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. OVERVIEW As a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products, our mission is to connect active people with their passions. We manage our product line in two major 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 Demand | We believe inflationary pressure, increased interest rates and general economic uncertainty are impacting consumer and wholesale customer behavior and demand. Wholesale customers have been increasingly cautious managing inventory, including placing advance orders. This cautiousness has been most pronounced in the U.S., but we believe that retailer prudence is spreading to other regions, including Canada and Europe. Consumer demand, particularly in the U.S and Korea, has been generally soft for apparel and footwear products. We anticipate these trends will continue to persist through the balance of 2023 and into 2024. Promotional and Clearance Environment | A surge in consumer demand in late 2021 and continuing through the first half of 2022 resulted in exceptionally low promotional levels which began to normalize in the second half of 2022. We believe consumers are seeking value and promotions in the marketplace, which has dampened demand in full price channels, particularly in the U.S., including our direct-to-consumer ("DTC") e-commerce sites and branded stores. In the first nine months of 2023, our promotional levels were on par with or slightly above levels prior to the COVID-19 pandemic. However, the proportion of older season clearance inventory being marked down and sold through our outlet stores has increased and resulted in lower DTC product margins. We expect this trend to continue until excess inventories return to normalized levels. Changing Consumer Expectations and Shopping Habits | Consumer behavior continues to fluctuate. We believe consumers in the U.S. are still adjusting shopping habits in a post-COVID pandemic world, including a shift back to brick-and-mortar retail shopping experiences. A culmination of other factors have and will continue to contribute to shifts in consumer preferences, including increased spending on dining, travel, and entertainment, as well as other discretionary forms of spending. As a result of these behavior shifts, anticipating future demand is increasingly challenging. Improved Inventory Receipts | As a result of 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 and Fall 2023, resulting in earlier production and receipt of inventory, and enabling timely (and even early) shipment of orders to our wholesale customers. As a result, the year-over-year timing of wholesale shipments has impacted our net sales growth on a quarter-by-quarter basis. We expect these improved transit times to continue and to be more in-line with our historical experience throughout 2023, assuming there are no significant disruptions to our logistics and distribution operations. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 21 Table of Contents Elevated Inventories | As a result of highly volatile shifts in supply and demand and supply chain challenges, we exited 2022 with elevated inventory. Improved on-time production throughout 2023 further contributed to an increase in our inventory levels during the first half of the year. At the end of the third quarter of 2023, our inventory primarily reflected current season inventory and, to a lesser extent, carryover and older season inventory. To address our elevated inventory levels, we meaningfully reduced purchases of Spring 2023 and Fall 2023 inventory and are taking a cautious approach to future season purchases. Additionally, we are leveraging our outlet stores and have opened temporary outlet stores to profitably clear excess inventory. To a far lesser extent, we are selling product through close-out sales to our wholesale customers. We are continuing to sell carryover and excess inventory during the Fall 2023 selling season and expect our inventory levels to reach more normalized levels by the end of the year. Distribution Center and Third-Party Capacity Pressure | Elevated inventory levels have resulted 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 through the end of 2023. We have incurred and expect to continue to incur additional inventory carrying costs throughout 2023 related to incremental outside storage, and other inventory related holding and handling costs, including losses in productivity, as we look to normalize our inventory position. We expect these pressures and incremental costs to alleviate as our inventory levels normalize at the start of 2024. China | From 2020 to 2022, government efforts to control the spread of COVID-19 in China severely impacted our business there. 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. Since 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 favorable results from our China business throughout the balance of 2023. Pricing | In response to prior supply chain and product input inflationary cost pressures, we implemented product price increases for our Spring 2023 season merchandise, 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 to mitigate inflationary pressure. As certain supply chain costs have normalized and product input costs have become stable, we have not implemented additional meaningful product price changes. Normalized Freight Charges | For the majority of 2022, we experienced elevated ocean freight costs, which had a substantially unfavorable impact on our gross margin. Beginning in the fourth quarter of 2022, we began to experience significant declines in ocean freight costs and have seen ocean freight container rates return to historical levels. Our gross margin has realized the benefits of these lower costs and we anticipate these lower ocean freight costs will persist and continue to benefit gross margin throughout the balance of 2023 and into early 2024. 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. Strong U.S. Dollar | In 2022, the rapid strengthening of the U.S. dollar relative to major foreign currencies unfavorably impacted our results. With the continued strength of the U.S. dollar in 2023, foreign currency translation has unfavorably impacted net sales and profitability in the first half of 2023. Beginning in the third quarter of 2023, foreign currency translation was slightly favorable to our results. We anticipate the translation of foreign currency exchange rates to have a modestly favorable impact on our results for the balance of 2023. Heightened Geopolitical Risk | We sell our products in approximately 90 countries and our ability to sell in certain markets may be impacted by ongoing geopolitical tensions. We believe these tensions will remain elevated and have manifested, and will continue to manifest themselves in certain regions where we operate. Increasing Regulatory Environment | Recently, the number of regulations at the global and jurisdictional level impacting our business, and in particular our products, has significantly increased. We expect this trend to continue, and as a result, will impact our expenses, product input costs and ultimately our products, which may in turn impact our revenue. These regulatory matters at a minimum include regulations related to climate, privacy and product chemistry. For example, in anticipation of the effectiveness of the regulations in California and New York states related to perfluoroalkyl and polyfluoroalkyl substances ("PFAS"), we have been working to eliminate PFAS chemicals across our global product line. We intend to stop manufacturing any apparel or footwear with PFAS intentionally added prior to our Fall 2024 season. This transition has the potential to impact the flow of our wholesale business in 2024, as well as our inventory management strategies for existing merchandise. In addition, these PFAS matters may result in a more promotional environment in 2024 as retailers move through merchandise containing PFAS. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 22 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 September 30, Nine Months Ended September 30, (in millions, except for percentage of net sales and per share amounts) 2023 2022 2023 2022 Net sales $ 985.7 100.0 % $ 955.0 100.0 % $ 2,427.2 100.0 % $ 2,294.6 100.0 % Cost of sales 505.5 51.3 % 496.5 52.0 % 1,233.5 50.8 % 1,173.5 51.1 % Gross profit 480.2 48.7 % 458.5 48.0 % 1,193.7 49.2 % 1,121.1 48.9 % Selling, general and administrative expenses 351.6 35.7 % 319.0 33.4 % 1,011.5 41.7 % 899.3 39.2 % Net licensing income 6.0 0.7 % 5.8 0.6 % 15.0 0.6 % 15.9 0.7 % Operating income 134.6 13.7 % 145.3 15.2 % 197.2 8.1 % 237.7 10.4 % Interest income, net 1.9 0.1 % 0.8 0.1 % 8.6 0.4 % 1.7 0.1 % Other non-operating income (loss), net (0.4) — % (0.3) — % 0.4 — % (1.7) (0.1) % Income before income tax 136.1 13.8 % 145.8 15.3 % 206.2 8.5 % 237.7 10.4 % Income tax expense 32.6 3.3 % 34.0 3.6 % 48.1 2.0 % 51.9 2.3 % Net income $ 103.5 10.5 % $ 111.8 11.7 % $ 158.1 6.5 % $ 185.8 8.1 % Diluted earnings per share $ 1.70 $ 1.80 $ 2.56 $ 2.94 COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 23 Table of Contents Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended September 30, (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 $ 804.0 $ (0.8) $ 803.2 $ 773.3 4% 4% SOREL 122.1 (0.3) 121.8 112.4 9% 8% prAna 30.7 — 30.7 37.4 (18)% (18)% Mountain Hardwear 28.9 0.3 29.2 31.9 (9)% (8)% Total $ 985.7 $ (0.8) $ 984.9 $ 955.0 3% 3% Product Category Net Sales: Apparel, Accessories and Equipment $ 731.7 $ 0.3 $ 732.0 $ 726.3 1% 1% Footwear 254.0 (1.1) 252.9 228.7 11% 11% Total $ 985.7 $ (0.8) $ 984.9 $ 955.0 3% 3% Channel Net Sales: Wholesale $ 664.3 $ (1.9) $ 662.4 $ 645.1 3% 3% Direct-to-consumer 321.4 1.1 322.5 309.9 4% 4% Total $ 985.7 $ (0.8) $ 984.9 $ 955.0 3% 3% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Our global net sales increase reflected balanced growth from our DTC and wholesale channels. Wholesale net sales growth was aided by earlier shipment of Fall 2023 wholesale orders in the third quarter compared to shipment of Fall 2022 orders in the same period of the prior year. This increase was partially offset by the anniversary of prior year shipments to Russia (for orders that were placed prior to the invasion of Ukraine), as well as a higher portion of Fall 2023 distributor orders shipping in the second quarter of 2023 compared to the timing of Fall 2022 shipments in the prior year. By brand, Columbia and SOREL brands' net sales benefited from earlier shipment of Fall 2023 wholesale orders. Footwear growth primarily reflected earlier shipment of Fall 2023 orders and increased clearance product sales. Our global DTC net sales reflected a 7% increase in brick-and-mortar business partially offset by a 3% decrease in e-commerce business for the three months ended September 30, 2023 compared to the same period in the prior year. Gross Profit. Gross profit is summarized in the following table: Three Months Ended September 30, (in millions, except for percentages and basis points) 2023 2022 Change Gross profit $ 480.2 $ 458.5 $ 21.7 5 % Gross margin 48.7 % 48.0 % 70 bps Gross margin expanded primarily due to the following factors: • an approximate 310 bps increase related to lower inbound freight costs; • favorable channel and regional net sales shifts primarily due to lower proportion of distributor sales, which generally carry lower gross margins; partially offset by COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 24 Table of Contents • an approximate 280 bps decrease of channel profitability resulting from lower wholesale margins reflecting actions to reduce excess inventory and lower DTC product margins due to increased brick-and-mortar clearance and promotional activity, and • year-over-year changes in inventory provisions. Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table: Three Months September 30, (in millions, except for percentages and basis points) 2023 2022 Change Selling, general and administrative expenses $ 351.6 $ 319.0 $ 32.6 10 % Selling, general and administrative expenses as percent of net sales 35.7 % 33.4 % 230 bps SG&A expenses growth was comprised of variable expenses incurred to support sales growth, investments to support growth strategies, increased distribution and fulfillment costs related to elevated inventory, and inflationary pressures, including increases in employee salaries and wages. SG&A expenses increased primarily due to the following factors: • higher omni-channel expenses of $12.8 million, reflecting higher DTC brick-and-mortar expenses, including increased personnel expenses and costs associated with new and temporary stores; • higher demand creation expenses; and • higher supply chain expenses, reflecting higher warehousing and fulfillment expenses, as well as increased third-party logistics costs. Interest Income, net. Interest income, net is summarized in the following table: Three Months Ended September 30, (in millions, except for percentages) 2023 2022 Change Interest income, net $ 1.9 $ 0.8 $ 1.1 138 % Interest income, net as a percent of net sales 0.1 % 0.1 % Interest income, net increased primarily reflecting higher yields on increased levels of cash, cash equivalents and short-term investments. Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table: Three Months Ended September 30, (in millions, except for percentages) 2023 2022 Change Income tax expense $ 32.6 $ 34.0 $ (1.4) (4) % Effective income tax rate 24.0 % 23.3 % Our effective income tax rates for the three months ended September 30, 2023 and 2022 were impacted by discrete tax items, which lowered the effective income tax rate for each period. For the three months ended September 30, 2023, our effective income tax rate was primarily impacted by a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction. For the three months ended September 30, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to a decrease in accrued foreign withholding taxes. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 25 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Nine Months Ended September 30, (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 $ 2,043.8 $ 25.0 $ 2,068.8 $ 1,903.0 7% 9% SOREL 220.4 0.7 221.1 204.7 8% 8% prAna 90.8 — 90.8 110.8 (18)% (18)% Mountain Hardwear 72.2 0.9 73.1 76.1 (5)% (4)% Total $ 2,427.2 $ 26.6 $ 2,453.8 $ 2,294.6 6% 7% Product Category Net Sales: Apparel, Accessories and Equipment $ 1,853.2 $ 20.5 $ 1,873.7 $ 1,760.6 5% 6% Footwear 574.0 6.1 580.1 534.0 7% 9% Total $ 2,427.2 $ 26.6 $ 2,453.8 $ 2,294.6 6% 7% Channel Net Sales: Wholesale $ 1,445.1 $ 11.7 $ 1,456.8 $ 1,353.2 7% 8% Direct-to-consumer 982.1 14.9 997.0 941.4 4% 6% Total $ 2,427.2 $ 26.6 $ 2,453.8 $ 2,294.6 6% 7% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Our global net sales increase was driven by international sales growth, primarily from our Europe-direct, China and Canada businesses. In these markets, DTC net sales have been generally strong throughout the year, while wholesale net sales growth was aided, in part, by favorable timing of Fall 2023 wholesale shipments compared to the same period last year. The timing of 2023 shipments represented more normalized timing compared to timing delays in prior years driven by COVID-19 pandemic related supply chain disruptions. Columbia brand net sales, in particular, benefited from increased international sales, while its sales in the U.S. were largely aided by earlier shipment of Fall 2023 wholesale shipments and increased DTC consumer demand. SOREL brand net sales were driven by earlier shipment of Fall 2023 wholesale shipments and increased clearance product sales, partially offset by a slight decline in DTC sales. Footwear sales growth reflects earlier shipment of Fall 2023 wholesale orders, as well as increased promotional activity to clear excess inventory. Our global DTC net sales reflected a 7% increase in brick-and-mortar business, partially offset by a 1% decrease in e-commerce business for the nine months ended September 30, 2023 compared to the same period in the prior year. Gross Profit. Gross profit is summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages and basis points) 2023 2022 Change Gross profit $ 1,193.7 $ 1,121.1 $ 72.6 6 % Gross margin 49.2 % 48.9 % 30 bps COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 26 Table of Contents Gross margin expanded primarily due to the following factors: • an approximate 210 bps increase related to lower inbound freight costs; partially offset by • unfavorable channel profitability reflecting lower DTC product margins and lower wholesale margins. Lower DTC margins discussed above were primarily driven by higher clearance and promotional activity, including a greater proportion of sales of excess inventory through our DTC outlet stores. Lower wholesale margins discussed above were primarily driven by actions to reduce excess inventory, partially offset by price increases that more than offset inflationary product costs. Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages and basis points) 2023 2022 Change Selling, general and administrative expenses $ 1,011.5 $ 899.3 $ 112.2 12 % Selling, general and administrative expenses as percent of net sales 41.7 % 39.2 % 250 bps SG&A expenses growth was comprised of variable expenses incurred to support sales growth, investments to support growth strategies, increased distribution and fulfillment costs related to elevated inventory, and inflationary pressures including increases in employee salaries and wages. SG&A expenses increased primarily due to the following factors: • higher omni-channel expenses of $37.6 million, reflecting higher DTC expenses, including variable expenses including personnel expenses and costs associated with new and temporary stores; • higher supply chain expenses of $33.3 million, reflecting increased global distribution center expenses resulting from elevated inventory levels, including higher warehousing and fulfillment expenses, as well as third-party logistics transition-related costs; and • higher information technology related expenses, reflecting increased personnel expenses to support digital strategies. Interest Income, net. Interest income, net is summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages) 2023 2022 Change Interest income, net $ 8.6 $ 1.7 $ 6.9 406 % Interest income, net as a percent of net sales 0.4 % 0.1 % Interest income, net increased primarily reflecting higher yields on increased levels of cash, cash equivalents and short-term investments. Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages) 2023 2022 Change Income tax expense $ 48.1 $ 51.9 $ (3.8) (7) % Effective income tax rate 23.4 % 21.9 % Our effective income tax rates for the nine months ended September 30, 2023 and 2022 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the nine months ended September 30, 2023, our effective income tax rate was primarily impacted by a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction. For the nine months ended September 30, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to the finalization of the U.S. and foreign audits, a non-recurring benefit related to a decrease in accrued foreign withholding taxes and a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 27 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 September 30, 2023 Compared to Three Months Ended September 30, 2022 Net sales by geographic segment are summarized in the following table: Three Months Ended September 30, (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. $ 635.4 $ — $ 635.4 $ 607.0 5% 5% LAAP 115.4 4.6 120.0 115.4 —% 4% EMEA 129.4 (8.8) 120.6 153.5 (16)% (21)% Canada 105.5 3.4 108.9 79.1 33% 38% $ 985.7 $ (0.8) $ 984.9 $ 955.0 3% 3% (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 September 30, (in millions) 2023 2022 Change U.S. $ 131.6 $ 145.3 $ (13.7) LAAP 14.5 11.8 2.7 EMEA 34.2 35.6 (1.4) Canada 30.2 20.2 10.0 Total segment operating income 210.5 212.9 (2.4) Unallocated corporate expenses (75.9) (67.6) (8.3) Operating income $ 134.6 $ 145.3 $ (10.7) U.S. U.S. operating income decreased $13.7 million to $131.6 million, or 20.7% of net sales, for the third quarter of 2023 from $145.3 million, or 23.9% of net sales, for the comparable period in 2022. The decrease was driven primarily by increased SG&A expenses. U.S. net sales increased $28.4 million, or 5%, for the third quarter of 2023, compared to the same period in 2022. U.S. net sales increased primarily in our U.S. wholesale business for our Columbia and SOREL brands. Increased U.S. wholesale net sales reflected earlier shipment of Fall 2023 wholesale orders compared to the same period in the prior year. U.S. DTC net sales increased primarily due to sales growth generated from our retail stores, partially offset by decreased net sales in our e-commerce business. As of September 30, 2023, our U.S. business operated 159 retail stores, compared to 148 stores as of September 30, 2022. In addition, we leveraged temporary outlet stores during the third quarter of 2023 to support excess inventory liquidation efforts. SG&A expenses increased as a percentage of net sales to 27.6% for the third quarter of 2023 compared to 25.9% for the same period in 2022, primarily driven by increased DTC expenses reflecting increased personnel expenses and costs associated with new and temporary stores, as well as higher warehousing and fulfillment expenses resulting from elevated inventory levels. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 28 Table of Contents LAAP LAAP operating income increased $2.7 million to $14.5 million, or 12.6% of net sales, for the third quarter of 2023 from $11.8 million, or 10.2% of net sales, for the comparable period in 2022. LAAP net sales were flat (increased 4% constant-currency) compared to the third quarter of 2022. LAAP net sales primarily reflected increased net sales in China resulting from higher consumer demand, partially offset by decreased net sales in Korea, reflecting challenging market conditions and efforts to reset the business to support long-term growth opportunities, and LAAP distributors due to a higher portion of Fall 2023 shipments in the second quarter compared to the same period in the prior year. LAAP SG&A expenses increased as a percentage of net sales to 42.5% for the third quarter of 2023 compared to 40.9% for the same period in 2022. EMEA EMEA operating income decreased $1.4 million to $34.2 million, or 26.5% of net sales, for the third quarter of 2023 from $35.6 million, or 23.2% of net sales, for the comparable period in 2022. The decrease was driven primarily by decreased net sales and increased SG&A expenses, partially offset by increased gross margin. EMEA net sales decreased $24.1 million, or 16% (21% constant-currency), for the third quarter of 2023, compared to the same period in 2022, driven by decreased net sales in our EMEA distributor business partially offset by increased net sales of our Europe-direct business. EMEA distributor net sales decreased primarily due to our anniversary of prior year shipments to Russia (for orders that were placed prior to the invasion of Ukraine), as well as a higher portion of Fall 2023 distributor orders shipping in the second quarter compared to the timing of Fall 2022 shipments in the prior year. Europe-direct net sales increased primarily due to the earlier shipment of Fall 2023 orders in the third quarter compared to the same period in the prior year, and, to a lesser extent, increased DTC net sales. Gross margin increased primarily due to favorable channel shifts driven by a lower proportion of distributor sales, which generally carry lower gross margins. SG&A expenses increased as a percentage of net sales to 25.0% for the third quarter of 2023 compared to 19.7% in 2022, primarily driven by channel shifts from a lower proportion of distributor sales, which carry lower SG&A expenses than our Europe-direct business. Canada Canada operating income increased $10.0 million to $30.2 million, or 28.6% of net sales, for the third quarter of 2023 from $20.2 million, or 25.6% of net sales, for the comparable period in 2022. The increase primarily resulted from increased net sales. Canada net sales increased $26.4 million, or 33% (38% constant-currency), for the third quarter of 2023, compared to the same period in 2022, driven by increased net sales in our Canada wholesale business primarily due to the earlier shipment of Fall 2023 orders, and, to a lesser extent, increased DTC net sales. Canada SG&A expenses decreased as a percentage of net sales to 18.2% for the third quarter of 2023 compared to 21.1% for the same period in 2022. Unallocated Corporate Expenses Unallocated corporate expenses increased by $8.3 million to $75.9 million in the third quarter of 2023, from $67.6 million for the same period in 2022, primarily driven by higher personnel expenses. Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Net sales by geographic segment are summarized in the following table: Nine Months Ended September 30, (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. $ 1,552.0 $ — $ 1,552.0 $ 1,521.4 2% 2% LAAP 345.1 21.4 366.5 309.9 11% 18% EMEA 338.5 (3.5) 335.0 305.8 11% 10% Canada 191.6 8.7 200.3 157.5 22% 27% $ 2,427.2 $ 26.6 $ 2,453.8 $ 2,294.6 6% 7% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 29 Table of Contents Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table: Nine Months Ended September 30, (in millions) 2023 2022 Change U.S. $ 268.3 $ 325.8 $ (57.5) LAAP 36.9 21.7 15.2 EMEA 69.6 51.0 18.6 Canada 41.1 31.9 9.2 Total segment operating income 415.9 430.4 (14.5) Unallocated corporate expenses (218.7) (192.7) (26.0) Operating income $ 197.2 $ 237.7 $ (40.5) U.S. U.S. operating income decreased $57.5 million to $268.3 million, or 17.3% of net sales, for the nine months ended September 30, 2023 from $325.8 million, or 21.4% of net sales, for the comparable period in 2022. The decrease was driven primarily by increased SG&A expenses. U.S. net sales increased $30.6 million, or 2%, for the nine months ended September 30, 2023, compared to the same period in 2022. U.S. net sales increased primarily due to earlier shipments of Fall 2023 wholesale orders and higher DTC consumer demand. As of September 30, 2023, our U.S. business operated 159 retail stores, compared to 148 stores as of September 30, 2022. In addition, we opened and leveraged temporary outlet stores in 2023 to support excess inventory liquidation efforts. SG&A expenses increased as a percentage of net sales to 32.3% for the nine months ended September 30, 2023 compared to 28.7% for the same period in 2022, primarily driven by increased warehousing and fulfillment expenses resulting from elevated inventory levels and higher DTC expenses reflecting higher personnel and costs associated with new and temporary stores. LAAP LAAP operating income increased $15.2 million to $36.9 million, or 10.7% of net sales, for the nine months ended September 30, 2023 from $21.7 million, or 7.0% of net sales, for the comparable period in 2022. The increase was driven primarily by increased net sales and decreased SG&A expenses as a percentage of net sales. LAAP net sales increased $35.2 million, or 11% (18% constant-currency), for the nine months ended September 30, 2023, compared to the same period in 2022. Increased LAAP net sales was primarily driven by our China and LAAP distributor businesses, partially offset by declines in our Korea business. Increased China net sales reflects higher consumer demand as we lapped prior year government mandated restrictions to prevent the spread of COVID-19. LAAP distributor net sales increased due to higher Spring 2023 and Fall 2023 orders compared to the same period in the prior year. Decreased Korea net sales reflects challenging market conditions and efforts to reset the business to support long-term growth opportunities. LAAP SG&A expenses decreased as a percentage of net sales to 44.6% for the nine months ended September 30, 2023 compared to 47.9% for the same period in 2022, primarily driven by leveraging of fixed operating expenses. EMEA EMEA operating income increased $18.6 million to $69.6 million, or 20.6% of net sales, for the nine months ended September 30, 2023 from $51.0 million, or 16.7% of net sales, for the comparable period in 2022. The increase was driven primarily by increased net sales and increased gross margin. EMEA net sales increased $32.7 million, or 11% (10% constant-currency), for the nine months ended September 30, 2023, compared to the same period in 2022, driven by increased net sales in our Europe-direct business, partially offset by decreased net sales in our EMEA distributor business. Europe-direct net sales increased primarily due to broad-based growth across our wholesale and DTC businesses, including the earlier shipment of Fall 2023 orders compared to prior year. EMEA distributor net sales decreased primarily due to our anniversary of prior year shipments to Russia (for orders that were placed prior to the invasion of Ukraine). Gross margin increased primarily due to favorable channel shifts driven by a lower proportion of distributor sales, which generally carry lower gross margins. EMEA SG&A expenses increased as a percentage of net sales to 26.5% for the nine months ended September 30, 2023 compared to 26.4% for the same period in 2022. Canada Canada operating income increased $9.2 million to $41.1 million, or 21.4% of net sales, for the nine months ended September 30, 2023 from $31.9 million, or 20.3% of net sales for the comparable period in 2022. The increase primarily resulted from increased net sales. Canada net COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 30 Table of Contents sales increased $34.1 million, or 22% (27% constant-currency), for the nine months ended September 30, 2023, compared to the same period in 2022, driven by increased net sales in our Canada wholesale and DTC businesses, including the earlier shipment of Fall 2023 orders compared to prior year. Canada SG&A expenses decreased as a percentage of net sales to 25.2% for the nine months ended September 30, 2023, compared to 26.2% for the same period in 2022. Unallocated Corporate Expenses Unallocated corporate expenses increased by $26.0 million to $218.7 million for the nine months ended September 30, 2023 from $192.7 million for the same period in 2022, primarily driven by higher personnel expenses. LIQUIDITY AND CAPITAL RESOURCES Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $720 million in total liquidity as of September 30, 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. Cash Flow Activities Cash flows are summarized in the following table: Nine Months Ended September 30, (in millions) 2023 2022 Change Net cash provided by (used in): Operating activities $ 22.2 $ (328.1) $ 350.3 Investing activities (38.5) 88.5 (127.0) Financing activities (197.6) (339.7) 142.1 Net effect of exchange rate changes on cash (3.1) (24.9) 21.8 Net decrease in cash and cash equivalents $ (217.0) $ (604.2) $ 387.2 The change in cash flows provided by operating activities was driven by a $365.8 million decrease in cash used in changes in assets and liabilities, partially offset by a $15.5 million decrease in cash provided by net income and non-cash adjustments. The most significant comparative changes in assets and liabilities included Inventories and Accounts Payable , and to a lesser extent, Prepaid expenses and other current assets and Accrued liabilities . The $578.6 million increase in cash provided by Inventories reflected a decrease in inventory as we curtailed inventory purchases to compensate for elevated inventories exiting 2022 and to eventually align inventory supply with future demand. The $54.3 million increase in cash provided by Prepaid expenses and other current assets was primarily driven by changes to inventory prepayments. These amounts were partially offset by the $216.0 million increase in cash used in Accounts payable primarily resulting from earlier production and payment of Fall 2023 and Spring 2024 inventory, as well as the $23.8 million increase in cash used in Accrued liabilities, which was primarily driven by higher sales reserves at the beginning of 2023 compared to 2022 as a result of higher sales in the fourth quarter of 2022. Net cash used in investing activities was $38.5 million for the nine months ended September 30, 2023, compared to $88.5 million of cash provided by investing activities for the nine months ended September 30, 2022. For the 2023 period, net cash used in investing activities consisted of $41.4 million in cash used for capital expenditures, partially offset by $2.9 million in net sales and maturities of short-term investments. For the 2022 period, net cash provided by investing activities consisted of $131.0 million in net sales and maturities of short-term investments partially offset by $42.5 million in cash used for capital expenditures. Net cash used in financing activities was $197.6 million for the nine months ended September 30, 2023 compared to $339.7 million for the nine months ended September 30, 2022. For the 2023 period, net cash used in financing activities primarily consisted of repurchases of common stock of $144.6 million and dividend payments to our shareholders of $55.4 million. For the 2022 period, net cash used in financing activities primarily consisted of repurchases of common stock of $287.4 million and dividend payments to our shareholders of $56.6 million. COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 31 Table of Contents Sources of Liquidity Cash and cash equivalents and short-term investments As of September 30, 2023, we had cash and cash equivalents of $213.3 million and short-term investments of $1.5 million, compared to $430.2 million and $0.7 million, respectively, as of December 31, 2022 and $159.2 million and $1.0 million, respectively, as of September 30, 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 September 30, 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 September 30, 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$4.6 million). There was no balance outstanding under the facility. Other Sources As of September 30, 2023, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$104.2 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 September 30, 2023, our inventory balance decreased to $885.2 million, compared to $1,056.9 million as of September 30, 2022, driven by a reduction in current season and carryover inventory resulting from lower inventory buys and earlier receipt and shipment of Fall 2023. We believe older season inventories represent a manageable portion of our total inventory mix. To address higher inventory levels, we meaningfully reduced purchases of Spring 2023 and Fall 2023 inventory and are taking a cautious approach to future inventory purchases. Additionally, we are leveraging our outlet stores and opened temporary outlet stores to profitably clear excess merchandise. As we continue to sell carryover and excess inventory during the Fall 2023 season, we believe our inventory levels have begun to normalize. We have planned 2023 capital expenditures of approximately $60 to $70 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 COLUMBIA SPORTSWEAR COMPANY | Q3 2023 FORM 10-Q | 32 Table of Contents 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 wer e $367.3 million a s of September 30, 2023, compared to $401.4 million and $435.5 million as of December 31, 2022 and September 30, 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 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 in 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.