyst]

Got it. That's super helpful. And I guess, just very quickly, when you talk about the -- in your presentation about the number of stores. Just want to make sure, does that number include the temporary stores that you're opening? And also, how long are these convert stores will be operational? Just, I guess, I mean the purpose of it is to get real excess inventory. So I just want to make sure like how should we think about those stores once -- now that the teams have pursued a good place. .

[Jim Swanson, executive]

Yes, temporary stores are not reflected in the store count that we provided. And we haven't provided those for a variety of reasons. These come in all different forms and shapes and sizes. And so they're really not comparable to looking at the existing store fleet. So that's why the store count is not included. We've begun to extend certain of those leases through much of next year knowing that we saw work to do in terms of getting our inventory cleaned up as much progress that we anticipate making by the end of this year, there's still continued efforts next year, coupled with, I think, the point around some of the PFAS inventory, certainly to the degree we have remaining unsold PFAS inventory, we would look to move that through our outlook that a profitable in a profitable manner similar to what we're doing this year.

[Mauricio Serna Vega, analyst]

Got it. I start very quickly. What are the 2 regions that you mentioned for the -- regarding the PFAS maybe I didn't hear it, but I just want to make sure that those -- what were those 2 regions?

[Jim Swanson, executive]

New York, California. Just those 2 states. Those are the only 2 states that require PFAS-free chemicals and the effective date of that regulation is January 1 of 25. So we have between now and then to work through the transition. We're well down the track on this. We'll -- or beginning with our fall '24 season, which we've commercialized and we're going to market on, that product no longer -- we've designed it so that it no longer has PFAS chemicals intentionally put into that product. And so we'll be working through next year as retailers destock any on-hand inventories they have and then restock into the new merchandise. That's going to create some of the challenges when you think about first half, second half from a rate standpoint because part of that first half order book is soft as retailers begin to contemplate what they need in inventory being that will sell down those PFAS styles. And then our expectation is that they'll eventually begin to restock into that as our fall merchandise becomes available in the market.

And to some degree, while this is specific to California, New York, we are making this conversions for our global product line. And so to some extent, while this is specific to New York and California, it does have a carryover impact into other geographies as they need to work through the same transition with all of their retailers.

[Operator]

The next question comes from Laurent Vasilescu with BNP Paribas.

[Laurent Vasilescu, analyst]

I wanted to ask -- sorry, I'm going to be the next person asked about PFAS, but I think Jim, you've been pretty clear about PFAS. You guys called it out at your Investor Day. I think you talked about it. It's in your 10-Q. You guys been ahead of the ahead of this, but what do you think are the implications? I know you can't speak to other companies, but what do you think the implications are for the industry? Where do you think you are in terms of phasing this out relative to the overall industry? Is this applicable to just outerwear? Or does it just go down all the way down to either the YKK zippers and this is more of a broad industry factor to consider?

[Timothy Boyle, executive]

Yes. So this is Tim. So just to be clear, PFAS has been around in thousands and thousands of products all the way from food containers to medical devices, which are implanted in a human body. So this is not just limited to outerwear. This is an endemic across all sorts of stuff, including furniture and anti[indiscernible], as you mentioned in the different thing. So these products are endemic and across all sorts of different products. I think we're well ahead. In fact, I know we're well ahead of many competitors, especially those who are smaller. So if we think about the size of our business and the amount of opportunity we have and capacity to accept additional expenses as it relates to understanding the chemistry, applying the chemistry to our products, et cetera, and then managing where these products go after January 1, '25 so that we don't run afoul of these issues.

We're well ahead. There are other smaller companies who are quite far behind it in some larger ones. So I think we're managing our business to the best we can. And I think we're -- we've got it well organized and I'm proud of what the team is doing to manage this process.

[Laurent Vasilescu, analyst]

Okay. Very helpful, Tim. And then maybe I might have missed this just because we're all juggling a bunch of earnings calls, but did you guys you talked a little about your spring order, the reflection of the challenges. Maybe can you just kind of put a finer point on that? Like how do we think about that for -- as we think about 1H? And is that reflective of U.S. wholesale challenges? Or are you also seeing that reflective of EMEA as well or other regions?

[Jim Swanson, executive]

Yes. We commented on [indiscernible], given the spring '24 order book that we've now fully taken, we anticipate our wholesale business globally be down a low double-digit percent. -- within that as you think about it from a geographic standpoint, knowing that the U.S. is where we've seen most of the softness and then you have some of the discrete activity that we're talking about on the conversion of PFAS. The U.S. wholesale business will decline at a faster rate than the overall global rate. To a lesser degree, are we seeing that in the case of our European business and then our Asia businesses we're actually still quite well performing.

Those in debit more D2C channels. Taking that outlook for our wholesale business being down low to double digit. And when we combine that with the expectation that our D2C business continues to grow in the first half of next year, we believe that from an overall standpoint through the first half of the year, our business is likely to be down a mid-single-digit percent. We're still very early in our 2024 planning processes. So we've not gone any further than that in terms of what that might mean from an operating income perspective. I would expect at least some pressure knowing that there's going to be -- the top line is going to be down to the first half of the year. And of course, it's too early for us right now to comment on the full year.

[Laurent Vasilescu, analyst]

Okay. No, that's helpful. And then maybe, yes, to your point, it's super early, but maybe you could just talk about just the degree of flexibility around the P&L, what could you do in terms of pulling back. I think you've got a 5% marketing spend. Anything that you would be willing to just -- are there no sacred cows kind of approach to hold the profitability for -- as we transition through this PFAS transition?

[Timothy Boyle, executive]

Yes, Laurent, I think I'd just like to make the comment that the company has been historically known as an incredibly conservatively run a very focused, efficient company. And I think you can expect that, that will continue, and that there are lots of levers for the company to use to manage our SG&A spend, and we'll be using every 1 of them to maximize the return for our investors.

[Jim Swanson, executive]

And not the least of which Laurent, as you'll recall, 1 of the areas that's impacted our P&L in a meaningful way this year is the elevated inventory and how that's added to our SG&A in terms of carrying costs and impacted our gross margin as well. So that is easily the top area that we're focused on getting those inventories back down and getting our labor productivity within our operations at a more efficient level because we know that, that can drive meaningful improvement in the operating structure of the business going into next year.

[Operator]

The next question comes from John Kernan with Cowen.

[Alexander Douglas, analyst]

This is Alex Douglas on for John. I actually just had a quick follow-up on something you said in response to the last question. As it relates to kind of the flow of those elevated inventory costs and what you might get back over the next couple of quarters, how should we think about the magnitude and the timing of that? Any additional color you could provide there would be extremely helpful.

[Jim Swanson, executive]

Yes, it's going to be difficult to provide specific guidance in terms of how we think about that in FY '24. What I would indicate is last quarter, we indicated that the impact of the elevated inventory on our operating profits here in '23, it's had about a 200 basis point impact on our operating profits. And that's a combination of SG&A with the likes of outside storage, labor costs and then, of course, the gross margin with the mix of excess product and SMU product that we do specifically for our outlets. And so there's a -- looking out to 2024, there is 200 basis points of improvement over time, whether to what extent we're able to capture all of that is dependent upon continuing to make progress on inventory.

I wouldn't think that we're going to get all of that back. And then certainly, there's so many other variables that play when we think about '24 from a profitability standpoint between revenue, other investments and other factors impacting the business. I don't want to get into magnitude and flow of what that could potentially look like.

[Operator]

The next question comes from Jim Duffy with Stifel.

[Jim Duffy, analyst]

A lot of questions have been asked already. I wanted to ask just about the trend that you're seeing in your outlet stores. And I'm curious how the stores are performing, given the mix has shifted towards clearance inventory versus made 4 product, so if you could comment on traffic and conversion in the stores, what you've seen thus far, that would be great?

[Jim Swanson, executive]

We still see nice growth coming out of our outlet channel. It's difficult to comment on the traffic side of things, in particular, only from the perspective of to the degree we've opened up, and in many cases, we've opened up temporary stores in locations where we have existing outlets. So there is some cannibalization, and we're only keeping traffic on the existing store fleet. So it's tough for me to answer that question because we know that there's some puts and takes across that.

But on the whole, we're still seeing in the quarter, we've seen nice growth in that brick-and-mortar business. I'd say that it's decelerated from an overarching standpoint, when you look at Q3 -- or sorry, Q1 to Q2 to Q3, but still driving nice growth in that part of our business.

[Operator]

Next question comes from Abbie Zvejnieks with Piper Sandler.

[Abigail Zvejnieks, analyst]

I understand that inventory is expected to be down over $200 million at the end of the year, but it seems like with the order book down low double digits for the first half, the goal will likely be to reduce inventory more. So what of that will be reducing inventory receipts, which I know you commented that you did versus how long will the impact of increased promotions way on gross margin?

[Jim Swanson, executive]

Well, we're still well on track to get that $200 million reduction in inventory exiting the year. Our primary focus there has been that should be less of a should be less of a factor as it relates to the timing of spring '24 inventory receipts in production. As we begin to lap spring '23 when we made progress with regard to the lead times within our supply chain. As we look forward, our supply chain has now caught up. So year-on-year, that really shouldn't be the factor. This is really much more a function of continuing to work through the inventory that we're carrying over from prior seasons in our fall '23 inventory and leveraging our outlets to profitably to that inventory here in the fourth quarter. And we've been -- we've been really pleased with the margins that we've seen as we've sold through that excess inventory in our outlets through the third quarter and into the fourth quarter here.

[Operator]

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

[Alexander Perry, analyst]

I guess just first, what are your current expectations for holiday? Do you sort of expect both you and the industry to lean heavier into promos during this holiday given what you're seeing from a consumer behavior standpoint? I guess how do you think the overall promotional environment will play out?

[Timothy Boyle, executive]

Yes, I think we can expect to be at sort of an average promotional year this year. Just to reiterate, Columbia's very weather-sensitive company in terms of our product offering, which is heavily weighted to outerwear and winter footwear. So that will be an important catalyst for growth and high margins as it relates to our company. And then you have to remember that Colombia is a global company. So we can't just look at the weather in North America, it's going to be important everywhere. So our expectations are that there's going to be an average weather year somewhere in the world and hopefully across the world.

[Alexander Perry, analyst]

Perfect. And then I just wanted to ask a similar question for sort of the puts and takes for 4Q gross margins? And then Jim, any sort of help on how we should start to frame calendar '24 gross margins? I know that freight has been a big benefit as we exited this year, offset by some heavier promos given the elevated inventory, just any color on sort of how we should be framing at least gross margins as we move through next year?

[Jim Swanson, executive]

Let me speak to the fourth quarter first. So our gross margins were up 70 basis points in the third quarter. We would expect our gross margin to be up slightly better than that in the fourth quarter. And it's essentially the same drivers that are going to underlie that. We know that we're going to continue to have or expect to have the freight benefits those freight benefits the last couple of quarters have been north of 300 basis points. We should see that same or similar benefit here in the fourth quarter. channel mix will be positive for us as we've got more of those wholesale shipments that we got out in the third quarter. So the business will be a bit more heavily weighted to our D2C business.

So combined, that's a pretty strong tailwind in the gross margin going into the quarter. The offset to that would be an increase in our promotional cadence, promotions and markdowns by and large, reflecting moving through that excess inventory through our outlets. So we feel good about the margin plans that we put for our margin in the third quarter came through a little bit stronger than how we planned coming into the quarter. So we think we're well set there.

Looking out to next year, I think the factors I'd be thinking about without getting into specifics, this inbound freight benefit that we've been seeing this year, that will carry through at least the first quarter of next year. That's probably about the time that, that would transition and be comparable for the balance of the year. The costing environment has generally been favorable as we've finalized our product costing for Spring '24 and fall '24. And with the favorable -- neutral to favorable costing environment, we by and large held pricing for a product line next year. So it should be net neutral to net positive.

And then, of course, we'll have some benefit. This is going to be the difficult -- the more difficult part of it to measure, but as we get inventories back down into more normalized levels and their balance on the full price close out or clearance activity that should provide a margin benefit. So now the challenge with that is going to be -- we need the top line as well to offset some of those margin pressures.

[Operator]

[Operator Instructions]

The next question comes from Jonathan Komp with RW Baird.

[Jonathan Komp, analyst]

I just want to follow up just to clarify on the PFAS topic. Did I miss maybe could you quantify the impact that you're talking about? Is that across sort of all product lines and all seasons? And then are you willing to sort of talk about the impact from destocking that you're embedding in the first half?

[Timothy Boyle, executive]

Yes. We're having a difficult time with the audio, but I think you're asking about PFAS. Is that correct?

[Jonathan Komp, analyst]

Yes. Hopefully, you can hear me. I was asking if it's really applicable to all product lines? And then are you able to quantify the drag that you're building into the first half commentary?

[Timothy Boyle, executive]

Yes. So the PFAS, as I said earlier in the call, is endemic across thousands of products. And so our are no exception. Many of our products contain PFAS and as we're building newer products and getting out of us, we're changing, and we don't intend to have any PFAS products that we're manufacturing after fall '24. So that's where we're headed. We've got a clear plan to sell the remainder of our PFAS inventory, almost all of it has been sold. And so we're expecting that the final liquidation will have minimal impact on the business in the future.

[Jim Swanson, executive]

And then, John, as it relates to the first half, it's exceptionally difficult to quantify the impact of what we're talking about from a PFAS transition perspective. There are so many other variables that are impacting the business. I -- we could even really estimate what that to look like. It's meaningful to as we took in our order book, it was a common conversation that we've had with our sales team with certain customers particularly in the U.S., but to some degree, it is touching on earlier globally as well because this is a change in our global product line.

[Jonathan Komp, analyst]

Okay. That's helpful. And 1 follow-up just on SOREL. If you could talk a little bit more about what's contributing to the lower growth outlook for this year? And as we think longer term, I know a year ago at Investor Day, you highlighted SOREL is having the opportunity to grow 20% or higher year in and year out and having a $1 billion revenue opportunity. So can you just maybe or we should be thinking about low single-digit growth this year for SOREL in terms of the broader opportunity and how you still see it?

[Timothy Boyle, executive]

Yes. We are still very bullish on the SOREL brand and the opportunities there is clear. I would say that the opportunity for us to continue to grow it into a year-round brand has been slightly more challenging than we thought. And so it's still dependent heavily on winter product, whereas as an incredible reputation. Our plan is to continue to focus on expanding with the seasonal nature of the products to take advantage of the incredible brand that Sorel has. We're also going to be expanding gender to get more men's product children's product in the offering. But right now today is still a very famous winter.

[Operator]

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

[Timothy Boyle, executive]

Well, we thank you for listening to us today, and we'll talk to you soon in February when we have results from our fourth quarter. Thank you.

[Operator]

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