Columbia Sportswear Company — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2019. Columbia designs, markets and distributes outdoor and active lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands through wholesale and direct-to-consumer channels. Results are highly seasonal, with sales and operating income concentrated in the second half of the year.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Net sales | $906.8 million | $795.8 million | +14% |
| Gross profit / margin | $446.7 million / 49.3% | $383.7 million / 48.2% | Margin +110 bps |
| Income from operations / margin | $152.0 million / 16.8% | $129.1 million / 16.2% | +18%; margin +60 bps |
| Net income attributable to Columbia | $119.3 million | $100.2 million | +19% |
| Diluted EPS | $1.75 | $1.42 | +23% |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Net sales | $2.088 billion | $1.885 billion | +11% |
| Gross margin | 49.7% | 48.4% | +130 bps |
| Operating income / margin | $256.3 million / 12.3% | $198.2 million / 10.5% | +29%; margin +180 bps |
| Net income attributable to Columbia | $216.5 million | $155.0 million | +40% |
| Diluted EPS | $3.15 | $2.19 | +44% |
Q3 sales growth was led by Columbia and SOREL, footwear growth, and wholesale shipments. Q3 wholesale sales increased 19% to $652.6 million, while direct-to-consumer sales increased 3% to $254.2 million. The United States generated $581.3 million of Q3 sales, followed by LAAP at $123.2 million, EMEA at $104.4 million and Canada at $97.9 million.
For the nine months, operating cash flow was negative $198.2 million versus negative $98.1 million in 2018. The use of cash reflected higher accounts receivable from earlier and higher fall-season shipments, a $199.0 million inventory increase and lower accounts payable. Investing activities provided $159.7 million, principally from net sales and maturities of short-term investments, offset by $104.5 million of capital expenditures. Financing activities used $171.1 million, including $116.2 million of share repurchases, $48.9 million of dividends and $17.9 million for the China buyout.
At September 30, 2019, cash and cash equivalents were $239.3 million and short-term investments were $1.5 million. No borrowings were outstanding under the domestic revolving facility or international credit lines, and the Company was in compliance with its covenants. Operating lease liabilities totaled $429.3 million, including $62.8 million current and $366.5 million long-term, following adoption of ASC 842.
Material changes versus the prior comparable period
- Project CONNECT benefits, including design-to-value, assortment optimization and manufacturing efficiencies, supported gross-margin expansion.
- SG&A increased 15% in Q3, primarily from global DTC operations, personnel, IT initiatives, demand creation and the absence of a prior-year insurance recovery.
- Earlier shipment of Fall 2019 wholesale orders shifted a greater portion of second-half profitability into Q3 from Q4.
- The Company completed the purchase of the remaining 40% interest in its China joint venture on January 2, 2019; China became wholly owned and non-controlling interest was eliminated.
- ASC 842 adoption added $352.7 million of right-of-use assets and corresponding lease liabilities at January 1, 2019, without a material income-statement or cash-flow effect.
- The nine-month effective tax rate declined to 18.2% from 21.7%, primarily because of a $6.6 million benefit from Swiss tax reform-related deferred tax asset revaluation.
- Shares outstanding declined to 67.6 million at September 30, 2019 from 69.3 million a year earlier, reflecting repurchases.
Guidance, outlook, commentary and risks
Management did not provide a clear full-year sales or earnings forecast in the filing. It expects 2019 capital expenditures of approximately $130 million to $140 million, funded by existing cash, operating cash flow and credit facilities. Management believes liquidity is sufficient for at least the next 12 months and expects to fund dividends and repurchases with operating cash generation.
Management expects the financial benefits of Project CONNECT to continue, but does not expect the same level of incremental gross-margin improvement in 2020. Strategic priorities include demand creation, digital and omnichannel capabilities, DTC expansion, IT modernization, supply-chain improvement and organizational optimization. The C1 retail platform was rolled out to 140 North American stores during the quarter; the X1 e-commerce implementation is expected to continue in North America during 2020.
Key risks include seasonal weather and consumer demand, inventory excess or shortages, wholesale customer cancellations and credit exposure, tariffs and trade policy, foreign-currency movements, China and other international market performance, contract manufacturing and transportation capacity, retail and e-commerce competition, IT implementation and cybersecurity, data-privacy regulation, tax audits and changing tax laws. Inventory purchase obligations were $356.5 million at September 30, 2019, and additional operating lease commitments not yet commenced were $13.6 million. Management does not believe existing litigation will have a material adverse effect.
Most important facts for investors to verify
- Whether Q4 sales and cash collections offset the substantial seasonal working-capital use through September 30.
- Inventory aging, liquidation activity, gross-margin sustainability and the effect of closeout sales.
- Execution, cost and financial returns from C1, X1, Project CONNECT and other IT and DTC investments.
- China, LAAP and other international demand trends, including elevated dealer inventories and currency effects.
- Wholesale customer financial health, order cancellations, receivables collectability and exposure to tariffs or trade restrictions.
- Future capital expenditures, lease obligations, share repurchases and dividend funding relative to operating cash flow.
- The effect of the one-time Swiss tax benefit and the absence of prior-year insurance and non-controlling-interest items on year-over-year comparability.