Greetings. Welcome to Columbia Sportswear Company first quarter fiscal year 2019 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations. Thank you. You may begin.
Good afternoon. Thanks for joining us to discuss Columbia Sportswear Company's first quarter results and 2019 outlook. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and the assumptions behind our 2019 outlook. The CFO commentary is available on our investor relations website, investor.columbia.com. With me today on the call are President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Operating Officer, Tom Cusick, Senior Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief Administrative Officer, Peter Bragdon. Peter is not available to join us today. I will start off by covering the safe harbor reminder. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations.
Please bear in mind that forward-looking information is subject to many risks and uncertainties. Actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K and subsequent filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs. 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 non-GAAP results for 2018.
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 first quarter 2019 earnings release. 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. I'll turn the call over to Tim.
Thanks, Andrew. Welcome everyone, and thanks for joining us this afternoon. Building on the momentum we generated through last year, 2019 is off to a fantastic start. In the first quarter, we generated record sales, gross margin, operating income, net income and earnings per diluted share that exceeded our expectations. Given this early success and the favorable advanced 2019 fall orders, we have the confidence to increase our full-year revenue and earnings outlook. Overall, we believe our brand-led, consumer-focused strategy is fueling market share gains, and we remain committed to investing in the business to drive sustainable, long-term profitable growth. In the first quarter, sales increased 8%, or 10% excluding the effect of exchange rates. Earnings per diluted share increased 39% compared to non-GAAP first quarter 2018 results.
Sales growth was led by the Columbia and SOREL brands. We're encouraged to see anticipated Project CONNECT benefits materialize, helping to fuel a 210 basis point of gross profit margin expansion in the quarter. Regionally, U.S. sales grew 14% in the quarter, driven by mid-teens percent growth in DTC and low double-digit growth in wholesale, reflecting strong execution and brand momentum. Favorable winter weather helped our wholesale partners and DTC stores drive end-of-season fall product sales. We've also experienced excellent early sell-through of spring 2019 products. In our DTC business, brick-and-mortar store performance as well as mid-20% e-commerce growth exceeded our expectations. For my review of international markets, I will reference non-GAAP constant currency growth rates, which we believe best reflects underlying business trends.
Sales outside of the U.S. grew 3% in the quarter, led by growth across Japan, Europe Direct, Korea, and international distributors, while China and Canada sales declined. Japan's mid-teens growth in the quarter reflects the long-running success of the Columbia brand in that market. Japan's growth also benefited from the one-time impact related to a key customer business model change and a favorable shift in the timing of spring 2019 shipments. We expect Japan to grow mid-single digit percent for the year. Europe Direct generated mid-single digit percent growth in the quarter, with contributions from wholesale, new DTC doors, and e-commerce growth. Europe Direct is positioned to grow mid-single digit percent for the full year. We are pleased with our performance in the Korean market, generating low double-digit percent growth as the business continues to stabilize in a declining outdoor market.
We are encouraged that our 2019 guidance for Korea calls for mid-single digit percent growth, which would represent our second consecutive year of growth in that market. Our international distributor business was up low double-digit percent in the quarter, led by our EMEA distributors. Canada posted a 1% decline in the quarter but remains on track to generate mid-single digit percent growth for the full year. China sales declined high single digit percent as we experienced challenges across our wholesale channel that outweighed our DTC growth. To help reinvigorate growth, we're investing in our consumer experience with store fixture upgrades, full store renovations, and enhancements to our digital capabilities. As our new China GM, John Soh, immerses himself in the business, we look forward to sharing additional updates on our go-forward strategy.
While we expect a mid-single digit % decline in China net sales for 2019, we continue to believe Columbia's represents one of Columbia's largest regional growth opportunities. Turning to margin performance, first quarter gross margin was up 210 basis points to 51.4%, driven by Project CONNECT benefits, higher full price product sales mix in our wholesale channels, favorable foreign currency hedge rates, and higher DTC sales mix. SG&A expenses grew 8% compared to last year's non-GAAP SG&A expenses, resulting in SG&A as a % of sales of 38.5% compared to non-GAAP SG&A as a % of sales of 38.3% in the prior year. The biggest drivers of SG&A growth were planned investments to support our expanding global DTC operations, higher personnel expenses to support business growth and strategic initiatives, as well as higher demand creation expense. I will now review our performance by brand on a reported basis.
Looking at the Columbia brand globally, sales increased 9% in the quarter. This growth was achieved via strong DTC performance and wholesale growth in the U.S., reflecting continued market share gains. On the product front, this innovative spring 2019 rainwear and Omni-Shade sun reflective products are receiving accolades. In rainwear, "Backpacker" magazine named the Columbia OutDry Extreme Rain Jacket as offering the best protection among all shells tested in their 2019 gear guide, and Gear Patrol named it as one of their most innovative rain shells in their spring roundup. "Men's Journal" featured Columbia's OutDry Extreme reversible jacket in their article, "The Seven Best New Rain Jackets to Keep You Dry This Season." The Omni-Shade sun reflective PFG hybrid shirt was featured as the lead product in the "Salt Water Sportsman" magazine's 2019 annual gear guide.
Bass Angler" magazine featured the spring 2019 PFG Super Terminal Tackle shirt in their spring new product showcase issue. During the quarter, we continued to invest in demand creation to amplify these product innovation stories and create deeper connections with consumers. We highlighted several unique digital stories of Columbia athletes putting our products to the test. Recently, we followed China's Li Kuo and Italy's Katia Fori as they searched for terrain that will prepare them for one of the world's most prestigious trail running competitions, the Columbia-sponsored UTMB trail run that begins in Chamonix, France, and spans three European countries. Collectively, our UTMB sponsorship and content has generated over 160 million impressions since 2015. Last week, we released a new PFG digital story following angler Wesley Locke to Hawaii as she makes her first ever attempt to catch a mahi mahi offshore on a fly.
This multi-generational family story celebrates that fishing is all about the experience, and regardless of the catch, there's always something to take home with you. We look forward to sharing more compelling content and product stories like this on our recently launched PFG Instagram channel. PFG remains a unique sub-brand that differentiates Columbia year-round from our traditional outdoor competitors. For spring 2019, our PFG advanced orders significantly outpaced the brand average. Early season PFG sell-through has been exceptional. In the second half of 2019, we're planning to execute key city attack plans in New York City and Denver. We see tremendous opportunity to increase our sales and brand awareness in the Northeast, and New York City provides a global stage to highlight our brand. Denver is an ideal location to further amplify our brand presence in an important outdoor-minded market.
We look forward to sharing more details about these activations in the coming quarters. SOREL sales surged 28% in the quarter, reflecting robust growth across both wholesale and DTC distribution channels. Sales growth in the quarter benefited from sales of spring 2019 product, as well as strong sales of fall 2018 fashion styles. SOREL's ability to be a year-round fashion footwear brand is evident in the sales trend of our spring 2019 product line, including the expanded KINETIC sneaker line and the Ella and Joanie sandal and wedge collections. SOREL's fashion styles have done exceptionally well in the U.S., and we're starting to see the same momentum build in Canada with the sell-in of fall 2019 product. We remain committed to SOREL becoming recognized as a year-round fashion footwear brand globally.
Given the product successes and the tremendous opportunity ahead, we are investing in SOREL demand creation to build on this momentum. At prAna, sales declined 3% in the quarter, reflecting lower wholesale and DTC brick and mortar performance, partially offset by e-commerce growth. From a category perspective, women's pants as well as men's and women's tees and basics performed well in the quarter. We're investing in demand creation to grow brand awareness and continue to see large market opportunity for prAna. Mountain Hardwear sales declined 11% in the quarter, reflecting lower excess liquidation sales compared to the prior year. We're pleased to see growth in full-price wholesale sales in the quarter. Healthy advanced fall 2019 orders gives us confidence the brand will generate full-year growth. With clean inventory and compelling new product and marketing, we're excited to see what our reinvigorated Mountain Hardwear brand can achieve.
I'll now quickly review our balance sheet and cash utilization. Total inventory exiting the quarter was up 28% to $521 million. This is in line with the outlook we provided on the last call for elevated inventory growth resulting from earlier receipts of fall 2019 product to improve our manufacturing efficiencies. Based on current timing of receipts and deliveries, we expect inventory growth to peak in the second quarter before moderating by year-end. Our balance sheet remains extremely strong with cash balances of over $700 million exiting the first quarter. We continue to have no long-term debt. During the first quarter, the company repurchased approximately 200,000 shares of common stock for $19 million and paid $16 million in shareholder dividends. Exiting the quarter, we had approximately $317 million remaining under the current stock repurchase authorization.
Given the substantial investments we're making in our brand-led, consumer-focused organization, I'd like to provide an update on current areas of spending. On the technology front, we continue to move forward with Consumer First, or C1, our new retail platform, and Experience First, or X1, our new mobile experience. While we are continuing to work toward North American implementation of C1 in the second half of 2019, we are now working towards a phased implementation of X1, beginning with Europe Direct in 2019, followed by the launch of North America in 2020. The financial impact of these timeline changes is contemplated in the financial outlook we're providing today. We are also making strategic investments across our supply chain to enable growth, improve productivity, enhance service levels, and add capacity throughout our distribution and fulfillment networks. Before moving to guidance, I'd like to discuss recent changes to our board of directors.
First, I'd like to thank Ed George, who will be retiring from the board at the upcoming annual meeting. His support to the company has spanned over five decades, including more than three decades serving on our board. Without the support and counsel Ed provided as the company's banker in the 1970s, Columbia would not exist today. More than anyone, he encouraged and helped us to build, in his words, a fortress balance sheet that has enabled us to prosper through good and bad times. I'd also like to highlight two new additions to our board, Sabrina Simmons and Kevin Mansell. Sabrina, who previously served as the CFO with Gap Incorporated, brings a wealth of global retail experience and insight managing a multibillion-dollar global apparel business that will help inform our strategy during this period of rapid retail change.
Kevin, who most recently served as chairman, CEO, and president of Kohl's Corporation, will provide a unique and powerful mix of retail experience and wholesale perspective from his tenure leading and growing one of the largest department store chains in the U.S. Thanks, Ed, and welcome Sabrina and Kevin. I now would like to provide some detail on our upcoming 2019 financial outlook. Based on first quarter performance and the completion of our fall 2019 wholesale order-taking process, we now anticipate 6.5%-8.5% sales growth. Compared to 2018 non-GAAP results, we now expect gross margin to improve by approximately 80 basis points, with the largest driver of year-over-year improvement coming from Project CONNECT benefits. Given our accelerated level of investment in our strategic priorities, we expect SG&A to deleverage, resulting in flat to 20 basis points of contraction in operating margin compared to 2018 non-GAAP results.
This equates to operating margin guidance of 12.7% and 12.9%. Together with the benefit of full ownership of our China business, we expect earnings per share of $4.40-$4.55, up 10%-13% from 2018 non-GAAP results. For the second quarter, we anticipate mid-single-digit percent net sales growth and earnings per share of breakeven to a small loss. Please note, the second quarter is our lowest volume sales quarter. The timing of product shipments and expenses can cause reported results to be materially different than our financial outlook. You'll find more details on our Q1 results and 2019 financial outlook in Jim's CFO commentary furnished to the SEC on Form 8-K and published on our website.
In summary, we believe our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence from which we will continue investing in our strategic priorities to drive brand awareness and sales growth through increased focused demand creation investments. Enhance consumer experience and digital capabilities in all our channels and geographies. Expand and improve global direct-to-consumer operations with supporting processes and systems. Invest in our people and optimize our organization across our portfolio of brands. We're making these investments to enable sustainable, long-term profitable growth, make us a more efficient company, and drive market share capture across our brand portfolio and geographic regions. We'd be happy to entertain your questions for the balance of the hour. Operator, could you help us with that?
At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes on the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.
Hi. Good afternoon, guys.
Hi, Bob.
Hi. Andrew, you did an okay job on the safe harbor.
Thank you.
Okay. I guess, Tim, the first question I have really is, when you look at your order book, look at how the first quarter materialized, you look at your order book and what's really transpired. Can you give us conservatism around the risk that you see for the rest of the year? You're off to a great start, and I guess just from the order perspective and the order book that you see, how conservative do you view the rest of the year?
Bob, we've been at this for This is in our 21st year of being a public company. We've always tried to look at all the factors that are involved with guiding and we have lots of work to do throughout the balance of the year. We believe this is our best look at what we think will happen, and obviously, there's lots of puts and takes, and weather can be impactful. We just want to make sure that we've got all the variables collected, and we've given investors our best shot at the future.
Got it.
Bob Drbul, this is Jim Swanson. I might just add, obviously, as we came through the fourth quarter last year, a very favorable selling environment. As we've put the outlook together for this year, we've certainly taken a more normalized approach with regard to how we're thinking about the business, particularly in the fourth quarter.
Got it. I guess just on the inventories, can you just put a little meat around the components there and just to I think it clearly is how you guys said it would be, but just can you help us with a little bit more, I don't know, like the buckets on the inventory.
Yep.
What you see from that perspective as well?
Yeah. Let me frame this up, Bob Drbul. This is Jim Swanson. When we look at the underlying composition of the inventory increase, as Tim Boyle indicated, the lion's share of our inventory is really comprised of current season spring and current season fall inventory. Similar to what we saw at the end of this last year in which we received our spring 2019 inventory earlier in order to alleviate some of the manufacturing capacity constraints to drive some of the cost efficiencies that we're seeing in our margin from a Project CONNECT standpoint. You're effectively seeing that same thing here in the first quarter, in which we're much more heavily received in the production and timing of our fall 2019 receipts are falling into the first quarter. Then to a far lesser degree, do we see an increase in the aging and the excess our inventory?
As we sit here today with the levels that we do have, we're certainly comfortable with our ability to liquidate that through the combination of wholesale and the outlet channels that we have.
Got it. Okay. Tim, I just have a tough question for you. So with Kevin Mansell on your board, do you think your orders from Kohl's are gonna go up or down versus when he was running the sale?
We spent quite a bit of time onboarding Kevin, and the word Kohl's never came up.
Sounds good. Good luck with it. Thanks very much.
Thanks, Bob.
Our next question comes from the line of Laurent Vasilescu, Macquarie. Please proceed with your question.
Good afternoon. Thanks for taking my question. I think it was noted on the last call that Columbia and prAna should grow at mid-single digit rate, then Mountain Hardwear should grow at a double-digit rate. With the annual top line guided up, just curious to have updated thoughts on those numbers.
Yeah. We continue to see growth really across the brand portfolio. I think, as we look at both the first quarter results coupled with where we see the fall 2019 order book coming in, certainly a lot of strength out of both the Columbia brand and the SOREL brand. Columbia's probably tracking relatively close to the overall company outlook that we've provided. Certainly, SOREL is a standout, and as Tim touched on, while Mountain Hardwear brand is down in the quarter due to liquidation of excess inventory that we'd done in the prior year, as we look at the balance of this year, we would anticipate Mountain Hardwear returning to growth in a pretty meaningful way. With prAna, despite the Q1 decline, we are anticipating prAna to be growing on the year as well.
As important as it relates to Mountain Hardwear, that we recognize the turnaround effort is ongoing there. Really comparing against prior periods where we were in heavy liquidation mode does a bit of a disservice to the brand's underlying strength.
Okay. Very helpful. Then I wanted to follow up on gross margins. It was up nearly 200 basis points. I think you guys are guiding for about 80 basis points of expansion for the full year. How do we think about the change versus first half, second half? Then as it relates to gross margin, Jim, correct me if I'm wrong, but I think in your CFO commentary, it's the first time that it's called out that Project CONNECT is a benefit to your quarterly gross margin result. If that's the case, any sense of the magnitude? Was it half of the 200 basis point increase?
Good question. Certainly, as we look at the performance in the quarter, the 210 basis points of margin improvement that we achieved, well over half of that is Project CONNECT, that's the great work that the teams have done over the course of the last year and a half. That's encompassed the work we've done around assortment optimization, design to value, some of our retail-based initiatives. In the quarter, there's a handful of other things that are contributing to the margin expansion, including currency and sales mix and so forth. Certainly, as we look at the balance of the year and the full-year outlook of +80 basis points, the offset there, because we do feel like we'll have that continued strength from Project CONNECT throughout the year.
Back to the favorable selling environment and less promotional activity that we had in the fourth quarter of 2018, the outlook's really reflecting more of a normalized view on that fourth quarter. Then to a lesser degree, currency and our full price closeout mix were a bit of a tailwind in the first quarter. We would anticipate those having more of a neutralized effect when we look at the full year.
Lastly, I think on the last call, you guys called out China was about 60% of your 2018 revenues, I think equating to about $170 million. While the Winter Games in Beijing are still two years away, how do we think about the revenue side opportunities over the next few years for that business?
We think China can really be the largest single territory or geography for the company. There's enormous opportunity there, especially when you consider that the Chinese government would like to over-invest in the Winter Olympics. They're going to be opening something like 300 ski resorts for the local Chinese sports people to be involved in. We expect that over time, that will be a spectacular part of the business. We think in addition to the outerwear opportunities, there are very significant footwear and sportswear opportunities in China for the company. We need to get it right, and we're continuing to invest to make sure that that happens.
That's great. Congrats again on fantastic results.
Thank you.
Our next question comes from the line of Susan Anderson with FBR Capital. Please, Sue, with your question.
Hi, good evening. Congrats on another great quarter. I was wondering if maybe you could talk a little bit about your thoughts around pricing, with the Columbia brand obviously doing so well, particularly in the U.S., and the growth there and just the inventory being pretty clean. Is there opportunity to maybe start to grow up the prices there, versus where your peers are at?
Yeah, thanks. Well, we believe that as we continue to invest in our brand acceleration and demand creation, that we're creating more power for pricing for the Columbia brand. We've also seen the effects of the innovation that we've been so heavily invested in, which gives us the opportunity to sell products where we own the IP and can really highly differentiate our products from others. Examples of that would be obviously Omni-Heat in the wintertime, but OutDry Extreme, which is a brand new method of waterproof breathable construction, which is ours exclusively, as well as the sun reflector, Omni-Shade Sun Deflector product, which we developed in-house. These give us the opportunity for pricing power to improve our business. Now, we have a belief in the slots where our garments should be priced, and we try to maintain those slots as much as we can.
We believe there's continued power of pricing. Again, concentrating on the balance sheet for the company, we have the ability to invest in additional inventory and accelerating the inventories to arrive earlier to flatten out some of the peaks that have previously been in our construction schedules to give ourselves the opportunity to have a higher margin and for our factory partners to also make more money on the company's products.
Got it. That's helpful. Just one follow-up, maybe if you can talk a little bit about Europe. I think it was positive mixing will be just excluding the currency impact, maybe just your thoughts there. Are there any macro concerns or any slowdown that you're seeing given the macro? Also maybe if you could touch on Canada a little bit and the negative growth there.
Sure. Well, as it relates to Europe, we believe, again, a terrific opportunity geographically for the company. We're a small player in most markets in Europe, we believe that we have the opportunity pan-European to be a much bigger player there. There was some impact on Brexit with our results in Q1, as well as some of the activities of the Yellow Vest people in France, which is our biggest market. We should be growing faster there, in my opinion, that's what we ended up with. We have a great team in place and great products, we're anxious to see that business continue to grow. Canada had a tough first quarter. Winter weather impacted the sales of spring products a bit there. We believe, again, from a historical perspective, it's a terrific market for the company and one that we should do very well in.
Great. That's helpful. Thanks so much.
Our next question comes from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question.
Yeah, thanks for taking my questions. Tim, on the fall orders, I know when you reported last quarter, I think you were about 75%-80% complete collecting those orders. I would assume that you're done now. I'm just wondering if the order been changed much from last quarter to this quarter, if it got a little better.
Yeah, we have new orders every day and cancellations every day. In general, we had a good thumbnail on where we were going to end up at the last call. It's continued to strengthen and gives us the opportunity to be confident in the guidance we've given today. We're pleased with it. We believe we're gaining market share, again, we hope that the indications we have on pricing power are going to continue. We've got big investments planned for demand creation, that plus the unique product that we've had developed will be hopefully quite well received by consumers.
Got it. On Q2 guidance, I know it's a low volume quarter that makes it pretty volatile. I'm just wondering why Q2 2018 kind of isn't the new normal. You guys had a really strong Q2 last year. Was that quarter abnormally strong? If I recall correctly, there was some shift in sales from Q1 to Q2. I think May and June were really good months at retail last year. I'm just wondering if the reason you're guiding the way you are versus a pretty strong earnings quarter last year there, if that was just an abnormally strong quarter that's just really tough to lap.
Yeah, Mitch, this is Jim. Again, we'd emphasize, it's just such a small quarter. Any shifts from a revenue standpoint with relatively fixed cost base can create quite a bit of volatility from an overall profitability perspective. Yeah, as we look back on Q2 of 2018, there certainly were some timing shifts that made that quarter a standout after basically, I think, a decade of having losses in the second quarter. Certainly, we'd like to more consistently deliver profits in the quarter, nothing of concern as we look at our outlook for the second quarter of this year.
Got it. All right. Thanks for the luck.
Yep.
Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.
Good afternoon, and my congratulations as well. I just wanted to follow up on a prior question, just regarding the second quarter. Is that also potentially reflecting a higher rate of SG&A spend, and that's part of the reason why it's sort of a break-even kind of quarter, maybe lose a little bit of money? Just kind of curious about the SG&A cadence in terms of spending.
Yeah. No, absolutely, Chris. I meant to get to that when Mitch had asked the question. Certainly, as our business began to accelerate last year, as we commented on it, the reinvestment of a lot of the benefits we're earning from Project CONNECT, we've picked up that rate of SG&A investment. Certainly, that's impacting the Q2 of this year from an outlook perspective.
Okay, got it. Just on the benefits on gross margin related to Project CONNECT , I'm just curious. Q1, obviously, you saw a substantial improvement and reflected in the gross margin. Is Q3 also potentially the quarter where you can see a more material, maybe similar to Q1 in terms of that improvement, just based on sell-in of fall orders and fall product? Just kind of how do I think about where Project CONNECT could impact the quarterly results?
Well, I think the Project CONNECT impact, we should generally see that more consistently across each of the quarters. Any difference between first quarter and the balance of the quarter is going to be the other factors that are contributing towards those changes. Whether that's currency, which is a slight tailwind to the first half of the year and will become a bit more of a headwind in the back half of the year and the favorable selling environment that we talked from the fourth quarter. It's going to be more of those shifts. The Project CONNECT side of the benefit for both our spring and fall 2019 seasons, I'd anticipate a nice improvement in the gross margin on that basis.
Okay. Then Tim, for you, just last question here. You had really good success last year doing Houston and Chicago, sort of this kind of a key attack market. I think Houston was PFG, I think Chicago was more your fall winter product. Just as you think about Denver and New York for this year, anything you plan on doing differently? Any learnings that you picked up? Just how do we think about this and maybe a little more color about timing, where they fall in the back half of the year, specifically?
Sure. Well, let me talk about Denver first, because that most closely connects with Houston and Chicago from a cost perspective. We'll probably be much more visible there to the average consumer than we will be in New York, which is an incredibly expensive market. We find when we really concentrate our marketing efforts in markets like, specifically those two, that we get a much larger return. It gives us the opportunity to not only have out-of-home marketing, and other sort of more typical. We can also add in the digital marketing and get people to walk into one of our customer stores and buy some products based on their geographic location. It's likely that we'll have good results, we believe, in both of those markets.
Again, it's a matter of focusing our efforts there to try and make us more visible than we otherwise would be in those really critical markets.
Okay. Are they both is one Q3, one Q4? Is that how?
No, sorry. They'll both be late Q3 into Q4. Just, we're going to try and catch the turn of the weather is where our plan is.
Okay, got it. Sounds good. All right. Thank you very much. All the best.
Thank you.
Our next question comes from the line of Jonathan Komp with RW Baird. Please proceed with your question.
Yeah, thank you. I wanted to just follow up on the first quarter and the outperformance versus what you had guided to. It looks like you beat on the top line a little bit, and you beat on the bottom line by quite a bit versus what you expected. Any more color on kind of where you were surprised, sales or margin in the quarter?
Yeah, really from our perspective, relative to the outlook that we had coming into the quarter, John, it was really a top-line story. The sales results, particularly for the U.S. business, for both the Columbia brand and the SOREL brand, strong within both wholesale and the direct-to-consumer. Then to a lesser degree, some gross margin benefits, but the rest of the P&L generally in line with where we had anticipated it being. We passed on a fair amount of that benefit into our full-year outlook, while at the same time realizing the difficult comps and so forth that we've got in the fourth quarter and normalizing our forecast for those effects.
Understood. That's actually part of the follow-up I had then. The earnings beat in the first quarter looks like they're not fully flowing through. I just wanted to maybe reconcile that with the positive commentary about the order book and if there's any other offsets to call out now to the quarter.
Nothing of note. The take-up in the outlook's predominantly reflective of the top line. A combination of the Q1 beat, coupled with the strength in the order book that Tim touched on. Aside from that, obviously passing along some of the gross margin beat as margins were healthy in the first quarter. Then I think we took up the SG&A a bit reflective of, in part, some of the variable base spend, and then to a degree as we've extended certain timing out on various projects, including C1 and X1, we've reflected those effects in our outlook as well.
Understood. Maybe just one other bigger picture, maybe for Tim. Just stepping back and looking at the U.S. performance and projecting the second year of double-digit growth, is there anything that's changing in terms of-- and now that you have a lot more of the marketing and product and a lot of the Project CONNECT benefits in place, just how are you thinking about kind of the sustained growth rate, especially with two really encouraging years here?
Well, thanks. It's been a lot of hard work from many of the team members, obviously, to get ourselves to this position. We believe there's a tremendous amount of growth left in the U.S. market. We have basically distribution in every customer that we want distribution in the U.S. We'd like to have lots more, and there's room for us to grow in almost every retailer that we sell to. That's, as you remember, the focus of our business has historically and continues to be wholesale. The other thing that really gives us a lot of opportunity is our footwear business. We've made big investments in people and design talent and marketing in footwear, which has been an area where we believe the commodity's ripe for our special kind of innovation.
That's where I expect our business will grow the fastest is in the footwear category in the U.S.
Excellent. That's a lot. Thank you.
Thanks.
Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.
Thanks. Good afternoon, everyone. Really nice job. I had a follow-up question on the inventory. Would you be able to give us some color on the split of that inventory? In other words, how are you thinking about the composition of that inventory by channel? What are you setting aside for your wholesale partners versus what your own expectations are for DTC?
As you know, with our wholesale business, we operate on an advance order system. Basically, the merchandise has been committed by our wholesale customers for 30 days at least, and maybe longer in some cases. That merchandise is all set aside for them. As it relates to our own DTC business, we have estimates which would include daily sales on various product categories, and that's how we've allocated the inventory for those businesses. To the extent we have variations in either the taking of the orders by our wholesale customers or shortfalls with our own DTC business, having the ability to liquidate errors in estimation in our own stores gives us a lot of confidence to be comfortable with our inventory positions at this time.
Great. Is there a way to put some sort of quantification around what you just said? In other words, if it were two-thirds wholesale, one-third DTC? I'm just trying to understand.
No, it'd be hard.
Got it.
Yeah. No, it'd be hard to do that. It'd reflect more or less what you see in terms of the top-line proportions, adjusted obviously for wholesale versus retail pricing. I think just one other follow-up comment. Certainly to the degree we've got excess inventory, we're managing that on much more of an omni-channel type basis and managing the demand as we see it between the various distribution channels.
Got it. My second question is on brand creation. You talked a lot about increasing your marketing spend, and I think you're starting to see some benefits from that. I was curious if you could maybe give some color on the channels that you're seeing the most traction. Also, if that's starting to inform more of who you're attracting to the brand in a greater way. Are you seeing traction on the social front, or are you using more traditional mediums, and how is that playing out from your customer perspective?
Yeah, I would suggest that the bulk of our marketing spend is going to be focused on the digital area, whether that's digitally operating in an environment where we can show a TV commercial in a specific location, et cetera. That's where we think the science of social media and the digital world can help us be much more efficient with our spend. I would point out as examples of that, we're doing an Instagram channel. I think Amelia talked about it in the script just now, where we can really merge those people who have contacted the company via email, whether or not they're interested in purchasing some product or just learning about our PFG product. We can approach them directly in a much more efficient way than we could if we were buying a traditional television broadcast channel ad.
I would say the bulk of our spend will be in that area where we can really scientifically approach those consumers. Again, I believe that we're moving slightly younger on our customer base, especially at PFG, but we're not trying to avoid any particular customer at this time in terms of how we buy the media.
Okay, great. That's fantastic insight. Thank you for that. Then just finally, on the order book, now that you've gotten full visibility or near full visibility into it, as you think about the conversations that you've had for the past four or so months with your wholesale partners, given that there's such clean inventory in the channel, exited the first quarter with really good clean above any sort of lingering post-Christmas inventory. Clearly, there's obviously a desire to order up just to maintain kind of a flattish sort of dollar relative to last year or even more up to grow. The question is, how do you moderate their maybe optimism or over-optimism without any sort of visibility into what the weather really will play out as?
Well, we've been at this for quite some time, 20 years as a public company and 20 years prior to that really as a private company. We've learned over the years that it's not good for us to oversell a retailer. We spend a lot of time with each one of our wholesale partners finding out if we're getting an order of significant increase, because it's coming from somebody else who's open to buy, or is it just that the particular retailer might expect business to be exceptionally large. We would caution that retailer to avoid any risk-taking which we believe is outside the norm. Again, we've been at this a long time, and we believe that we have a good handle on the speed and cadence at which we should get increases.
We're mindful of that, and we have serious conversations with retailers about their demands.
Have you had to tamp down some of those expectations a little bit?
Yeah, from time to time. Yep, that happens for sure.
Okay. Well, great guys. Thanks so much and good luck.
Thanks.
Thank you.
Our next question comes from the line of Jim Duffy, Stifel. Please proceed with your question.
Thank you, guys. Couple questions from me. First on China, another on strategic opportunities with Project CONNECT. With China, Tim, clearly, you're bullish on long-run opportunities for the size of the business. With the model and the go-to-market strategies, where do you see the long-run margin opportunity for the China business as it scales?
Yeah. When we look at the China market across the other areas where we distribute, it's one of the highest profit margin territories for us. That's because we entered the market there at a very premium space, and it gives us pricing power in that market that we don't have in some other emerging markets. We're pretty pleased with that. It gives us the ability to invest pretty heavily in new stores and store remodels and openings. Probably we could be criticized for not quickly enough refreshing that store fleet there. We believe that that's going to be, again, as I said, a great market for us and one that's highly profitable. You had a second question. I'm sorry, Jim.
Well, just sticking with that one for a moment. I presume there will be some investment there as you take it over that works against the margin. Should we think about China being an opportunity for margin expansion with scale?
Jim, maybe to jump in terms of investments that we would make in the China market to the degree that investments are going to be much more from a commercial demand creation, some of the fixturing and so forth that Ken touched on. As it relates to the infrastructure and so forth, over the last five years that we've operated a joint venture, we've migrated all of the people, systems, process, just all infrastructure to support the China business over to us. We do not anticipate incremental investment associated with the back of house and the administrative side of operating China.
Okay. Thank you. Next question. I know it's been a few years since you've been active in M&A. You've recently been through a lot of internal exploration, unlocks from Project CONNECT are beginning to show in both the revenue and the margin. I'm curious, should we think about the foundational efforts with Project CONNECT as a strategic platform that you guys can apply to potential acquisitions? Does that at all increase your appetite for M&A?
Well, Jim, as you know, we never comment any particular activity in that area. However, we're only 18 months really into Project CONNECT, and we certainly consider ourselves to be well along but not completely. We haven't seen all the fruits of Project CONNECT, and we are working diligently to make sure that those expertises are well established before we do much more than just focus on our own issues. As you know, I've said many times, we're really much better off spending time and improving the businesses that we already have, versus exploring unknown territories.
Very good. Helpful, guys. Thank you.
Thank you.
Our next question comes on the line of Rick Patel with Needham & Company . Please proceed with your question.
Thank you, and congrats on the strong execution, guys.
Thanks.
Just a question on footwear. Very nice double-digit growth there, and you cited strength in PFG and SOREL. Can you talk about any variations in geographic performance that you saw with North America versus Europe? As we think about this category long term, can you talk about the potential to expand into Asia? I think you mentioned China earlier, but just some context on what you need to see before moving forward with that.
Sure. Well, when we look at the category globally, it runs in the neighborhood of 20% of total sales. Our European penetration in footwear is actually higher than the average across the company. When we think about areas of where the company can naturally play, it's really about trail activity, trail running, and then our very successful winter product business. Those are sort of the three areas on the Columbia brand. SOREL obviously is really focused on, in addition to its historical presence in the winter boot business, the move, and which has frankly been quite successful, to a year-round business for that brand, which will allow us to really fully develop its potential globally.
We have customers who would like to buy that product globally in many different parts of the globe, but they really want to have a full year-round business first, we're just now getting to the point where we can show that happening. As it relates, again, to geographies, I would expect our biggest successes in high volume footwear would be in North America, with primarily our existing customers who are currently buying our products and our footwear products. They're just not buying as much as we would like them to. Our goals over the next several years are going to be to really earn our spots there by having highly differentiated products that reflect the company's values and performance features, with hope that we can do in footwear what we've done in apparel, which is develop innovative solutions that are ours to own.
The team is highly focused on getting this stuff accomplished.
Can you also talk about the rollout of Consumer First, perhaps some context on the investments that are being made and where you see the low-hanging fruit to improve engagement? At what point would you expect it to be a needle mover for the business?
Yeah. This is Tom speaking. On C1, we're running a brick-and-mortar business in North America on fairly old systems. The intent there is to modernize the systems and improve the consumer experience
As it relates to X1, we're really focused on migrating to a mobile-first architecture.
Thank you very much.
Thanks, Rick.
Yes.
Our next question comes from the line of Michael Kawamoto with D.A. Davidson. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Just to build on C1 and X1, can you talk about your thought processes of how you're rolling them out geographically, starting with the U.S. in C1 and in Europe for X1? Just curious why you chose to start with Europe for X1.
Primarily Europe for X1 is because Europe's really the smallest business for the X1 system, and it's dependent on the SAP system. There's a lot of variables here.
Okay, got it. DTC and e-commerce continue to be a bigger and bigger piece of revenue. Do you have any targets or thoughts on where you think that piece of the business could go over the next few years?
Well, again, we hope that it will continue to grow, but its percentage of the business is going to be dependent on how great a job we do, A, with our footwear business, and B, with continuing to improve our products and raise the level of awareness and demand for the company's products. We expect that our own business will grow, but how fast it becomes a bigger part of the business is really a function of how well we do with the other parts of the business.
Cool. Thanks, guys, and good luck for the rest of the year.
Thanks.
Our next question comes from the line of Paul Lejuez with Citi. Please proceed with your question.
Hey, guys. Paul Lejuez. Just curious if you can maybe talk a little bit about what drove your bricks-and-mortar store performance from a traffic versus ticket perspective. Also curious if you saw a negative impact in the DTC business from the Easter shift, if there's any quantification there.
Yeah. We noticed across the global nature, especially in North America and Europe, a switch in timing of the Easter holiday. Again, our performance across new products in our own stores as well as the wholesale partners that we have, and you might remember that we monitor about 85% of the sales in the U.S. of our products. We saw a continued strength across the markets, almost absent the change in Easter holiday.
Paul, with regard to your question on the retail metrics, it's not something that we've historically disclosed. The growth that we're seeing in our stores is a combination of new store openings, improvement in productivity within the existing store base.
Got you. Thanks. Also curious about on the U.S. wholesale growth, how much of that is being driven by increased sales from existing customers versus new customers? Thanks.
Yeah. We're currently selling basically only customers that we've had in our fleet for quite some time. We haven't really added any new distribution in the last several years. We're selling everybody we want to sell in the U.S. We'd obviously like to sell more to each of them, to date, we haven't added any distribution.
Are there a particular few that are really fueling the majority of the growth that you might want to share?
Well, we have, I want to say, maybe 10, 12 customers sort of in the same range. They'd be people you might recognize in the outdoors/outdoor gear space, as well as department stores.
It's pretty balanced from a growth standpoint. When you look at the first quarter, certainly we were aided a bit in the January, February timeframe with the cold weather that enabled us to work through some of our fall/winter product. As we ended the quarter in the month of March and so far the spring sell-through has been solid as well. Happy with the overall performance in that channel of our business.
Great. Thank you. Good luck, guys.
Our next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch. Please proceed with your question.
Hi, this is Alex Perry for Robbie. Congrats on a great quarter.
Thank you.
Actually, I just have one here. Just first, Tim, I just wanted to follow up on your comments about the PFG business. Can you talk through how that business has been performing in both footwear and apparel? I think you mentioned last call about that business being around $150 million. Any indication on how large the PFG business can become over time? Thank you.
Well, thanks. It's really gratifying to see the business grow so nicely. It's now approximating $200 million. It really covers, in addition to apparel and footwear, we have a terrific accessory business, including headwear. That's been great. It really was a category of merchandise that we developed in-house, which just shows you how important it is to be first movers and to really own some of these spaces. It really is an area where we have very little of our traditional outdoor customers operating. As it relates to PFG, we think that we can spread that business all the way from a more traditional preppy style garment, all the way to casual lifestyle garments, and then all the way into performance based on rainwear or, in the case of footwear, demanding offshore categories.
We believe that has a tremendous amount of ability to grow and again, as it relates to a unique position in the market, it really can be something that we can own and really drive that business significantly.
Thank you. Very helpful.
Thanks.
We have reached the end of our question-and-answer session, and I would like to hand the call back over to management for closing remarks.
Thank you all for listening in. We've had a great time, and thanks for the compliments on the quarter. We're looking forward to talking to you again at the end of next quarter.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.