Columbia Sportswear (COLM) Q4 2019 Earnings Call Transcript

Columbia Sportswear (COLM 0.72%)
Q4 2019 Earnings Call
Feb 06, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Columbia Sportswear fourth-quarter and fiscal-year 2019 financial results conference call. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Andrew Burns. Please, go ahead.

Andrew Burns -- Director of Investor Relations and Competitive Intelligence

Good afternoon, and thanks for joining us to discuss Columbia Sportswear company's fourth-quarter and full-year results and 2020 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 2020 outlook. The CFO commentary is also available on our Investor Relations website, investor.columbia.com. With me today on the call are Chairman, 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; 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 we 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 with 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 fourth 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 -- Chairman, President, and Chief Executive Officer

Thanks, Andrew. Welcome everyone and thanks for joining us this afternoon. 2019 was another strong year for Columbia Sportswear with record net sales surpassing the $3 billion mark for the first time in our company's history, as well as record gross margin, operating income and diluted earnings per share. Broad-based growth was led by the momentum of the Columbia and SOREL brands and our brand-led consumer-focused strategy.

I'd like to thank our global team whose dedication and focus made these outstanding results possible. While we celebrate these financial results, 2019 was also a year of remembrance as we lost our one tough chairman who strengthened character guided this company for nearly 50 years. For mantra, it's perfect, now make it better, guides our culture of relentless improvement and our image and likeness will remain an integral part of our branding. In the fourth quarter, we experienced a challenging retail environment, particularly in outerwear, which resulted in higher levels of promotional activity in our DTC business and higher closeout sales in our wholesale business, as we took actions to reduce inventory levels.

Globally, many regions also experienced weather that was meaningfully warmer than historical averages, particularly late in the quarter. In this environment, we delivered results generally in line with our guidance, including strong sales growth for the SOREL brand. Overall, in the fourth quarter, we generated 4% net sales growth and operating margin compressed 230 basis points, resulting in a 1% decrease in diluted earnings per share compared to non-GAAP fourth-quarter 2018 results. Please note that discrete tax items resulted in a lower-than-planned tax rate in the quarter, which benefited diluted earnings per share by $0.09.

For the year, we generated 9% net sales growth, expanded operating margins by 10 basis points and delivered 20% earnings-per-share growth compared to 2018 non-GAAP results. Both Columbia and SOREL had excellent years, growing net sales by 9% and 21%, respectively. Sales growth was broad-based by channel, with our wholesale business growing 11%, followed by our DTC business, which grew 6% for the year. In 2019, our global DTC business represented 41% of net sales, including our e-commerce business, which represented 11% of net sales.

As we enter 2020, we believe the strength of our unique brand portfolio, diversified business model and ongoing strategic investments position us for long-term profitable growth and market share gains. There is strong demand for the Columbia brand, and the focus remains on becoming the No. 1 outdoor brand in the world. SOREL is expected to remain our fastest-growing brand, as its successful evolution to a year-round function first footwear brand continues.

For prAna and Mountain Hardwear, we will be building on the foundational work we began in 2019 with an eye toward unlocking growth potential in the years ahead. 2020 will also be a year of investment, as we incurred the full-year financial impact of initiatives we began in 2019, many of which continue into 2020. We believe these investments are vital to sustaining our long-term profitable growth trajectory. The timing of financial benefits derived from these investments is not always aligned with sales growth in any given year.

And as a result, our 2020 financial outlook contemplates a modest level of operating margin contraction. With that said, we have a strong track record of delivering improved profitability with over 300 basis points of operating margin expansion over the last five years, and we remain firmly committed to improving operating margin over time. I will provide more details on our 2020 outlook and growth investments later in the call. In recent weeks, the coronavirus outbreak in China has gripped the global community.

Our first priority has been to take appropriate measures to ensure the health and safety of our employees and partners in the region. As work continues to contain the spread of the virus, it's having an immediate impact on our business in China, including the effects of store closures and lower store traffic at stores that remain open. We are also seeing an impact in regions and stores outside of China due to lower tourism related to the outbreak. This has resulted in a challenging start to the year, which will likely persist until normality returns to the region.

At this point, it's too early to forecast the regional and global financial impact on our business, including sourcing, production and supply chain implications. Given the real-time nature of these developments, the potential financial impact related to this outbreak has not been factored into the 2020 financial outlook that we are providing today. Regionally, U.S. net sales increased 8% in the fourth quarter, driven by high single-digit percentage growth in wholesale and mid-single-digit percent growth in DTC, which was driven by new store openings and a high single-digit percentage increase in e-commerce.

Wholesale growth was primarily driven by higher closeout sales. In DTC, the performance was impacted by a challenging holiday sales environment, particularly in outerwear and difficult comparisons versus exceptional sales performance in the prior year. For the year, U.S. sales grew 12%, led by mid-teens wholesale growth and high single-digit DTC growth, which was comprised of mid-single-digit brick-and-mortar growth and low teens percent increase in e-commerce.

In 2020, we expect U.S. net sales to increase high single-digit percent, including high single-digit percent growth in DTC and mid-single-digit percent growth in wholesale. Our DTC business remains a viable and profitable growth engine for the company. I'd highlight that from 2017 to 2019, our U.S.

DTC net sales have grown by nearly 30%. And in 2020, we will continue to selectively open new border locations and invest in our e-commerce capabilities to fuel continued growth. 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.

decreased 1% for the quarter but were up 5% for the full year. Japan's net sales grew low single-digit percent in the quarter and were up mid-single-digit percent for the year. Fourth-quarter sales were negatively impacted by the October 1, 2019, consumption tax rate increase from 8% to 10%, as well as warmer weather. For the year, we're pleased to see Japan's more than two decades span of annual constant-currency growth continue in 2019.

Facing uncertainty around consumer spending in light of the consumption tax rate increase, we believe it's prudent to plan 2020 conservatively and are looking for low single-digit percent net sales growth for the year. Despite significant geopolitical and economic turmoil in several LAAP distributor markets, I'm pleased to report our distributor business generated growth in 2019. In our EMEA distributor business, net sales increased mid-teens percent in the quarter and were up low teens percent for the full year. In our LAAP distributor business, net sales decreased mid-teens percent in the quarter and were down low single-digit percent for the full year.

In 2020, we expect our EMEA distributor business net sales to increase high single-digit percent, and our LAAP distributor business to decline high single-digit percent reflects a challenging political and economic conditions in several markets in Asia and South America combined our diversified global distributor base remains a valuable and profitable growth engine that mitigates risks while extending our global reach. In Canada, net sales decreased 10% in the quarter, primarily reflecting a shift in the timing of fall 2019 shipments into the third quarter, while full-year net sales increased 8%. For the year, Canada's net sales growth was balanced across our wholesale and DTC businesses. In 2020, we expect Canada net sales to grow at a pace similar to '19, up high single-digit percent for the year.

Europe's direct net sales increased mid-single-digit percent in the quarter and for the full year. Growth in the quarter was driven by favorable DTC performance, as well as higher closeout sales in wholesale. For the year, I'm encouraged that we were able to overcome a challenging retail backdrop and deliver broad-based net sales growth. I recently spent a week in Europe with our European management team and our largest customers and came away confident that demand for the Columbia brand is very strong in this market.

We have a significant opportunity to grow market share. As we look into 2020, we expect the retail environment to remain challenging and are anticipating mid-single-digit percent net sales growth in our Europe-direct business for the year. Korea's net sales decreased mid-single-digit percent in the quarter, as warmer weather negatively impacted outerwear sales. For the year, we were able to overcome a soft overall outdoor market and generate relatively flat net sales.

We're encouraged that Columbia remains one of the better-performing brands relative to our peer group, but we expect softness in the overall outdoor market to persist into 2020. In light of this, our initial outlook for Korea contemplates low single-digit percent net sales growth in 2020. China's net sales decreased by mid-single-digit percent in the quarter and were down slightly for the year. While I'm disappointed by our underperformance in this important market, our new leadership team is focused on building a foundation for sustainable long-term growth by elevating the consumer experience, improving our wholesale distribution and modernizing consumer-facing technology systems.

We believe that Columbia's brand recognition is strong in China and are confident that we can reaccelerate growth over time with the investments we're making. For 2020, we currently expect China's net sales to increase low single-digit percent. However, this outlook does not include the potential financial impact of the recent coronavirus outbreak. Turning to gross margin performance, fourth-quarter gross margin declined 160 basis points to 50.1%, driven primarily by a higher proportion of lower gross margin closeout product sales in wholesale and unfavorable DTC product margins, reflecting increased promotional activity and shifts in product mix.

These headwinds were partially offset by Project Connect benefits. For the year, gross margin improved 30 basis points to 49.8%, as benefits from Project Connect more than offset a higher proportion of closeout sales in wholesale and unfavorable DTC product margins. Turning to SG&A performance, in the fourth quarter, SG&A expenses grew 6% compared to last year's non-GAAP SG&A expenses, up 70 basis points as a percent of net sales from the prior year. For the full year, SG&A expenses grew 9% compared to last year's non-GAAP SG&A expenses, up 20 basis points as a percent of net sales from the prior year.

The biggest drivers of SG&A growth for the year were investments to support our expanding global DTC operations and higher personnel demand creation and technology expenses. This was partially offset by a favorable impact from foreign currency rates. As a percent of net sales, demand creation increased to 5.5% of net sales, compared to 5.4% last year. Overall, our gross margin and operating expense performance led to an operating margin decline of 230 basis points in the quarter compared to non-GAAP 2018 operating margin.

For the year, operating margin expanded 10 basis points to 13%, compared to non-GAAP 2018 operating margin of 12.9%. 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, net sales increased 4% in the quarter and 10% for the full year, led by U.S. wholesale business and was balanced across footwear and apparel.

Within sportswear, our PFG line experienced strong sell-through in 2019, and total PFG net sales, including apparel and footwear, surpassed $200 million this year. We were excited to see the country singer and brand ambassador wearing his signature black PFG Bahama shirt during his recent Saturday night live performance. I'm also proud of the progress we made toward unlocking the Columbia brand's long-term footwear opportunity during the year. The investments we are making in footwear became evident to consumers with the shift product launch in August, which is the first of many new product families to be unveiled in the coming seasons.

This new product, along with refreshed classic styles, will be essential to building a much bigger footwear business with existing, as well as new wholesale accounts. In the fourth quarter, footwear outperformed the brand overall, driven by top-selling styles, including the Newton Ridge and Columbia's innovations remain a key differentiator in the marketplace. During the quarter, we received several media call-outs and awards. In apparel, men's health featured the interchange jacket in their 10 best ski jackets for Men Article and Forbes featured the Columbia women's heavenly long hooded jacket in their top plus-size codes for the season.

In footwear, Business Insider featured the omni heat in their article, the best winter boots for and self-awarded the shift the best shoe for hiking in their article, the 15 best new workout sneakers of 2019. I'd also like to congratulate a few Columbia sponsored athletes, Alex Brera, Sara Hofland and for their performance at the 2020 X games. All three athletes earned a spot on the podium in their respective disciplines. Very well done.

This season, Columbia's marketing efforts included the Heat Seal campaign, which encompassed a unified marketing message and marketing assets that were leveraged globally. We also implemented key city plans in New York and Denver to drive increased brand awareness during the quarter. In 2020, we will continue to focus our marketing efforts on key markets and highlight our innovative product, including celebrating omni heat's 10-year anniversary. For the SOREL brand, 2019 was an amazing year that reflects the momentum of the brand strategy and positioning as a year-round function first footwear brand.

Net sales increased 14% in the fourth quarter and were up 22% for the full year, driven by robust growth across our U.S. wholesale and e-comm businesses. During the quarter, SOREL's evolution beyond this legacy winter utility business was once again evident, as consumers continue to demand more wearable style-focused products. SOREL continues to see the positive impact coming off the brand's Mile Long Runway event held in New York City in October as evidenced by an increase in consumer awareness, engagement and ultimately, omnichannel sales.

We're proud of these results, but this is just the beginning. In 2020, the SOREL brand is poised to capitalize on the brand's momentum and to leverage the investments we're making in demand creation. We expect this strategy to drive mid-teens net sales growth for the brand in 2020. Turning to prAna, 2019 was a transition year, with net sales down 3%, as the team optimized distribution and reestablished the brand's premium positioning in the marketplace.

In the fourth quarter, net sales decreased 10%, reflecting lower wholesale sales, partially offset by DTC growth. We were encouraged by robust e-commerce growth late in the quarter, as consumers responded positively to promise refreshed products and positioning. The brand is focused on elevating the style of its product to differentiate them from their competitive set. They also have launched their new global tag line, Clothing for a Positive Change.

This has provided them with a broader and far stronger platform for inspiring social and environmental change. During the quarter, we unveiled the winner of Promise Dream Job campaign. After reviewing thousands of entries, we selected one person to receive a $100,000 price, allowing them a year to chase their dream. True inspiring story stood out as the very definition of creating positive change.

We wish her the best as she embarks on her nationwide poetry tour. The dream job promotion has been promised the most impactful marketing campaign to date and has generated over 60 impressions. In 2020, the prAna team is focusing on growing brand awareness, solidifying the brand's position at the intersection of style and outdoor and unlocking product category opportunities. We expect the prAna brand net sales in 2020 to grow mid-single-digit percent, with sales growth more weighted toward the second half of the year.

We believe product clothing for a positive change message resonates with consumers, and we're taking necessary steps to drive sustainable long-term growth. For mountain hardwear, 2019 was a transformational year. We brought revamped product line to market, reignited business with key U.S. wholesale specialty accounts, further strengthened our team and reestablished mountain hardwear position in the marketplace.

Our refocused strategy has yielded a healthy foundation from which we expect to grow going forward. The success of our fall 2019 product line, was evident in strong full-price sales growth, which gives us confidence the brand is moving in the right direction. Net sales increased 5% in the fourth quarter and were relatively flat for the full year. In 2020, the Mountain Hardwear team is focused on further elevating the brand's position in the U.S., as well as accelerating DTC through e-commerce.

We're currently planning brand net sales to be at high single-digit percent in 2020. It will be an exciting year for the sport of rock climbing as it's introduced into the 2020 Olympics in Japan. We'd like to congratulate Mountain Hardwear's sponsored athlete who has earned the opportunity to compete for team USA against the best in the world. As climbing enters the global spotlight, we are excited to highlight Mountain Hardwear's authentic brand heritage.

I'll now quickly review the balance sheet and cash flow. Our balance sheet remains extremely strong with cash balances over $680 million at year end. During 2019, we repurchased 1.2 million shares of common stock for approximately $121 million at an average price of $97.46 per share and paid $65 million in shareholder dividends. Exiting the year, we had $215 million remaining under the current stock repurchase authorization.

Total inventory at year end was up 16% year over year to $606 million, primarily reflecting current and future season inventory. This includes increased carryover products, the majority of which has already been sold as a part of our fall 20 pre-season wholesale order book. In 2020, we expect to grow inventory at a slower than sales growth and modestly improve inventory turns. I'd now like to review our 2020 financial outlook and provide an update on current areas of investment.

Our initial 2020 outlook contemplates 4.5% to 6% net sales growth, including growth from all four brands. We anticipate footwear growth to outpace apparel, driven by SOREL and the Columbia brands, and we also expect both our wholesale and DTC businesses to grow in 2020. The gross margin is expected to expand up to 30 basis points to 50.1%. We look to maintain the gross margin benefits of Project Connect that we realized in 2019, as well as benefit from a lower mix of wholesale closeout sales and improved product margins, higher DTC sales mix and lower promotional activity compared to 2019.

We expect SG&A to grow faster than net sales, resulting in 40 to 50 basis points of SG&A deleverage compared to 2019. The increase in SG&A expenses is expected to be driven by business growth, as well as ongoing and incremental investments in our strategic priorities. Combined, we're planning for operating margin to decline 20 to 40 basis points to 12.6% to 12.8%, compared to 2019 operating margin of 13%. Based on these assumptions, we expect diluted earnings per share to be in the range of $4.75 to $4.90.

In 2020, we anticipate strong free cash flow generating in excess of $250 million, and we remain committed to returning capital to shareholders via share repurchases and dividends, including the 8% dividend increase we announced today. In the first half of 2020, our outlook contemplates low to mid-single-digit percent net sales growth, a slight decline in gross margin and SG&A grow faster than net sales resulting in diluted earnings per share range of $0.80 to $0.90. First-half operating profit is anticipated to be entirely weighted to the first quarter with a slight operating loss anticipated in the second quarter. Given the magnitude of the investments we're making and their impact on SG&A growth this year, I'd like to spend some time highlighting key investments and how they're aligned with our strategic priorities.

First, to drive brand awareness and sales growth, we remain committed to investing in demand creation. In 2020, we expect to maintain demand creation as a percent of sales at 5.5%, while continuing to evolve our mix toward high-return opportunities, including digital and in-store marketing. We believe investing in demand creation to tell our unique brand stories, grow brand awareness and create a clear path to purchase for consumers is essential to propelling sales momentum. We're investing to enhance our global omni-channel capabilities and evolving DTC platforms to deliver a better consumer experience.

In 2020, investments in our brick-and-mortar stores, including ongoing store refreshments and optimizing the consumer first or C1 platform. In addition, we're updating in-store consumer-facing technology systems to meet the needs of consumer demands within China's advanced digital ecosystem. In our e-commerce business, we intend to continue rolling out our new mobile platform experience first or X1 across the remainder of North America. We're also investing to strengthen our capabilities across the organization.

Within merchandising and product teams, we've been investing in personnel to enhance our product engine across our brand portfolio. For the Columbia brand, this includes product initiatives for 2020 and beyond that span footwear, apparel, and accessories. For SOREL, we're experiencing tremendous brand momentum and have added product creation resources to drive further growth in a year-round style-focused product. Across the enterprise, we're making investments to enhance our data and analytics capabilities in support of our brand-led consumer-focused operating model.

In 2020, we're continuing to make investments in processes and systems across our supply chain to improve productivity, enhance service levels and add capacity throughout our distribution and fulfillment networks. We're investing in systems to unlock greater end-to-end inventory visibility and enable more dynamic and automated planning and fulfillment capabilities. We are also increasing network capacity and speed to drive faster store replenishment and fulfillment. I'd also like to highlight that in addition to investing in our business to fuel profitable growth, one of our core values is to do the right thing, not just for our shareholders, but also for consumers, customers, employees, and the communities that we touch.

I encourage you to review our most recent corporate responsibility report posted to our website, which highlights our strategy and recent accomplishments that we've made empowering people, sustaining places, and promoting responsible practices. In summary, our profitable growth trajectory and fortress balance sheet provide a foundation of strength and confidence on which we will continue investing in our strategic priorities to drive global brand awareness and sales growth through increased focused demand creation investments; enhance 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. That concludes my prepared remarks. We welcome your questions.

Operator, could you give us a hand with that?

Questions & Answers:

Operator

[Operator instructions] Our first question today is in from Bob Durbl from Guggenheim. Your line is now open.

Bob Durbl -- Guggenheim Securities -- Analyst

Good evening. I don't think I need to tell you, but I'm missed and I know you do, so my sympathies. And Andrew Burns, you guys you were cut off for you in terms of that safe harbor. So I'm sorry, Tim.

And then, I guess, just on the guidance for 2020, I was just wondering if as you look forward in terms of the business your visibility on spring versus fall, the U.S. expectations for high single digit. Can you sort of fuel some layers back on that? And just help us understand the drivers behind ad piece of it? That's my first question. And then my second question is, essentially, I think the inventories were up 16%.

I think it was just -- if you could sort of help us understand the gross margin guidance, your inventory levels and just sort of put those two pieces, that would be pretty helpful as we think about 2020 going forward?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, as you know, Bob, we have a high percentage of our business is wholesale where we have an advanced book. So we have significant visibility against the book for spring, and we're in the process of shipping that product now. So we have a good idea about what we can expect from a gross margin and inventory liquidation period.

We also have a good view of fall 2020 as well. And we've liquidated or I should say, we have orders against a high percentage of our carryover inventory that we have at all going into the fall portion of 2020. We probably got a little aggressive on our inventory purchases for 2019 based on the exquisite year that we had in 2018 and the beginning of 2019, where inventory levels were compressed. We ran out of inventory in certain categories.

And so we probably got a little ahead of ourselves. But as our business is a high percentage of repeat products, where we have significant business and so that merchandise has been, as I said, on orders that we have for our wholesale customers, as well as inventory that we'll be placing in our outlet stores. So we have a high degree of confidence in our visibility we've given you today. And we have the balance sheet to provide significant comfort for the company.

Bob Durbl -- Guggenheim Securities -- Analyst

OK. And then if I could just do one follow-up, which is essentially on the footwear business, it seems to perform pretty well. Just give us maybe an update on where you think you are? Where do you think you're going on that piece of it? What you've learned thus far with Peter?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, on the Columbia brand, we think there are enormous opportunities. I've been talking about this since we went public 20 years ago that it should be the biggest product category for the company. And we're well on our way now with some of these interesting products that bring together the outdoor business and the comfort and convenience of the athletic business in footwear.

And I'm just very convinced that we're going to have a very solid business over time. It's not growing as rapidly as we'd like, but it's still growing at a high clip and growing faster than our apparel business in the Columbia brand. As it relates to the SOREL brand, Mark and his team have done just a spectacular job of really fashion and function together in really interesting characteristics of products that has really resonated, especially with women. Now that being been said, our fall 2020 SOREL product will include men's products, not for the first time, but for the first time in casual footwear.

So it's really exciting time for that brand today, and we're looking forward to great. Thanks.

Bob Durbl -- Guggenheim Securities -- Analyst

Great. Thanks, Tim. Good luck.

Operator

Our next question is coming from Alex Perry from Bank of America. Your line is now live.

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

Yeah. Thanks for taking my question. Just first, can you talk about how you feel about overall inventory levels in the channel as we stand here today given the warmer weather, both in the U.S. and internationally?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, by comparison to last year, they're elevated. We just had an enormously warm winter really globally. So I think they're elevated.

And this is why we talk a lot about our history in the winter products business and our balance sheet, which gives us tremendous confidence and comfort that we that we're in the right place. We understand how to run these seasonal businesses and how to build product and stage our products, so it will be, to the extent we can be insulated from these weather events. So yes, they're elevated from last year, certainly, but we're comfortable we're in the right place with our inventories today.

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

Great. And then just one on the Columbia brand footwear specifically, I know you called out some key styles, but can you remind us what's driving that business? When the SH/FT platform continues to scale? And just more color about the brand footwear business specifically?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, the Columbia brand footwear for the back half of 2019 was supported in large part by our traditional products, including the Ridge, Bugaboo and others And SH/FT created a number of interesting product rollouts from Sneaker brands and Sneaker retailers globally. I was in a Sneaker store in prAna two weeks ago, and the entire firm of the store was Columbia SH/FT product. So it's really helped us to gain some not variety there.

But I think the whole concept of us putting together the athletic shoe comfort and a traditional shoe to give ourselves city comfort and high performance on the trail is going to really be the right way to go, and we're very excited about the potential of that product combination.

Jim Swanson -- Senior Vice President and Chief Financial Officer

And Alex, this is Jim. Our outlook for 2020 also contemplates a faster pace of revenue growth coming out of Columbia footwear. It's in the teen range of growth. So pleased with the direction that we're anticipating from that area business.

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

Great. That's super helpful. Best of luck.

Tim Boyle -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

Our next question is coming from Chris Svezia from Wedbush. Your line is now live.

Chris Svezia -- Wedbush Securities -- Analyst

Thanks for taking my questions and congrats on the year. I guess, just first, I guess, product questions. Number one, just PFG, what do you think that business can ultimately grow to? And just sort of the thoughts for 2020? And also, secondarily, just on the omni anniversary for fall. Just what are you looking to do? What can we expect from a product pipeline perspective? That's my first question.

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, PFG is the most popular participant sport in the United States. So the market is significant. And our expectation is that that brand will continue to grow at mid-teens level the way it has been over the last several years.

I should say, we are just tapping into footwear as it relates to PFG. So the combination of the footwear and the PFG apparel products, I think, are going to be a significant business for us over time. There are already a couple of hundred million dollars in revenues, but it's a unique product. We don't have a lot of competitors in this marketplace.

And we expect that this will continue to allow us to expand our business, and it really allows us to have innovations present in clothing for warm weather. So as we get warm events, we have a particular point of view on innovations, including and omni freeze, etc., that goes through that. As it relates to omni heat, as you know, we're one of the few companies that really focuses on developing product and product characteristics and components internally. So we have patented products in omni heat family that will allow us to have a highly visible technology, which consumers immediately understand how that works.

And we have a few different variations of that product today, where we have some elevated with more enhanced thermal capacity, as well as our initial original on And it allows us to create assets around omni heat, which can really continue to differentiate our products over others that don't include that. So we've got a whole collection of digital assets that will be debut sometimes in the first part of the fall, September, October, which we're going to highlight omni heat. And then we have a pipeline of new, interesting omni heat variants which will be introducing into fall of 2021.

Chris Svezia -- Wedbush Securities -- Analyst

Got it. And just, Jim, for you, just on I guess, the first half guidance. So any additional color you can maybe provide? I'm just curious, you're talking low to mid-single-digit revenue growth. I can understand Q2 is going to have, I guess, the guidance assumes it loses some money.

Just any color about where maybe more of the gross margin pressure could be or the SG&A deleverage just any color there would be helpful?

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. I think as it relates to the gross margin, and we've provided guidance that that's coming down slightly in the first half of the year, keep in mind, the comparisons that we had to the first quarter of this last year. Again, it was similar to the fourth quarter of '18 in that we had an exceptional backdrop from a weather standpoint that really drove demand, not as heavily promotional as we've seen the first part of this year in January. We're just anticipating some degree of margin pressure.

Separate from that, and to answer your question, with regard to SG&A, the SG&A growth is effectively the anniversary or the annualized effect of many of the in-flight initiatives we've begun executing over the course of the better part of last year that we've touched on. It encompassed everything from the direct-to-consumer investments with new stores, the C1 and X1 initiatives and so forth. And then as we get into the latter part of the year, certainly, our expectation would be that we begin to see a normalization of that rate of SG&A growth.

Chris Svezia -- Wedbush Securities -- Analyst

OK. And just a final thing for me. Just on the overall growth rate for the company, it just assumes an acceleration into the back half. Is that just because of the Q4 comparison? Or do you really have, I guess, confidence in the backlog and the order book visibility to feel that confident in that improvement in revenue cadence as you go into the back half of the year?

Jim Swanson -- Senior Vice President and Chief Financial Officer

It is, in part, going to be the latter, the prior comment you made with regard to the more favorable comps that we'll have in the fourth quarter. As it relates to the wholesale order book, as Tim commented on, we've got the lion share of that order book in. And that would indicate to us that our wholesale business globally for the fall '20 seasons growing in the mid-single-digit range, probably in the low end of the guidance that we're providing here today.

Chris Svezia -- Wedbush Securities -- Analyst

All right. Thank you very much. All the best. Appreciate it.

Operator

Our next question is coming from Jonathan Komp from Robert W. Baird. Your line is now live.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

Yeah. Hi. Thank you. Maybe just a bigger-picture question on how you're viewing the operating margin for the business overall.

Just with two years of kind of flat to slightly down operating margin, including the guidance for 2020, following a number of years of really strong increases, do you think longer term, you're kind of reaching a ceiling in terms of operating margin? Or how would you characterize the business longer term?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Yes. Certainly, yes. There's a slight moderation in 2020 contemplated. If you look back over several years, we've raised the operating margins about 300 basis points.

And if you go back even further in the company's history, there were periods of time when we had over 20% of operating margins. And I think, frankly, from my particular view of history, we were to have been criticized for having operating margins that much higher than the average of our peer group because I think we could have reinvested those profits into marketing funds that would have paid the company larger, quicker. So our goal is to always raise our operating margins to the extent possible, but we want to make sure that we've got the correct advertising and marketing funds, demand creation funds available, so that would grow the business as fast as we can.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes, Jon. I would add, we're just taking a balanced approach. I mean, there's going to be years in which we're making investment, as we've demonstrated,the past couple of years. And on the same token, longer term, and we don't see the 13% operating margin that we achieved here in 2019 as being the high watermark.

Certainly, we've got the aspirations, as Tim described, to continue to expand those operating margins over time. And as we look at our performance over the last few years, the EBITDA margins that we're achieving there, our EBITDA as strong as our peer group and in the upper quartile.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

OK. Great. That's very helpful. And then one follow-up just on the high-level commentary about the coronavirus and developments there.

I'm wondering if you could help provide any more parameters, kind of the major kind of risk in terms of financial and operationally, just any more color? And I guess, just specifically related to the China disruption, may be separate from the global tourism, do you think there's scenarios that the risk might be contained within your full-year earnings guidance? Or just any other thoughts about how to frame it up?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Well, yes. As we said, the guidance does not include any implications on coronavirus beyond what we've talked about today. The first and foremost order of business is to make sure our employees and our partners are safe and protected, but there are going to be implications throughout the supply chain and into our sales and purchases. So maybe might be better for Tom to talk a little bit more about that topic.

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes, Jon. So for our fall -- or excuse me, our spring '20 production is largely complete to the extent we've got orders in process for fall. The line show that production has not been made to the extent we don't have that inventory on hand. So there's the most risk in our business as we sit here today.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

OK. Appreciate the color.

Operator

The next question is coming from John Kernan from Cowen and Company. Your line is now live.

John Kernan -- Cowen and Company -- Analyst

Good afternoon, guys. Thanks for taking my question. Congrats on a good year. I just wanted to a lot of color on the domestic business a lot of us were out outdoor retail kind of now going on in terms of the promotional environment with outerwear here.

Just any comments on EMEA. In Latin America, Asia Pacific, I think you did give some guidance on the revenue side for both of those regions? Any comments there on the state of the inventory in those regions and what your outlook is for international this year?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, I think, in general, the inventory levels are elevated over last year, as I said earlier. But again, we have the history of the balance sheet to be able to navigate these kinds of temporary issues well. The areas that we can predict, I think, we've certainly accounted for in our LAAP business, you have to remember that we have a significant Hong Kong, Chile, Argentina business, which, in addition to weather issues, there have also been geopolitical issues in those markets, which have been well-documented.

EMEA, frankly, that business has the biggest opportunity for us outside of China in terms of a strong economy, great brand acceptance, not our best brand awareness levels, but certainly, brand acceptance and product acceptance in those markets is significant. So we see big opportunities there. And so those areas that we can have an impact on, we're well-coordinated. There's areas that those particular political or health issues that we have no control over, we have the balance sheet to be able to get through those things.

John Kernan -- Cowen and Company -- Analyst

Got it. And then, Jim, the $350 million to $400 million guidance for operating cash flow and the $90 million to $110 million in CAPEX guidance, it seems to give you at the high end close to $300 million in free cash flow this year. Any comments on capital allocation this year? I know over a year ago, the stock was back kind of in the mid to low 80s you were fairly aggressive in terms of any comments on capital allocation this year if you hit toward the high end of that capital guidance?

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes, John. I would say that no fundamental change relative to how we thought about use of cash in the past. As we've demonstrated, first and foremost, we're putting investment back in the business. We've done that in the form of the demand creation.

Some of the capital investments to ensure that we're able to continue driving growth. Beyond that, when we think about return of capital to shareholders. Obviously, we've made an increase in the dividend year to date. And then consistent with our past practice, we've got $215 million remaining on our current share repurchase authorization, and we'll be opportunistic in how we leverage that.

And then one of the things that also embedded in our outlook in our share count is the fact that we do offset the effect of the dilution from our employee stock plans. That's already reflected in that free cash flow estimate.

John Kernan -- Cowen and Company -- Analyst

Got it. And then maybe one final question. Inventory of 15%, you're guiding gross margin up for the year. And just based on, I think, where your operating cash flow guidance is for the year, it seems like you're embedding the expectation that inventories back in line by sales by the back half of the year.

Is that a fair assumption?

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. Absolutely. I would expect it to normalize beginning in the first half and then getting down below the rate of sales growth as we get into the back half of the year. And certainly, as we look at the composition of the inventory that we're carrying into 2020.

There's a chunk of it that is currently in our carryover inventory that was carried into fall '20. So as it relates to the working capital side of the equation, that's certainly going to benefit how we're thinking about operating cash flow for the year.

John Kernan -- Cowen and Company -- Analyst

Thank you.

Operator

The next question is coming from John Morris from D.A. Davidson. Your line is now live.

John Morris -- D.A. Davidson -- Analyst

OK. Thank you. Congratulations on a good year as well. Wondering if you can tell us a little bit about how city attack went for you? What were the learnings there, the extent to which you might be thinking about rolling that up further in the coming year? And then I got a quick follow-up.

Tim Boyle -- Chairman, President, and Chief Executive Officer

Well, unfortunately, we picked this year to have a very real focus on New York City, where the weather was a little bit warmer than we expected. So I would say the results this year were lackluster, but we're committed to this kind of focused activities around certain cities, and we'll continue to amplify our voice in those important markets, especially around the areas of outerwear consumption and so we think it's a way for us with our modest marketing funds to be more important in certain markets. So that plan is in place for future seasons.

John Morris -- D.A. Davidson -- Analyst

And then my follow-up, for the Columbia brand as you're looking into next year with respect to apparel, are there any kind of innovation initiatives that you can call out? I know you don't want to tip your hand competitively. But question kind of going toward, can we see further differentiation with the apparel business in vis-a-vis the other terrific brands in the portfolio? Anything you're excited about there?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Certainly. Well, I would say the lead technology that we've talked about in 2020 is something called Black Dot, which is, if you think about our omni heat reflective technology on the inside of the garment, this is basically a heat sink application to the exterior of the garment. So these are technological innovations, which we're very excited about. They performed terrifically.

They're a little bit unusual. So maybe that the uptake is not as thrilling as the technology, but we're excited about that possibility. And then as we go forward into '21, we've got further enhancements of our omni heat, as I said, which will be an exciting expansion. Our omni heat, we've sold billions of dollars of products with omni heat ornament and consumers know them well, but applying them to a more fashionable product has also been really important for us.

John Morris -- D.A. Davidson -- Analyst

Great. Looking forward to seeing those. Thanks.

Tim Boyle -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

Our next question is coming from Mitch Kummetz from Pivotal Research. Your line is now live.

Mitch Kummetz -- Pivotal Research -- Analyst

Yes. Thanks for taking my questions. Tim, did I hear you correctly that you said that fall orders are mostly in and that's embedded in the outlook for the full year?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Yes. We have a high percentage of our order book in, yes, and that gives us confidence in the outlook we've given you today.

Mitch Kummetz -- Pivotal Research -- Analyst

So Tim, can that change over the next couple of months? I mean, you mentioned that inventories elevated. I talked to a lot of people last week where they were seeing the retailers or they're trying to get clean, hopefully at the end of February. It seems like there's a lot of wild cards. A lot of question marks around the ability to get clean given kind of what the weather is doing.

I'm just wondering if channel inventories stay elevated in the next month or two, could that put some risk to the orders that you guys have in hand?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Well, as we say frequently, we get orders every day and cancellations every day. But frankly, we've never had an experience where we've had significant cancels on future orders in any kind of meaningful way, certainly, at this time of the year. And you also remember this coronavirus is going to be likely impacting the importation of new products. So actually, if we have inventories in line with good product today.

We think we're in a superior position and somebody who might be sold out.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. That makes sense. And then, Jim, on the guide, you guys mentioned a slight loss for Q2, that implies Q1 that EPS are better than $0.80, $0.90 you guys did $1.07 last year, if I'm correct. You mentioned an exceptional backdrop to the first quarter last year.

I'm just trying to understand how you kind of get to sort of the implied outlook for Q1. Again, I would guess that maybe January is not off to a great start. You got a tough compare in February. So I'm just trying to understand some of the assumptions around, maybe the weather or just how you see market shape up?

Jim Swanson -- Senior Vice President and Chief Financial Officer

Yes. I probably don't want to get into parsing the quarters too much. We're not providing quarterly guidance. I think the outlook that we've provided for the first half based upon all assumptions you have around the order book.

Mitch, to your point, certainly, the first quarter poses some additional challenges for the D2C business, just given the favorable backdrop. That's all factored into the outlook that we're providing here today. So we look forward to providing more of an update on that.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. OK. Fair enough. Thanks.

Good luck.

Operator

The next question today is coming from Paul Lejuez from Citi. Your line is now live.

Paul Lejuez -- Citi -- Analyst

Thanks, guys. I'm sorry if I missed this, but did you say anything about what you're seeing in China currently in terms of the percentage hit to the business? I just want to understand how F '20 guidance might be reflecting what you're seeing right now based on current trends? And if it's not based on current trends, what is driving your assumption for China growth in 20? Maybe any color you can give there? Also, if you could remind us on the percent of your sourcing that is coming from China? And also just how you're thinking generally about raw material costs and the impact on gross margin in F '20?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Yes. What we said early on that the guidance today does not include the impacts of the coronavirus. That having been said, we have a decent business in China, and we've given guidance in the prepared remarks today about what our plans are in that market. We have to go back.

Jim Swanson -- Senior Vice President and Chief Financial Officer

And maybe just to jump in a couple of specifics. So certainly, as Tim indicated, we've got a fair amount of stores that are closed, both that we operate directly ourselves, as well as many of our wholesale dealers, and over half of those stores are currently closed. At this point in time, this is a fluid situation. We have been able to estimate the financial impact, and that's not embedded in our outlook at this point.

Paul Lejuez -- Citi -- Analyst

So does that mean that you're kind of giving guidance as if those stores weren't closed? Has that been talked about?

Jim Swanson -- Senior Vice President and Chief Financial Officer

That's correct at this stage.

Paul Lejuez -- Citi -- Analyst

Got it. OK. And then just on the sourcing piece, the percent coming from China and just raw materials, the impact on gross margin?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Yes. So China is a low double-digit percentage of our total production, higher than that for footwear, a little lower than that for apparel. And raw materials, the lion's share of footwear raw materials are sourced in China. And a fairly significant portion of raw materials for apparel are sourced in China.

Paul Lejuez -- Citi -- Analyst

Thank you, guys. Good luck.

Operator

Our next question is coming from Jim Duffy from Stifel. Your line is now live.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thanks, guys. Thank you for taking my question. Tim, I want to follow-up on channel inventories. When you discuss channel inventories, you spoke using last year is the comparison, given how tight inventories were a year ago, that seems almost an unfair comparison.

How would you characterize them versus some other years, maybe like '17 or '18, my sense is that channel inventories are nowhere near as out of bounds as we've seen in recent history. Is that fair?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Yes. I think you're right. The average inventories, they might be slightly elevated from an average point of view, but frankly -- and again, I hate to talk about history, which seems like 1989, when we went public, it's a long time ago. But we have a long history of managing our way through seasonal inventories.

And again, the balance sheet of the company provides us a lot of comforts. But I would say, specifically, your question about inventories, they probably are a little bit elevated over average, but this is not an unusual situation.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Good to hear. OK. And then SOREL success, that's been really impressive to watch. Mark and his team have done a terrific job.

Are there specific pages from the SOREL playbook that you think are applicable to the footwear business for the Columbia brand?

Tim Boyle -- Chairman, President, and Chief Executive Officer

Probably, I would say, Mark has a much higher focus on fashion and design than we have at Columbia. The fashion and design, in addition to the functionality of the SOREL products, are the key differentiator. For Columbia, we've always emphasized our innovations and maybe we overemphasize that. But frankly, the results for the last, call it, 18 months on our footwear business have been significant.

And as we add design into the innovation packages at Columbia, I think we've got the opportunity to grow the business very rapidly. It's still the biggest opportunity product categorical wise for the company.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thanks. Good luck. Thank you.

Operator

We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Tim Boyle -- Chairman, President, and Chief Executive Officer

Well, thank you very much for listening in. We look forward to talking to you again at the end of Q1. And we're all hopeful that the coronavirus topic will be behind us by then.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Andrew Burns -- Director of Investor Relations and Competitive Intelligence

Tim Boyle -- Chairman, President, and Chief Executive Officer

Bob Durbl -- Guggenheim Securities -- Analyst

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

Jim Swanson -- Senior Vice President and Chief Financial Officer

Chris Svezia -- Wedbush Securities -- Analyst

Jonathan Komp -- Robert W. Baird and Company -- Analyst

John Kernan -- Cowen and Company -- Analyst

John Morris -- D.A. Davidson -- Analyst

Mitch Kummetz -- Pivotal Research -- Analyst

Paul Lejuez -- Citi -- Analyst

Jim Duffy -- Stifel Financial Corp. -- Analyst

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