Columbia Sportswear Company: Q2 2012 Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. The unaudited filing covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The business is highly seasonal, with sales and profitability weighted toward the third and fourth quarters.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $290.4 million | $268.0 million | $623.5 million | $601.1 million |
| Gross profit | $117.9 million | $112.4 million | $265.8 million | $261.9 million |
| Gross margin | 40.6% | 41.9% | 42.6% | 43.6% |
| Loss from operations | $10.7 million | $18.6 million | $5.4 million | $0.7 million |
| Net income (loss) | $(7.9) million | $(13.6) million | $(4.0) million | $(0.8) million |
| Diluted EPS | $(0.23) | $(0.40) | $(0.12) | $(0.02) |
| Operating cash flow | Not separately provided | Not separately provided | $18.7 million | $12.0 million |
At June 30, 2012, cash and cash equivalents were $193.2 million and short-term investments were $35.3 million. Inventory was $523.1 million, including $519.8 million of finished goods. Total liabilities were $327.4 million and shareholders’ equity was $1.06 billion. No balance was outstanding under the $125.0 million domestic revolving credit facility or the approximately $93.8 million of international operating lines. The company reported compliance with its credit covenants.
Six-month investing cash outflows were $53.7 million, including $32.3 million of net short-term investment purchases and $21.4 million of capital expenditures. Financing cash outflows were $11.8 million, primarily $14.8 million of dividends. Cash decreased by $47.8 million during the six months.
Material changes versus the prior comparable period
- Q2 sales increased 8% to $290.4 million; six-month sales increased 4% to $623.5 million. Foreign exchange reduced the Q2 comparison by approximately one percentage point.
- Q2 net loss improved 42%, principally because sales increased and SG&A declined 1.0% to $133.2 million. Six-month net loss increased to $4.0 million from $0.8 million.
- Gross margin contracted 130 basis points in Q2 and 100 basis points for the six months. Drivers included increased distributor shipments, promotional activity and close-out sales related to excess inventory following an unseasonably warm winter.
- Six-month SG&A increased 3% to $277.7 million, reflecting ERP implementation costs, direct-to-consumer expansion and approximately $4.0 million of restructuring charges, partly offset by cost containment and favorable currency effects.
- Q2 geographic sales increased in the United States by 2%, LAAP by 10% and EMEA by 31%, but declined 52% in Canada. Six-month sales increased 12% in LAAP and 10% in EMEA, while declining 22% in Canada.
- Six-month apparel, accessories and equipment sales increased 6%, while footwear sales declined 6%, largely because warm winter weather reduced demand for cold-weather footwear, particularly Sorel products.
- Inventory increased 43% from December 31, 2011 and 24% from June 30, 2011. Accounts receivable declined from year-end levels as seasonal collections increased.
Guidance, outlook, risks and unusual items
Management stated that full-year 2012 sales growth was expected to be limited by the unseasonably warm 2011/2012 winter and difficult economic conditions, particularly in Europe. Management expected full-year SG&A to increase at a rate comparable to anticipated sales growth after first-quarter cost containment actions, while continuing to invest in product innovation, direct-to-consumer operations, marketing, information technology and supply-chain improvements.
- Key risks include weather-driven demand volatility, discretionary consumer spending, retailer order cancellations, excess inventory, promotional pressure, foreign currency movements and input-cost inflation.
- The company had $271.5 million of inventory purchase obligations at June 30, 2012.
- Approximately 45% of cash and short-term investments were held by foreign subsidiaries and were intended to remain indefinitely reinvested outside the United States; repatriation could create significant tax expense.
- The worldwide ERP implementation began with the Canadian subsidiary in April 2012 and may create implementation costs, operational disruptions, data issues and changes in internal controls. Management reported that disclosure controls were effective at quarter-end.
- Currency forward contracts were used to hedge exposures. Approximately $7.1 million of deferred net derivative gains were expected to be reclassified into income over the following twelve months, subject to exchange rates.
- Legal proceedings arose in the ordinary course of business; management did not expect their resolution to materially affect financial position, results or cash flows.
- On August 6, 2012, the company announced an agreement to form a China joint venture with Swire Resources Ltd. The company expects to own 60%, with operations targeted for January 1, 2014, subject to regulatory and other conditions.
Most important facts for investors to verify
- Whether second-half seasonal sales and profitability offset the first-half loss and whether the stated full-year sales outlook changes.
- Inventory levels, close-out activity, promotional pricing and resulting gross-margin trends.
- Execution, costs and internal-control effects of the global ERP implementation.
- Performance in EMEA and Canada, including exposure to economic conditions and currency movements.
- Cash conversion, capital expenditures, dividend funding and utilization of available credit facilities.
- Terms, regulatory approval and financial impact of the planned China joint venture.