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 more than 100 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 20 Table of Contents 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. We seek to bring additional consumer segments to our brands in the marketplace. For the Columbia brand, we are working to establish the Columbia.com site as the best expression of the brand through enhancements to the consumer experience, as well as generally less promotion and discount activity. In an effort to reduce inventories and to assist with our transition of merchandise containing perfluoroalkyl and polyfluoroalkyl substances ("PFAS") chemicals, we opened temporary outlet stores in the U.S., which will remain open through 2024, and begin to ramp down throughout 2025. Profit Improvement Program As part of our strategic priorities, we are implementing a multi-year profit improvement program to accelerate profitable growth and improve the efficiency of our operations. We are focused on four areas of cost reduction and realignment, including: • operational cost savings; • organizational cost savings; • operating model improvements; and • indirect, or non-inventory, spending. When the benefits of this program are combined with the cost savings we anticipate to receive from normalized inventory levels, we believe we can reach $125 million to $150 million in annualized savings by 2026. We anticipate these cost savings will ramp up over the course of 2024 and 2025, with the full benefit being realized in 2026. In 2024, we anticipate realizing approximately $75 million to $90 million in realized cost savings, net of approximately $3 million to $4 million of severance and other costs. Business Environment and Trends Increasing Competitive Environment | We believe many brands have shifted their strategies and new brands have entered the marketplace to capitalize on the emergence of casual and lifestyle trends. The versatility of casual and lifestyle products provides consumers the ability to use these products in a variety of settings, including outdoor activities. This shift has been evident in both the apparel and footwear product categories. We believe this trend has accelerated because of changes in consumer behavior resulting from the COVID-19 pandemic, which has resulted in an increasingly competitive apparel and footwear marketplace. Economic Environment Impacting Demand | We believe general economic uncertainty is impacting consumer and customer behavior and demand. Customers have been increasingly cautious managing inventory and in placing advance orders. This cautiousness has been most pronounced in the U.S., but has spread to other regions, including Canada and, to a lesser extent, Europe. Consumer demand, particularly in the U.S., has been generally soft for outdoor apparel and footwear products. We anticipate these trends will persist throughout 2024. Promotional and Clearance Environment | Since last year, we have been proactively managing promotional activity on Columbia.com to help establish the site as the best expression of the brand. However, we believe consumers are still seeking value, particularly in the U.S. This is contributing to reduced demand for our direct-to-consumer ("DTC") e-commerce sites and branded stores. To capture demand associated with value conscious consumers, we have increasingly relied on our fleet of DTC brick-and-mortar outlet stores and clearance locations, which offer discounted and clearance merchandise. The use of temporary clearance stores results in lower DTC product margins, increased SG&A expenses and modest operating income. We believe this method of liquidation results in stronger financial returns to the Company in comparison to wholesale closeout sales channel alternatives and has a less disruptive impact in the marketplace. We anticipate continuing to utilize temporary clearance locations to assist with inventory liquidation through 2024 with plans to ramp down these locations throughout 2025. Changing Consumer Trends | The U.S. consumer remains challenged by the current economic environment as inflationary pressures continue to weigh on sentiment across the U.S. retail environment. This has translated to traffic declines and slower-than-planned sales COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 21 Table of Contents within our DTC e-commerce and brick-and-mortar businesses. As a result, we expect our DTC channel to continue to be challenged year-over-year. We believe this is a transitional trend and that, over time, growth will return to the DTC channel. Distribution Center and Third-Party Capacity Pressure | Elevated inventory levels resulted in storage and process capacity pressures within our distribution centers and third-party logistics operations throughout 2023. These pressures included additional inventory carrying costs related to incremental outside storage, and other inventory related holding and handling costs, including losses in productivity, as we worked to normalize our inventory position. We exited 2023 with more normalized inventory levels. As these storage and process capacity pressures have alleviated, we have begun to realize lower distribution-related expenses and expect to see further benefit in our operating results for full year 2024. Freight Cost Environment | Over the past year, we have realized significant declines in ocean freight rates and costs in comparison to prior year elevated levels. These lower ocean freight rates resulted in substantially lower inbound freight costs which benefited our gross margin in 2023 and first half of 2024. As a result of ongoing conflict disrupting ocean transport through the Red Sea, spot ocean freight rates have begun to increase, and ocean carriers have initiated peak season surcharges. We utilize contracted pricing for the bulk of our ocean freight, which minimizes our exposure to spot pricing. However, if the conflict and ocean freight rate trends persist beyond our current contracts, we could incur increased ocean freight costs in future periods. Additionally, we may incur peak season surcharges and/or need to pay a premium to secure needed capacity. 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 2023, nearly 60% of our net sales and nearly 80% of our operating income were realized in the second half of the year. Heightened Geopolitical Risk | We sell our products in more than 100 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, social, privacy, and product chemistry. For example, in anticipation of the effectiveness of the regulations in California and New York states related to PFAS chemicals, we have been working to eliminate PFAS chemicals across our global product line. These PFAS matters have and may continue to result in a more promotional environment in 2024 as retailers move through merchandise containing PFAS . 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. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 22 Table of Contents 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 June 30, Six Months Ended June 30, (in millions, except for percentage of net sales and per share amounts) 2024 2023 2024 2023 Net sales $ 570.2 100.0 % $ 620.9 100.0 % $ 1,340.2 100.0 % $ 1,441.5 100.0 % Cost of sales 296.8 52.1 % 306.9 49.4 % 677.2 50.5 % 728.0 50.5 % Gross profit 273.4 47.9 % 314.0 50.6 % 663.0 49.5 % 713.5 49.5 % Selling, general and administrative expenses 302.7 53.1 % 312.5 50.3 % 652.0 48.6 % 659.9 45.8 % Net licensing income 5.5 1.0 % 4.7 0.7 % 9.9 0.7 % 9.1 0.6 % Operating income (loss) (23.8) (4.2) % 6.2 1.0 % 20.9 1.6 % 62.7 4.3 % Interest income, net 8.3 1.5 % 3.5 0.6 % 17.5 1.3 % 6.7 0.5 % Other non-operating income (expense), net 0.5 0.1 % (0.1) (0.1) % 0.8 0.1 % 0.7 0.1 % Income (loss) before income tax (15.0) (2.6) % 9.6 1.5 % 39.2 3.0 % 70.1 4.9 % Income tax expense (benefit) (3.2) (0.6) % 1.2 0.2 % 8.6 0.6 % 15.5 1.1 % Net income (loss) $ (11.8) (2.0) % $ 8.4 1.3 % $ 30.6 2.4 % $ 54.6 3.8 % Diluted earnings (loss) per share $ (0.20) $ 0.14 $ 0.51 $ 0.88 COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 23 Table of Contents Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended June 30, (in millions, except for percentages) Reported Net Sales 2024 Adjust for Foreign Currency Translation Constant-currency Net Sales 2024 (1) Reported Net Sales 2023 Reported Net Sales % Change Constant-currency Net Sales % Change (1) Brand Net Sales: Columbia $ 508.6 $ 5.9 $ 514.5 $ 537.0 (5)% (4)% SOREL 21.0 0.1 21.1 37.8 (44)% (44)% prAna 21.8 — 21.8 27.6 (21)% (21)% Mountain Hardwear 18.8 0.2 19.0 18.5 2% 3% Total $ 570.2 $ 6.2 $ 576.4 $ 620.9 (8)% (7)% Product Category Net Sales: Apparel, Accessories and Equipment $ 464.0 $ 4.3 $ 468.3 $ 488.9 (5)% (4)% Footwear 106.2 1.9 108.1 132.0 (20)% (18)% Total $ 570.2 $ 6.2 $ 576.4 $ 620.9 (8)% (7)% Channel Net Sales: Wholesale $ 278.4 $ 2.2 $ 280.6 $ 328.3 (15)% (15)% Direct-to-consumer 291.8 4.0 295.8 292.6 —% 1% Total $ 570.2 $ 6.2 $ 576.4 $ 620.9 (8)% (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 decrease primarily reflects lower wholesale net sales in the U.S., partially offset by strength in international markets, compared to the same period in 2023. DTC net sales were flat, with declines in our e-commerce business offset by growth in our brick-and-mortar business from temporary and new stores, compared to the same period in 2023. The declines in wholesale net sales resulted from retailer cautiousness and a difficult competitive environment in the U.S. The declines in e-commerce net sales resulted from softness in the U.S., which we attribute to a challenging e-commerce environment for traditional outdoor brands, coupled with efforts to de-emphasize promotions on Columbia.com. Gross Profit. Gross profit is summarized in the following table: Three Months Ended June 30, (in millions, except for percentages and basis points) 2024 2023 Change Gross profit $ 273.4 $ 314.0 $ (40.6) (13) % Gross margin 47.9 % 50.6 % -270 bps Gross margin contracted primarily due to the following factors: • an approximate 330 bps decrease in channel profitability resulting from lower margins reflecting actions to spur demand and reduce excess inventory, as well as changes in sales provisions; partially offset by • favorable other costs, including lower inbound freight costs. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 24 Table of Contents Selling, General and Administrative Expenses. SG&A expenses are summarized in the following table: Three Months June 30, (in millions, except for percentages and basis points) 2024 2023 Change Selling, general and administrative expenses $ 302.7 $ 312.5 $ (9.8) (3) % Selling, general and administrative expenses as percent of net sales 53.1 % 50.3 % 280 bps SG&A expenses decreased primarily due to the following factors: • lower supply chain expenses, reflecting decreased global distribution center expenses resulting from more normalized inventory levels; and • lower demand creation expenses, primarily reflecting decreased net sales; partially offset by • higher omni-channel expenses, reflecting higher DTC brick-and-mortar expenses, including costs associated with new stores and temporary clearance locations and personnel expenses. Interest Income, Net. Interest income, net is summarized in the following table: Three Months Ended June 30, (in millions, except for percentages) 2024 2023 Change Interest income, net $ 8.3 $ 3.5 $ 4.8 137 % Interest income, net as a percent of net sales 1.5 % 0.6 % 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 June 30, (in millions, except for percentages) 2024 2023 Change Income tax expense (benefit) $ (3.2) $ 1.2 $ (4.4) (367) % Effective income tax rate 21.6 % 12.6 % Income tax expense (benefit) decreased to ($3.2) million for the second quarter of 2024 from a tax expense of $1.2 million for the comparable period in 2023. Our effective tax rate was 21.6% for the three months ended June 30, 2024 compared to 12.6% for the same period in 2023. For the three months ended June 30, 2024, our effective tax rate was primarily impacted by a non-recurring expense associated with stock compensation benefits. For the three months ended June 30, 2023, our effective tax rate was primarily impacted by a non-recurring benefit related to foreign currency loss resulting from an intercompany transaction. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 25 Table of Contents Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Six Months Ended June 30, (in millions, except for percentages) Reported Net Sales 2024 Adjust for Foreign Currency Translation Constant-currency Net Sales 2024 (1) Reported Net Sales 2023 Reported Net Sales % Change Constant-currency Net Sales % Change (1) Brand Net Sales: Columbia $ 1,172.5 $ 9.9 $ 1,182.4 $ 1,239.8 (5)% (5)% SOREL 66.7 — 66.7 98.3 (32)% (32)% prAna 53.1 — 53.1 60.1 (12)% (12)% Mountain Hardwear 47.9 0.3 48.2 43.3 11% 11% Total $ 1,340.2 $ 10.2 $ 1,350.4 $ 1,441.5 (7)% (6)% Product Category Net Sales: Apparel, Accessories and Equipment $ 1,083.0 $ 7.6 $ 1,090.6 $ 1,121.5 (3)% (3)% Footwear 257.2 2.6 259.8 320.0 (20)% (19)% Total $ 1,340.2 $ 10.2 $ 1,350.4 $ 1,441.5 (7)% (6)% Channel Net Sales: Wholesale $ 669.3 $ 3.3 $ 672.6 $ 780.8 (14)% (14)% Direct-to-consumer 670.9 6.9 677.8 660.7 2% 3% Total $ 1,340.2 $ 10.2 $ 1,350.4 $ 1,441.5 (7)% (6)% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Our global net sales decrease primarily reflects lower wholesale net sales in the U.S. for the six months ended June 30, 2024, compared to same period in 2023. DTC net sales increased, reflecting growth in our brick-and-mortar business from temporary and new stores, partially offset by declines in our e-commerce business for the six months ended June 30, 2024, compared to the same period in 2023. The declines in wholesale net sales resulted from retailer cautiousness and a difficult competitive environment in the U.S. The declines in e-commerce net sales resulted from softness in the U.S., which we attribute to a challenging e-commerce environment for traditional outdoor brands, coupled with efforts to de-emphasize promotions on Columbia.com. Gross Profit. Gross profit is summarized in the following table: Six Months Ended June 30, (in millions, except for percentages and basis points) 2024 2023 Change Gross profit $ 663.0 $ 713.5 $ (50.5) (7) % Gross margin 49.5 % 49.5 % 0 bps Gross margin was flat primarily due to the following factors: • unfavorable decrease in channel profitability resulting from lower margins reflecting actions to spur demand and reduce excess inventory; offset by • favorable other costs, including lower inbound freight costs; and • favorable region and channel net sales mix. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 26 Table of Contents Selling, General and Administrative Expenses. SG&A expenses are summarized in the following table: Six Months Ended June 30, (in millions, except for percentages and basis points) 2024 2023 Change Selling, general and administrative expenses $ 652.0 $ 659.9 $ (7.9) (1) % Selling, general and administrative expenses as percent of net sales 48.6 % 45.8 % 280 bps SG&A expenses decreased primarily due to the following factors: • lower supply chain expenses of $17.1 million, reflecting decreased global distribution center expenses resulting from more normalized inventory levels; and • lower demand creation expenses, primarily reflecting decreased net sales; partially offset by • higher omni-channel expenses of $17.4 million, reflecting higher DTC brick-and-mortar expenses, including costs associated with new stores and temporary clearance locations and personnel expenses. Interest Income, Net. Interest income, net is summarized in the following table: Six Months Ended June 30, (in millions, except for percentages) 2024 2023 Change Interest income, net $ 17.5 $ 6.7 $ 10.8 161 % Interest income, net as a percent of net sales 1.3 % 0.5 % 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: Six Months Ended June 30, (in millions, except for percentages) 2024 2023 Change Income tax expense $ 8.6 $ 15.5 $ (6.9) (45) % Effective income tax rate 22.0 % 22.2 % Income tax expense decreased to $8.6 million through the second quarter of 2024 from $15.5 million for the comparable period in 2023. For the six months ended June 30, 2024, our effective tax rate was primarily impacted by a benefit related to a non-recurring decrease in foreign withholding taxes. For the six months ended June 30, 2023, our effective income tax rate was primarily impacted by a non-recurring benefit related to foreign currency loss resulting from an intercompany transaction. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 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. Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Net sales by geographic segment are summarized in the following table: Three Months Ended June 30, (in millions, except for percentage changes) Reported Net Sales 2024 Adjust for Foreign Currency Translation Constant-currency Net Sales 2024 (1) Reported Net Sales 2023 Reported Net Sales % Change Constant-currency Net Sales % Change (1) U.S. $ 340.2 $ — $ 340.2 $ 399.1 (15)% (15)% LAAP 99.5 5.7 105.2 93.3 7% 13% EMEA 103.9 0.4 104.3 100.8 3% 3% Canada 26.6 0.1 26.7 27.7 (4)% (4)% $ 570.2 $ 6.2 $ 576.4 $ 620.9 (8)% (7)% (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 June 30, (in millions) 2024 2023 Change U.S. $ 23.5 $ 55.1 $ (31.6) LAAP 6.1 4.1 2.0 EMEA 14.4 15.0 (0.6) Canada (0.1) 0.1 (0.2) Total segment operating income 43.9 74.3 (30.4) Unallocated corporate expenses (67.7) (68.1) 0.4 Operating income (loss) $ (23.8) $ 6.2 $ (30.0) U.S. U.S. operating income decreased $31.6 million to $23.5 million, or 6.9% of net sales, for the second quarter of 2024 from $55.1 million, or 13.8% of net sales, for the comparable period in 2023. The decrease was driven primarily by decreased net sales and gross margin, partially offset by lower SG&A expenses. U.S. net sales decreased $58.9 million, or 15%, for the second quarter of 2024, compared to the same period in 2023, driven primarily by decreased net sales in our U.S. wholesale business. DTC net sales decreased modestly as a result of lower e-commerce net sales, partially offset by net sales growth from our brick-and-mortar business. The declines in wholesale net sales resulted from retailer cautiousness and a difficult competitive environment in the U.S. The declines in e-commerce net sales resulted from softness in the U.S., which we attribute to a challenging e-commerce environment for traditional outdoor brands, coupled with efforts to de-emphasize promotions on Columbia.com. The increases in brick-and-mortar net sales were primarily driven by our temporary clearance locations which have continued to support our excess inventory liquidation efforts. As of June 30, 2024, our U.S. business operated 46 temporary clearance locations, compared to 30 locations for the comparable period in 2023. In addition, our U.S. business operated 163 retail stores as of June 30, 2024, compared to 157 stores for the comparable period in 2023. U.S. SG&A expenses increased as a percentage of net sales to 42.6% for the second quarter of 2024 compared to 38.7% for the same period in 2023, driven by fixed SG&A expenses and decreased net sales. In total, U.S. SG&A expenses decreased for the second quarter of 2024, compared to the same period in 2023, primarily driven by lower supply chain expenses resulting from more normalized inventory levels and lower demand creation expenses, partially offset by higher DTC brick-and-mortar expenses, including costs associated with new stores and temporary clearance locations and personnel expenses. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 28 Table of Contents LAAP LAAP operating income increased $2.0 million to $6.1 million, or 6.1% of net sales, for the second quarter of 2024 from $4.1 million, or 4.4% of net sales, for the comparable period in 2023. LAAP net sales increased 7% (13% constant-currency) compared to the same period in 2023. LAAP net sales primarily reflected increased net sales in our LAAP distributor business due to higher Fall 2024 distributor orders and favorable impacts from timing of distributor shipments, as well as increased sales in China reflecting strong consumer demand, compared to the same period in 2023. Japan net sales declined driven by unfavorable effects from foreign currency fluctuation, which more than offset constant-currency net sales growth resulting from increased international tourism. Korea net sales also declined. LAAP SG&A expenses decreased as a percentage of net sales to 47.4% for the second quarter of 2024 compared to 53.1% for the same period in 2023. EMEA EMEA operating income decreased $0.6 million to $14.4 million, or 13.9% of net sales, for the second quarter of 2024 from $15.0 million, or 14.9% of net sales, for the comparable period in 2023. EMEA net sales increased $3.1 million, or 3% (3% constant-currency), for the second quarter of 2024, compared to the same period in 2023. EMEA net sales increased primarily in our Europe-direct business, boosted by continued momentum and increased traffic within our brick-and-mortar and e-commerce businesses. This net sales increase was partially offset by decreased net sales in our EMEA distributor business. EMEA SG&A expenses increased as a percentage of net sales to 28.6% for the second quarter of 2024 compared to 26.7% in 2023, primarily driven by higher DTC brick-and-mortar expenses and personnel expenses. Canada Canada had an operating loss of $0.1 million, or (0.4)% of net sales, for the second quarter of 2024 compared to operating income of $0.1 million, or 0.4% of net sales, for the comparable period in 2023. Canada net sales decreased $1.1 million, or 4% (4% constant-currency), for the second quarter of 2024, compared to the same period in 2023, primarily reflecting the impact of lower Spring 2024 wholesale orders, partially offset by growth in DTC brick-and-mortar net sales. Canada SG&A expenses increased as a percentage of net sales to 49.7% for the second quarter of 2024 compared to 48.5% for the same period in 2023, driven by fixed SG&A expenses and decreased net sales. In total, Canada SG&A expenses decreased for the second quarter of 2024 compared to the same period in 2023. Unallocated Corporate Expenses Unallocated corporate expenses decreased by $0.4 million to $67.7 million in the second quarter of 2024, from $68.1 million for the same period in 2023. Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 Net sales by geographic segment are summarized in the following table: Six Months Ended June 30, (in millions, except for percentage changes) Reported Net Sales 2024 Adjust for Foreign Currency Translation Constant-currency Net Sales 2024 (1) Reported Net Sales 2023 Reported Net Sales % Change Constant-currency Net Sales % Change (1) U.S. $ 814.6 $ — $ 814.6 $ 916.6 (11)% (11)% LAAP 238.2 12.3 250.5 229.7 4% 9% EMEA 208.4 (1.8) 206.6 209.1 —% (1)% Canada 79.0 (0.3) 78.7 86.1 (8)% (9)% $ 1,340.2 $ 10.2 $ 1,350.4 $ 1,441.5 (7)% (6)% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 29 Table of Contents Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table: Six Months Ended June 30, (in millions) 2024 2023 Change U.S. $ 96.5 $ 136.7 $ (40.2) LAAP 27.9 22.4 5.5 EMEA 33.5 35.4 (1.9) Canada 11.1 10.9 0.2 Total segment operating income 169.0 205.4 (36.4) Unallocated corporate expenses (148.1) (142.7) (5.4) Operating income $ 20.9 $ 62.7 $ (41.8) U.S. U.S. operating income decreased $40.2 million to $96.5 million, or 11.8% of net sales, for the six months ended June 30, 2024 from $136.7 million, or 14.9% of net sales, for the comparable period in 2023. The decrease was driven primarily by decreased net sales and gross margin, partially offset by lower SG&A expenses. U.S. net sales decreased $102.0 million, or 11%, for the six months ended June 30, 2024, compared to the same period in 2023, driven primarily by decreased net sales in our U.S. wholesale business. DTC net sales decreased modestly as a result of lower e-commerce net sales, partially offset by net sales growth from our brick-and-mortar business. The declines in wholesale net sales resulted from retailer cautiousness and a difficult competitive environment in the U.S. The declines in e-commerce net sales resulted from softness in the U.S., which we attribute to a challenging e-commerce environment for traditional outdoor brands, coupled with efforts to de-emphasize promotions on Columbia.com. The increases in brick-and-mortar net sales were primarily driven by our temporary clearance locations, which have continued to support our excess inventory liquidation efforts. U.S. SG&A expenses increased as a percentage of net sales to 37.9% for the six months ended June 30, 2024 compared to 35.6% for the same period in 2023, primarily driven by decreased net sales. In total, U.S. SG&A expenses decreased for the six months ended June 30, 2024 compared to the same period in 2023, primarily driven by lower supply chain expenses resulting from more normalized inventory levels and lower demand creation expenses, partially offset by higher DTC brick-and-mortar expenses, including costs associated with new stores and temporary clearance locations and personnel expenses. LAAP LAAP operating income increased $5.5 million to $27.9 million, or 11.7% of net sales, for the six months ended June 30, 2024 from $22.4 million, or 9.8% of net sales, for the comparable period in 2023. The increase was driven primarily by increased net sales and gross margin. LAAP net sales increased $8.5 million, or 4% (9% constant-currency), for the six months ended June 30, 2024, compared to the same period in 2023. Increased LAAP net sales were primarily driven by our China business, which continues to see strong consumer demand. Japan net sales declined, driven by unfavorable effects from foreign currency fluctuation, which more than offset constant-currency net sales growth resulting from international tourism. Korea net sales also declined. LAAP SG&A expenses decreased as a percentage of net sales to 44.1% for the six months ended June 30, 2024, compared to 45.7% for the same period in 2023. EMEA EMEA operating income decreased $1.9 million to $33.5 million, or 16.1% of net sales, for the six months ended June 30, 2024 from $35.4 million, or 16.9% of net sales, for the comparable period in 2023. EMEA net sales decreased $0.7 million, or 0% (1% constant-currency), for the six months ended June 30, 2024, compared to the same period in 2023, driven by lower EMEA distributor net sales, partially offset by an increase in our Europe-direct DTC net sales. EMEA SG&A expenses increased as a percentage of net sales to 30.0% for the six months ended June 30, 2024 compared to 27.4% for the same period in 2023, primarily driven by higher DTC brick-and-mortar expenses and personnel expenses. Canada Canada operating income increased $0.2 million to $11.1 million, or 14.1% of net sales, for the six months ended June 30, 2024 from $10.9 million, or 12.7% of net sales, for the comparable period in 2023. Canada net sales decreased $7.1 million, or 8% (9% constant-currency), for the six months ended June 30, 2024, compared to the same period in 2023, primarily due to lower Spring 2024 wholesale orders, partially COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 30 Table of Contents offset by an increase in DTC brick-and-mortar net sales. Canada SG&A expenses increased as a percentage of net sales to 35.3% for the six months ended June 30, 2024 compared to 33.8% for the same period in 2023, primarily as a result of decreased net sales. Unallocated Corporate Expenses Unallocated corporate expenses increased by $5.4 million to $148.1 million for the six months ended June 30, 2024 from $142.7 million for the same period in 2023, largely driven by higher personnel expenses. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity include cash, cash equivalents, short-term investments and available committed credit lines. 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: Six Months Ended June 30, (in millions) 2024 2023 Change Net cash provided by (used in): Operating activities $ 108.9 $ 9.7 $ 99.2 Investing activities 30.0 (89.9) 119.9 Financing activities (139.0) (115.2) (23.8) Net effect of exchange rate changes on cash (8.4) (3.3) (5.1) Net decrease in cash and cash equivalents $ (8.5) $ (198.7) $ 190.2 The change in cash flows provided by operating activities was driven by a $124.7 million increase in cash provided by changes in assets and liabilities, partially offset by a $25.5 million decrease in cash provided by net income and non-cash adjustments. The most significant comparative changes in assets and liabilities included Accounts payable , Inventories , and Prepaid expenses and other current assets. The $100.4 million increase in cash provided by Accounts payable was primarily driven by lower inventory receipts in the second quarter of 2024 compared to the second quarter of 2023. The $46.5 million decrease in cash used in Inventories reflected a decrease in inventory as we curtailed inventory purchases to compensate for elevated inventories exiting 2022 and liquidated excess inventory levels throughout 2023 and the first half of 2024. These amounts were partially offset by the $33.2 million decrease in cash provided by Prepaid expenses and other current assets primarily driven by lower inventory prepayments. Net cash provided by investing activities was $30.0 million for the six months ended June 30, 2024, compared to $89.9 million of cash used in investing activities for the six months ended June 30, 2023. For the 2024 period, net cash provided by investing activities consisted of $446.1 million in cash provided by sales and maturities of short-term investments, partially offset by $388.3 million in cash used for purchases of short-term investments and $27.8 million for capital expenditures. For the 2023 period, net cash used in investing activities consisted of $117.9 million in purchases of short-term investments and $22.8 million for capital expenditures, partially offset by $50.7 million provided by sales and maturities of short-term investments. Net cash used in financing activities was $139.0 million for the six months ended June 30, 2024 compared to $115.2 million for the six months ended June 30, 2023. For the 2024 period, net cash used in financing activities primarily consisted of repurchases of common stock of $102.6 million and dividend payments to our shareholders of $35.6 million. For the 2023 period, net cash used in financing activities primarily consisted of repurchases of common stock of $78.3 million and dividend payments to our shareholders of $37.1 million. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 31 Table of Contents Sources of Liquidity Cash and cash equivalents and short-term investments As of June 30, 2024, we had cash and cash equivalents of $341.8 million and short-term investments of $369.3 million, compared to $350.3 million and $414.2 million, respectively, as of December 31, 2023 and $231.6 million and $71.2 million, respectively, as of June 30, 2023. 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, 2023 for further information regarding our domestic credit facility. As of June 30, 2024, 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 June 30, 2024, 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$4.7 million). There was no balance outstanding under the facility. Other Sources As of June 30, 2024, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$103.2 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 June 30, 2024, our inventory balance decreased to $823.6 million, compared to $1,162.5 million as of June 30, 2023, driven by a reduction in current season and carryover inventory resulting from lower inventory buys, as well as the use of our outlet stores and temporary clearance locations to profitably sell excess merchandise. We believe older season inventories represent a manageable portion of our total inventory mix. We have planned 2024 capital expenditures of approximately $60 to $80 million. This includes investments in our DTC operations, including new stores 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. 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. COLUMBIA SPORTSWEAR COMPANY | Q2 2024 FORM 10-Q | 32 Table of Contents Other cash commitments Our inventory purchase obligations were $450.9 million as of June 30, 2024, compared to $343.4 million and $301.9 million as of December 31, 2023 and June 30, 2023, 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, 2023. CRITICAL ACCOUNTING 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, 2023 for additional information regarding our critical accounting policies and estimates. Management regularly discusses with our audit committee our critical accounting estimates and the development and selection of these accounting estimates. 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, 2023. 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, 2023.