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Columbia Sportswear Co  (NASDAQ:COLM)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Columbia Sportswear Company's Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations. Please go ahead.

Andrew S. Burns -- Director, Investor Relations

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter results and 2019 outlook. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our 2018 results and the assumptions behind our 2019 outlook. This CFO commentary is also available on our Investor Relations website investor.columbia.com.

With me today on the call are; Chairman of the Board, Gert Boyle; President and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Operating Officer, Tom Cusick; Senior Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrator Officer, Peter Bragdon.

Gert will start us off by covering the safe harbor reminder.

Gertrude Boyle -- Chairman

Good afternoon. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operation. Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's Annual Report on Form 10-K and subsequent filing with the SEC.

Forward-looking statements in this conference call are based on our current expectations and beliefs and we do not undertake any duties to update any of the forward-looking statements after the date of this conference call to conform that forward-looking statement to actual results or to changes in our expectations.

Andrew S. Burns -- Director, Investor Relations

Thanks, Gert. I'd also like to point out that during the call we may reference certain non-GAAP financial measures including non-GAAP results which exclude the effects of the new revenue accounting requirement standards and insurance claim recovery benefit, program expenses and discrete costs associated with Project CONNECT, income tax charges associated with the Tax Cuts and Jobs Act as well as constant currency net sales growth.

You'll find a reconciliation of these non-GAAP financial measures to comparable measures reported under US GAAP in the supplemental information tables that accompany our earnings release, along with an explanation of management's rationale for referencing these non-GAAP financial measures.

Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour.

Now, I'll turn the call over to Tim.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thanks, Andrew. Welcome everyone and thanks for joining us this afternoon. 2018 was a tremendous year for Columbia Sportswear and I'm thrilled to see it end on a high note with record fourth quarter financial results that significantly exceeded our expectations.

Our success across both wholesale and DTC channels around the world highlights that our brand-led consumer focus strategy is fueling market share gains. Sales, gross margin, operating income, net income and earnings per share were all at record levels for the quarter and full year.

Successfully adapting to the rapidly changing retail environment while enhancing our consumer experience is not an easy task and I'd like to thank our global team of over 7800 employees whose dedication and focus made these outstanding results possible.

Our fourth quarter non-GAAP sales, which exclude the impact of new revenue accounting standard increased 16% and our non-GAAP net income, which excludes one-time items, increased 27% resulting in non-GAAP diluted earnings per share of $1.68.

This growth was broad-based across wholesale and DTC channels and led by the US, our largest market. The quality of this growth is outstanding with 280 basis points of non-GAAP gross margin expansion and 230 basis points of non-GAAP operating margin improvement. For the full year, non-GAAP sales increased 12% and non-GAAP diluted earnings per share increased 35% to $4.01.

On a reported basis, our wholesale sales were up 8% globally for the year. Considering the negative impacts that bankruptcies and store closures had on wholesale trends in the US and various international markets in recent years, we're gratified to see this important channel generate healthy growth in 2018. Our global DTC sales increased 22% in 2018 and now represent 42% of total net sales, up from 40% in the prior year. E-commerce which was up over 20% versus the prior year grew to 11% of total net sales.

Looking at the year ahead, we are clearly entering 2019 in a position of strength. Our record 2018 results will create challenging comparisons, especially considering our planned investments, increasing global economic uncertainty and unresolved trade issues. We're mindful of these factors as we plan 2019, but given our business momentum, financial benefits from Project CONNECT and our fortress balance sheet, we believe we'll be able to continue our profitable growth trajectory while making substantial investments in the business.

These investments will include higher demand creation spending, including wholesale point-of-sale marketing to elevate our unique brand portfolio as well as investments in our global DTC business, information technology and supply chain capabilities. We believe the path we're on will enable continued market share capture across our brand portfolio and geographic regions and fuel long-term margin improvement.

Regionally, US sales grew 20% in the quarter, driven by low 20% growth in DTC and high-teens growth in wholesale, reflecting strong execution and a shift in timing of fall 2018 shipments. Fourth quarter was also aided by colder weather here in the US and a healthy retail backdrop.

In our DTC business, brick-and-mortar store productivity gains, e-commerce growth and margin performance all exceeded our expectations. During the fourth quarter, e-commerce sales were up high 20%, reflecting the strength of our brand portfolio. For the year, US sales grew 14% led by high-teens DTC performance and high single-digit growth in our wholesale business.

For my review of international markets, I will reference non-GAAP constant-currency growth rates after adjusting for new revenue accounting standards which we believe best reflects underlying business trends. In 2018, our international sales grew 8%. In the quarter, sales outside of the US grew 12% led by growth across Canada, Europe-direct, Korea, China and Japan. Canada posted its best quarterly growth of the year, up 26%; while Europe-direct momentum continued with mid-teens percent growth for the quarter and the year.

We are encouraged to see that Korea, which has been a difficult market in recent years, generated low double-digit growth in the quarter, helping to propel low single-digit growth for the full year. While the Korean market remains highly competitive we're encouraged to see sales turn positive in 2018 and expect continued growth in 2019. Japan's steady growth trajectory continues with mid-single-digit growth in the quarter and high-single-digit growth for the year.

Our international distributor business was up low-single-digit in the quarter and the year, led by our EMEA distributors. Our diversified portfolio of over 25 distributors across more than 60 markets remains a profitable growth engine that mitigates risk while extending the brand's portfolio's reach beyond our core markets.

We closed our China JV buyout in January of this year and also welcome John Soh as our new China GM who starts later this month. In the quarter, our China business was up high single-digit percent largely reflecting significantly lower sales provisions related to dealer transitions compared to the prior year.

Even though China's economy appears to be decelerating, it remains one of the fastest growing markets globally and represents one of Columbia's largest regional growth opportunities. Over our Company's long history, we have proven that the ability to generate long-term growth, irrespective of economic cycles. That said, we believe the combination of a changing retail environment, heightened brand competition and economic uncertainties will weigh on our performance in the current year.

We currently forecast China, which represented 6% of total sales in '18 to be down low single-digit percent for 2019. To help address the current softness and changes in the marketplace, we will continue to invest in our in-store experience with store fixture upgrades and full store renovations as well as launch our new casual outdoor lifestyle format that is well aligned with current consumer trends. We look forward to sharing additional updates to our China strategy as John Soh puts his stamp on the business.

Turning to margin performance, fourth quarter consolidated non-GAAP gross margin was up 280 basis points to 50.7%, driven by higher product margins in our US DTC business, favorable full price sales mix, and foreign currency hedge rates and higher DTC sales mix.

For the year, non-GAAP gross margin improved a 170 basis points, driven by favorable product margins in our DTC business, improved full price sales mix, higher DTC sales mix, and favorable foreign currency hedge rates. In 2019, we expect Project CONNECT benefits to yield further gross margin improvement which I'll discuss in our financial outlook later in the call.

On the SG&A front, our spending accelerated as expected in the fourth quarter, growing 17% compared to last year on a non-GAAP basis. As a percent of sales, non-GAAP SG&A increased 50 basis points with the biggest drivers of SG&A growth being investments to support our expanding DTC operations, higher demand creation and incentive compensation expenses. For the full year, non-GAAP SG&A, as a percent of sales, improved by 10 basis points to 36.2% compared to 36.3% in the prior year.

This is inclusive of a 40 basis point increase in demand creation, which rose to 5.4% of sales as well as investments related to our Europe SAP implementation and C1 and X1 technology initiatives that should yield financial benefits for years to come. Based on the heightened level of investment we intend to make in 2019, we expect SG&A will deleverage, which I will discuss in more detail later in the call. Non-GAAP operating margin improved 230 basis points to 17.2% in the quarter and improved a 180 basis points to 13.1% for the full year.

I will now review our performance by brand on a reported basis. Looking at the Columbia brand globally, sales increased 21% in the quarter and 15% for the full year. This growth was achieved via strong DTC performance and wholesale growth that clearly demonstrates we continue to gain market share. From a category perspective, both footwear and apparel were up double digits in 2018.

On the product front, Columbia's new winter technology Omni-Heat 3D won GearJunkie's prestigious Gear of the Year award. We're pleased with the sales performance of this new technology with an outerwear which was sold exclusive in our Titanium line. We will be cascading it into more styles for 2019.

Columbia's Fall 2018 collaborations with Kith and Opening Ceremony continued to appeal to young urban consumers and earned high marks from several media outlets including Esquire, Refinery 29 and Vogue. For our Star Wars collection, the Empire crew jacket struck a chord with Columbia and Star Wars fans alike. The limited-edition jackets sold out within minutes online and drove significant traffic to our retail locations in the US and abroad.

Several key media outlets covered the launch, including the Wall Street Journal, Esquire, Good Morning America and FOX Business News. Globally, the Star Wars campaign generated over 450 million earned media impressions. Our Heat Seal outwear collection will be an important global product story in 2019 and we will be investing in marketing to increase consumer awareness and to drive demand. We will also have broader services of newer technologies like Omni Shade Sun Deflector this spring and Omni-Heat 3D in the fall.

Shifting to brand marketing, our investments in demand creation are amplifying these product innovations and brand stories. In 2018, we executed two Key City Attack grounds; Houston early in the year and Chicago this past holiday.

In Houston, we saw PFG footwear sales more than double compared to the prior season and we're also encouraged by the broad-based sales lift experienced in Chicago as a result of this focused marketing effort. We will continue to deploy key city attack plans in 2019 to drive growth across key wholesale partners as well as our own DTC stores and columbia.com.

Many of our partners outside of the US joined us in celebrating our Columbia brand heritage and 80th anniversary celebration across Asia, Europe and distributor markets with in-store media and special events. I'd also like to recognize a few Columbia sponsored athletes and friends of the brand for their recent accomplishments. Congratulations to Cassie Sharpe and Alex Ferreira who won gold in Women's and Men's SuperPipe at the recent 2019 X Games.

Congratulations to Columbia/Montrail athlete Jiasheng Shen, who just won the 2019 Hong Kong 100 Ultra-Trail race. Sheng will be participating in the 2019 UTMB a Columbia-sponsored globally renowned trail running event this August in Chamonix, France. We wish him all the best in Chamonix.

Further highlighting our relevance to the trail running community Columbia's Montrail -- Montrail's latest trail running film Bucket List FKT won the Trail Running Film Festival's best short-film award. And congratulations to country singer Luke Combs who won New Artist of The Year at this fall's CMA award. True to form, Luke accepted one of country music's most prestigious awards wearing his signature black PFG Bahama shirt.

From a category perspective, our Columbia brand growth was balanced during the quarter and the year. In outerwear, our Women's heavenly jacket was the best-seller, experiencing excellent sell-through in both wholesale and DTC.

In footwear popular styles like Newton Ridge Fairbanks, Ice Maiden and Minx were stands out for our winter line and we look forward to continuing the momentum we saw in PFG's footwear for spring in 2019. We've long said footwear could be our largest category and we're investing in the people and resources required to realize that goal.

We recently announced the hiring of Peter Ruppe to head our Columbia brand Footwear team and we're eager to unlock our full potential in this $30-billion-plus global category. This newly formed team's first platform innovation called Shift takes the best in athletic performance and style and adds the outdoor functionality that Columbia brand is famous for. This new line will come to market in fall 2019 and you can expect even more new footwear innovations and product stories into 2020 and beyond.

SOREL sales were up 11% in the quarter and 14% for the year, reflecting healthy growth across wholesale and DTC channels. Under Mark Nenow's leadership, SOREL is proving its ability to extend beyond the core winter boot category. During the quarter, SOREL experienced high demand for fall styles like the Joan of Arctic Wedge and winter fashion styles like the Explorer Joan and Out N About Plus. SOREL's Kinetic sneaker exemplifies the brand's potential to expand beyond winter. We're excited to launch several new Kinetic styles for spring 2019 and demand creation is also a focus for SOREL.

During the quarter, SOREL executed a Key City Attack Plan in New York City with out-of-home, in-store, and digital advertisements helping to drive strong sell-through in one of the most important trend setting markets in the world. In 2019, we will further invest in demand creation to build on this momentum and based on the order book, we're planning double-digit percent growth for the SOREL brand.

At prAna, sales grew 21% in the quarter reflecting healthy full price e-commerce and US wholesale growth. Men's lifestyle, women's yoga, holiday product capsules and the new Cardiff collection, all performed well in the quarter. For the year, prAna generated record sales, up 11%.

In 2019, we remain committed to investing in prAna's demand creation spending to grow brand awareness and we're eager to share the brand's focus on clothing for a positive change with consumers. We're forecasting another year of profitable growth for prAna in 2019.

2018 was a transition year for Mountain Hardwear and established the foundation for profitable growth going forward. Under Joe Vernachio's leadership, the brand has reinvigorated its product engine, increased full price sales mix, and refocused marketing to enhance brand content and point-of-sale presentation. It's clear, consumer's respond when the brand delivers innovative products such as the iconic Ghost Whisperer and popular StretchDown outerwear line. We plan to build on these successes in the years ahead.

With clean inventory and a healthy order book, the brand is poised to deliver double-digit percent growth in 2019. Mountain Hardwear's recovery will be product-driven and our wholesale partners are excited about the 2019 product line up. For the quarter, sales were down 8% primarily reflecting lower closeout sales compared to the prior year as well as the brand's 2017 decision to exit the Korean market. For the year, sales were down 12%.

I will now quickly review our balance sheet and cash utilization. Total inventory exiting the quarter was up 14% to $522 million or 20% excluding the impact of balance sheet reclassification related to the new revenue accounting standard. This is in line with the outlook we provided on the last call and primarily reflects earlier receipts of spring 2019 product to alleviate manufacturing capacity constraints and drive cost efficiencies.

We're comfortable with the quality and the aging of current inventory. Given the earlier receipts of fall 2019 product, we expect inventory growth will significantly exceed sales growth in the first half of 2019. Our balance sheet remains extremely strong with cash balances of over $700 million exiting the fourth quarter. We continue to have no long-term debt.

During 2018, the Company repurchased 2.3 million shares of common stock for $202 million and paid $63 million in shareholder dividends. Our Board of Directors has approved an additional $200 million share repurchase authorization which is in addition to the approximately $130 million currently remaining under the current stock repurchase authorization.

I'd like to now provide some details regarding our 2019 financial outlook. All figures discussed will be GAAP, unless otherwise noted. Our 2019 outlook anticipates 6% to 8% sales growth with contributions from all brands and all four geographic regions. We expect the financial benefits of Project CONNECT to be clearly evident in our gross margin performance which we expect to improve by approximately 70 basis points in the year on top of a 170 basis points of non-GAAP gross margin improvement in 2018.

Given the elevated level of investments that I will discuss next, operating margin is forecasted to contract modestly to the range of 12.4% to 12.6%. While our initial 2019 financial outlook does contemplate slight operating margin contraction, we believe reinvesting Project CONNECT value capture back into the business is critical to improve operating capabilities that will enable long-term sustainable profitable growth.

It's important to note that while our initial operating margin outlook is below 2018 record performance, it is a 120 basis points above 2017 non-GAAP performance and 390 basis points higher than five years ago. Diluted earnings per share is expected to be in the range of $4.30 to $4.45.

Given the moving parts within our outlook as well as the investments we're making as a brand-led consumer-focused Company to adapt to the retail landscape I want to spend some time on what we're investing in and how it will benefit shareholders over the long-term. First, we remain committed to investing in demand creation.

The results were evident in 2018 and we expect demand creation to increase in 2019 to approximately 5.5% as a percent of sales. We believe investing in demand creation to tell our unique brand stories has a high return on our investment and is vital to growing the brand awareness and continuing to propel our sales momentum.

On the technology front, our Consumer First or C1 strategic initiative is intended to enable us to deliver a more personalized seamless experience for consumers across our global retail operations and includes a new retail ERP platform as well as loyalty, order management and point-of-sale systems.

Experience First or X1 will create a mobile first architecture designed to enhance the mobile consumer experience. This encompasses a reimplementation of our e-commerce platform to improve search, browsing, checkout, loyalty and customer care experiences for mobile shoppers. Once completed, X1 will be integrated with C1 across all of our brands.

While we are continuing to work toward 2019 implementations of C1 and X1, we may shift that timeline to ensure completeness of each system and to align timing of go-live with our retail calendar and store rollout plan. We do not currently anticipate that changes in the timeline would have a material impact of the financial outlook we are providing today.

We are also making strategic investments across our supply chain to enable growth, improve productivity, enhance service levels, and add capacity through our distribution and fulfillment networks. It's important to note that our investments in the business will also be evident in capital expenditures which are expected to be between $130 million and $135 million in 2019 compared to $66 million in 2018. This increase reflects continued investment in our DTC business, facilities expansion, technology platforms, and supply chain capabilities and emphasizes our confidence in the future of our business.

As you can see, 2019 will be a busy year for Columbia Sportswear as we continue to invest in our four strategic priorities which remain; drive global brand awareness and sales growth through increased, focused, demand creation investments; enhance consumer experience and digital capabilities for all of our channels and geographies; expand and improve global direct-to-consumer operations with supporting processes and systems; and invest in our people and optimize our organization across our portfolio of brands.

In summary, we remain committed to investing in our strategic priorities to drive long-term sales growth and operating margin expansion. We'll now answer your questions for the remainder of the hour. Operator, if you could help us with that?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.

Robert Drbul -- Guggenheim Securities LLC -- Analyst

Hi, good afternoon.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Hey Bob.

Robert Drbul -- Guggenheim Securities LLC -- Analyst

Hey, Tim. I've a couple of questions. In the first one, on the demand creation spend, you're taking it up in 2019 I was just wondering with your 2019 outlook, do you have another marketing campaign ready-to-go if the government shuts down again to follow-up on Make America's Parks Open Again campaign?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Well, we can definitely put one together quickly but our expectation is that the government will not shut down, but if they do, we'll be ready for them.

Robert Drbul -- Guggenheim Securities LLC -- Analyst

All right. And then, I was just wondering, you guys did the Chicago campaign. I was wondering if you have any learnings from that as you think about this year. What other markets you have in mind?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Certainly. Well, we learned both from the Houston attack plan and the Chicago plan that basically these highly focused emphasis on certain markets can really pay big dividends. So for 2019, we've chosen New York City and Denver to really focus our attention on and we expect that those markets will get much heavier exposure to the brand and we're also connecting with our host of partners in those markets to make sure that we have great presentations of our products in the stores when the heavy-up period is happening.

Robert Drbul -- Guggenheim Securities LLC -- Analyst

Got it, OK. And then, just a couple of quick ones. Tim, I was just wondering, now with Peter Ruppe onboard, just wondering if you could give us some updated thoughts and targets around the footwear business, and where you see that going over the next few years.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Well, as -- talking about the next few years, I've been taking, since the company went public in 1998, about the opportunity and our success in footwear and we haven't really shown that we've been able to do that, although we do have -- footwear is now at about 20% of our Company's total revenues, when you combine SOREL and the Columbia brand. But frankly, Peter's focus is exclusively on the Columbia brand. So our expectation is that we'll finally now be able to get the true return on that promise.

And doubling the footwear business from the Columbia's standpoint is not beyond the realm of possibility. And as you know, covering some of these large footwear businesses, that can happen quickly if we have the right merchandise. We've shown a number of our customers this shift product and there has been great results from the customer rave reviews.

Obviously, we have to wait for the sell-through to really confirm that we've got the right of approach. But frankly I think this is going to be a significant milestone in the Company's history when we talk about footwear and getting the opportunity well under way.

Robert Drbul -- Guggenheim Securities LLC -- Analyst

Got it. One last one if I could, are you going to have enough inventory in the Pacific Northwest for the storm coming to you guys this weekend?

Timothy P. Boyle -- President, Chief Executive Officer and Director

I hope not. No, we have inventory. We always should be able to find some, but it'd be better if there were more people in the Pacific Northwest.

Robert Drbul -- Guggenheim Securities LLC -- Analyst

Alright, good luck. Thanks very much. Congratulations on a great year, guys.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thanks a lot. Thank you.

Operator

Our next question comes from the line of Laurent Vasilescu with the Macquarie Group. Please proceed with your question.

Laurent Vasilescu -- Macquarie Capital -- Analyst

Hello, good afternoon and thanks for taking my question and congrats on a really unbelievable results here. So I want to ask about the direct-to-consumer business, and I think for FY '18 it was about 43% of your overall sales. How do we think about that as a percentage of sales for FY '19? Or maybe asked a different way, how should we think about the growth rate of DTC and wholesale for the overall year?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes. Laurent, I'll jump in here for a minute. Globally, just one quick correction, the DTC business was about 42% of our global business, off of 40% last year so certainly outpacing it. Including with -- included within the outlook and if you dig back in my CFO commentary, we have provided specific outlook with regard to global DC (ph) on a go-forward basis. Having said that, we have provided our initial outlook from a US DTC perspective in which we believe that will grow at a low-double digit rate. And within that growth margin outlook, again, sales mix with the retail business continuing to outpace the wholesale business is going to help provide a little bit of a margin tailwind.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Yes, well, Laurent, we look at -- we still consider ourselves to be primarily a wholesale business and that's where our focus has been, although the DTC business really solidifies and confirms the power of the brand, so -- which is great for us. Overtime though, as our footwear business grows, that will almost be exclusively a wholesale business, and so the expectation is that overtime this may be the highest penetration of DTC, certainly in North America.

Laurent Vasilescu -- Macquarie Capital -- Analyst

Okay, very helpful. And then, if you hypothetically beat your initial FY '19 topline guidance, are there any additional investments that you're planning for the out years that could potentially move out to FY '19? Or should we think about the potential topline be as a flow-through to the bottom line?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Well, we can always pull the demand creation lever. We talked about moving up to 5.5%, which we consider to be a significant improvement over prior periods, but frankly, we're not spending as much as we should be spending. Now, we're spending that 5.5% much more efficiently than we have in the past, just based on the digital approach to marketing. But we would likely make further investments in demand creation ahead of other investments.

Laurent Vasilescu -- Macquarie Capital -- Analyst

Okay, very helpful. And then a last question here. In terms of brands, how do we think about the revenue growth for the individual brands? Should we kind of think about some of the most recent results as proxies for this year?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Not necessarily, Laurent. From an overarching standpoint, when we look at 2019 outlook I would describe the revenue growth is going to be fairly broad-based across the brand portfolio. Within the emerging brands in particular, SOREL, we continue to see lot of momentum behind that brand and anticipate a growth rate well into the double digits. As Tim's prepared remarks had indicated, we do see a recovery in the Mountain Hardwear business and we are anticipating seeing a double-digit rate of growth out of Mountain Hardwear business at this time, which is exciting. And then, across each of Columbia and prAna, more of a mid-single-digit rate of growth from each of those two brands.

Laurent Vasilescu -- Macquarie Capital -- Analyst

That's great. Thank you very much and best of luck.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thanks.

Operator

Our next question comes from the line of Jonathan Komp with Robert W. Baird & Company. Please proceed with your question.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Yes, hi, thank you. I wanted to follow-up on the Columbia brand, and maybe just first just ask, as you look forward to 2019 if you have any current reads on ordering trends and just the appetite from your retail partners? And then, I have a follow-up on Columbia.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Okay, certainly. Well, as you know for spring 2019 obviously we've had our order book in hand for quite some time. And then as it relates to the fall order book, I would say we're 75% to 80% of the way booked against our plan for fall. So, we have a high degree of confidence in the numbers we're giving your day. And we monitor in the US that about 85% of our -- the progress of our wholesale partners with our products. So, we have a number of opportunities to stay connected with our -- with the sell-through et cetera on our -- for our retailers.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay, great. And as a follow-up there just -- I know there's a couple of references in the CFO commentary. But any more color on what you're assuming for Columbia in terms of how much was over delivery in 2018 that creates a tougher sales and margin compare for 2019? Just hoping to get a little color there on what you're assuming?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes, Jon, I think, certainly the biggest challenge in there is going to be the retail performance. The productivity that we saw both in the stores and from an e-commerce perspective was really quite outstanding through -- throughout the quarter. And so, certainly as we get into the latter part of this year that's where we have taken our historical approach with regard to how we plan the business for more a normalized perspective in how we've done that. But obviously, there are those comps that will be challenging as we get out to the latter part of the year.

And then specifically as it relates to the wholesale business, we did have a -- little bit of a shift in the timing of deliveries on the wholesale business between the third and fourth quarters. I think 90-days going (ph) indicated, that was about a $10 million shift given the order conversion. We saw excellent order conversion throughout the quarter in terms of the reorders that we saw within the wholesale business as well as lighter cancellations in our replenishment business was quite healthy. And so that $10 million shift has been probably twice that when you reflect the momentum that we had in the business throughout the quarter.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Yes. Jonathan, I might just add that, obviously in fourth quarter we're shipping primarily winter merchandise and the liquidation on those products, especially in North America based of the weather has been exceptional. So, our expectation is that the channel is going to be extremely clean and so we -- again, we have a high degree of confidence in what we're talking about today.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Excellent. And my last one was just on the Project CONNECT initiatives. I don't know if you could give more of a multiyear look into the benefit you expect, and I guess I'm trying to understand, Tim, I know you highlighted operating margin will be up in 2019 quite a bit versus 2017, but it still will be deleveraging for the full year. So I'm wondering if maybe beyond 2019 there is more of an opportunity to get the sales, the end margin benefits from the actions you're taking.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Certainly. Well, we have a bit of deleveraging as 2018 which was a spectacular year in almost any measure. And I think we're committed, frankly, to keeping our marketing spend as high as possible. So the expectation is that while we always will have incremental improvements in our operating margin performance, we're mindful of the fact that we need to make sure that we've got the right amount of voice in the marketplace, keeping our demand up and that's where we'll likely to be maybe overemphasizing the spend.

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

And Jon, I'd add as it relates to the financial benefits themselves from a Project CONNECT standpoint, certainly when we reflect on our 2018 results, we began to see a meaningful level of financial value capture from this Project CONNECT both from a top line perspective with some of our commercial-based initiatives that impacted our retail business as well as some cost savings as it relates to the SG&A side.

Certainly, as we look forward to 2019 and what's embedded in the outlook, there is even a more meaningful -- we continue to have confidence in terms of the financial value capture of Project CONNECT in 2019. I think the most significant area which you're going to see, that's in our gross margins and while gross margin is up 70 basis points, keep in mind that on top of the 170 basis points that we delivered this year we've got the challenging comp as we go into the fourth quarter next year.

So the Project CONNECT's benefits that are embedded in that outlook are really quite substantial. They're greater than the overall improvement in our gross margin for the year. And then, I think beyond 2019, the bulk of the benefits we see from a Project CONNECT standpoint would be in '19. Those of course carry forward and we would expect some degree of incremental benefit beyond that.

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Okay, great. That's really helpful. Thank you.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Operator?

Operator

Our next question comes from the line of Camilo Lyon the Canaccord Genuity. Please proceed with your question.

Camilo Lyon -- Canaccord Genuity -- Analyst

Thank you. Good afternoon everyone. Very nice job on the quarter, congrats. I guess within the same context of the last question, with respect to gross margin, you had a fantastic quarter, everything came together. Other brands have spoken of similar benefits and have certainly put up result that reflects that. Could you help us parse out, of this 280 basis points that you delivered in the fourth quarter, how much of that was really something that was weather-driven versus the Project CONNECT or more structural benefits that you're implementing into the business?

And would you think that the 70 basis points of margin for next year are truly just reflective of the structural changes that you're embedding into the business or is there some expectation that the benefits that you experienced this quarter probably aren't at least in the plan until you get closer to the season for next year?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Well, certainly, the Project CONNECT related benefits that we're expecting gross margin, which by and large relate to a combination of the designed value work that we've done and previously spoken of as well as the work we've done from a SKU rationalization perspective. Those don't really kick in until our spring 2019 season. So effectively what you're seeing that's driving that gross margin benefit in our fourth quarter is a favorable selling environment.

When you look at the combination of having favorable weather for most of the quarter, I think a positive backdrop obviously from an economic and from a consumer perspective, that really aided the margins that we saw in our business, I think both from a retail perspective in which we were far less promotional than what we would normally be. And then also in the case of the wholesale business where our relative mix of full price sales relative to close-out was much more skewed to the full price side.

And so, how we plan the margins this year, it's again kind of -- it's on more of a normalized basis knowing that we had some of those favorable comps with the performance that we achieved in the fourth quarter.

Camilo Lyon -- Canaccord Genuity -- Analyst

Great. So that 70 basis points for 2019 is more structural benefits with none of these incremental benefits that you experienced in Q4 are planned, is that the right way to think about?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

That's exactly right yes. In fact the structural benefits are even greater than that 70 basis points, as I was mentioning earlier.

Camilo Lyon -- Canaccord Genuity -- Analyst

Okay. And so the -- and so what would be the offsets to that, to get you to 70 basis points?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Well, the offset is effectively the more difficult comps as we've normalized our expectations around what we would experience from a promotional standpoint particularly in the DTC business in the fourth quarter. That'd be the single biggest thing that's really a factor in there.

Camilo Lyon -- Canaccord Genuity -- Analyst

Got it. Okay, perfect. And shifting gears a little bit more to the expense fixture, fully on board with the need to continue to invest in demand creation and all the initiatives that you have, could you help us a little bit with the cadence. I think you alluded to the cadence in the CFO commentary, but how should we think about that, if you could just refresh that?

And then, with respect to, maybe your longer term expectations on what you need to see to begin to leverage some of those investments? Whether it's certain level of fails or what have you where it may pull back on that percentage? Are you reaching a certain level of dollars of marketing investment that you're comfortable maintaining at that pace? How do we think about the leverage component starting to kind of flow through to the bottom line in the out years?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Okay. So, yes, let me start with the first piece there, as it relates to the cadence. And as you've seen, I mean throughout the year we've steadily made investments in 2018 that are broader rate of SG&A growth from a mid-single-digit level to where we exit the year on a non-GAAP basis in the 17%-plus range. And that elevated level effectively where we're at exiting the year. I would fully expect it'd be at an elevated level through the first half of the year as we anniversary many of those investments.

But certainly our expectation and, as Tim had pointed out, I mean given some of the economic uncertainty and other geopolitical tensions that as we get to the latter part of this year we'd like to see our SG&A growth come back down in line with our full year sales growth.

While at the same time, it is important to continue investing in the strategic priorities that we've outlined as a business. And I think, on a longer term basis, we're absolutely committed to what we've indicated in the past in terms of continue to drive toward sustainable profitable growth and as part of that, would equate to achieving some degree of SG&A leverage in there as well.

Camilo Lyon -- Canaccord Genuity -- Analyst

Okay, fantastic. And then just finally, so I have that piece right about how you qualified the wholesale timing of the deliveries. Initially you thought it was going to be $10 million but because of more favorable condition, more reorders less cancellation, lower liquidation that trend into 2020. Is that the right way to...

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes. That's the way we're looking at it and a lot of that is just really driven by the favorable selling and what we experience from a net reorder and replenishment perspective.

Camilo Lyon -- Canaccord Genuity -- Analyst

Okay. So -- but that wasn't really a shift, that was just better business conditions and better execution?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes, I mean shift is hard to do it right? We're looking at the full season in terms of proportionately what we ship in the third quarter and the fourth quarter. So it gets a little bit comingled once you start looking at shifts relative to at-once business and so forth.

Camilo Lyon -- Canaccord Genuity -- Analyst

So the shift is really $10 million?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

It really depends on which way you look at it Camillo, yeah.

Camilo Lyon -- Canaccord Genuity -- Analyst

Okay, got it. Thank you so much. Take care.

Operator

(Operator Instructions) Our next question comes from the line of John Kernan with Cowen & Company. Please proceed with your question.

John Kernan -- Cowen and Co -- Analyst

Good afternoon guys and congrats on just a wonderful 2018.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thanks.

John Kernan -- Cowen and Co -- Analyst

Tim, can you talk about what enabled you to outperform your fourth quarter guidance and expectations so much, particularly in the Columbia brand, just any color there. I mean there was a lot upside in the initial outlook and even -- the upside even accelerated relative to your outlook for the fourth quarter. So just wondering, what really drove this tremendous performance relative to the outlook for the fourth quarter?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Well, thanks. We really focus for several seasons and several years on improving our product mix and focusing on those areas of the business where we have points of differentiation that we could talk to at some length. So all of that's supercharged by terrific marketing where we're able to focus our marketing efforts in a bigger way geographically and with some digital assets and then we'd love to say we did it without weather but weather was certainly a tailwind for us.

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

And I would -- Yes, I'd just add to that. When you step back and look at regionally where we saw that improvement. Our topline came in a good, nearly $50 million better than the outlook that we provided back in October. The lion's share was effectively North American market, and we saw pretty balanced growth between both the DTC business and the wholesale business outperforming throughout the quarter that drove that and a lot of that tied back to the weather and the economic side of it. And then the other piece I would add here as well as our European business had a solid fourth quarter as well and delivered stronger than expected results.

John Kernan -- Cowen and Co -- Analyst

Got it. And then the Key City Attack program that used in New York City, I know you had that event in Houston and Chicago as well. And I think PFG is one of the brands you've used within those activations. Can you just give us some numbers around PFG? The growth has been exponential that you've talked to on the call and it feels like the brand is in a real inflection point, so any color around PFG (multiple speakers)?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Yes. I guess the most of exciting part of our PFG business which is in the range of a $150 million from an apparel perspective is the power of the brand in footwear. So if there was anything that we learned from the Houston attack it was really that consumers want to buy footwear with PFG performance and branding on it and so that really gives us a lot of confidence that we can have a very significant spring and summer business around PFG and footwear.

John Kernan -- Cowen and Co -- Analyst

Excellent. Thanks guys, I'll let someone else jump in. Best of luck.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy -- Stifel Nicolaus & Company -- Analyst

Thank you and good afternoon. Really nice to hear an outlook guys, I know there has been a lot hard work behind these results. The Project CONNECT really yielding some nice unlock on the margins. A component of this is DTC outgrowth, you've also realigned some of the sourcing. Jim, are there any the working capital implications or implications for the cash cycle with Project CONNECT that we should consider?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Well I mean, certainly our -- the averaging unit cost of the inventory that we're purchasing is going to be lower. But aside from commenting on that Jim and then we've added some comments obviously to Tim's remarks and my CFO commentary, just regard to the flow from an inventory perspective. Obviously we're receiving spring 2019 inventory quite a bit earlier this year which is really driving the lion's share of inventory growth that we see at the end of the year. And I would fully expect that from a fall 2019 perspective we're expecting something similar, barring getting complete visibility to the flow of those purchase orders, but it's probably a like increase as we get to the midpoint in 2019.

Jim Duffy -- Stifel Nicolaus & Company -- Analyst

Okay, that's helpful, thank you. And then, with Project CONNECT, have you been able to make progress on direct attribution of marketing or return on marketing spend since you have confidence to allocate dollars and improve this marketing yield?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Yes, we can, especially in our e-commerce business, but when we're able to go out and find consumers on these various categories of merchandise, we could be much more targeted. And that's where the bulk of our spend is going to be enhance.

Jim Duffy -- Stifel Nicolaus & Company -- Analyst

Great, thank you guys.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Great, thank you guys.

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Thanks Jim.

Operator

Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.

Susan Anderson -- B. Riley FBR -- Analyst

Hi, good evening. Let me add my congrats to just an amazing quarter and an amazing year. I guess I wanted to maybe follow-up on some of the earlier questions. I was a little curious on just the sales growth in the quarter. Was it -- how much more, I guess, was unit growth and appear to us to be pretty low promotional activity out there during the winter season so far versus I guess higher prices or higher AUR growth as a result?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

I think the lion's share of the growth, Susan, is going to be volume based. There are some component to the degree, we're talking the DC business with some of the lower promotions, but by and large I think our AFC has been relatively constant on a year-over-year basis.

Susan Anderson -- B. Riley FBR -- Analyst

Got it, OK, that's helpful. And then maybe if you could just give some more color around China, and you talked about earlier on the call on the macro environment over there and just I guess the pressure that you are expecting and kind of how long you expect that to persist for?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Certainly. Well as we've looked at our competitors and their results announcements we realize that we're underperforming there. And this is an area where we've said many times this is the largest geographic area from a revenue standpoint that the company has in its distribution. So, we made changes in the general management of the Company there and we're focusing on improving the look and feel of the stores, refreshing the stores, and I think that that we'll see quick results from the change in management and the improvement in the store look and feel.

And frankly, we've shown and I might point out Europe as an area where the Company underperformed for many, many years and we realized once we got the right people in place that we can be very successful there. So my expectation is that that business will come around quickly. And as I said, I think it can be the -- one of the largest geographies for the Company over the long-term.

Susan Anderson -- B. Riley FBR -- Analyst

Great, that's helpful. I guess if I could throw one more in, just one the increased investment and demand creation. I guess is this new level kind of something that you expect to be more normalized as we look out over the next three or five years?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Well, if we look across our competitive set globally, some of our competitors are north of 10% of sales in demand creation. And so while we don't think we have to go that high for our business but we know we need to spend more and we need to spend it incredibly efficiently. So my goal is to increase our demand creation spend overtime and that will depend on other priorities of investment such as we talked about today but the plan is to continue to improve that and increase it.

Susan Anderson -- B. Riley FBR -- Analyst

Great, that's helpful. Nice job again. Good luck for 2019.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thank you.

Andrew S. Burns -- Director, Investor Relations

Operator, we'll take the next question. Thanks. Looks like we're having a technical difficulty here, we're waiting for the operator, but it should be fixed shortly.

Operator

Our next question comes from the line of Rick Patel with Needham & Company. Please proceed with your question.

Rick Patel -- Needham & Co. -- Analyst

Hey guys, congrats on a terrific year. Can you talk about what your mix of sales were between wholesale and DTC at the end of the year? I know historically you've considered the Company to be primarily a wholesaler but given the strong progress you're seeing and investments you're making in DTC. I'm curious about how high you see this penetration ultimately going and is there anything to call out in terms of brand as we think about where the opportunities to improve DTC penetration can go?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes. I think specifically as we look at the US wholesale business because I've got some of that detail in front of me. Certainly the US retail business in the fourth quarter, the business is going to skew a lot more in that direction just given the volume of businesses that we do at that point in time. The wholesale business, keep in mind, we ship in a lot of our fall winter product in the third quarter. There is still some to come in reorders obviously in the fourth quarter, but we do see that the business is skewed to the retail side at the end of fourth quarter. To provide specifics around that we haven't done a historical and we (ph) -- or we keep it that way for the time being.

Rick Patel -- Needham & Co. -- Analyst

And I have a follow-up to the earlier question on China. So it sounds like you're tempering expectations for that market 2019 but your fourth quarter sales were up. So I'm curious, does this reflect softness that you're seeing in the new quarter or is this conservatism and now that you have full ownership of your operations in this market, any updated thoughts on the strategy as we think about the next year?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes, Rick, couple of comments on that. So, the third quarter, you'll recall, our China business was down a low-double-digit percent. The fourth quarter was the reported, like local currency-based growth or constant currency growth of 8% in the comments that we provided, lot of the growth that we're seeing there is year-over-year comparative shifts in sales provisions with a couple of dealers that we've transitioned out.

And so, if you adjust for the impact of those to transitions, one in the fourth quarter this year and one in the fourth quarter last year, our business in China in Q4 that we've just come through of '18 was up a low single-digit percent. So we're certainly seeing some softness there, and as Tim touched on, we're committed to making the right demand creation investments and giving the right team and whatnot -- aboard with John coming aboard with us in the next month here I'm excited about getting after the business.

Rick Patel -- Needham & Co. -- Analyst

Thanks very much.

Operator

Our next question comes from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question.

Mitchel Kummetz -- Pivotal Research -- Analyst

Yes, thanks for taking my question. Tim you mentioned Korea that was up low-doubles in the quarter. I know that was a challenging market for you guys a while back. Can you just -- is there any way to say how big that business is for you? And then could you -- is there anything you could put your finger on as to why that's now returned to growth?

Timothy P. Boyle -- President, Chief Executive Officer and Director

Yes. This is -- I'll have Jim speak to the specifics on the size of the business. But frankly we went through a painful period there rightsizing the inventory investment and getting ourselves back to a profitable contributing position for that market. I would say that the market is down from its peak. And if you remember, I think we almost had 30 or 35 international competitors in that market at the peak of the outdoor boom in Korea. We've weeded out a lot of those competitors, and frankly, we're back now to a more solid business, although we don't expect it to become as large as it once was in the foreseeable future.

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes. And then just to add there, the size of that Korea business, it's under 5% of global revenue. So and then, as Tim touched on, we are profitable in Korea but there's certainly room to leverage that business with growth in the coming year.

Mitchel Kummetz -- Pivotal Research -- Analyst

Got it. And then, just a quick couple on follow-ups just on the SG&A, I know that you expect to deleverage in 2019. Could incentive comp be a line item that you leverage, just kind of based on where your plan is relative to what you guys just did this past year? And then on demand creation, I know you're talking about 5.5% of sales in 2019. Can you remind us what it was in 2018?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes certainly. The incentive comp, obviously with the year that we just had that's really what's driving the incentive comp up for 2018. So I would expect barring having another banner year like we just -- like we just put out that incentive comp will be more normalized.

Timothy P. Boyle -- President, Chief Executive Officer and Director

By the way Mitch, I would hope that we finish at the levels this year, frankly. I mean the team has just done a spectacular job. So we hope so.

Mitchel Kummetz -- Pivotal Research -- Analyst

And then, on the demand creation, the percent this year, 2018?

Jim A. Swanson -- Senior Vice President, Chief Financial Officer

Yes. So the demand creation were at 4.5% this year Mitch against 5% last year. And then in the outlook that we provided for 2019, we're currently contemplating growing that 5.5%.

Mitchel Kummetz -- Pivotal Research -- Analyst

Yeah, all right. Okay, great. Thanks guys.

Timothy P. Boyle -- President, Chief Executive Officer and Director

Thank you. All right, well I'm sorry, we had...

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Tim Boyle, CEO for closing remarks.

Timothy P. Boyle -- President, Chief Executive Officer and Director

I'm sure we had technical difficulties with the call this time. But we're certainly thrilled to be reporting the results with you today and we look forward to talking to you in about 90 days' time.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 66 minutes

Call participants:

Andrew S. Burns -- Director of Investor Relations

Gertrude Boyle -- Chairman

Timothy P. Boyle -- President, Chief Executive Officer and Director

Robert Drbul -- Guggenheim Securities LLC -- Analyst

Laurent Vasilescu -- Macquarie Capital -- Analyst

Jim A. Swanson -- Senior Vice President and Chief Financial Officer

Jonathan Komp -- Robert W. Baird & Co. -- Analyst

Camilo Lyon -- Canaccord Genuity -- Analyst

John Kernan -- Cowen and Company -- Analyst

Jim Duffy -- Stifel Nicolaus & Company -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Rick Patel -- Needham & Company -- Analyst

Mitchel Kummetz -- Pivotal Research -- Analyst

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