Columbia Sportswear (COLM) Q3 2019 Earnings Call Transcript

Columbia Sportswear (COLM 1.49%)
Q3 2019 Earnings Call
Oct 30, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Columbia Sportswear Company's third-quarter fiscal-year 2019 financial results. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Andrew Burns, director of investor relations and competitive intelligence for Columbia Sportswear.

Thank you. You may now begin.

Andrew Burns -- Director of Investor Relations and Competitive Intelligence

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's third-quarter results and 2019 outlook. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and the assumptions behind our 2019 outlook. The CFO commentary is available on our Investor Relations website, investor.columbia.com. With me today on the call are 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 Administrative Officer Peter Bragdon.

This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations. 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 filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations.

I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including non-GAAP results for 2018. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our third-quarter 2019 earnings release. 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.

Tim Boyle -- President and Chief Executive Officer

Thanks, Andrew. Welcome everyone and thanks for joining us this afternoon. Record third-quarter results exceeded our expectations with broad-based growth across our geographic segment channels and product categories. We were able to ship a greater portion of our fall 2019 order book in the third quarter of this year compared to the fall of 2018 season as retailers restock depleted inventory positions after harsh winter weather and exceptional sell-through in North America last year.

Our largest brands Columbia and Sorel both generated impressive double-digit growth which was led by North America. We also generated 100 basis points of operating margin expansion compared to prior-year non-GAAP results driven by Project Connect margin benefits. Together this fueled earnings-per-share growth in excess of 20% while continuing to make substantial investments in our strategic priorities. Based on a strong year-to-date performance, we are raising the low end of our net sales outlook and raising our operating margin and earnings per share outlook for the full year.

In the third quarter, net sales increased 14%, gross margin expanded 110 basis points and diluted earnings per share increased 24% to a record 1.75, compared to non-GAAP third-quarter 2018 diluted earnings per share of $1.41. On a year-to-date basis, net sales increased to 11% gross margin expanded 130 basis points and diluted earnings per share increased 35% to a record $3.15, compared to non-GAAP year-to-date 2018 for diluted earnings per share of $2.34. Regionally, U.S. net sales increased 17% in the quarter and 15% year to date.

In the quarter growth was driven by a low 20% growth in wholesale and mid-single-digit percent growth in DTC, which included brick-and-mortar net sales growth and a high single-digit percent increase in eCommerce. Wholesale growth was driven by higher advance orders and earlier shipments of fall 2019 product. In DTC, both our brick and mortar and eCommerce businesses were up against exceptional sales performance last year. From our review of international markets and brand performance, I will reference constant-currency growth rates which we believe best reflect the underlying business trends.

Net sales outside of the U.S. increased 11% in the third quarter and 8% year to date with growth in all international regions. In Canada, net sales increased 22% in the third quarter and 15% year to date. Third-quarter net sales growth was primarily driven by earlier shipments of fall 2019 wholesale products, as well as increased fall 2019 advance orders.

Our international distributor business, net sales increased mid-teens percent in the third quarter and low double-digit percent year to date. In the third quarter, LAAP distributor net sales increased low 20% resulting from timing shifts in the shipment of the fall 2019 product. EMEA distributor net sales grew high single-digit percent driven by higher fall 2019 advance orders. Japan's net sales grew mid-single-digit percent in the third quarter and a high single-digit percent year to date.

We've experienced over 20 years of steady constant currency growth in this important market which has continued in 2019. Europe direct net sales increased high single-digit percent in the quarter and mid-single-digit percent year to date. In the quarter growth was aided by earlier shipment of fall 2019 product, as well as higher closeout sales. We continue to experience a challenging retail environment in several European markets but remain optimistic about our long-term growth opportunities given our relatively low market share in that market today.

Korea net sales increased high single-digit percent in the third quarter and mid-single-digit percent year to date. Columbia remains one of the few successful outdoor brands managing to grow in 2019 despite a Korean outdoor market that continues to contract. In China, net sales decreased low single-digit percent in the third quarter, but are up low single-digit percent year to date. During the quarter, higher outlet store sales and eCommerce growth helped partially offset typical wholesales performance.

We are working to optimize distribution and remain focused on investing in our consumer experience to reinvigorate growth. Columbia's brand has a strong market position in China. And we believe the decisions and investments we're making this year are building the foundation for long-term growth in this important market. Turning to gross margin performance.

The third-quarter gross margin was up 110 basis points to 49.3% largely reflecting Project Connect benefits including our design to value, assortment optimization, and manufacturing efficiency initiatives. These benefits more than offset modest headwinds due to channel and close-up product mix. Year-to-date gross margin is up 130 basis points to 49.7% including greater than 100 basis points of benefit from Project Connect. It's important to note that 2019 gross margin performance is in top of full-year 2018 non-GAAP gross margin expansion of 117 basis points.

Regarding the current U.S.-China trade battles. We reiterate that we believe our diversified supplier base is a competitive strength. For 2019, we received the majority of our fall 2019 product prior to the September 1st tariff increase, resulting in a minimal financial impact to 2019. When assessing the impact in 2020, it's important to remember that nearly 40% of our sales are outside the U.S.

and are not directly impacted by the U.S.-China trade battle. Based on our projected 2020 production base products sourced in China for the U.S. market is expected to represent a low double-digit percent of the total estimated imported value. As with tariffs around the world, we are actively working to mitigate the financial impact.

Looking beyond the direct impact to Columbia. We believe escalating trade battles globally are disruptive for American businesses, bad for the global economy, and costly for consumers. In an industry that already suffers from punitive tariffs some as high as 37.5% adding additional taxes on our products places an undue burden on consumers and employers, furthermore, raising tariffs in a capricious manner creates uncertainty for business which discourages investment. History has shown the cost of these tariffs is borne by U.S.

consumers. Turning to SG&A performance. SG&A expenses grew 14%, compared to last year's non-GAAP SG&A expenses resulting in SG&A as a percent of sales of 33%, which was flat when compared to non-GAAP SG&A as a percent of sales in the prior year. The biggest drivers of SG&A growth were planned investments to support our expanding global DTC operations, hire personnel and technology-related expenses and increased demand creation spending.

Moving to performance by brand. I'd like to remind you that I will be referencing constant-currency growth rates. Looking at the Columbia brand globally sales increased 15% in the third quarter and are up 12% year to date. In the third quarter, we were able to ship a greater portion of our fall 2019 order book compared to the fall 2018 season as retailers restock depleted fall season inventory positions.

Our team has done an excellent job of executing on fall 2019 deliveries and we believe retailers are positioned for success when winter weather arrives. In markets, where winter weather has arrived, we've been pleased with our initial fall 2019 sell-through performance in regions that are still awaiting the onset of cold weather, the benefits of our product diversification efforts are evident as our popular PFG line has been a top performer. During the third quarter, Columbia's innovative products continued to receive media callouts and awards. In apparel, outside magazine featured the road runner jacket and flare gun flannel in their annual winter buyer's guide.

Backpacker highlighted the northern comfort shirt in their article on the best women's hiking and backpacking apparel of 2019. In outerwear, Free Skiers' annual buyer's guide featured the Columbia outdoor kit jacket and snow rival pants as one of the best ski caps of the year. For fall 2019, the Columbia brand has several compelling product stories to highlight including our newest collection of insulated products called Heat Seal which utilizes several of our innovations including Omni-Heat and advanced baffling construction so that heat stays in and cold stays out. The Heat Seal collection includes both casual and technical products and will be prominently featured in our marketing this season.

We've also joined up with the team behind Disney's highly anticipated Frozen 2 movie to create a beautifully designed limited-edition outerwear collection inspired by the iconic characters of the film. This product will be available on our website and at select retail locations starting November 15th. During the quarter, we launched our new Shift footwear platform and an exclusive media preview event in Brooklyn, New York and amplified the launch with a comprehensive marketing campaign including influencers, digital, in-store and out-of-home advertisements. Grammy Award-winning artist Zedd helped to share the Shift story with consumers around the world.

Since the launch coverage has reached over 288 million impressions including placement in major outlets and publications such as CNBC, Billboard, People, Gear Patrol, Hypebeast and Men's Health, which awarded the Shift OutDry Mid a 2019 sneaker award in their hiking category. We are pleased with the launch and believe this exciting new product is reaching younger urban consumers around the world. We follow this initial August launch of the low and mid product with the release of the Shift hiker and boot collections in October. We're excited about Shift's potential, as well as several new footwear platforms that we'll be launching in the coming season.

For Omni-Heat, our most successful cold-weather technology I'd like to note that since it was launched in 2010 cumulative sales have far exceeded $1 billion and we still see tremendous opportunity in the years ahead. For fall 2020, we'll be celebrating Omni-Heat's 10-year anniversary with our most innovative Omni-Heat product to date. I look forward to sharing more details as we get closer to launch. Moving to marketing.

In August, the Columbia sponsor UTMB trail run event or Ultra-Trail du Mont-Blanc highlighted Columbia's relevance to the global trail running community and created a powerful brand experience for participants, spectators and online viewers from around the world. Collectively our UTMB sponsorship and content have generated over 200 million impressions since 2015. Several Columbia sponsored athletes competed in the race, as well as our Americas General Manager Franco Fogliato who successfully finished the grueling race in a mere 41 hours. In the fourth quarter, we're executing two key city attack plans, one in Denver next month and one in the dry state area including New York City where our market amplification has already begun.

During most of October, thousands of consumers a day were able to view our window displays at the iconic Macy's Herald Square location. We continue to believe this focused marketing effort in targeted cities drives brand awareness and growth across our wholesale partners, DTC stores and Columbia.com. For our Sorel brand, 2019 has been a fantastic year that validates the brand strategy and positioning as a year-round function first fashion footwear brand. Sorel net sales increased an impressive 29% in both the quarter and year to date, growth in the quarter was led by U.S.

wholesale, Canada and U.S. DTC businesses. Sorel success can be attributed to its evolution beyond its legacy winter utility business to become a year-round footwear brand. To put this in perspective, in 2016, winter products represented 70% of U.S.

sales. In 2019, winter product is expected to be just 45% of the U.S. mix and within that the product mix has shifted significantly toward lighter winter style products. For fall 2019, Sorel has added several new bold products to its collection including the Joan next winter light boot and the Joan wedge zip boot.

We are also excited to expand our successful Disney partnership beyond the core Columbia brand with the recently launched Sorel Frozen 2 collection for women and kids. Sorel's brand and product momentum are evident, and we are investing in demand creation to unlock its full potential. In October Sorel hosted its biggest event yet creating a mile-long runway through the streets and the Highline of New York City. One hundred women walk in a full mile -- walk a full mile in Sorel's fall collection transforming the event to a celebration of unstoppable women and demonstrate the meaning of function first, fashion footwear.

In recent quarters prAna sales performance has slowed with net sales down 3% in the quarter and down 1% year to date. To reinvigorate the business, the product team has focused on raising brand awareness, solidifying the brand's position at the intersection of style and outdoor, optimizing distribution and refining the product offering. We believe the prAna brand continues to resonate with consumers and we are taking the necessary steps to drive sustainable long-term growth. Mountain hardwear sales declined 2% in the quarter and year to date.

In the third quarter, Mountain hardwear launched a refreshed and reenergized fall 2019 product line including a new Gore-Tex snow sport line which fueled robust growth in our U.S. wholesale business. This was more than offset by a decrease in international sales some of which were impacted by timing and lowered DTC sales. We are excited about the new product direction in Mountain hardwear and expect strong growth in the fourth quarter will drive full-year net sales growth.

During the quarter Mountain hardwear also created a unique product and brand story with their Everest expedition. A group of six employees embarked on a 10-day trek to Everest base camp meeting up with a team of climbers including brand President Joe Vernachio as they prepared for their chance to reach the highest summit on earth. The field-tested products along the way, learn firsthand about the community that enables climbers in Nepal, connected with places that inspired the brand's existence, as well as connecting with each other bringing a stronger foundation back to Mountain hardwear's home base. I will now quickly review our balance sheet and cash flow.

Total inventory exiting the quarter was up 16% to $717 million primarily reflecting current and future season inventory, while aged inventory increased modestly. Inventory levels are slightly elevated driven primarily by a more aggressive buy in lower risk styles and the effects of level loading to alleviate capacity constraints. We are well-positioned to capture consumer demand and confident in our ability to manage inventories by leveraging the strength of our brands and the breadth of our distribution channels. We anticipate high-teens inventory growth at year-end primarily consisting of current fall season inventory and to a lesser degree future spring season inventory.

This is a slight change versus our prior expectations, reflecting earlier than anticipated receipts of spring 2020 products. We are focused on aligning inventory and revenue growth in 2020. Our balance sheet remains extremely strong with cash balances of over 240 million exiting the third quarter. I'd note that our cash position is typically lowest at the end of the third quarter and rebuilds in the fourth quarter driven by collections of wholesale receivables and fourth-quarter DTC sales.

Year to date, we repurchased 1.2 million shares of common stock for approximately $116 million at an average price of 97.50 per share and paid 49 million in shareholder dividends. Exiting the quarter, we had $220 million remaining under the current stock repurchase authorization. Before reviewing our updated 2019 financial outlook, I'd like to provide an update on current areas of investment. On the technology front, we rolled out our new retail platform Consumer First or C1 to our North America store fleet in the third quarter.

These stores now have enhanced point of sale systems including mobile checkout, access to our greater rewards loyalty programs, as well as improved merchandising and pricing functionality. Customers also have additional payment options providing an improved consumer experience. As a reminder, we implemented our new mobile platform experience first or X1, last quarter in our Europe-direct and product eCommerce businesses. X1 enables us to create mobile-first design sites more efficiently, which in turn will elevate the consumer experience as they shop our brands.

We still expect the remainder of the X1 North America implementation to occur in 2020. As part of our headquarters expansion initiative. We recently purchased a property adjacent to our headquarters campus for $33 million in order to provide room for future expansion and employees that are currently offsite. We expect to begin occupying the property next year.

We are also continuing to make strategic investments across our supply chain to enable growth, improved productivity, enhanced service levels and add capacity throughout our distribution and fulfillment networks. I'd now like to provide some detail on our updated 2019 financial outlook and preliminary 2020 commentary. For 2019, we anticipate 7.5% to 8.5% full-year net sales growth. Gross margin is expected to improve by approximately 60 basis points with the largest driver of year-over-year improvement coming from Project Connect benefits partially offset by difficult fourth-quarter comparisons given last year's record performance.

We expect operating margins to be between 13% and 13.2%, compared to the 2018 non-GAAP operating margin of 12.9%. Diluted earnings per share is expected to be between 470 to 480 up 17% to 20% from 2018 non-GAAP results. For the fourth quarter, it's important to remember we are lapping last year's record results that benefited from an extremely favorable retail environment, as well as ideal winter weather. Additionally, fall 2019 shipments were more heavily weighted to the third quarter of this year compared to fall 2018 shipments.

Including these factors, we anticipate low to mid-single-digit percent and net sales growth and diluted earnings per share of $1.55 to $1.65 which compares to 2018 non-GAAP fourth-order diluted earnings per share of $1.68. Regarding our current planning efforts for 2020, based on advanced wholesale and distributor orders for the spring 2020 season and plans for continued growth in our global direct to consumer business, we currently believe we can achieve mid to high single-digit percent net sales growth in the first half of 2020. We will provide our full-year 2020 net sales growth outlook when we report fourth-quarter results next February and have better visibility to fall 2019 performance, as well as fall 2020 advance orders. In 2020, we believe we'll be able to sustain meaningful gross margin benefits related to Project Connect that we achieved in 2019.

Based on visibility to spring and fall of 2020 product costs, higher tariffs and anticipated product mix, we expect gross margin to be relatively stable compared to 2019. Beginning in 2018, we initiated significant investments in the business to support our strategic priorities. These investments increased in 2019 and will continue into 2020. Based on the full-year impact of initiative spending that commenced in 2019, as well as planned investments in 2020 to support our strategic plan, we expect modest SG&A deleverage as a percent of net sales.

We will provide our full-year 2020 financial outlook when we announced fourth-quarter results in February. In summary, our record year-to-date performance is evidenced that our brand-led consumer focus strategy is working. Our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence from which we will continue investing in our strategic priorities to drive global brand awareness and sales growth through increased focused demand creation, investments; enhanced consumer experience and digital capabilities in 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. You can find more detail on our third-quarter results in 2019 financial outlook in Jim CFO commentary available on our website.

That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, could you help us with that?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.

Bob Drbul -- Guggenheim Securities -- Analyst

Hi. Good afternoon. Tim, I guess two questions for you. The first one is the performance in the footwear business was very strong.

You talked of the launch on the shift product. Can you just comment on early reads for October, what you're seeing in terms of sell-through? And the second piece is, can you elaborate a little bit more on the DTC performance for the quarter or maybe just the breakout between what you did see digitally versus your brick-and-mortar stores and a little bit more color would be great. Thanks.

Tim Boyle -- President and Chief Executive Officer

Certainly. Well, yeah, our shift launch was really one of the most comprehensive we've done and the sell-through was quite good in several areas, especially our own DTC business especially the eCommerce business. So, I would say the best sell-throughs were in our specialty sneaker areas. And if you remember, we were very methodical in terms of how we've launched this product with the larger chains and the mall operators.

So, I would say it was good. There's going to be way more shift-type product in that collection to be launched further in October, as well as in 2020. So we're pleased with the launch and it's given us a lot of confidence in that part of the business. As it relates to the DTC quarterly performance as you know, Bob, we consider ourselves to be really a wholesale business.

So, we don't report a lot of information that a typical retailer would report.

Jim Swanson -- Senior Vice President and Chief Financial Officer

On that, Bob, one quick comment. I think Tim touched on this in the prepared remarks. We did see some deceleration in growth rates within our DTC business relative to the third quarter of last year. And just keep in mind the growth rates that we achieved in the third quarter last year were significant.

We were up a low 20% in our brick and mortar channel, at high 20% within the eCommerce channel. So we're lapping those and then we've continued to see nice growth within those channels, both from the contribution from new stores and our existing stores have continued to be productive.

Bob Drbul -- Guggenheim Securities -- Analyst

And I guess if I can just follow up on -- when you think about those comparisons in the third quarter, can you just give us an idea, remind us what you're up against in the fourth quarter and sort of how you're playing the fourth quarter in this updated guidance today, especially on the DTC piece of it.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yeah. We continue to plan the business on a more normalized basis as we've suggested in the past. As it relates to the -- what we achieved in the fourth quarter last year, the brick and mortar business was up in mid-teen percent and the eCommerce business is at the high 20%. And so, we've taken that into account as we've provided the outlook that we have here today.

So that's reflected based on the results we've seen thus far in the quarter, it's consistent with expectation.

Bob Drbul -- Guggenheim Securities -- Analyst

Great. Thank you very much.

Operator

Our next question comes from the line of John Kernan with Cowen. Please proceed with your question.

John Kernan -- Cowen and Company -- Analyst

Hi. Thanks for taking my question, and congrats on all the momentum. Great to see. So, Tim, you talked about a 100 basis points gross margin benefit from Project Connect so far this year.

How are we thinking about that in the fourth quarter? I know we're keeping in mind that, some channel mix is going to work against you and potentially tariffs, but just how do you think about the overall benefits and puts and takes to gross margin because if I look at your guidance, it is assuming --

Tim Boyle -- President and Chief Executive Officer

Well, we'd have to look into Project Connect benefits on really a three-year stack basis and maybe Jim can make sure I don't guide you incorrectly. But we've saw some benefits in 2018 and some in '19 and they're going to be spread across the business quite dramatically. But Jim, you might want to just get more specific.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. That's right, Tim. So if you look at on the two-year stack basis, our gross margins were up 170 basis points in 2018 and with the updated outlook that we're providing here today, we anticipate 60 basis points of improvement for the full year. As you look at that and you think about the fourth quarter, certainly as we look at the first three quarters of the year, gross margins has been up well over 100 basis points.

And by and large reflecting on the effects of Project Connect, we would anticipate, along those same lines of improvement from Project Connect going into the fourth quarter, there are however, a couple of offsets, so one of those offsets is going to be the positive environment that we had in the fourth quarter of last year. And then the other component of which is we do anticipate some incremental closeout mix. Obviously, it's the lower gross margin relative to some of the whole price selling and we'd see that in the fourth quarter. And those are really the deltas that are going to drive the gross margin down.

I think it's 70 basis points or so that we've got contemplating our fourth-quarter outlook.

John Kernan -- Cowen and Company -- Analyst

Sure. OK. Thank you. And then, just maybe a follow up on the X1 initiative.

I think it's largely falling into next year. Sounds like, you're looking for modest SG&A delevers. So it's just maybe any puts and takes of the X1 initiative and we should think about the cost and benefits to that as we go into next year.

Tim Boyle -- President and Chief Executive Officer

Surely X1 is up and running now on 20 sites now, 20 sites, which would include all of our Europe business, which have multiple sites, multiple brands, multiple languages, as well as the prAna site here in North America. And so we like it, it's offering a lot of opportunity for enhanced consumer experience, but the big business that North America, Columbia Sorel business for next year with X1 will be next year sometime and X1 is just one of a few platforms that are being revised, slashed improved. So it's probably the most recognizable, but there were other significant investments in digital capacities going on throughout next year.

John Kernan -- Cowen and Company -- Analyst

Got it. Thanks. And I know my daughters will be looking forward to the collaboration in a few months.

Operator

Thank you. Our next question comes from the line of Alex Perry with Bank of America Merrill Lynch. Please proceed with your question.

Alex Perry -- Bank of America Merrill Lynch -- Analyst

Hello. Congrats on a strong quarter. Thanks for taking my question. Just first maybe for Jim.

Can you help us frame the impact of the timing shifts given the earlier shipment of the fall 2019 orders, so if you normalize that out, could you help us quantify maybe the dollar value or EPS impact on go forward?

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes, absolutely. So in our second-quarter earnings call, it indicated that the shift was going to be about 20 million out of the fourth quarter and into the third quarter relative to the experience that we'd had last year. And as we sit here today, and obviously we had the earlier receipt of our inventory that we've been reflecting on an inventory balance, that shift came at about 45 million from again from Q4 and into Q3 and call it two-thirds of that was in the U.S., they're the portion of that that was international as well. And that's by and large what drove the upside to our outlook for the quarter.

So it is more of a timing shift than anything.

Alex Perry -- Bank of America Merrill Lynch -- Analyst

Perfect. That's really helpful. And then, if I could just get some more color on the assumptions behind the sort of stable gross margin outlook for 2020, given the strong 2019 performance, just sort of what the puts and takes are there and if you continue to see Project Connect talents to 2020 or do those start to moderate. And then, maybe any specific sort of tariff commentary you can give us with regards to that as well.

Thanks.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. And, Alex, this is the first part of your question, but as it relates to Project Connect, by and large, we'd anticipate that the benefit that we were striving to achieve from a gross margin standpoint. We've effectively realized those as we get through the balance of the year here and that's been reflected in the outlet that we provided. And so we've seen a nice step function improvement in our gross margin both in 2018 some of which stem from Project Connect and certainly as we get into -- as we wrap up 2019 as well.

As we get into next year and with Tim's prepare prepared remarks on our 2020 outlook, we do not anticipate that step function improvement to continue into 2020. With that said, the processes that we put in place as a part of Project Connect, those sustainable processes in which we'd be seeking to maintain those margin gains that we had previously achieved.

Tim Boyle -- President and Chief Executive Officer

Yes. As it relates to tariffs, the company prides itself on its ability to navigate tariffs globally. We have a really excellent team here and they're focused on modifications that can be made in garments, as well as the location of manufacturing, etc. But nobody can really predict in the capricious nature of these tariffs impacts when we can't predict in advance where or when it's going to happen.

So once they happen, we feel comfortable being able to with our diverse source base and our expertise in tariffs, we can do what we can, but and this environment is quite difficult.

Alex Perry -- Bank of America Merrill Lynch -- Analyst

Perfect. That's really helpful. Best of luck.

Operator

Thank you. Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.

Paul Lejuez -- Citi -- Analyst

Hey. Thank you. I'm curious, excluding the timing shifts that you talked about as benefiting the quarter, can you just talk about where you saw our results come in ahead of plan versus a little plan? Were you feeling better or worse as you look across the business?

Jim Swanson -- Senior Vice President and Chief Financial Officer

I think by and large the results came in where we would have anticipated them. We did have this shift that I referred to where we came in about 25 million better on the wholesale side relative to our internal outlook. Our internal outlook, we came at about 15 million better. So there are a couple offsets in their part of that would relate to the direct-to-consumer business.

So, as we've gotten off to a slightly warmer fall, winter season, particularly in the month of September, which was quite a bit colder last year, that we've seen some offsets in that and to a lesser degree in parts of the wholesale business for the same reasons. But we've captured all of that in the updated outlook that we're providing today.

Paul Lejuez -- Citi -- Analyst

Gotcha. Thanks. And you've mentioned I believe, you need higher closeouts plan for Q4. Can you just talk about what's driving that? And also, what do margins on the closeout goods look like this year versus closeouts last year you're getting better margins or worse margins on the closeout product? Thanks.

Tim Boyle -- President and Chief Executive Officer

Well, last year, this year, as you know, we mentioned in our prepared remarks, our inventories are slightly elevated, so that's driving an expectation of some additional closeouts. Last year, we actually ran out of inventory. So, the closeout comparison to prior periods, it is not really accurate, but it hit historically, our closeout margins run fairly high by comparisons to our regular gross margins, not like we're trying to build additional inventory to closeout, but we have healthy margins typically on our closeouts.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. Well, I have one other comment. To our part closeout level last year, we're at an exceptionally low level just given how well sell-through was in our inventory position. Even this year, despite the fact that has been increased relative to last year, there's still relatively -- low relative to some of our historical levels.

Paul Lejuez -- Citi -- Analyst

Gotcha. Thank you. Good luck.

Operator

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

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thanks. Good afternoon, guys. First question, point of clarification, did Joe Vernachio summit Everest with the team?

Tim Boyle -- President and Chief Executive Officer

No. You know what? Actually, it's a testament to his good decision-making. There was a very significant rockfall present actually last year killed a few people. And so once they get close enough to the summit where they can recognize this danger existed, they determined that it was too dangerous and so they came back down.

So we're happy to report that. They had a lot of great experiences, but they did not summit, but they did come home.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. Good to hear. And then, I had a question on the 2020 commentary. Thanks for that.

You didn't provide a full-year revenue view, but Tim, you spoke to expectations for deleveraging. Would you change that view based on revenue outlook or is that kind of the plan irrespective of what you see as growth for the year?

Tim Boyle -- President and Chief Executive Officer

Well, as I mentioned, we have several initiatives in flight, which you're going to be helping us to become a more efficient business and more focused on demand creation and consumer connections and scope. It's difficult for us to predict the full year's results because the big fall season, we haven't signed any business up yet, but the actual location is that we know we need to add these additional capacities to the business and so they're very likely going to be built in investments. And of course, if we have a terrific revenue year, we'll be back to leveraging. That's our ultimate goal.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. Thanks for that.

Operator

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

Mitch Kummetz -- Pivotal Research -- Analyst

Yes. Thanks. I got two questions. So one of the gross margins that you've taken, Jim, you've taken the guide down to 20 bps.

I can appreciate that. Closeouts were few and far between last year and you're assuming a more normalized level this year. But why did it come down 20 bps from your prior outlook? Is it on the closeout side or is it on something else?

Jim Swanson -- Senior Vice President and Chief Financial Officer

It's predominantly that, Mitch, in terms of closeouts, we weren't anticipating quite the degree of closeout that as we evaluate inventory positions. We've taken the closeout forecast up for the year and there's probably a bit more normalization that we've done in our gross margin as well. Just given the experience that we saw in the month of September with some of the warm weather. So we've made some adjustments on that end as well.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. And then, Tim, in 2020, I know last year you gave a sales out for the full year of this. You're giving it for the first half, if I recall it correctly last year at the time that you gave it, you mentioned that sell-throughs were great, you referred to your spring order book for spring '19. You talked about early feedback on the fall of 2019 line.

All of that gave you a lot of confidence to guide to full-year sales for 2019. Is there something missing today that's not giving you that confidence? Is it that last year, the season started so strong that it was kind of fully baked at the time of the Q3 call and this year there's just a lot of the season, more of the season last? Or how should I think about that?

Tim Boyle -- President and Chief Executive Officer

I would say there is a number of factors though. Certainly, we will have better opportunity to be more accurate later in the year after we've seen some orders. We just all have to recognize the global headwinds that are talking about ad nauseam to consumers. So, the expectation for difficulties ahead are many.

In fact, I have been trapped in a conference room all day, so I don't know what the fed did today or what they plan to do tomorrow, but if they're lowering rates to near-zero or something like that, it's an indication that maybe the experience that we've all had in the last several years, there's just incredible growth is moderated.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. All right. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.

Chris Svezia -- Wedbush Securities -- Analyst

Good afternoon, and thanks for taking my questions. I guess just to go to the direct consumer initiatives X1, C1, how do you think about those initiatives driving direct to consumer growth? I guess to a degree, Q4, but more importantly, as we start to look to next year to accelerate growth from those key issues. Maybe talk a little bit about what those provide?

Tim Boyle -- President and Chief Executive Officer

Certainly. Well, we look at the eCommerce business that we do directly here at all of our brands as being really two parts. One is obviously their commerce that they generate and the ability to have a high, highly profitable revenue stream. But additionally, they provide a terrific marketing tool for the company.

So if we get open rates with 10% or 15%, and then we get a conversion rate, which is more normalized to the industry, we get millions of people getting a terrific marketing message from a company and it's much more valuable than a mere billboard or an ad, which we do those in addition. But it's a very robust way for us to connect with customers. So we need to be making to confirm that whatever consumers see from us digitally is of the highest quality and has the most interest. So that's the two reasons that we're really moving forward on this X1 platform.

In addition, consumers are moving rapidly to their mobile phones for almost everything. And so this is going to enable us to be much more mobile-first than we have been ever.

Chris Svezia -- Wedbush Securities -- Analyst

Let me see if I can ask the follow up to that. Is there any color you can add as you've layered in some of these initiatives particularly X1 on the international side? What are from a conversion perspective or just anything you're seeing, and I got a similar view probably on C1 here in North America. It's early days. But anything you're seeing at all that's positive.

Tim Boyle -- President and Chief Executive Officer

Yes. Certainly, it's early days on both C1 and X1 in terms of seeing their returns, but certainly, the returns have been gratifying enough for us to continue to invest in those and these are not insignificant investments. So we wouldn't go forward with them, but we didn't have the expectation that we're going to get great results.

Chris Svezia -- Wedbush Securities -- Analyst

OK. And I guess, Jim, for you. Just on the point of leverage, I know you're making investments as you think about 2020, but where would you argue or where can we get a handle on where the leverage point is from a revenue perspective into business? I mean, you potentially can grow almost 8% or about this year. I think in some regards you're making disproportionate investments this year.

But just curious where that leverage point would be from a revenue perspective?

Jim Swanson -- Senior Vice President and Chief Financial Officer

Take a step back here and look at what we've been able to deliver each of the last few years from having an operating margin or even a margin that was well below our peer group. And as we sit here today, we've got EBITDA margin that's every bit as competitive or in the upper quartile of what we view our peer group to be. And so when we step back and look at SG&A investments that we made in '18, we've made a '19 and what we'll continue to do in 2020 and that's had strong return shareholders, our return on invested capital is quite, quite frankly, solid. And so as we go out to next year, there are going to be years in which, we're in an investment cycle.

It's going to require a bit more from a top-line standpoint to leverage that over time. Certainly, our expectation would be that we're generating positive returns in leveraging that. But, with the outlook provided today, it's going to be -- it's going to take a little bit more revenue growth to leverage the SG&A next year.

Chris Svezia -- Wedbush Securities -- Analyst

OK. Thank you. Just last eventually just on the inventory piece. I'm just curious as you come out of '20 -- as you come out of this year, you're looking for growth, but is any color, how much you can break out between what's the advanced spring receipts versus maybe some of the residual closeout inventory, those move in the fourth quarter and probably you can break out between those two pieces as you go out toward the end of the year.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Well, with the outlook we provided in terms of our inventory being projected up high teens rates at the end of the year and keep in mind incredibly difficult to forecast the timing of inventory receipts, particularly at the end of the fourth quarter. The end of when we're seeding heavily on inventory. So there can be volatility related to that. Sitting here today though what we've contemplated in that high teen rate of growth at the end of the year, it would assume that our spring '20 receipts are slightly greater than where we were from a spring '19 perspective, obviously, which has pulled forward quite a bit in light of the Project Connect and the production capacity changes that we've made.

So most of the increase we'll have at the end of the year inventory will be fall '19 inventory that we're carrying. The last point I'd make there's, our aged inventory positions are remaining really quite healthy. So it's more current season.

Chris Svezia -- Wedbush Securities -- Analyst

OK. It's more current season inventory by the time it gets to the end of the year.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Current fall of '19 season that we carry in itself through the first part of the year. And if necessary, move into the latter part of the year, leverage our outlets and then will also still be current season or future season, spring in the case of spring '20. And to a far lesser degree, is it something that is older, seasoned inventory meeting a year older.

Chris Svezia -- Wedbush Securities -- Analyst

Got it. OK. Thank you.

Operator

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

Carlin Lynch -- B. Riley FBR -- Analyst

Hi, guys. This is Carlin Lynch for Susan. Thanks for taking my question. I just had a quick question on mountain hardware.

I know you had -- we saw a little bit of pressure this quarter end, but you had guided the fourth quarter for some strengths. I just wanted to get a sense of what was driving that strength. Is it the new product that you announced rolling out in Europe or is it just kind of the easier compare in 4Q versus last year?

Tim Boyle -- President and Chief Executive Officer

Yes. So if you look at the mountain hardware business over the last several years it's declined. And primarily because our prior management team didn't have as good a handle on it, on the product offering that we know needs to be unique and differentiated. So Joe Vernachio and his team have been working diligently to get that product line correctly organized and correctly set up for success.

So, the comparisons when we're talking about the decline have been in many ways a function of the liquidations that took place in prior periods. So Joe's products are now just hitting the stores and where we're expecting good sell-through and robust growth in sales in the fourth quarter of '19.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. And I'd just add that the lion's share of that growth will see in the U.S. and it will, be focused in the U.S. wholesale business.

We've got order book that would support at this point.

Carlin Lynch -- B. Riley FBR -- Analyst

Got it. And then, just as we think about that in the calendar '20, is Joe's product expected to kind of roll out more globally in spring of calendar '20 or is it going to be a kind of wait and see on U.S. sales before we roll that out globally? Thanks.

Tim Boyle -- President and Chief Executive Officer

No. It's global today, including '19 product is global. And so the spring product is going to go out a portion of it -- small portion in Q4, but the bulk of it in Q1 of next year. And then, it'll be global.

Carlin Lynch -- B. Riley FBR -- Analyst

Got it. Thanks.

Operator

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

Jonathan Komp -- Robert W. Baird -- Analyst

Yes. Hi. Thank you. I just wanted to ask on the U.S.

wholesale business, I think you slightly bumped up the outlook for the year to mid-teens growth. I just wanted to confirm that and maybe ask what drove that, as well as -- when you look at the wholesale business today, if you could kind of went down to any -- at a high level, any pockets of strength or weakness across the various segments?

Tim Boyle -- President and Chief Executive Officer

Certainly. Well, I think our business at wholesale is quite good in the U.S., we're gaining market share, I would say of all the product -- the channels that where we're doing the best as it relates to sell-through, etc, are probably in the department store, channel. But we've had good uptake, new business with customers like Macy's, etc. And that business has been quite good.

We had -- as you may have noticed an exceptional promotional event with Macy's at their Harold Square store. We had great views of our outerwear, etc. And so that's been probably the best area of great sell-through.

Jim Swanson -- Senior Vice President and Chief Financial Officer

And John, we didn't take the forecast up slightly from a low double-digit up to or a low teen to mid-teen, sorry, low double-digit to low teen, sorry. And part of that reflecting, in the quarter, particularly early in the third quarter, in our conversion rate and a replenishment on our spring-summer goods, it's in really good shape, softened up a little bit, which is the warmer winter that we got in the month of September, but conversion was generally pretty positive in the quarter.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. Great. And then maybe just one clarification on the inventory, I just wanted to confirm, are you now expecting to have more fall '19 product on hand at the end of the year? And if I can maybe just understand if that is the case, why that might be?

Tim Boyle -- President and Chief Executive Officer

Yes. We expect to have slightly more fall '19 inventory. We're comfortable with the quality inventory. Frankly, we talked in the prepared remarks.

We have slightly more than we would like, but we have the ability with our balance sheet to carry it into next year and liquidate it through our own outlet stores with shoes or to liquidate it either this year or next year at closeout.

Jim Swanson -- Senior Vice President and Chief Financial Officer

And part of that stem, Jon, we came out of a really clean fall '18 season, so we bought in more aggressively and that's effectively why you're seeing a bit more inventory as we have this year.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. Great. Then maybe just last one for me, bigger picture, kind of the evolution of the Columbia brand, certainly with the footwear in more of a kind of a fashion -- performance fashion orientation and see some of that too with -- some of the retro or even streetwear elements in parts of the apparel assortment. I'm just wondering how you're viewing that evolution for the brand and maybe any thoughts going forward on where you think it can go.

Tim Boyle -- President and Chief Executive Officer

Sure. Well, we say frequently inside the company that nobody needs another brand of apparel and footwear. So the key for us is to differentiate ourselves from the other zillions of brands of apparel and footwear that are available globally. And we've really chosen to focus on the points of differentiation around innovation and technologies.

And I think if we're critical of ourselves, we probably haven't thought of the F word as much as which sure mean fashion. And I think we're really beginning to blend much more of our technology and fashion together to give ourselves the real opportunity to grow the business. And that's our plan, we'll continue to be a point of differentiation around technology, but we know we need to have really trend right product.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. I appreciate the color. Thank you.

Operator

Thank you. Our next question comes from the line of [Inaudible] with Evercore ISI. Please proceed with your question.

Unknown speaker

Hi. Thanks for taking my question. It's actually a follow-up on the last question that was asked how much of the new footwear innovation that we'll see from Peter and his team over the next year or two, how much of that will be targeted toward your traditional trail and winter categories and how much will be new categories like we saw with the shift launch?

Tim Boyle -- President and Chief Executive Officer

Well, it really depends on how good a job we do with the shift product. The expectation is that we'll have continued design investments against shift and against the whole concept of outdoors and technology and fashion together with really focusing on a younger urban consumer. So it's a function, it's a question of how well we do against that initiative. But additionally, we have the opportunity and it's fairly significant to grow our PFG footwear business where we really have a very tiny competitive set and a really wide space there that we can lean on the well-known PFG brand, their focus on technology, etc.

So there's a number of different areas where we can be really successful. Not to mention the real franchise we have in winter footwear between the Columbia brand and the Sorel brand. So there's really lots of opportunities for us in that category.

Unknown speaker

Got it. Thanks. And the other question I had was, you've been piloting some pretty interesting new marketing initiatives with influencers and some product collaborations. Is there any data you can share on your new versus existing customer mix? Whether those collaborations and also some of the new products bringing new customers into the brands?

Tim Boyle -- President and Chief Executive Officer

Certainly. Well, I think, it's interesting the Zedd collaboration, acceleration was a real opportunity to bring us newer customers that maybe knew the brand but didn't recognize it, the fact that it was more forward than they had thought. And that was really gratifying to see the number of visits and visibility that brought us especially from younger folks. But simultaneously we had Luke Combs who was a very popular young country Western singer that just happened to find our brand and his popularity both as a young performer, as well as a fisherman, a guy who does what his parents and grandparents have done.

It's a nice combination of opportunity for the business that we can speak to both of those kinds of generations and it'd be really relevant.

Unknown speaker

Great. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Boyle for any closing comments.

Tim Boyle -- President and Chief Executive Officer

OK. Thank you very much for listening in. We look forward to talking to you in February of our results from Q4 and about our plans for 2020.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Andrew Burns -- Director of Investor Relations and Competitive Intelligence

Tim Boyle -- President and Chief Executive Officer

Bob Drbul -- Guggenheim Securities -- Analyst

Jim Swanson -- Senior Vice President and Chief Financial Officer

John Kernan -- Cowen and Company -- Analyst

Alex Perry -- Bank of America Merrill Lynch -- Analyst

Paul Lejuez -- Citi -- Analyst

Jim Duffy -- Stifel Financial Corp. -- Analyst

Mitch Kummetz -- Pivotal Research -- Analyst

Chris Svezia -- Wedbush Securities -- Analyst

Carlin Lynch -- B. Riley FBR -- Analyst

Jonathan Komp -- Robert W. Baird -- Analyst

Unknown speaker

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