The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward Looking Statements", Part I, Item 1 and Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, refer to Item 7 in our Annual Report on Form 10-K for the year ended
December 31, 2021for our discussion and analysis comparing financial condition and results of operations from 2021 to 2020.
We connect active people with their passions. We are a global leader in designing, developing, marketing, and distributing outdoor, active and everyday lifestyle products. We manage these products in two categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four well-known brands: Columbia, SOREL,
Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwearand prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in approximately 90 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada.
We are committed to generating long-term sustainable and profitable growth and investing in our strategic priorities to:
• Drive brand awareness and sales growth through increased and targeted investment in demand creation;
•enhancing customer experience and digital capabilities across all our channels and geographies;
•expand and improve DTC’s global operations with supporting processes and systems; and
•invest in our people and optimize our organization across our portfolio of brands.
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Table of Contents Notes to Condensed Consolidated [[Image Removed: colm-20220331_g1.jpg]] Financial Statements (Unaudited) Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term.
Business environment and trends
Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals in
the United Statesto spend an increased amount of time outside, including participating in outdoor recreational activities. While outdoor participation rates may not be maintained, we believe that our addressable consumer base worldwide has been expanded and expect outdoor participation to remain elevated in comparison to pre-pandemic levels. Casualization of the Apparel and Footwear Market | During the COVID-19 pandemic, we saw a move to casualization by consumers. Our products provide comfort and function in diverse environments. We believe we have benefited from this trend and expect it to continue to be a tailwind moving forward. Decreased Promotional Environment | In the first quarter of 2022, we operated in a low promotional environment and experienced fewer order cancellations, sales returns and customer accommodations than historically experienced. We expect these trends to remain favorable in early 2022 and expect a gradual return to a more normalized promotional environment and transition towards more normalized trading terms. For 2022, we do not expect these metrics to return to levels experienced in 2019 and prior years. Lean Inventory Across the Marketplace | Consumer demand acceleration coupled with supply chain constraints in 2021 resulted in lower inventory in the marketplace at the start of 2022. Given ongoing supply chain disruptions and the imbalance between global supply and demand, we expect marketplace inventories to remain low until supply chain constraints ease. In addition, retailers may choose to carry less inventory than pre-pandemic levels and instead rely on replenishments, to the extent possible. Changes in Consumer Spending Ability and Preferences | We believe government stimulus and unemployment benefits increased consumers' discretionary spending ability in 2021 and 2020. In addition, we believe we benefited as consumers shifted from service-based to product-based spending due to their limited ability to travel, attend entertainment-based experiences or purchase certain services. For 2022, we have experienced and expect to continue to experience a reduction of these tailwinds. Decreased Direct-to-Consumer Store Traffic | For the first quarter of 2022, the majority of our stores remained open. At varying times, government efforts to control the spread of COVID-19 impacted our stores in China. Overall, our global store retail traffic trends continue to improve, with our U.S.retail store traffic recovering to pre-pandemic levels in the first quarter of 2022. While store traffic is improving, we expect it to continue to remain uneven across our store fleet by region, depending on regional impacts of the virus and government efforts. Increased Freight Charges | In the first quarter of 2022, we experienced elevated ocean freight charges as a result of an imbalance of supply and demand for steamship and ocean container capacity and changes in our ocean freight sourcing practices. We expect our ocean freight charges to be reduced in the latter part of 2022. However, the imbalance in the marketplace persists and ocean freight costs will remain elevated compared to historical norms. Additionally, recent increases in oil prices have resulted in fuel surcharges from certain of our freight carriers that deliver product to our retail stores and to consumers. Later Inventory Receipts | During the third quarter of 2021, several weeks of government mandated factory closures in Vietnamdisrupted our manufacturing partners' operations and impacted production of Fall 2021 and Spring 2022 product. In addition, port congestion and shortages in transportation and labor further slowed the transportation of our inventory. As a result of these supply chain disruptions, we received Fall 2021 inventory later than expected, and continue to receive Spring 2022 inventory later than originally planned. We expect the supply chain transit time to modestly improve by late 2022. However, we continue to anticipate longer than historical transit times for inventory receipts and shipments to our wholesale customers and inventory available for our DTC businesses in 2022, potentially resulting in impacts to future net sales and gross margin. Manufacturing Capacity Constraints | In 2021, we experienced footwear manufacturing capacity constraints which prevented us from securing footwear product to fully meet demand. Although we are growing footwear manufacturing capacity in 2022, we again expect demand to outstrip capacity due to anticipated footwear sales growth rates. We anticipate being able to meet footwear demand with appropriate supply in 2023. Continued Labor Shortages | Labor shortages continue to be prevalent in the U.S.and labor costs have risen in an effort to compete for employees. We have made certain wage adjustments in an effort to be more competitive in the current environment and have diminished the effects of current labor shortages on our operations at this time. However, we anticipate rising costs and labor shortages to continue in 2022 resulting from the continued competition for talent. COLUMBIA SPORTSWEAR COMPANY| 2022 FORM 10-Q | 18 --------------------------------------------------------------------------------
Table of Contents Notes to Condensed Consolidated [[Image Removed: colm-20220331_g1.jpg]] Financial Statements (Unaudited) Increased Inflationary Pressures | Inflationary pressures, including increased inbound freight costs, impacted our results in the first quarter of 2022. In addition to increased inbound freight costs, we expect increased product input costs, including higher wages and raw materials costs, to impact our results throughout 2022. We implemented product price increases for our Spring 2022 season and, to a greater extent, for our Fall 2022 season. We do not expect planned price increases will fully offset gross margin pressure, particularly the effect of increased inbound freight costs. Price increases varied by market and product category. In the
U.S., on average, we increased pricing by a mid-single digit percent for our Spring 2022 product line and by a high-single to low-double-digit percent for our Fall 2022 product line. Over time, we anticipate ocean freight and raw material cost inflation will moderate, while wage inflation will be more permanent. Changing Geopolitical Environment | The macro-geopolitical environment has rapidly changed as a result of the invasion of Ukraineby Russian forces. We do not have any direct operations in Russiaand historically have operated in that market through a contract with a third-party international distributor on an advance order basis. As a result of the conflict in Ukraine, we paused taking any new orders from this distributor. The impact of the invasion is being felt not only in our relationship with our third-party international distributor, but also in political relationships throughout the globe. These political tensions have the potential to manifest themselves in certain regions where we directly operate. Changing Consumer Expectations | Consumer behavior continues to fluctuate. Consumer expectations and the related competitive pressures have increased and continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to provide forecasting of optimal inventory to meet customer and consumer demands. Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2021, over 60% of our net sales and over 75% of our operating income were realized in the second half of the year. RESULTS OF OPERATIONS The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Item 1 of this Quarterly Report on Form 10- Q. Allreferences to quarters relate to the quarter ended March 31of that particular year. Non-GAAP Financial Measure To supplement financial information reported in accordance with accounting principles generally accepted in the United States("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in foreign currency exchange rates against the United Statesdollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United Statesdollars at the exchange rates that were in effect during the comparable period of the prior year. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measure useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP.
The following discussion includes references to constant currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
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Notes to Condensed Consolidated
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Financial statements (unaudited)
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