Columbia Sportswear Company: FY2018 Form 10-K 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. Products are sold through wholesale, direct-to-consumer (DTC), international distributors, and licensing channels in approximately 90 countries.
This Form 10-K covers the fiscal year ended December 31, 2018. The business is highly seasonal: approximately 60% of 2018 net sales and 80% of operating income were generated in the second half of the year.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $2.802 billion | $2.466 billion | Up 14% |
| Gross profit | $1.386 billion | $1.160 billion | Up 20% |
| Gross margin | 49.5% | 47.0% | Up 250 basis points |
| Income from operations | $351.0 million | $263.0 million | Up 33% |
| Operating margin | 12.5% | 10.7% | Up 180 basis points |
| Net income attributable to Columbia | $268.3 million | $105.1 million | Up 155% |
| Diluted EPS | $3.81 | $1.49 | Up 156% |
| Cash flow from operations | $289.6 million | $341.1 million | Down 15% |
Net income benefited substantially from the comparison with 2017, which included $95.6 million of provisional tax expense related to the Tax Cuts and Jobs Act. The 2018 effective tax rate was 23.8%, compared with 57.9% in 2017; 2018 included approximately $5.1 million of additional TCJA-related tax expense.
- U.S. net sales rose 14% to $1.729 billion and represented 61.7% of consolidated sales.
- LAAP sales rose 12% to $530.2 million, including $41.0 million associated with ASC 606 adoption.
- EMEA sales rose 19% to $350.8 million; Canada sales rose 9% to $192.9 million.
- DTC sales increased 22% to $1.190 billion, while wholesale sales increased 8% to $1.612 billion.
- Columbia brand sales increased 15% to $2.292 billion; SOREL rose 14% to $260.3 million; prAna rose 11% to $157.0 million; Mountain Hardwear declined 12% to $89.5 million.
- Apparel, accessories, and equipment accounted for $2.191 billion, or 78.2%, of sales; footwear accounted for $611.3 million, or 21.8%.
Liquidity, capital allocation, and balance sheet
- Cash and cash equivalents were $437.8 million at December 31, 2018, compared with $673.2 million at year-end 2017. Short-term investments increased to $262.8 million from $95.0 million.
- Total assets were $2.369 billion; total liabilities were $678.4 million; total equity was $1.690 billion.
- No balances were outstanding under the domestic revolving credit facility or international operating lines at year-end. The domestic committed facility had average annual availability of approximately $100 million, and international lines had aggregate limits of approximately $107 million.
- Capital expenditures were $65.6 million, compared with $53.4 million in 2017.
- The Company repurchased $201.6 million of common stock in 2018 and paid $62.7 million of dividends to Company shareholders. The quarterly dividend increased from $0.22 to $0.24 per share in the fourth quarter.
- At December 31, 2018, inventory was $521.8 million, up from $457.9 million, and accounts receivable were $449.4 million, up from $364.9 million.
Material changes versus the prior comparable period
- Sales growth accelerated, particularly in DTC, the U.S., EMEA, and across the Columbia and SOREL brands.
- Gross margin expanded due to favorable U.S. DTC selling conditions, a higher full-price and DTC sales mix, favorable currency hedge rates, and reduced closeout activity.
- SG&A increased 15% to $1.051 billion, or 37.5% of sales, reflecting DTC expansion, demand-creation spending, personnel and incentive compensation, and ASC 606 presentation changes.
- Operating cash flow declined despite higher earnings, primarily because inventory increased by $94.7 million on a cash-flow basis.
- ASC 606 adoption increased reported 2018 net sales, gross profit, and SG&A by approximately $41.0 million, primarily because certain LAAP concession fees moved from a reduction of revenue to SG&A. The filing states that adoption did not materially change the timing of revenue recognition.
- Project CONNECT generated benefits in 2018; the Company reported $15.8 million of related program expenses and discrete costs in operating income and expected additional value capture in 2019 and beyond.
- On January 2, 2019, Columbia completed the purchase of the remaining 40% interest in its China joint venture. Beginning in the first quarter of 2019, the consolidated statements will no longer separately report non-controlling interest related to that venture.
Guidance, outlook, commentary, and risks
Management did not provide a clear numerical 2019 sales or earnings forecast in the filing. It stated that 2019 profitability would remain heavily concentrated in the second half of the year and identified the following key priorities and uncertainties:
- Growth and profitability of global DTC and e-commerce operations.
- Implementation and optimization of global retail, e-commerce, ERP, supply-chain, and other information technology systems.
- Further financial benefits from Project CONNECT, with resources potentially reallocated toward demand creation and growth initiatives.
- Continued growth in LAAP, particularly China, and efforts to reinvigorate Mountain Hardwear.
- Potential effects of tariffs, international trade policy, foreign currency movements, economic and geopolitical conditions, and the TCJA.
- Consumer demand, seasonal weather, wholesale order cancellations, customer financial health, inventory levels, promotions, and retail traffic.
Principal operating risks include dependence on contract manufacturers and concentrated Asian sourcing, volatile raw-material and transportation costs, currency exposure, customer and retailer consolidation or insolvency, inventory forecasting risk, intense competition, cybersecurity and privacy risks, product liability and recalls, intellectual-property disputes, labor disruptions, and the fixed costs of DTC stores and distribution facilities.
The Company had approximately $363.8 million of inventory purchase obligations, $451.5 million of operating lease obligations, and $37.7 million of remaining TCJA transition-tax obligations. Management did not believe outstanding litigation or tax audits would have a material adverse effect, although approximately $13.1 million of unrecognized tax benefits were recorded as long-term liabilities and certain tax matters remained subject to review.
Most important facts for investors to verify
- Whether DTC growth and higher full-price selling can offset rising SG&A, technology, store, and demand-creation investments.
- Whether the 2018 gross-margin expansion is sustainable after favorable selling conditions, mix, and currency hedging effects.
- Inventory growth, sales reserves, customer receivables, and cash conversion, given the $94.7 million inventory-related operating cash outflow.
- The effect of the China joint-venture buyout on 2019 earnings, cash, and non-controlling interest.
- Exposure to tariffs, sourcing concentration in China and Vietnam, foreign exchange movements, and transportation or factory disruptions.
- Progress, cost, and operational impact of the C1, X1, ERP, and supply-chain technology initiatives.
- Reported results excluding the $41.0 million ASC 606 presentation impact and the unusually high 2017 TCJA tax charge when assessing underlying growth.
- Future lease obligations and the effect of the Company’s January 2019 adoption of the new lease accounting standard, which resulted in approximately $350 million of right-of-use assets and $385 million of lease liabilities.