Columbia Sportswear Company: Q2 2017 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. Products are sold through wholesale, direct-to-consumer and international distributor channels.
This unaudited filing covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Results are highly seasonal: approximately 60% of 2016 sales and 90% of profitability occurred in the second half of the year.
Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $398.9 million | $388.7 million | $942.7 million | $913.9 million |
| Gross profit | $180.9 million | $179.6 million | $439.3 million | $427.0 million |
| Gross margin | 45.3% | 46.2% | 46.6% | 46.7% |
| Operating income (loss) | $(17.3) million | $(11.8) million | $30.7 million | $32.5 million |
| Net income (loss) attributable to Columbia | $(11.5) million | $(8.2) million | $24.5 million | $23.6 million |
| Diluted EPS | $(0.17) | $(0.12) | $0.35 | $0.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $157.0 million | $102.7 million |
Q2 sales increased 3%. The quarterly loss widened as SG&A increased faster than sales and gross margin contracted. Six-month sales increased 3%, while operating income declined 5.4%; lower tax expense helped increase six-month attributable net income by 3.7%.
Q2 SG&A was $200.6 million, or 50.3% of sales, versus $193.3 million, or 49.7%, in the prior year. Six-month SG&A was $413.4 million, or 43.9% of sales, versus $398.3 million, or 43.6%.
At June 30, 2017, cash and cash equivalents were $620.6 million and short-term investments were $1.6 million. Inventories were $559.5 million, accounts receivable were $181.1 million, and total assets were $2.01 billion. Total liabilities were $439.0 million and total equity was $1.57 billion.
No short-term borrowings or credit-facility balances were outstanding. The company had an unsecured domestic revolving line averaging $100 million of monthly availability and international operating lines with approximately $88 million of combined capacity. The related-party note payable was fully repaid in June 2017.
Cash Flow, Capital Allocation and Balance-Sheet Changes
- Six-month operating cash flow increased to $157.0 million from $102.7 million, primarily due to more favorable inventory changes.
- Investing cash outflow was $25.1 million, including $24.3 million of capital expenditures.
- Financing cash outflow was $67.8 million, including $35.5 million of share repurchases, $25.0 million of dividends and $14.2 million to repay the related-party note, partly offset by $7.1 million of employee stock-plan proceeds.
- Cash increased $69.3 million from December 31, 2016. Approximately 55% of cash and short-term investments were held by foreign subsidiaries and intended to remain indefinitely reinvested outside the United States.
- The company paid a quarterly dividend of $0.18 per share and repurchased 665,095 shares for $35.5 million during the first six months.
Material Changes Versus the Prior Comparable Period
- Q2 regional sales increased in the United States by 4% and EMEA by 14%, but declined 9% in LAAP; Canada increased 2%.
- Q2 brand sales increased for SOREL by 71%, prAna by 9% and Columbia by 2%, while Mountain Hardwear declined 5%.
- U.S. direct-to-consumer sales increased, while wholesale sales were pressured by customer bankruptcies, liquidations and store closures. The company operated 122 retail stores at June 30, 2017, compared with 113 a year earlier.
- Gross margin declined primarily because of increased U.S. promotional activity to liquidate aged inventory, partly offset by a greater direct-to-consumer sales mix.
- The company completed an operating-model assessment and began Project CONNECT, a leadership and organizational realignment intended to support brand-led, consumer-focused growth.
- The China joint venture implemented the ERP system during Q2. The company also began an early-design global retail platform initiative, with costs expected to begin in the second half of 2017 and regional implementations targeted from the first half of 2019.
- Inventory purchase obligations were $319.7 million at June 30, 2017.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific quantitative full-year 2017 sales or earnings guidance figure. Management expects profitability to remain heavily concentrated in the second half of the year and states that liquidity needs for at least the next 12 months are expected to be covered by cash, operating cash flow and existing borrowing arrangements.
- Key outlook variables include direct-to-consumer performance, weather, wholesale order cancellations, retailer financial health, currency movements, Korea and other LAAP markets, Europe-direct growth, prAna growth, Mountain Hardwear performance and costs associated with the operating-model assessment.
- Currency risk is material. Currency derivatives had gross notional amounts of $314.0 million for cash-flow hedges and $166.5 million for non-designated contracts at June 30, 2017. Approximately $7 million of deferred net derivative losses were expected to be reclassified into income over the following twelve months.
- The company disclosed a February 2017 cybersecurity incident involving the prAna.com website and referred the matter to the FBI.
- Major risks include seasonality and weather sensitivity, excess or obsolete inventory, promotional pricing, retailer bankruptcies, reliance on contract manufacturers, supply-chain and transportation disruptions, currency fluctuations, information-technology implementation risk, cybersecurity, competition, product liability and intellectual-property disputes.
- Legal proceedings arise in the ordinary course; management did not believe their resolution would materially adversely affect the company.
- The company expects to adopt revenue-recognition guidance on January 1, 2018 and stated that it does not expect a material impact on revenue timing. Lease accounting adoption is expected to materially increase reported assets and liabilities.
Important Facts for Investors to Verify
- Whether second-half seasonal demand and profitability offset the Q2 operating loss and margin pressure.
- Inventory aging, liquidation activity, promotional intensity and the $319.7 million of inventory purchase commitments.
- Progress, cost overruns and operational disruption risks associated with ERP, the global retail platform and Project CONNECT.
- Exposure to financially stressed wholesale customers, particularly customer receivables and potential cancellations.
- Foreign-currency effects on gross margin, operating income and accumulated other comprehensive loss.
- The scope and potential financial or reputational consequences of the prAna cybersecurity incident.
- Use of cash for dividends and repurchases while approximately 55% of cash and short-term investments remain offshore.