Columbia Sportswear Company — 2019 Second-Quarter Form 10-Q
Business context and reporting period
Columbia Sportswear designs, develops, markets, and distributes outdoor and active-lifestyle apparel, footwear, accessories, and equipment under the Columbia, SOREL, prAna, and Mountain Hardwear brands. The unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Results are highly seasonal, with approximately 60% of 2018 sales and 80% of operating income generated in the second half of the year.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $526.2 million | $481.6 million | $1,180.8 million | $1,088.9 million |
| Gross profit | $253.6 million | $228.6 million | $590.3 million | $528.1 million |
| Gross margin | 48.2% | 47.5% | 50.0% | 48.5% |
| Income from operations | $16.4 million | $9.7 million | $104.3 million | $69.1 million |
| Operating margin | 3.1% | 2.0% | 8.8% | 6.3% |
| Net income attributable to Columbia | $23.0 million | $9.7 million | $97.2 million | $54.8 million |
| Diluted EPS | $0.34 | $0.14 | $1.41 | $0.77 |
| Net cash from operating activities | Not separately provided | Not separately provided | $2.6 million | $99.3 million |
Q2 reported sales increased 9% year over year, or 11% on a constant-currency basis. Six-month sales increased 8%, or 10% constant currency. Q2 sales were led by the United States, which increased 13%, while LAAP increased 1%, EMEA increased 8%, and Canada increased 12%. Wholesale sales rose 12% and direct-to-consumer sales rose 6% in Q2.
At June 30, 2019, cash and cash equivalents were $386.2 million, short-term investments were $138.2 million, and total current assets were $1.66 billion. The company had no borrowings outstanding under its revolving or international credit lines and was in compliance with applicable covenants. Inventory was $756.4 million, compared with $570.5 million at June 30, 2018. Total liabilities were $1.01 billion, including $405.9 million of operating lease liabilities recognized following adoption of ASC 842.
Material changes versus the prior comparable period
- Gross margin expanded by 70 basis points in Q2 and 150 basis points for the six-month period, primarily from Project CONNECT initiatives, including design-to-value, assortment optimization, and manufacturing efficiencies.
- SG&A increased 8% in Q2 to $240.8 million, but declined to 45.8% of sales from 46.1%. The increase reflected DTC expansion, personnel and project costs, IT implementation, and higher demand-creation spending.
- Operating income increased 68% in Q2 and 51% for the six-month period. The 2018 comparison included Project CONNECT program expenses and discrete costs that did not recur in 2019.
- Q2 net income included a $6.6 million tax benefit from Swiss tax reform, which produced a negative 15.3% quarterly effective tax rate. The six-month effective tax rate was 13.0%, compared with 19.9% in 2018.
- Cash from operations declined to $2.6 million from $99.3 million, principally because of earlier purchases and receipts of fall 2019 inventory and higher spring inventory. Inventory increased $185.9 million year over year.
- The company completed the purchase of the remaining 40% interest in its China joint venture on January 2, 2019, making the China business wholly owned. The transaction required $17.9 million of cash during the six months, including final settlement payments.
- Share repurchases increased to $100.4 million for the six months from $40.1 million in 2018; dividends paid were $32.7 million. At June 30, $235.9 million remained available under the repurchase authorization.
- ASC 842 adoption resulted in recognition of $368.9 million of operating lease right-of-use assets and $405.9 million of operating lease liabilities at June 30, 2019. Prior-year balance sheets were not restated.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific full-year sales or earnings forecast in the filing. It expects 2019 profitability to remain heavily concentrated in the second half of the year and anticipates approximately $145 million of 2019 capital expenditures, funded through cash, operating cash flow, and available credit facilities. Management stated that liquidity needs for at least the next 12 months are expected to be adequately covered.
Strategic priorities include demand creation, enhanced digital and consumer capabilities, global DTC expansion, investment in people, and process and system optimization. The C1 retail platform began a limited North American store pilot in July 2019. X1 e-commerce enhancements were implemented across 10 European countries and for prAna in the United States during the quarter; most North American implementation was expected to begin in 2020.
- Inventory growth and the ability to liquidate excess inventory without increased markdowns remain important risks.
- Unseasonable weather, changing consumer demand, order cancellations, retailer financial distress, and seasonal concentration could materially affect results.
- China sales softened during the six-month period because of competitive pressures and elevated dealer inventory levels.
- Tariffs, international trade policy, foreign-currency volatility, sourcing and transportation costs, and contract-manufacturer capacity could pressure margins and product availability.
- C1, X1, ERP, and other technology implementations could cause business interruptions, data issues, higher costs, shipment delays, or internal-control challenges.
- The company is exposed to cybersecurity, data privacy, litigation, tax-audit, warranty, product-liability, and intellectual-property risks.
- Inventory purchase obligations were $364.2 million at June 30, 2019. Management did not expect existing legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether second-half demand, weather, wholesale order fulfillment, and DTC performance support the expected seasonal concentration of annual profit.
- Whether elevated inventory converts to sales without material write-downs, closeouts, or margin erosion.
- Whether operating cash flow improves as inventory is sold and whether capital expenditures remain near the approximately $145 million plan.
- The recurring earnings impact excluding the $6.6 million Swiss tax benefit and the favorable comparison from nonrecurring 2018 Project CONNECT costs.
- Progress, costs, and operational effects of the C1, X1, ERP, and Project CONNECT initiatives.
- Developments in China, tariffs and trade policy, foreign-currency movements, retailer credit quality, and supplier or transportation capacity.
- The effect of operating leases, repurchases, dividends, and the China buyout on future liquidity and capital allocation.