COLUMBIA SPORTSWEAR CO 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward-Looking Statements", Part I, Item 1 and Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, refer to Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2022 for our discussion and analysis comparing financial condition and results of operations from 2022 to 2021. OVERVIEW We connect active people with their passions. We are a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products. We manage these products in two categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four brands: Columbia, SOREL, Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwear and prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in approximately 90 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada. We are investing in our strategic priorities to: • accelerate profitable growth; • create iconic products that are differentiated, functional and innovative; • drive brand engagement through increased, focused demand creation investments; • enhance consumer experiences by investing in capabilities to delight and retain consumers; • amplify marketplace excellence, with digitally-led, omni-channel, global distribution; and • empower talent that is driven by our core values through a diverse and inclusive workplace. Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term. Business Environment and Trends Economic Environment Impacting Consumer Spending Ability and Preferences | We believe inflationary pressures, increasing interest rates and recessionary fears are impacting wholesale customer behavior, including cautiousness in placing advance orders for merchandise. In addition, we anticipate risk of consumer discretionary spending coming under pressure as the U.S. federal funds rate fluctuates and credit markets tighten. Elevated Inflationary Pressures | Inflationary pressures, including outbound freight, raw materials, labor and wage rates, and product input costs, impacted our first quarter 2023 results. We implemented product price increases for our Spring 2023 season, which varied by market and product category. In the U.S., on average, we increased pricing by a mid-single to high-single-digit percent. We do not expect to implement additional meaningful product price increases as we anniversary prior year increases and begin to see inflationary pressure moderate. Strong U.S. Dollar | In 2022, the rapid strengthening of the U.S. dollar relative to major foreign currencies unfavorably impacted our results. The impact of unfavorable foreign currency translation unfavorably impacted net sales and profitability in the first quarter of 2023, and is anticipated to continue to through at least the first half of 2023 before shifting to a favorable impact in the second half of 2023. Heightened Geopolitical Environment | Geopolitical tensions throughout the globe escalated in 2022 as a result of the invasion of Ukraine by Russia and other actions. We believe these geopolitical tensions will remain elevated and have the potential to manifest themselves in certain regions where we directly operate. Increased Freight Charges | For the majority of 2022, we experienced elevated ocean freight costs as a result of price increases stemming from an imbalance of supply and demand for steamship and ocean container capacity. As a result, these costs have had a substantially unfavorable impact on our gross margin. Beginning in the fourth quarter of 2022, we experienced significant declines in ocean freight cost, which we expect will benefit gross margin throughout 2023. We anticipate these lower ocean freight costs to persist into 2023. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 18 Table of Contents Improved Inventory Receipts | As a result of certain supply chain disruptions, we received Spring 2022 and Fall 2022 inventory later than expected and realized much higher than normal cancellations from our wholesale customers. Inventory production and logistics transit times have improved markedly for Spring 2023, impacting sales and inventory. We expect to continue to uphold these improved transit times and to be more in-line with our historical experience throughout 2023, assuming no material downturn in port or railroad labor relations. COVID-19 Impacts in China | From 2020 to 2022, government efforts to control the spread of COVID-19 in China severely impacted our business in China. We believe these efforts resulted in lower consumer demand, as well as disruption of our operations, including operations of our owned DTC stores and stores operated by our wholesale customers, and warehousing and fulfillment operations. Upon the change in China's zero-COVID policy in December 2022, our business in China has experienced a surge in consumer demand. We expect to continue to see our China business improve in 2023 as the market benefits from re-opening and pent-up demand. Elevated Inventories | Following strong consumer demand in 2021 combined with healthy retail marketplace inventories exiting 2021, wholesale customers placed aggressive orders for inventory. Correspondingly, our inventory purchases were far greater than historical norms. However, in 2022, a slowing of consumer demand in the market combined with our delivery delays, resulted in our elevated inventory levels. As retailers rationalized their inventory needs and demonstrated a more conservative approach to inventory management, we experienced increased order cancellations for Spring 2022 and Fall 2022 orders. At the end of the first quarter of 2023, our inventory levels reflected elevated carryover inventory and, to a lesser extent, increased older season inventory. To address these higher inventory levels, we have adjusted future inventory purchases and plan to utilize our outlet stores to sell a portion of our excess inventory. We expect our inventories to remain elevated through the first half of 2023 and to begin to normalize in the second half of the year. Increased Distribution Center Capacity Pressure | Elevated inventory levels combined with uneven flow of inventory receipts and shipments are resulting in storage and process capacity pressures within our distribution centers and third-party logistics operations. We began to experience these pressures as we received Fall 2022 inventory and expect this trend to continue well into 2023. We have and expect to continue to incur additional inventory carrying costs in 2023 as a result of additional costs for outside storage, and other inventory related holding costs, including losses in productivity, as we look to normalize our inventory position. Changes in Promotional Environment | Near the end of the third quarter of 2022, we began to increase promotional activity based on the marketplace and our inventory position. This resulted in an unfavorable impact to our DTC product margins compared to the same period in the prior year in which promotional activity was exceptionally low. In the first quarter of 2023, we believe our current level of promotional activity is consistent with historical norms and reflects a return to those levels in the marketplace. We anticipate this to continue throughout 2023. In addition, in the first quarter of 2023, we experienced strong consumer traffic in our retail stores and a softening of e-commerce sales as we believe consumers are seeking out value and promotions in the marketplace. Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals in the United States to spend an increased amount of time outside, including participating in outdoor recreational activities. We believe we have benefited from the consumers need for outdoor products. However, we believe the outdoor participation growth rates are returning to normalized levels. We have seen this in certain parts of our business, such as outdoor footwear. In the first quarter 2023, footwear sales for hiking and trail activities have softened, following growth over the last several years. Changing Consumer Expectations and Shopping Habits | Consumer behavior continues to fluctuate. Consumer expectations and the related competitive pressures have increased and continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We also believe consumers in the U.S. are still adjusting shopping habits in a post-COVID world, which may be indicative of consumer habits shifting back to brick and mortar retail. Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2022, over 60% of our net sales and over 75% of our operating income were realized in the second half of the year. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 19 Table of Contents RESULTS OF OPERATIONS The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Part I, Item 1 of this Quarterly Report on Form 10-Q. Non-GAAP Financial Measure To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the exchange rates that were in effect during the comparable period of the prior year. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measure useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP. The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below. Results of Operations — Consolidated The following table presents the items in our unaudited Condensed Consolidated Statements of Operations, both in dollars and as a percentage of net sales: Three Months Ended March 31, (in millions, except for percentage of net sales and per share amounts) 2023 2022 Net sales $ 820.6 100.0 % $ 761.5 100.0 % Cost of sales 421.1 51.3 % 383.1 50.3 % Gross profit 399.5 48.7 % 378.4 49.7 % Selling, general and administrative expenses 347.4 42.3 % 299.1 39.3 % Net licensing income 4.3 0.5 % 4.4 0.6 % Operating income 56.4 6.9 % 83.7 11.0 % Interest income, net 3.3 0.4 % 0.4 — % Other non-operating income, net 0.9 0.1 % — — % Income before income tax 60.6 7.4 % 84.1 11.0 % Income tax expense 14.4 1.8 % 17.3 2.2 % Net income $ 46.2 5.6 % $ 66.8 8.8 % Diluted earnings per share $ 0.74 $ 1.03 COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 20 Table of Contents Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended March 31, (in millions, except for percentages) Reported Net Sales 2023 Adjust for Foreign Currency Translation Constant-currency Net Sales 2023 (1) Reported Net Sales 2022 Reported Net Sales % Change Constant-currency Net Sales % Change (1) Brand Net Sales: Columbia $ 702.8 $ 19.2 $ 722.0 $ 643.8 9% 12% SOREL 60.5 0.9 61.4 63.6 (5)% (3)% prAna 32.5 — 32.5 32.7 (1)% (1)% Mountain Hardwear 24.8 0.5 25.3 21.4 16% 18% Total $ 820.6 $ 20.6 $ 841.2 $ 761.5 8% 10% Product Category Net Sales: Apparel, Accessories and Equipment $ 632.6 $ 14.9 $ 647.5 $ 565.9 12% 14% Footwear 188.0 5.7 193.7 195.6 (4)% (1)% Total $ 820.6 $ 20.6 $ 841.2 $ 761.5 8% 10% Channel Net Sales: Wholesale $ 452.5 $ 11.1 $ 463.6 $ 408.2 11% 14% Direct-to-consumer 368.1 9.5 377.6 353.3 4% 7% Total $ 820.6 $ 20.6 $ 841.2 $ 761.5 8% 10% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Overall, our global net sales increased primarily due to earlier shipments of Spring 2023 wholesale orders and higher consumer demand in our DTC business, partially offset by unfavorable impacts from changes in foreign currency exchange rates. While our wholesale business benefited from improved transit times, Columbia and SOREL brand net sales reflect a decline in footwear net sales, highlighting challenging dynamics in the footwear market. Our DTC e-commerce net sales contracted 1% year-over-year for the three months ended March 31, 2023 compared to the same period in the prior year. For the three months ended March 31, 2022, DTC e-commerce net sales grew 21% compared to the same period in the prior year. Gross Profit. Gross profit is summarized in the following table: Three Months Ended March 31, (in millions, except for percentages and basis points) 2023 2022 Change Gross profit $ 399.5 $ 378.4 $ 21.1 6 % Gross margin 48.7 % 49.7 % -100 bps Gross margin contracted primarily due to the following factors: • unfavorable channel profitability due to the net effect of lower DTC margins and, to a lesser extent, higher wholesale margins; partially offset by • lower inbound freight costs. Lower DTC margins discussed above were primarily driven by higher promotional activity and elevated outbound freight costs. Higher wholesale margins discussed above were primarily driven by price increases more than offsetting inflationary product costs, partially offset by actions to reduce excess inventory. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 21 Table of Contents Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table: Three Months Ended March 31, (in millions, except for percentages and basis points) 2023 2022 Change Selling, general and administrative expenses $ 347.4 $ 299.1 $ 48.3 16 % Selling, general and administrative expenses as percent of net sales 42.3 % 39.3 % 300 bps SG&A expense growth reflects elevated expenses to support the growth of our business, inflationary pressures, and investments to drive our brand-led consumer-focused strategies. SG&A expenses increased primarily due to the following factors: • higher supply chain expenses of $18.8 million, reflecting increased global distribution center expenses, including higher warehousing and fulfillment expenses, resulting from elevated inventory levels as well as third-party logistics transition-related costs; and • higher omni-channel expenses of $13.8 million, including higher DTC expenses, including variable expenses including personnel expenses and costs associated with new stores. Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table: Three Months Ended March 31, (in millions, except for percentages) 2023 2022 Change Income tax expense $ 14.4 $ 17.3 $ (2.9) (17) % Effective income tax rate 23.7 % 20.5 % Our effective income tax rates for the three months ended March 31, 2023 and 2022 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the three months ended March 31, 2023, our effective income tax rate was primarily impacted by a non-recurring benefit related to foreign currency gains resulting from an intercompany transaction. For the three months ended March 31, 2022, our effective income tax rate was primarily impacted by the non-recurring benefit related to the finalization of U.S. and foreign audits. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 22 Table of Contents Results of Operations — Segment Segment operating income includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Operating income as a percentage of net sales in the U.S. is typically higher than the other segments primarily due to scale efficiencies associated with the larger base of net sales in the U.S. and, to a lesser extent, incremental licensing income. We anticipate this trend to continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business. Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Net sales by geographic segment are summarized in the following table: Three Months Ended March 31, (in millions, except for percentage changes) Reported Net Sales 2023 Adjust for Foreign Currency Translation Constant-currency Net Sales 2023 (1) Reported Net Sales 2022 Reported Net Sales % Change Constant-currency Net Sales % Change (1) U.S. $ 517.5 $ — $ 517.5 $ 501.9 3% 3% LAAP 136.4 11.9 148.3 121.7 12% 22% EMEA 108.3 5.3 113.6 94.7 14% 20% Canada 58.4 3.4 61.8 43.2 35% 43% $ 820.6 $ 20.6 $ 841.2 $ 761.5 8% 10% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table: Three Months Ended March 31, (in millions) 2023 2022 Change U.S. $ 81.6 $ 113.2 $ (31.6) LAAP 18.3 13.0 5.3 EMEA 20.4 16.5 3.9 Canada 10.8 8.1 2.7 Total segment operating income 131.1 150.8 (19.7) Unallocated corporate expenses (74.7) (67.1) (7.6) Operating income $ 56.4 $ 83.7 $ (27.3) U.S. U.S. operating income decreased $31.6 million to $81.6 million, or 15.8% of net sales, for the first quarter of 2023 from $113.2 million, or 22.5% of net sales, for the comparable period in 2022. The decrease was driven primarily by increased net sales, more than offset by decreased gross margin and increased SG&A expenses. U.S. net sales increased $15.6 million, or 3%, for the first quarter of 2023, compared to the same period in 2022. U.S. net sales increased across all channels and was primarily driven by U.S. wholesale net sales for our Columbia brand. Increased U.S. wholesale net sales were primarily driven by earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders in the prior year. U.S. DTC net sales increased due to sales growth generated from our retail stores and was partially offset by decreased net sales in our e-commerce business. U.S. gross margin decreased primarily due to lower DTC margins resulting from higher promotional activity. As of March 31, 2023, our U.S. business operated 156 retail stores, compared to 143 stores as of March 31, 2022. SG&A expenses increased as a percentage of net sales to 33.1% for the first quarter of 2023 compared to 27.5% for the same period in 2022, primarily driven by increased distribution center expenses and higher third-party logistics expenses including transition related costs. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 23 Table of Contents LAAP LAAP operating income increased $5.3 million to $18.3 million, or 13.4% of net sales, for the first quarter of 2023 from $13.0 million, or 10.7% of net sales, for the comparable period in 2022. The increase was driven primarily by increased net sales and decreased SG&A expenses, partially offset by decreased gross margin. LAAP net sales increased $14.7 million, or 12% (22% constant-currency), for the first quarter of 2023, compared to the same period in 2022. Increased LAAP net sales was primarily driven by our LAAP distributor and China businesses, partially offset by our Korea business. LAAP net sales increased due to higher consumer demand, including a surge in demand in China partially resulting from the change in its zero-COVID policy, as well as earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders. LAAP SG&A expenses decreased as a percentage of net sales to 40.6% for the first quarter of 2023 compared to 46.6% for the same period in 2022, primarily driven by leveraging of fixed operating expenses. EMEA EMEA operating income increased $3.9 million to $20.4 million, or 18.8% of net sales, for the first quarter of 2023 from $16.5 million, or 17.4% of net sales, for the comparable period in 2022. The increase was driven primarily by increased net sales. EMEA net sales increased $13.6 million, or 14% (20% constant-currency), for the first quarter of 2023, compared to the same period in 2022, driven by increased net sales in our Europe-direct business. Europe-direct net sales increased primarily due to earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders, as well as broad-based growth across wholesale and DTC businesses. EMEA distributor net sales decreased primarily due to our prior year decision to pause taking new orders from a third-party international distributor for Russia, Ukraine and Belarus markets, partially offset by growth in other EMEA markets. EMEA SG&A expenses increased as a percentage of net sales to 28.0% for the first quarter of 2023 compared to 26.3% for the same period in 2022. Canada Canada operating income increased $2.7 million to $10.8 million, or 18.5% of net sales, for the first quarter of 2023 from $8.1 million, or 18.9% of net sales for the comparable period in 2022. The increase primarily resulted from increased net sales. Canada net sales increased $15.2 million, or 35% (43% constant-currency), for the first quarter of 2023, compared to the same period in 2022, primarily driven by increased net sales in our Canada wholesale and DTC businesses. Canada SG&A expenses decreased as a percentage of net sales to 26.8% for the first quarter of 2023, compared to 28.5% for the same period in 2022. Unallocated Corporate Expenses Unallocated corporate expenses increased by $7.6 million to $74.7 million for the first quarter of 2023 from $67.1 million for the same period in 2022, primarily driven by higher personnel expense. LIQUIDITY AND CAPITAL RESOURCES Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $965 million in total liquidity as of March 31, 2023. Our liquidity may be affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash and cash equivalents and short-term investments balances generally are at their lowest level just prior to the start of the U.S. holiday season and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales. This trough cash position is impacted by the amount of product we order from our contract manufacturers in anticipation of customer demand and is more heavily impacted in advance of periods of expected high demand. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 24 Table of Contents Cash Flow Activities Cash flows are summarized in the following table: Three Months Ended March 31, (in millions) 2023 2022 Change Net cash provided by (used in): Operating activities $ 78.0 $ (33.8) $ 111.8 Investing activities (111.7) (56.8) (54.9) Financing activities (35.6) (237.9) 202.3 Net effect of exchange rate changes on cash 0.1 0.3 (0.2) Net decrease in cash and cash equivalents $ (69.2) $ (328.2) $ 259.0 The change in cash flows provided by operating activities was driven by a $133.0 million decrease in cash used in changes in assets and liabilities, partially offset by a $21.2 million decrease in cash provided by net income and non-cash adjustments. The most significant comparative changes in assets and liabilities included Inventories, and to a lesser extent, Accounts payable, Prepaid expenses and other current assets, and Accrued liabilities. The $142.6 million increase in cash provided by Inventories reflected a decrease in inventory due to a larger portion of Spring 2023 being received on time, which allowed it to be delivered to customers, compared to Spring 2022 in which a larger portion of inventory was in transit as of March 31, 2022. The $40.7 million increase in cash provided by Prepaid expenses and other current assets was primarily driven by changes to inventory prepayments. The $21.9 million decrease in cash used in Accrued liabilities was primarily driven by lower bonus payments in 2023 compared to 2022. These amounts were partially offset by the $74.6 million increase in cash used in Accounts payable primarily resulting from the effects of lower payables related to a decline in in-transit inventory in the first quarter of 2023 compared to the first quarter of 2022. Net cash used in investing activities was $111.7 million for the three months ended March 31, 2023, compared to $56.8 million for the three months ended March 31, 2022. For the 2023 period, net cash used in investing activities consisted of $97.7 million in net purchases of short-term investments and $14.0 million in cash used for capital expenditures. For the 2022 period, net cash used in investing activities consisted of $43.9 million in net purchases of short-term investments and $12.9 million for capital expenditures. Net cash used in financing activities was $35.6 million for the three months ended March 31, 2023 compared to $237.9 million for the three months ended March 31, 2023. For the 2023 period, net cash used in financing activities primarily consisted of repurchases of common stock of $15.3 million and dividend payments to our shareholders of $18.6 million. For the 2022 period, net cash used in financing activities primarily consisted of repurchases of common stock of $217.3 million and dividend payments to our shareholders of $19.2 million. Sources of Liquidity Cash and cash equivalents and short-term investments As of March 31, 2023, we had cash and cash equivalents of $361.0 million and short-term investments of $99.5 million, compared to $430.2 million and $0.7 million, respectively, as of December 31, 2022 and $435.2 million and $175.0 million, respectively, as of March 31, 2022. Domestic Credit Facility Refer to Note 7 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding the domestic credit facility. As of March 31, 2023, we had available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million. We were in compliance with all associated covenants and there was no balance outstanding under the facility. International Credit Facility As of March 31, 2023, our European subsidiary had available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.8 million). There was no balance outstanding under the facility. COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 25 Table of Contents Other Sources As of March 31, 2023, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$106.8 million. There was no balance outstanding under these facilities. Capital Requirements Our expected short-term and long-term cash needs are primarily for working capital and capital expenditures. We expect to meet these short-term and long-term cash needs primarily with cash flows from operations and, if needed, borrowings from our existing credit facilities. Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collection of accounts receivable balances from our customers. Inventory balances may be elevated in advance of periods of expected high demand. As of March 31, 2023, our inventory balance increased to $959.2 million, compared to $714.4 million as of March 31, 2022, driven by elevated carryover inventory, earlier receipts of Spring 2023 product, and, to a lesser extent, increased older season inventory. We believe older season inventories represent a manageable portion of our total inventory mix. To address higher inventory levels, we have adjusted future inventory purchases and we are leveraging our outlet stores to sell excess merchandise. We expect inventory to remain elevated into the second half of 2023 as we carry forward inventory into future seasons, balancing reducing inventory levels with maintaining profitability. We have planned 2023 capital expenditures of approximately $70 to $80 million. This includes investments in our DTC operations, including new stores, U.S. distribution projects to increase efficiency and expand storage, corporate facilities improvements, and digital and supply chain capabilities to support our strategic priorities. Our actual capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction as well as the availability of capital assets from suppliers. Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon our financial position, market conditions and our strategic priorities, our capital allocation approach includes: • investing in organic growth opportunities to drive long-term profitable growth; • returning at least 40% of free cash flow to shareholders through dividends and share repurchases; and • considering opportunistic mergers and acquisitions. Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures since it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity. Other cash commitments Our inventory purchase obligations were $540.6 million as of March 31, 2023, compared to $401.4 million and $876.3 million as of December 31, 2022 and March 31, 2022, respectively. There have been no other significant changes to our other cash commitments as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting for sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies and estimates. We base our ongoing estimates on historical COLUMBIA SPORTSWEAR COMPANY | Q1 2023 FORM 10-Q | 26 Table of Contents experience and other assumptions that we believe to be reasonable in the circumstances. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding our critical accounting policies and estimates. Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this Quarterly Report on Form 10-Q. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. There have been no significant changes to the Company's significant accounting policies described at Note 2 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note 1 in Part I, Item 1 of this Quarterly Report on Form 10-Q. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has not been any material change in the market risk disclosure contained in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022.