Columbia Sportswear Company — Q1 2018 Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets and distributes outdoor and active-lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands. The unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The business is seasonal, with sales and operating income weighted heavily toward the second half of the year.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $607.3 million | $543.8 million | +12%; +8% constant currency |
| Gross profit | $299.4 million | $258.5 million | +16% |
| Gross margin | 49.3% | 47.5% | +180 basis points |
| SG&A expense | $243.4 million | $212.8 million | +14% |
| Operating income | $59.3 million | $48.0 million | +24% |
| Operating margin | 9.8% | 8.8% | +100 basis points |
| Net income attributable to Columbia | $45.1 million | $36.0 million | +25% |
| Diluted EPS | $0.64 | $0.51 | +$0.13 |
| Net cash from operations | $77.4 million | $88.2 million | -12% |
Cash and cash equivalents were $717.2 million at March 31, 2018, supplemented by $91.0 million of short-term investments. Total current assets were $1.60 billion versus $383.7 million of current liabilities. No borrowings were outstanding under the domestic revolving credit facility or international subsidiary lines of credit, and the company was in compliance with applicable covenants. Total debt was not material; the related-party note payable was repaid in June 2017.
Capital expenditures were $12.3 million. Investing activities used $8.3 million, primarily because $37.1 million of short-term investments were sold while $33.2 million were purchased. Financing activities used $28.2 million, including $15.5 million of dividends and $18.1 million of share repurchases, partially offset by employee stock-plan proceeds.
Material changes versus the prior comparable period
- Sales increased $63.5 million, led by the United States, EMEA and direct-to-consumer channels. DTC sales increased 23% to $263.4 million, while wholesale sales increased 5% to $343.9 million.
- Reported sales benefited from favorable foreign-currency translation and the adoption of ASC 606. The new revenue standard added $8.3 million to reported sales and SG&A in the quarter without materially changing the timing of revenue recognition. Excluding currency effects, sales increased 8%.
- Gross margin expanded primarily because of lower DTC promotional activity, favorable hedge rates and a greater mix of DTC and wholesale sales versus lower-margin distributor sales.
- SG&A increased partly because of approximately $11.0 million of Project CONNECT costs and $8.3 million of ASC 606-related classification costs, compared with approximately $1.3 million of Project CONNECT costs in Q1 2017.
- Net income attributable to Columbia included approximately $8.4 million, or $0.12 per diluted share, of after-tax Project CONNECT program expenses and discrete costs. Q1 2017 included approximately $0.9 million, or $0.01 per diluted share.
- The effective tax rate increased to 20.6% from 20.1%, including approximately $1.0 million of incremental tax expense related to the Tax Cuts and Jobs Act and the refinement of provisional estimates.
- Operating cash flow declined despite higher earnings, primarily because of working-capital timing related to earlier receipt of spring inventory and changes in accounts payable and accrued liabilities.
- Mountain Hardwear sales declined 12% to $24.4 million, while Columbia, SOREL and prAna sales increased 13%, 13% and 9%, respectively.
Outlook, commentary, risks and unusual items
Management did not provide a clear numerical full-year 2018 sales or earnings guidance figure in the filing text. Management expects profitability to remain heavily concentrated in the second half of 2018 and identifies DTC performance, weather, wholesale customer health, foreign exchange, Korea, EMEA growth, Mountain Hardwear, Project CONNECT, tax estimates, tariffs and trade policy, and technology implementations as significant factors.
- Strategic priorities include demand creation, improved digital and consumer experiences, expansion of global DTC operations, organizational optimization and investment in information systems.
- Consumer-First Platform and Experience First initiatives are multi-year programs targeting regional implementations beginning in the first half of 2019. The Europe-direct business was expected to transition to the global ERP system in mid-2018.
- Project CONNECT is intended to improve revenue, sourcing efficiency, SG&A productivity and marketing effectiveness. Management reported early benefits and greater confidence in more meaningful value capture in 2019.
- The company announced in April 2018 its intent to purchase Swire’s remaining 40% interest in the China joint venture. The transaction is subject to conditions including regulatory approval in China and was expected to close in early 2019; purchase consideration was not provided in the filing.
- Inventory purchase obligations were $614.9 million at March 31, 2018. Management believes liquidity for at least the next 12 months is adequately covered by cash, operating cash flow and existing borrowing arrangements.
- Key risks include seasonality and weather, consumer discretionary spending, wholesale customer cancellations or financial distress, inventory forecasting, currency fluctuations, tariffs, sourcing and transportation costs, contract manufacturers, cybersecurity, ERP and DTC system implementation, product liability, intellectual property, tax uncertainty and competitive pressure.
- The company expects adoption of the lease standard in 2019 to materially increase balance-sheet assets and liabilities, with no material expected effect on operations or cash flows.
- Management stated that ongoing litigation was not expected to have a material adverse effect, and disclosure controls were effective at March 31, 2018.
Important facts for investors to verify
- Reconcile reported growth with the $8.3 million ASC 606 classification impact and the 8% constant-currency growth rate.
- Assess whether gross-margin gains persist after favorable promotional, mix, hedge and accounting effects.
- Monitor Project CONNECT spending, expected 2019 benefits and the effect of continued DTC, ERP, C1 and X1 investments on SG&A and cash flow.
- Evaluate second-half execution because approximately 90% of 2017 operating income was generated in the second half.
- Track inventory levels, the $614.9 million of purchase obligations and potential cancellations or markdowns if demand or weather changes.
- Confirm the timing, regulatory approval, financing and purchase price of the proposed China joint-venture buyout.
- Assess foreign-exchange exposure, derivative losses and the approximately $12.4 million of deferred derivative losses expected to be reclassified to income over the following 12 months.
- Review the effects of the TCJA, future tax guidance, tariffs and the expected 2019 lease-accounting adoption.