Greetings, and welcome to the Columbia Sportswear Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Ron Parham, Senior Director of Investor Relations and Corporate Communications at Columbia Sportswear. Thank you, Mr. Parham. You may begin.
All right. Thanks, Bob. Good afternoon and thanks for joining us to discuss Columbia Sportswear Company's 2nd quarter and first half financial results and our reiterated 2016 financial outlook. In addition to our earnings release, we furnished an 8 ks containing a detailed CFO commentary analyzing our results and explaining the assumptions behind our 2016 outlook. This CFO commentary is available on our Investor Relations website.
With me today on the call are Chairman of the Board, Gerd Boyle Chief Executive Officer, Tim Boyle President and Chief Operating Officer, Brian Timm Executive Vice President of Finance and Chief Financial Officer, Tom Cusick and Executive Vice President and Chief Administrative Officer, Peter Bragdon. Gert will start us off by covering the Safe Harbor reminder.
Good afternoon. 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 and actual results may differ materially from what it projects. Many of these risks and uncertainties are described in Columbia's annual report on Form 10 ks and subsequent filing with the SEC. Forward looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty of this update of any of the forward looking statements after the date of this conference call.
To conform to the forward looking statements to actual results or to changes in our expectations.
Thanks, Kurt. And I also want to point out that during the call, we will reference constant currency net sales growth, which is a non GAAP financial measure. And in the supplemental financial tables that accompany our earnings release, we provide a reconciliation of constant currency net sales to net sales as reported under U. S. GAAP and an explanation of management's rationale for including this non GAAP measure.
And then I'll turn it over to Tim.
Thanks, Ron. Welcome everyone and thanks for joining us this afternoon. We're pleased to report slightly better than expected second quarter and first half results and to reiterate our previous full year outlook of mid single digit sales growth and high single digit earnings growth. Our strong balance sheet has always served us well and it becomes even more important during periods of market disruptions like we're witnessing today because it enables us to keep investing behind our competitive advantages including our portfolio of powerful brands, innovative and differentiated products and our global omnichannel operating model. As we've told you, Q2 is the smallest quarter of the year and the least indicative of our business trends.
Therefore, I'm going to focus my remarks on the first half results, which provide solid evidence that our diverse brand portfolio and global operations performed well in the face of challenging conditions around the world. As you've seen in the press release and CFO commentary, first half global sales increased 6% or 8% in constant currency, including 6% growth from the Columbia brand, 16% growth from Prana and 22% growth from SOREL. Our first half sales growth was especially strong in North America, where we grew 14%, 15% in constant currency and in Europe, where we grew at a high teens rate mid-twenty percent in constant currency. During the first half, the Columbia brand 6% growth consisted of mid teen growth in North America, reflecting broad based strength in sportswear, PFG and rainwear along with trail and PFG footwear. High teens growth in our Europe direct business, mid-twenty percent in constant currency, featured double digit constant currency growth in all but one of our 17 Europe direct markets.
Columbia Footwear and Apparel each grew in excess of 20% in Europe with Trail Footwear and Rainwear the strongest categories. And in Japan, the Columbia brand expanded at a mid single digit rate, low single digit rate in constant currency. The Columbia brand's strong performance in those markets was partially offset by declines in Korea due to a contracting outdoor market. Currency, economic and geopolitical challenges in some LAAP and EMEA distributor markets and a mid single digit decline in China, up less than 1% in constant currency. Looking ahead to this coming fall for the Columbia brand, our global Test and Tough marketing campaign will focus on our patent pending waterproof breathable OutDry Extreme Technology platform that's revolutionizing the waterproof breathable apparel and footwear categories.
OutDry Extreme redefines waterproof breathable apparel by placing the membrane, which does all the work on the exterior of the garment, using the membrane's natural water repellency to keep the wearer dry while putting the textile against the skin to provide the highest level of breathability of any rain garment. The additional benefit of OutDry Extreme is the fact that the innovative technology is immediately visible to the consumer, differentiating the garments further from other traditional waterproof breathable apparel. We first introduced OutDry Extreme Rain Shells in spring 2016 and for fall 2016 we've extended the platform into insulated jackets, gloves and an expanded assortment of rain shells. At next week's outdoor retailer market in Salt Lake, we'll be highlighting the extension of the OutDry Extreme platform into soft shells and trail footwear for spring 2017. We'll also be showcasing the OutDry Extreme Eco Rain Shell that has been heralded by journalists and ecologists globally as the most functional performance garment with the least impact on the environment.
OUTRA Extreme is the latest example of the significant investments we make in innovation that provide us with superior proprietary technologies that define and differentiate the Columbia brand. In Europe, our marketing team is making final preparations for next month's Ultra Trail du Mont Blanc or UTMB held in Chamonix, France. The Columbia brand is proud to be the presenting sponsor
of the
UTMB recognized as one of the world's most iconic ultra trail running events. The UTMB consists of 5 endurance races held over an entire week on some of the most stunning and challenging terrain on earth and attracts thousands of spectators plus global coverage that reaches millions of enthusiasts. In addition to serving as the presenting sponsor, our brands are also proud to sponsor 25 of this year's UTMB athletes representing the U. S, Hong Kong, Japan, Netherlands, New Zealand, Switzerland, China, Spain and Scotland. The UTMB is the perfect global event to showcase Columbia's elevated commitment to the trail running category.
Our new trail running collection took the best features of VonTrail, the original trail running brand and forged them with the best features of our Columbia trail running line to create a versatile assortment of high performance shoes for endurance athletes. And finally, beginning this fall, the Columbia brand will commemorate the 30th anniversary of the introduction of its iconic Bugablu jacket, one of the company's first major category defining innovations with a retro version featuring updated styling targeted at today's outdoor enthusiasts. Since its introduction, we've sold millions of Bugaboos and other styles with the distinctive interchange construction. Our reiterated full year outlook contemplates mid single digit growth from the Columbia brand. The Piranha brand is now our 2nd largest first half and first half brand and contributed $74,000,000 in sales and 16% growth concentrated in the U.
S. Prana's product offering this spring included a significantly expanded swimwear line that's resonating well with consumers along with its more extensive men's and women's outdoor lifestyle and men's yoga and fitness offerings. In addition, during the Q2, Piranha launched new integrated brand positioning and messaging across its marketing platforms and its retail and wholesale channels. This new messaging supports regional marketing campaigns targeting Los Angeles, San Francisco and Denver Boulder as well as new fixturing and point of sale assets that are being deployed in a wide cross section of its wholesale accounts and Toronto retail stores. Our full year outlook anticipates mid teen growth from Prana and it remains our most seasonally balanced brand.
We continue to focus on de winterizing our SOREL business by gradually increasing the mix of lighter weight fall styles represented in our wholesale and direct to consumer channels. SOREL grew 22% in U. S. Dollars and 25% in constant currency during the first half, primarily in the U. S.
With most of that growth occurring in the Q1 on sales of fall and winter product and delivery of SOREL's new spring line to select wholesale customers. Consumer reaction to SOREL's new spring assortment at select retailers and our own direct to consumer platform reaffirmed our belief that consumers are ready to embrace SOREL in warm seasons. For spring 2017, SOREL is planning a full scale launch of an expanded spring assortment and we're increasingly confident in our ability to unlock SOREL's year round global potential over the coming seasons. We've begun delivering advanced wholesale orders for SOREL's fall 2016 season, which also became available recently at sorel.com and our 3 SOREL branded stores in New York, Chicago and Boston. SOREL's fall line features a higher proportion of lighter weight, less weather sensitive fashion styles like the updated Joan Wedge collection.
Our full year outlook continues to anticipate high single digit growth from the SOREL brand with the 7 Hack second half expected to account for nearly 90% of its full year sales. Mountain Hardwear sales declined 9% during the first half, 7% in constant currency. New Mountain Hardwear brand President, John Walbrecht is aggressively tapping into the brand's rich DNA to reestablish Mountain Hardwear as the premier brand for alpine athletes. This fall, Mountain Hardwear's target consumers will begin to see examples of the brand's new imaging and messaging platform across social media and in a new print campaign that will appear in leading publications including Alpinist, Rock and Ice, Climbing, Outside and Men's Journal along with many others. Mountain Hardwear's newly assembled product design and merchandising teams are working hard to reinvent the product line as rapidly as possible with a deep lineup of innovative high performance products targeted for introduction to consumers beginning in fall 2017.
Those of you attending next week's Outdoor Retailer Show will get an early glimpse of Mountain Hardwear's reinvented brand strategy at its dramatically redesigned trade show booth. Our full year outlook anticipates Mountain Hardwear sales declining at a low double digit rate compared to its performance in the first half. Looking at our first half results geographically, North America sales grew 14%, 15% in constant currency. First half U. S.
Direct to consumer sales expanded by more than 20%, while wholesale sales achieved high single digit growth. We're on pace to open 7 new U. S. Outlet stores in 2016, including 2 that opened in June. Also in June, we opened a new Columbia branded retail store at Disney Springs, Florida that has generated tremendous consumer response in its 1st month of operations.
Our full year outlook anticipates high single digit growth in the U. S. First half sales in our EMEA region were up 3%, 5% in constant currency with our Europe direct markets increasing high teens in U. S. Dollars and mid-twenty percent in constant currency.
Our Europe direct team has now posted 6 consecutive quarters of 15% or greater constant currency growth. This growth was partially offset by declines in EMEA distributor markets, especially Russia due to the macroeconomic factors that we've discussed previously. We're working closely with our Russian distributors to support their efforts to return to growth in that region. Our full year outlook anticipates our Europe direct business generating high teens growth in both U. S.
Dollars and in constant currency, partially offset by lower sales to EMEA distributors resulting in low single digit growth for the combined EMEA region. First half sales in our LAAP region declined 10%, 9% in constant currency. As I mentioned earlier during my Columbia brand comments, lower sales in Korea and LAB distributor markets plus a small decline in China were partially offset by growth in Japan. Our full year outlook anticipates a low single digit net sales decline in the LAAP region comprised of declines in Korea and LAAP distributor markets, partially offset by growth in Japan and China. Our consolidated inventory levels are in line with our expectations and reflect earlier receipt of fall production setting us up for timely delivery of fall wholesale advanced orders and to support our direct to consumer channel.
We continue to expect inventory growth to moderate during the second half to levels comparable to our mid single digit full year sales growth expectations. In summary, we're pleased with our solid first half performance, particularly against the challenging global background. Despite the challenging environment, we believe the Columbia, SOREL and Prana brands have solid momentum and are gaining market share, particularly in North America and in Europe. And our new Mountain Hardwear team is working aggressively to return that brand to growth. Each brand's direct to consumer platform is a source of growth as well as serving as an increasingly powerful marketing tool to connect with millions of consumers to drive sales either through our wholesale partners brick and mortar stores and e commerce sites or through our own.
Through periods of rapid growth and periods of uncertainty, our strong balance sheet enables us to make investments that we believe position the company to deliver on our commitment to shareholders to drive growth, expand gross margins, invest in demand creation and improve our profitability over the long term. You can find many more details on our Q2 and first half results and our reiterated 2016 outlook in Tom's CFO commentary available on our website. That concludes my prepared remarks. We're welcome to answer questions. Operator, could you help us with that?
Sure. Thank you. We'll now be conducting a question and answer session. Our first question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.
Hi, this is Pallav on behalf of Camilo. Thanks for taking our questions. First of all, can you quantify the shift in wholesale advance orders from that are going from Q3 into Q4?
Yes. So this is Tom. In October of last year, we had commented that we had about $40,000,000 shift from Q4 into Q3 in 2015. And this year, we've got based on the order book, we've got about $20,000,000 shifting from Q3 to Q4, which equates to a little less than 3% growth.
Great. Thank you. And can you explain why what was the reason behind the sales decline in China? And what gives you the confidence that the region will return to growth in the back half?
Yes, I think what China we think is one of the company's largest opportunities internationally and may at some point in time eclipse the rest of the world's not the entire rest of the world, but certainly be the largest market for the company. We've been resetting that market. There's been a tremendous amount of international brands and local brands entering the market there and we believe that that's impacted our growth. We have a solid team there. We expect growth during the full year of 2016 in that market.
But we had a bit of a reset in the first half of the year.
Great. And just last question, what percentage of your or what's the magnitude of the actual DTC business in your Q4 outlook?
Yes, I think it's probably a little premature to call that. And we've tried to be fairly limited in how we disclose the direct to consumer business, but we'll be sure to comment on that coming out of the Q4.
Great. Thanks for taking the questions.
Thank you. Our next question comes from the line of Kate McShane with Citigroup. Please proceed with your question.
Hi, thanks for taking my question. My first question, we've heard a couple of competitors talk about the fall, particularly early fall being a much heavier promotional environment. How are you thinking about, again, September, October, early fall, given the amount that was packed away last winter and the promotional cadence that we should expect
to see?
Well, I
think as it relates to the back half of the year, we've been modeling the year somewhat more promotionally than we had in prior periods. So whether that comes at the beginning of the first half or the end of first half is yet to be determined. But I think there's we expect there to be additional promotional activity.
Okay, great. And then I believe you've addressed this before, but now that we're kind of post the event, can you talk about how you've handled the inventory that was being sold into the Sports Authority? And how much of an opportunity did you have to sell to other retailers? And how much did you take to put through your own retail channel?
Certainly. Well, yes, we were sorry to see that the sports authority have the ultimate disposition that it did, but frankly we recognized there was a significant problem in Q4. So we took the bulk of our reserves or any kind of accounts receivable problem that we might have had in that period. And we were very cautious in terms of how we approached that business from the beginning of the year really. So we believe that we've got the inventory that would have otherwise ended up in Sports Authority well distributed and its disposition is calculated in the guidance we gave you today.
And Kate that would include our own wholesale business our wholesale business and our own direct to consumer business.
Okay. That's very helpful. Thank you.
Thank you. Our next question comes from the line of Lindsay Druckerman with Goldman Sachs. Please proceed with your question.
Thanks. Good afternoon, everyone. I was hoping maybe you could square, these might be unrelated, but you have excess inventory exiting Q2 because of some earlier receipts of wholesale orders yet you expect delayed shipment timing of those orders pushing out of 3Q into 4Q. So can you talk about maybe the disconnect there?
Yes. So let me just talk a little bit. A lot of this has to do with the sourcing environment in Asia, which is quite soft. So we've seen where we might have expected merchandise to arrive at the back half of our order of windows. It now comes to the first half and we're just responding from our deliveries to what the original order dates were from our customers.
These are we haven't seen really any change in the order book since we for all intents and purposes closed it up in March April. But I think it's mostly a result of the slow environment in Asia and a quicker shipment.
I would say, Lindsay, the other piece is coming out of fall 2014, the channel is fairly clean. It's certainly not as clean coming out of fall 'fifteen. So the order book got written slightly differently this fall, fall 'sixteen as compared to a year ago fall.
Thanks. And as it relates to your you guys held on to some inventory exiting last year to push it through your own outlet stores this year or this season anyway. How should we be thinking about the percentage of made for versus clearance product in outlet and where do you kind of like that ratio to be over time?
Well, I think this year it's slightly lower made for than maybe it would have been in previous periods. At the end of the day, we want to make sure that we've got a healthy retail business and at the same time an appetite for liquidations of mistakes or other market caused inventory disruptions. So we really don't have a perfectly modeled equation for that. But those are the two functions that those outlet stores have to serve and we try and balance the inventory as appropriate.
Got it. And then just lastly, as you think about risks to the back half of the year and the things that you guys can control, are there opportunities on the expense side for you to flex in order to kind of manage the earnings number?
Absolutely. I mean the single largest piece of our SG and A is our headcount and We've shown in the past where we've needed to be managing our SG and A. We've taken steps in that area, but we don't expect that to be the case this year. And there are other levers that we can pull to provide the profitability that we've guided today.
And Lindsay, that's an area we've been diligently managing from my perspective all year long. If you look at our back half guidance, we've got roughly 4% SG and A expense growth on mid single digit top line.
Great. Thanks so much.
Thanks.
Thank you. Our next question comes from the line of Laurent Vasilescu with Macquarie. Please proceed with your question.
Good afternoon. Thank you very much for taking my question. Under Armour announced a few days ago that they're launching at Kohl's. Can you provide any initial thoughts on this announcement? Can you parse out how big Kohl's is?
And then do you anticipate any future revenue opportunities for the Columbia brand there?
Well, yes, we typically don't comment on our competitors. Obviously, Under Armour is a strong brand and I know that those discussions have been ongoing for quite some time. So we would expect that the biggest impact from the vendor base would be likely on other athletic brands as opposed to the outdoor brands that Kohl's carries. Yes, we want Kohl's to be a very strong customer and they need to have a broader base, I guess, of athletic brands that they carry. So I would expect that that product line would do well there.
Okay, very helpful. And then on inventories, following up on Lindsay's questions, I think last quarter you outlined that you expect inventories to finish up the year generally in line with sales growth. Was that comment based on 4th quarter sales growth or is that guidance still is the guidance still the case or is that really based on like long term growth of mid singles to high singles?
Yes, it was really based on the mid single digit growth rate. For 2016.
Okay. Okay. Very helpful. And then lastly, can you parse out in basis points the FX impact to the 1st and second quarter gross margin? And then how should we think about FX for 3Q and 4Q?
Yes. I'm probably not going to get into the quarterly granularity, but we've commented over the last two quarters that FX will have about 100 basis point headwind for the full year and most of that headwind is felt in the 1st and third quarters when we do the lion's share of our international wholesale deliveries. So Q3 will see a headwind from currency much more so than Q2.
Okay, very helpful. Thank you very much.
Thank you. Our next question comes from the line of John Kernan with Cowen and Company. Please proceed with your question.
Good afternoon, everyone. Thanks for taking my question.
Sure.
Can you just going back to shipment timing issues, are there any disproportionate effects to gross margin or SG and A due to this in the Q3?
Some, but not significant. Hedging is by far the biggest component of the margin deleverage that we're anticipating in the Q3.
Okay. And then it seems like there's a pretty powerful theme of you going more direct with at least certainly direct outgrown wholesale by a pretty significant amount in some key regions so far in the first half. Can you help us understand the economics of the direct business? I mean from a margin perspective, is it any better, is it significantly better or worse than the wholesale channel?
Well, it depends really on the particular period of time whether we're liquidating inventories or selling product that we made for the outlets. But in general, we've said many times that we consider ourselves to be a supplier to the wholesale trade and that's where our focus has been and we'll continue to be frankly.
Okay. Thank you. And then I guess last question just on the distributor business internationally. I think it's lagged a bit from the directly operated channels. Any comments on what you any initiatives you can do to get that distributor business kind of with growing again at a more sustainable rate?
Well, most of the issues we have in our distributor business frankly are a function of this disruption either politically or economically in a particular market. So a great example is the Russian business which historically has been very strong for the company. And obviously when the ruble goes to half its value and the price of oil is impacted. That's impacting our business. So we're basically selling in every major international market today.
And when one of those major markets gets disrupted by portions outside of our control, it's very difficult for us to react.
Okay, thanks. And then just one housekeeping question. Free cash flow guidance this year, any change to that?
No, we're still looking at 110 to 130.
Okay. Thank you.
Thank you. Our next question comes from the line of John Komp with Robert W. Baird. Please proceed with your question.
Yes. Hi. Thank you. If I could first just ask a clarification question on the outlook. I know you reiterated the full year targets for revenue and the earnings.
It did sound like there was a little incremental impact from the Sports Authority liquidation. So should we think that the impact from TSA was just immaterial to the full year outlook? Are there some other offsets? Or do you expect to be at a different point of the range of the outlook? Or any kind of clarification thoughts there?
Yes. We've essentially held our top line and bottom line outlook. So the sports authority is really not really a factor in the second half outlook. Really, there's some puts and takes between gross margin and SG and A. But again, the top line hasn't changed or the bottom line.
I'd say the biggest factor that's probably changed in the last 90 days is Korea continues to soften. So that would be probably the single biggest call out at this point.
Okay. And then another question just on the shift, the Q3 and the Q4, the relative growth rates. Obviously, more 4th quarter weighted than I think we were contemplating previously. But I know you had not given quarter by quarter guidance. So I'm just curious outside of the order timing that you mentioned and maybe Korea, are there any other moving parts that you've seen internally versus your forecast shift more during the Q4?
No, not really. I mean, we have the order book in hand for Q3 on our April call. So, no major changes in that regard.
Okay, great. And then the last question, I just wanted to ask about that change in the full year gross margin. Now I think only up 10 basis points for the year. I know it was mentioned that you're expecting a more second half promotional activity. I just wanted to clarify, is that because of specific differences in the inventory that you see internally?
Is it more because of just the external environment? I guess what's driving the change in the gross margin outlook for the second half?
It's really the external environment in the inventory that's currently in the channel.
Okay. Thank you.
Thank you. Our next question comes from the line of Susan Anderson with FBR Capital Markets. Please proceed with your question.
Good evening. Thanks for taking my question. Just a follow-up really quick on that last question on the gross margin. Is there an impact at all too because you're going to be selling some stuff through the outlets? But I guess you guys would have known that before.
And then also is this excess inventory because of what was left over from last year?
No. I would say that the margin take down of roughly 20 basis points is predominantly a function of the current health of the Korean market and to a lesser degree just the overall promotional environment in the U. S. Wholesale sector.
Got it. Okay. That's helpful. And then for fall this year, I think last year you had more wear now product early on versus the heavy jackets in the store. Are you going to be continuing that?
Is there going to be more of that this year? Are you guys doing anything different from last year?
No, I mean we think last year obviously the weather didn't cooperate in the back half of the year, but we didn't make drastic changes in our offering. So we have products which are appropriate for multiple different seasons. And our expectations are built on the fact that we believe we've planned against a normal winter. So if it's something other than that, we believe we've still gotten ourselves in a position to be hitting our number.
Got it. And then on the SOREL brand, I guess going into the fall, maybe if you could just give a little bit more color on just how you feel about the brand? I think last year you were already seeing some pretty early orders of boots. Does it feel like it's going to be strong again? And I think last year you came out with a lot more fashionable styles.
Is there anything else newer going on this year?
Well, yes, I mean, we have a very heavy emphasis on de winterizing the brand. If you remember, it was almost exclusively heavy duty men's work winter brand. And Mark Nino and his team have really successfully transferred that business to being 1st of all female and second of all much more fashionable. And now the focus is really on giving ourselves a significant opportunity when the weather is not there. So the fall 2016 product is very heavily emphasizing this wedge lightweight wedge product, which has done very well for us in our early launch this spring as well as last fall.
And then next spring's product, which has been very well received includes some rain product, which is going to be an important part of the future. So we're very excited about that brand and how well it's coming along.
Great. That sounds good. And then last question just on shelf space. I know a couple of years of really gaining shelf space, especially for the Columbia brand from private label. Is there anything else left to take in the stores or is it really just kind of growing what you have?
No, I think frankly there's opportunity in wholesale at other brands that don't have the kinds of brand strength that we have. So the tertiary brands and then against major brands we have a very strong position especially in our PFG line which is we have very little competition in that area and it's an area of significant focus for the company. So there's lots of opportunities for us.
Great. Sounds good. Good luck next quarter.
Thank you.
Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Thanks. Good afternoon, guys. Hey, Jim. Jim, I'll build on your last comments. I was going to ask about the PFG franchise and an update on what you're seeing there, how you feel about the performance of the PFG store and opportunities for that into next spring?
Certainly. Well, we've got several PFG stores. The newest one really is this store in Disney and it's a terrific product. I think if you look at the demographic studies on what people do with their time their free time, it's fishing and hiking are the dominant activities by far. And with PFG, we're able to get that consumer who wants to make sure not only his wardrobe performs when he's fishing, but then when he's at work or reasonably casually dressed, he reflects that he's a fisherman.
And that's been a really terrific part of the business. And in North America, it really helps to supplant our to counterbalance our heavy emphasis on winter, but it's really begun to resonate in South and Central America and a bit in Europe, which has been fun to watch.
Great. And then the consistent and broad based strength across direct markets in Europe is encouraging. With the building scale you're seeing here, can you speak to opportunities to drive profitability?
Yes. Well, we would have been profitable this year absent the effect of currency. So the team there has been very, very singularly focused on rebuilding the product based offering and getting our business bigger there. And as you can see, they've been successful. We've really been ultra focused on the SG and A, because at the end of the day that was probably our biggest mistake several years ago when we let our SG and A get out of whack there when the business declined.
But I think the brand is so strong in France and in Spain that once we start having the right team in place, which we've had now for several years and the right products, which we're getting better, more products which are relevant for that market, We're going to be a real dominant player in that area. We already have, as you know, the infrastructure is built there. So it's just a matter of taking advantage of the strengths that we already have and the focus. So we're excited.
Good. And with the trend lines you're seeing, obviously difficult to call out to next year, but would you expect to get to profitability next year or be disappointed if you did not?
Well, obviously, I'll be disappointed. I'm disappointed today because we're not profitable, but it really depends on certain things that are outside our control, including currency, etcetera. But we are on the right path and whether it's the next 12 months or 18 months, we're going to get there and we're going to be a very much stronger company as a result of it. Okay. Thanks for that.
Thanks, Jim. Thank
you. Our next question comes from the line of Jay Sole with Morgan Stanley. Please proceed with your question.
Great. Thank you. My question is on the golf business. I realize this is a new business, but can you give us an update on how that business is doing and if it was a notable contributor in the quarter?
Well, if you remember, the golf business for us is licensed. And so we really have taken the bulk of our revenue from that license and plowed it back into the marketing in that market for that market specifically. So we've opened a lot of customers and been focusing our licensee has been focused on the Greengrass opportunity, which is an area we've never been involved in the past. We've sponsored a few golfers. We've had we've gotten close a few times.
We haven't had a winner yet, but certainly the exposure has been very significant for us. It's our expectation that that part of the business, specifically golf will continue to grow. And frankly, it's a good contributor. And we'd love to see a real winner with we're in Colombia soon and we expect that we will.
Okay. And then I know that there's been a lot of questions already about the sports story. But just looking forward and how you see your business trending, when an event like this happens where a retailer goes away, do you see the demand filtering out to other channels where overall it's the same demand picture and it's just happening in other places? Or is this a situation where a retailer is going away and that's a sign of overall demand going down for the product and it's not really a situation where you see demand where you see people just shopping for the same amount in other
places? Well, you can see our company growing in the face of declining number of retail locations. So we consider the brand very strong and people are searching it and finding it wherever it might be. I guess, our viewpoint of the future is that likely be continued consolidation and that retailers that aren't that don't have solid balance sheets and good operating models will be continually challenged by the reduction in traffic really across that sector.
Okay, great. That's helpful. Thank you. Good luck.
Thank you. Our next question comes from the line of Rafi Trudyos with Bank of America Merrill Lynch. Please proceed with your question.
Some of the drivers to your momentum in Prana and then can you remind us where you are internationally with that brand?
Sure. Yes. Sorry, you get cut off on the first part of your question. Could you mind repeating
it? Sure. Can you just kind of talk about what's driving the strong momentum that you're seeing there with Prana? Maybe where you see the most opportunity and then remind us where you are in international Prana?
Certainly. Well, Prana's significant growth in this first half was in North America. And it's really a function of a number of things, including and I guess I would call out for sure, the swimwear opportunity where we think there's big opportunity there for the brand and the fact that it's a company based in Southern California with access obviously to the oceans and they really have a sense for what products are going to be in demand there. As well as just the unique positioning of the brand between yoga and climbing that product tends to resonate significantly. Additionally, it's the women's it's heavily faired by women's.
So we like that. And we would expect that that brand is going to continue to grow as well. There's opportunities in other seasons for Prana, which we think we'll be focusing on in the future. As it relates to international, we hope frankly to have a bigger, quicker uptake on the brand internationally than we've had. The demand is still there.
The product personality is still quite unique and we believe that there's significant opportunities internationally. It's just taking us a bit longer.
And then in terms of the elevated channel inventories that you called out earlier in North America, where do you expect or what's sort of the timing of how that inventory how retailers kind of work through that inventory? And I guess the brand as well, are you anticipating most of that will be in the outlets, off price? And then can you remind us sort of what your off price penetration is now and compare that to prior years?
Yes. I think when we talk about the elevated inventory levels, it's not necessarily our inventory. It's sort of an amalgamated inventory from all brands and some more significant than ours certainly. So based on how our customers purchased their fall products or how they approach the fall business for 2016, they were quite cautious. So my assumption is that we're going to have clean inventories at the end of 2016 if we have a normal winter.
So we don't talk specifically about our particular off price percentage of the business, but I believe it's quite healthy. And we have, if you remember our own outlet channels to dispose of merchandise through and frankly that's our preference to liquidate through our own channels.
Thank you. That's really helpful. And then just one more. You mentioned market share gains earlier. Are there any specific channels or geographies or categories that you can call out where you're seeing the kind of stronger market share gains?
Thank you.
Well, certainly in the summer sportswear business, so where we have a very strong hiking and trail business, but the addition of our PFG business, which we don't really have competitors in that market of any significance. So when we talk about market share, it's really, I would say, led by sportswear where we have these iconic categories of merchandise that others don't have.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Andrew Burns with D. A. Davidson. Please proceed with your question.
Hi, guys. Congrats on first half performance on a tough environment. Historically, you've talked about your U. S. Wholesale distribution strategy being roughly equally split between specialty, sporting goods and department stores.
And I was wondering if that thought process has changed at all given the dramatic changes in consumer shopping behavior driving your retail traffic issues and the store closures and bankruptcies we're seeing today? Thanks. Yes. We look at the business the same way basically today. It's unfortunate to lose a major player in the sporting goods sector, frankly, segment in any major segment we work in.
But we would look at the business, the retailers about the same way today. I mean, we might parse especially slightly excuse me, we might parse the sporting goods between athletic sporting goods operations and hunt fish camp, but we basically have the same view of the marketplace and where we belong in those various categories. Great, thanks. And then just a follow-up in terms of Korea and the continued weakness there. Is it still just a situation of too many brands, too much inventory?
Or underlying all of this, do you think there's been any shift away from outdoor brands in general? Yes. I think there's probably been somewhat of a fashion shift away from the hiking look. And that coupled with the fact that that market grew so rapidly over the last 5 or 6 years that it was flooded with not only all the major players in the outdoor business, but also some local brands that just got into business. So it's another area where our balance sheet allows us to continue to focus on that market, which we believe will continue to be strong, while others leave the market and there have been a lot of departures.
But we still have an inventory overhang and then we have to make sure that we focused our time and effort on having the right assortment of outdoor product and not particularly any specific look. Okay. Thanks and good luck for the balance of the year. Thank you.
Thank you. Our next question comes from the line of John Kernan with Cowen and Company. Please proceed with your question.
Hey guys, thanks for letting me jump back in the queue.
Just a
comment on PFG are interesting. Have you sized the overall market opportunity and have you disclosed how big that category is for you currently?
I mean in terms of our sales?
Yes.
Yes. Okay. I think our sales are north of $120,000,000 in that range. In terms of the markets, the applicable market size, it's very significant. And it's really the bulk of our PFG sales are in that southern part of the United States, Central America and Northern South America where we have great weather and where fishing is a real popular sport.
But it's a humongous market and that's obviously where there's a large population.
Okay. Thank you.
Thank you. There are no further questions at this time. I would like to turn the floor back to Tim Boyle for closing comments.
Thank you, operator. We look forward to talking to you at our next conference call. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.