Greetings. Welcome to Columbia Sportswear fourth quarter 2022 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. Please note this conference is being recorded. I will now turn the conference over to your host, Andrew Burns. You may begin.
Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available on our Investor Relations website, investor.columbia.com. With me today on the call are Chairman, President, and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief Administrative Officer, Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations, or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. Each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings.
We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation for management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and appendix for CFO commentary and financial review.
Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.
Thanks, Andrew. Good afternoon, everyone. I'm incredibly proud of the financial performance and accomplishments that our global workforce delivered in 2022. For the year, net sales grew 11% to a record $3.5 billion. On a constant currency basis, net sales increased 14%. I'd like to thank our dedicated employees whose tremendous efforts enabled these results. We achieved these results while navigating numerous supply chain challenges. We know there's a strong demand for our products. Our recent financial performance could have even been higher absent the product delivery delays we experienced. Columbia and SOREL led the charge, with both brands generating record net sales and double-digit constant currency growth in 2022. Geographically, we have broad-based momentum. Our largest market, the U.S., grew 12% on a constant currency basis.
International growth highlights include Europe Direct surging 31% on the year and Canada growing 19%. By channel, our growth in 2022 was relatively balanced, with both our wholesale and DTC business generating double-digit constant currency growth. Our global DTC e-commerce business grew 10% constant currency and represented 18% of total net sales. I believe these results are proof that our strategies are working. Looking at the current environment, the threat of a recession is weighing on the market. In these times, our strong financial position is a strategic advantage. We exited the year with over $400 million in cash and no bank borrowings. We're entering 2023 in a position of strength with positive momentum in many markets around the world. The Columbia brand's iconic innovation, value proposition, and democratic product offering are enabling us to capitalize on the popularity of outdoor activities.
Differentiated innovations like Omni-Heat Infinity and the recently introduced Omni-Heat Helix are separating Columbia from the competition and fueling its growth trajectory. SOREL's function first fashion footwear is resonating with consumers. We believe SOREL is on its way to $1 billion in sales and becoming the next global footwear force. Our products have earned us a loyal base of consumers, and we're making focused demand creation investments to create even deeper consumer connections and unlock growth. We have amazing strategic wholesale partners and a powerful direct-to-consumer business that's helping us create the marketplace of the future. As we begin the year, one of our top priorities is to reduce our inventory position and align it with demand. I'm confident in our ability to perform this task effectively and profitably over the course of the year.
Our business model, strong financial position, and strategies are well- suited to manage this process. Our product offering includes a large percentage of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. Given our strong balance sheet, we can be patient as to when and where we sell our product. We expect to continue utilizing our fleet of outlet stores to profitably liquidate remaining excess inventories. Columbia Sportswear is positioned to deliver another year of profitable growth in 2023. The top end of our financial outlook contemplates 6% net sales growth and a 12.2% operating margin. I will provide more details on the key drivers and assumptions influencing this outlook later in the call. I will now review our fourth quarter 2022 financial performance. Net sales grew 4% or 8% on constant currency basis.
This was within the financial outlook we provided in October and reflects strong execution in a challenging environment. Gross margin contracted 180 basis points and was roughly in line with our outlook. The largest driver of contraction was higher promotional activity in the marketplace as we lapped an exceptionally low promotional environment in the prior year. SG&A expenses increased 5% and represented 34.6% of net sales, compared to 34% in the prior year. We incurred $35.6 million in non-cash impairment charges during the quarter, which impacted diluted earnings per share by $0.43. Diluted earnings per share decreased 15% to $2.02. I will now review fourth quarter and full- year net sales growth by region and brand.
For this review, I'll reference constant currency net sales growth to illustrate underlying growth in each market. All regions outside the U.S. were unfavorably impacted by foreign exchange rates. U.S. net sales increased 2% in the fourth quarter and 12% for the year. In the quarter, we generated high single-digit percent DTC growth balanced across our brick-and-mortar and e-commerce businesses. U.S. wholesale net sales decreased mid-single digit percent. Wholesale performance in the quarter was unfavorably impacted by a greater portion of fall '22 orders shipping in the third quarter this year relative to last year. Looking at the third and fourth quarters combined, second- half U.S. wholesale net sales increased high- single-digit percent, reflecting healthy retailer demand for our products. We know supply chain disruptions and resulting delivery delays tempered our fall 2022 performance.
We were unable to maximize early- season full- price sales, and we experienced higher order cancellations resulting from the late receipt of inventories. As we move into spring 2023, our on-time delivery percentage has greatly improved and is approaching pre-pandemic service levels. U.S. fall 2022 retail sell-through trends were generally positive. With the season almost complete, sell-through is tracking roughly in line with fall 2021, which was exceptionally strong. Turning to our international business. Latin America, Asia Pacific region, or LAAP, net sales increased 11% in the quarter and 13% for the full year. China was up mid-single digit percent for the quarter, led by strong dtc. com performance. For the year, China declined mid-single digit percent, primarily reflecting the impact of government efforts to contain COVID-19 outbreaks. I'd like to thank our team in China, who overcame numerous supply chain and COVID-related challenges.
I'm encouraged by the emerging momentum I see in this market as we start 2023. I believe the investments in talent and operational improvements we've made over the last several years position us to accelerate the business as China reopens. We know we have powerful brand recognition in China, and that this market represents one of our largest geographic growth opportunities. Japan increased high single-digit percent in the quarter and high- teens percent for the full year. For the quarter, net sales growth was led by DTC as traffic recovered and consumers embraced Columbia's products. Korea grew low single-digit percent in the quarter and high single-digit percent for the full year. There is sustained interest in outdoor products and activities in that market, and we are positioned for continued growth in 2023.
Our new leadership in Korea is focused on managing the marketplace to optimize our DTC store fleet and retail partners' distribution to further elevate the brand and drive productivity across all channels. LAAP distributor markets were up low 80% for the quarter and high 70% for the full year. Growth in the quarter reflects higher fall 2022 and spring 2023 orders, as well as favorable timing of shipments. With robust growth in 2022, our LAAP distributor business has returned to pre-pandemic sales levels. Europe, Middle East, Africa region, or EMEA, net sales increased 32% for the quarter and 26% over the year. Europe Direct grew low- 30% in the quarter and for the full year, including strong demand across all channels. I'm extremely proud of our team and the progress they've made growing our business in Europe while improving profitability.
If you'll remember, in 2015, Europe Direct represented just over EUR 100 million in annual net sales and generated an operating loss. In 2022, we surpassed EUR 300 million, and its profitability is accreted to our consolidated operating margin. Our products, marketing, and marketplace strategies are yielding powerful results. Europe Direct is expected to be one of our fastest-growing markets in 2023. Our EMEA distributor business was up high 30% in the quarter and up low teens percent for the full year. Growth in the quarter was driven by favorable timing of fall 2022 and spring 2023 shipments compared to last year. As we previously noted, we've paused taking any new advanced orders for the Russian market early last year.
Our outlook for our EMEA distribution business does not include sales to Russia but contemplates healthy growth in other distributor markets, which will help offset a portion of these lost sales. Canada net sales were up 23% in the quarter and 19% for the full year. In the quarter, growth was led by wholesale, which benefited from favorable timing of fall 2022 shipments compared to last year. We are well-positioned for continued growth in Canada. Columbia and SOREL have high brand awareness and excellent market positions. In fact, Columbia has been voted the number one trusted sportswear brand for seven years in a row in the University of Victoria Brand Index. Looking at performance by brand. Columbia brand net sales increased 13% in the fourth quarter and 16% for the full year. During the quarter, growth was relatively balanced across apparel and footwear.
Following last year's launch of Omni-Heat Infinity, we were able to build on the momentum this season, launching an expanded collection for fall 2022. Our worldwide marketing campaign focused on how the technology works and why it matters. One campaign featured a partnership with Eagles Star quarterback Jalen Hurts. Jalen's timely content was also featured in a number of NFL broadcast spots. Good luck in the Super Bowl, Jalen. We also utilized micro-to-macro influencers like YouTube sensation Dude Perfect in the campaign. The Dude Perfect team visited the Columbia store at the American Dream Mall, tested out the Omni-Heat Infinity jackets on the slopes, and the content was featured on the Jimmy Kimmel show. The Omni-Heat Infinity technology received numerous accolades during the quarter. Several styles, including the Platinum Peak and Ballistic Ridge jackets, were featured in this season's best of lists from Outside Magazine, Gear Patrol, and SKI Magazine.
We successfully introduced Omni-Heat Helix, our new disruptive poly fleece visible technology. Helix was a small targeted launch in our DTC business for fall 2022, and we're excited to build on this unique technology in the seasons ahead. On the product collaboration front, we saw the successful launch of our newest Star Wars collection inspired by The Clone Wars animated series. Our latest collaboration includes references to Obi-Wan Kenobi and Anakin Skywalker, among others. The collection incorporates Omni-Heat Infinity thermal reflective technology to help fans overcome the harsh winter elements wherever in the galaxy they are. Shifting to our emerging brands. SOREL brand net sales decreased 9% in the quarter and increased 11% for the full year. In the quarter, net sales were unfavorably impacted by a greater portion of fall 2022 orders shipping in the third quarter, as well as higher order cancellations.
Early season sell-through was challenged given delivery delays. As product availability improved, consumer demand for the brand was evident on sorel.com, which generated robust growth in December. Both categories, including sneakers and sandals, were top performers in the quarter. Sorel's consumer base is passionate about the brand. The SOREL team remains laser-focused on bringing a relentless flow of compelling products to its unstoppable consumer. In 2023, the brand has exciting pro-product partnerships and shop-in-shops planned with key retail partners. We expect SOREL t o be our fastest-growing brand in 2023. While supply chain constraints held back growth in 2022, we are confident that SOREL can grow even faster in the years ahead. prAna net sales decreased 6% in the quarter but were up 1% for the full year.
Sales declines in the quarter were driven by softness in the wholesale business, which was impacted by late product deliveries, partially offset by DTC growth. The Climb, the HBO Max reality series sponsored by prAna, debuted in January. Hosted by Jason Momoa and prAna ambassadors Chris Sharma and Meagan Martin, the series features climbers taking on various challenges as they compete for a $100,000 prize and a prAna sponsorship. We believe this series is a unique opportunity to raise awareness around prAna as we reestablish the brand's roots in key activities like climbing. The prAna team remains focused on repositioning the brand in the marketplace to energize growth. Mountain Hardwear net sales decreased 9% in the quarter, but increased 5% for the year. Similar to our other emerging brands, net sales were impacted by late product deliveries, which drove higher order cancellations.
I will now discuss our initial 2023 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentations for additional details and disclosures related to those statements. We remain focused on achieving the long-term growth algorithm we laid out at our Investor Day in September. As we noted, growth will never be perfectly linear, and we are not immune to near-term macro headwinds. Our 2023 outlook contemplates a 3%-6% net sales growth. The positive momentum we've experienced in 2022 is expected to be tempered by consumer spending headwinds and retailer caution as they manage their inventory positions. While our initial 2023 outlook is below the three-year growth figure we outlined at the Investor Day, our confidence in our long-term growth opportunity has not wavered.
Since our IPO in 1988, we've generated a 9% net sales growth figure and look to improve this into the future. We anticipate gross margin expansion of 60 basis points to approximately 50%. We expect SG&A expenses to grow faster than net sales growth. While others are cash constrained and limiting their investment spend, we're using our strong financial position and profitability to strengthen our competitive position. We will continue to invest in our strategic priorities to support long-term profitable growth. On the digital front, we're investing in consumer data and analytics that will ultimately fuel membership enhancements and build stronger connections with our consumers. More broadly, we're investing in digital capabilities across the business to be more agile and adaptive. When it comes to supply chain capabilities, we're investing in people, processes, and systems to improve supply and demand planning, drive inventory efficiency, and support growth.
This outlook contemplates maintaining our demand creation spend as a percent of sales at 5.9%, consistent with 2022. We may adjust this level of spend depending on market conditions. We expect operating margin to be in the range of 11.6%-12.2%. Operating margin performance will not always be linear year to year, and we remain firmly committed to improving operating margin over time. This operating performance leads to a diluted earnings per share range of $5.15-$5.55. We anticipate strong operating cash flow of at least $500 million in 2023 as our inventory levels normalize. In summary, I'm confident we have the right strategies in place to unlock the significant growth opportunities we see across the business.
We're investing in our strategic priorities to accelerate profitable growth, create iconic products that are differentiated, functional, and innovative, drive brand engagement with increased focused demand creation investments, enhance consumer experiences by investing in capabilities to delight and retain customers, amplify marketplace excellence that is digitally led, omni-channel and global, and to empower talent that is driven by our core values. That concludes my prepared remarks. We'll welcome your questions. Operator, could you help us with that, please?
Absolutely. 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 keys. One moment, please, while we poll for questions. Our first question is from Bob Drbul with Guggenheim. Bob, please proceed.
Thank you. Good afternoon, guys.
Good afternoon.
Two questions. I'll stick to the request, Andrew. On 2023, Tim, can you talk more about your order book visibility, you know, the cancellations that you had in the spring, you know, just sort of how much of the book is firmed up for sort of fall all of 2023? That's my first question. The second question is, just could you spend a little more time on China? I'm curious in terms of, you know, monthly trends or, you know, the reopening trends and how you feel like C ategory inventories are, you know, overall and sort of how you think about 2023 in aggregate, within the guidance that you gave us today. Thanks.
Certainly, yeah. Thanks, Bob. Well, as it relates to the order book, as you know, we concluded our spring order book much earlier in the year, and we're in the process of shipping it now. In fact, we're in great shape. We've brought our service levels nearly back to pre-pandemic levels, and we're shipping like crazy right now. We've had no substantial cancels and don't expect any on the spring book. As it relates to the fall book, that's also nearly complete and we're buying, well, we're matching the fall order book against our inventory levels that exist today, style by style, color by color. We've done some purchasing to balance the book and the and our inventory so that they are in sync. We don't expect fall cancels.
Frankly, the only reason we received such significant cancels this year versus prior periods is because our deliveries from Asia were significantly later than they had been in the past periods. We're expecting, you know, great things. We're approaching the business appropriately from an investment standpoint, and we're excited about the possibilities that are before us. As it relates to China, if you remember, we've been pretty open that we've underperformed there historically. We've come from a great position and we lost our way a bit. The team that we have there today is exceptional in building a great business. We expect that that business will once we get fully opened here, and that's where we're headed certainly, that the business is gonna really, really grow.
I'm convinced it's gonna be, if not the greatest geographic sales area we have, certainly among the best. In general, and as it relates to 2023, I'm bullish. You know what? We've always said that we expect high levels of growth. We're a growth company, and I think this gives us the opportunity with our balance sheet and weakness of certain of our competitors, that we will have a great opportunity to grow in 2023 and beyond.
Thanks, Tim.
The next question comes from Laurent Vasilescu with BNP Paribas. Please proceed.
Good afternoon. Thank you very much for taking my question. Tim, it's great to hear that you're bullish for 2023. In the CFO commentary, it talks about Columbia, the brand itself being up high single digits for the year as part of the guidance. Then you have some other commentary saying that footwear is gonna grow fastest, faster than apparel, excuse me. Within Columbia, the brand growing high single digits, can you maybe parse out how much do you think is apparel is gonna grow this year versus footwear overall?
Yeah, Laurent, this is Jim. We do anticipate that footwear as a category is gonna outpace the growth of apparel, that would be inclusive of both the SOREL brand and Columbia. When you think about the high single digit rate of growth for the Columbia brand, by and large, I'd say that's the case across all markets except the EMEA distributor market, which of course, you know, we'll be lapping the Russia shipments that we had in 2022 that we do not have contemplated in our outlook for 2023.
Okay, very helpful. It's good to see, Jim, that you have first- half commentary, your top line is expected to be mid-single digits, so in line with the full year. Any puts and takes that we should think about first quarter, second quarter? Is, like, any shifts there that we should think about? I think you're calling out gross margins to be down in the first quarter. Just curious to know, sorry, Andrew, so it's three questions now. How do we think about gross margins being down in the first quarter? Can it be in the magnitude of 100 to 200 basis points?
Yeah. I think the way I would think about Q1, Q2, the key call out is what we've included in the CFO commentary. That's that we would expect gross margin to be down in Q1. That in part being reflective of the fact that we're lapping the exceptionally low promotional levels from a D2C perspective last year. Aside from that, Laurent, yeah, I would expect that the first quarter from a growth standpoint should outpace the second quarter, related to what Tim was describing earlier, the fact that our spring inventory receipts for 20 23 are much more timely than they were a year ago, and so we're getting those wholesale shipments out sooner as well. That'll drive a little bit of the timing variance on the top line. Those should be the biggest variables.
Also included in the CFO commentary, we did make a comment that Q2 is typically our lowest volume quarter. Given that being a low volume quarter, we do anticipate Q2 being roughly break even. That'll, if you do the math, you kind of back into what that would imply in terms of Q1 earnings.
Always helpful. Thank you so much, Jim.
Yeah. You bet. Thanks, Laurent.
Up next, we have Mitch Kummetz with Seaport Research. Please proceed.
Yeah, thanks for taking my questions. Maybe just a continuation on the gross margin discussion. You expect it to be up 60 basis points for the year. I would imagine that better freight has a big impact on that. Is there any way, Jim, you could kind of walk us through the year-over-year impact in timing of the freight improvement that you expect to see over the course of 2023?
Yeah, we, just big picture, Mitch, in looking back at 2022, inbound freight had nearly a 200 basis point, 170 basis points, 180 basis point impact unfavorably to our gross margin. Part of 2021, the tail end of 2021 was also impactful from an unfavorable standpoint. The weight of the inbound freight is probably a little bit more heavily weighted Q1, Q2, Q3, and then it'll start to abate a bit in Q4 and normalize. That's the way I would think about that.
I think the offsets to keep in mind, you know, and why you're only seeing 60 basis points of gross margin improvement relative to what those inbound freight benefits are the fact that, you know, we are continuing to lap the early part of last year in which the promotional environment was extremely low. We anticipate that normalization. Then with the elevated inventory levels that we have, and as we work through that inventory through the combination of our outlet channels and from a wholesale closeout perspective, that'll have some impact on margin as well. Those are effectively the two major offsets to the inbound freight benefit.
Secondly, on the late deliveries, the delays, delivery delays and the order cancellations that kind of became of that, is there any way to either kind of quantify the impact that that had on the fourth quarter or maybe back half combined? Maybe better yet, I mean, as you, as you lap that, and I think, Tim, you said that, you know, you're not expecting any order delays or any real cancellations for fall 2023. As you lap those delays with an order book that, you know, doesn't have cancellations to it, is there any way to kind of quantify kind of what you pick up as you lap that kind of easy comparison?
Well, I think the easiest way to think about it in terms of the incremental cancellations that we incurred above and beyond what we expected, I think if you just look at the high end of the revenue guidance that we provided in October relative to where we landed, the delta there is gonna be entirely related to cancellations, in North America across our U.S. and Canada business. Aside from that, trying to quantify the full effect of cancellations, it'd be tough to get down into that level of detail. Obviously, you're seeing it in the inventory balance because by and large, the increase in our inventory is effectively, that, cancellations, plus to some degree, earlier receipt of our spring inventory.
You know, as we get into this next year, Mitch, we're planning for kind of more of a normalized shipping pattern, knowing that, from a supply perspective, as Tim touched on, we're in much better shape going into 2023 now.
Okay. Thanks. Good luck.
The next question is coming from Paul Lejuez with Citigroup. Paul, please proceed.
Hey, thanks. It's Tracy Kogan filling in for Paul. My two questions, I guess the first is on your inventory. If you could just give us a little more detail there on where you think you have too much in terms of brands and categories. I guess secondly, what are you seeing on the AUC side for this year, the product costing side, and are you expecting any additional price increases? Thanks.
I'll let Jim talk about the specifics around the inventory, I can tell you, maybe begin with the costing expectations. About half of our inflationary pressure was inbound freight. We've seen a healthy degree of moderation, in fact, even rollbacks the cost there. That's a tailwind for us. Additionally, there appears to be a moderation in the cost increases we were experiencing in raw materials in the components of our products. Labor rates have also increased some substantially, those are not gonna roll back. I think our expectations are that the price increases at the high rate that we saw them in 2021 and 2022 will moderate and there'll be some opportunity for us to expand our gross margins as we've guided.
Jim can talk a little bit about the components of the current inventory.
Yeah, Tracy, to talk through the composition of inventory a bit, certainly we're more elevated than where we'd ordinarily like to be from an inventory perspective. I think when you get under the hood of our inventory and look at the actual composition of the inventory, we're still comfortable with overall quality. You know, there's certainly more of it, by and large, the predominant side of it's current future season based inventory. We're much earlier received on the spring season. We are carrying over a fair amount of inventory. As we've previously spoken about, you know, there's a large proportion of our product lineup that is evergreen product that carries over season to season.
Much of that's been offered as part of our fall 2023 product mix that we've sold into our wholesale customers. We're in good shape as it relates to, you know, having sold in a lot of that inventory already. To the degree there is aged or excess inventory that's remaining, you know, we've adjusted our inventory buys for our outlets and shifted that back more towards moving through excess and liquidation as opposed to made for product. More specifically around composition of inventory, the focal point in terms of where we're seeing the growth in that is predominantly in North America.
You know, I think that that's a good thing in that, you know, that's where we've got the greatest ability from an outlet perspective to be able to move through that inventory profitably.
Great. Thanks very much.
The next question is coming from Mauricio Serna with UBS. Please proceed.
Hi. Good afternoon. Thanks for taking my questions. Just wanted to ask if we could get maybe a little bit more detail on the U.S. growth expectation for the first quarter, maybe in terms of, you know, the wholesale versus DTC. What are you seeing also like in the DTC trends of your business so far? Maybe you could provide a little bit more detail on, you know, the rationale or what caused you guys to take that impairment charge on the prAna business. Just get a little bit more details on that will be very helpful. Thank you.
Yeah, certainly. Well, when I think about the first half of 2023, I'm mindful that we had some of our largest customers had almost no Columbia inventory in their stores during the first several months of 2022. Our deliveries were that impacted. The expectations are that we'll have a nice solid Q1, fill these stores up the way they should be, and we'll have a good start out to 2023. Our DTC growth should be solid as well. Although if you remember, we're really focused on being a wholesale company, we don't give a lot of detail around... that a normal retailer would give. It's just not as much a focus for the company as the wholesale portion of the business.
As it relates to the rationale on the prAna business, we're very bullish on the prAna brand. As you know, we've talked a lot about the reset going on there at prAna. We just believe it's taking longer than we anticipated and wanted to make sure that we were, you know, prepared to give ourselves the time to turn that brand around.
Yeah. Mauricio, I'd just add, you know, there's a lot of factors that go into the impairment. Some of them, some of it's what Tim's describing in the form of the brand's underperformance, you know, in our minds relative to the plan that, you know, we'd set upon acquisition. To a degree, looking at market multiples, looking at interest rates, certain of those factors have also influenced the impairment charge that we took in the quarter.
Got it. Thank you very much.
The next question is coming from Alex Perry with Bank of America. Please proceed.
Hi. Thanks for taking my questions. Just first, can you maybe talk through what is embedded in your guidance in terms of wholesale versus DTC? I think at the Investor Day, you had talked about modest 1 H wholesale growth. Is that sort of the case in how you're thinking about the full year? Thanks.
Yeah. I think the to the degree we've provided detail from a channel perspective, it's a little bit higher level, Alex. You know, we are anticipating after an incredibly solid year from a wholesale perspective in 2022 that the DTC business would outpace wholesale growth in 2023. A couple factors there. One, you know, continued investment in what we're making in from a digital and e-commerce perspective. As you think about the brick-and-mortar side of our business, we did add a fair amount of new stores in 2022, so we'll be lapping the opening and the annualization of those stores in 2023, plus we've got a handful of new stores also planned from a growth standpoint.
That's really helpful. I think a lot of people have asked about your sort of balance sheet inventory, but I wanted to ask sort of about your, how you're thinking about channel inventories. How are you sort of viewing that both for, you know, you and others that you compete with? Do you feel like channel inventories are in a good place, or do you think that retailers will be carrying over inventory into, you know, sort of fall 2023? Thanks.
We monitor something in the range of 85% of our North American retail customers' inventories, so we can gauge how we're doing there from a sell-through perspective on our brands. And what we're seeing is generally average to slightly better than average sell-through performance when you compare with prior periods, including pre-pandemic prior periods. We can't see visibility on other brands, but as it relates to ours, we're in a good position and one that would be approximately where we've been in the past. You know, weather plays a big portion in the second half business and the residual inventories. As you can see, the great cold weather that's going through North America today is making a very big impact on the liquidation for our retailers.
Our expectation is once the winter's done, that we'll be in a good, solid, clean position with our merchandise.
Perfect. That's very helpful. Best of luck going forward.
Next question is coming from Alex Douglas with Cowen. Cowen, excuse me. Please proceed.
I just wanted to go back to the question on fiscal 2023, gross margins and maybe, how that's broken down. Is there any more detail that you could provide on maybe specifically the impacts from freight and promotions and maybe kind of the cadence throughout the year would be very helpful. Thank you.
Yeah. If you reference the CFO commentary we've provided, there's a bullet point list there, but I can speak a little bit in terms of the relative weighting of these. Lower inbound freight costs. We anticipate and we've built into our guidance a very significant element of benefit there. In 2022, I mentioned it was about 180 basis point headwind to us in gross margin. That was also a headwind to us in the latter part of 2021.
With freight rates coming down basically to where they were in advance of the escalation we saw in those costs, we should be getting most of that back in 2023, and that's built into the outlook that we've provided. To a lesser degree, you know, there's some favorable channel mix . Our D2C business is anticipated to outpace growth across the rest of the business. The big offset in here is going to be the expectation around promotional levels coming back down to more normalized levels, and us also working through getting our inventory clean. You know, there's a sizable benefit from a inbound freight standpoint that's gonna be offset to a pretty good degree given promotion levels and clearing through the inventory.
That's helpful. Thank you.
We have reached the end of the question and answer session. I will now turn the call over to management for closing remarks.
All right. Thank you very much for listening in. We're looking forward to a great 2023 and being able to update you as we go along during our next quarterly call. Thanks for listening. We'll talk to you soon.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.