Columbia Sportswear Company: Q1 2012 Form 10-Q Summary
Business context and reporting period
Columbia designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Products are sold through wholesale, distributor, direct-to-consumer and licensing channels. This unaudited Form 10-Q covers the three months ended March 31, 2012, with comparisons to March 31, 2011. The business is highly seasonal, with sales and profitability concentrated in the second half of the year.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $333.1 million | $333.1 million | Flat |
| Gross profit | $147.9 million | $149.5 million | Down $1.6 million |
| Gross margin | 44.4% | 44.9% | Down 50 basis points |
| SG&A expense | $144.6 million | $134.1 million | Up 7.8% |
| Income from operations | $5.4 million | $17.9 million | Down 70.1% |
| Net income | $3.9 million | $12.8 million | Down 70% |
| Diluted EPS | $0.11 | $0.37 | Down $0.26 |
| Operating cash flow | $22.2 million | $36.4 million | Down $14.1 million |
| Capital expenditures | $12.0 million | $9.0 million | Up $3.0 million |
| Cash dividends paid | $7.4 million | $6.8 million | Up $0.7 million |
Cash and cash equivalents were $240.7 million at March 31, 2012, compared with $241.0 million at December 31, 2011 and $235.0 million at March 31, 2011. Short-term investments were $12.0 million. The company reported no outstanding balance on its $125.0 million domestic revolving credit facility or its international operating lines. Total liabilities were $221.6 million, and shareholders’ equity was $1.08 billion.
Inventory was $366.6 million, up from $303.1 million a year earlier. Accounts receivable were $253.3 million, compared with $218.9 million at March 31, 2011. The company had $455.2 million of inventory purchase obligations and $1.6 million of outstanding import letters of credit.
Material changes versus the prior comparable period
- Sales were essentially unchanged overall, but regional performance diverged: LAAP increased 14% to $76.8 million, while EMEA declined 14% to $38.1 million and Canada declined 13% to $25.2 million. U.S. sales were approximately flat at $193.0 million.
- Apparel, accessories and equipment sales rose 2% to $284.3 million, while footwear sales fell 10% to $48.8 million. Sorel sales declined 38% to $6.4 million.
- Gross margin contracted because of increased promotional and close-out sales from excess inventory and higher product costs. Favorable foreign-currency hedge rates, lower airfreight costs and geographic and channel mix partly offset the pressure.
- SG&A increased by $10.5 million, primarily because of $4.0 million of restructuring charges, global direct-to-consumer expansion, ERP and other information-technology initiatives, and the anniversary effect of prior-year staffing additions.
- Restructuring charges reduced first-quarter net income by approximately $2.8 million after tax, or $0.08 per diluted share.
- Operating cash flow decreased mainly because of lower earnings, an inventory increase and larger reductions in accounts payable and accrued liabilities. Accounts receivable collections provided a significant offset.
- Other comprehensive income was $2.7 million, including a $4.6 million foreign-currency translation gain and derivative-related losses.
Guidance, outlook, commentary and risks
Management described the global business climate as uncertain and said limited full-year 2012 net-sales growth compared with 2011 was possible. Unseasonably warm winter weather and challenging economic conditions in Europe reduced retailer confidence for Fall 2012 orders. Management expected full-year SG&A to increase at a rate comparable to anticipated sales growth after implementing cost-containment measures, including headcount reductions, reduced compensation and benefit increases, and lower discretionary spending.
The company remains committed to investments in product innovation, design, direct-to-consumer operations, marketing, information technology and supply-chain improvements. A worldwide ERP implementation was scheduled to begin with Canada in April 2012 and could affect business processes and internal controls as it progresses.
- Weather-driven demand variability, excess inventory, order cancellations and promotional selling remain significant risks.
- Consumer discretionary spending, economic weakness in Europe, retailer consolidation and customer financial health could affect sales and receivables.
- Input costs, freight capacity, labor costs, factory capacity and foreign-currency movements could pressure margins.
- The company relies on independent factories and certain key suppliers, creating production, quality, labor and supply-chain risks.
- Approximately 37% 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.
- Currency forward contracts were used to hedge exposures. Approximately $5.1 million of deferred net derivative gains were expected to be reclassified into income over the following twelve months, subject to exchange rates and underlying transactions.
- Routine litigation and regulatory matters were not expected by management to have a material adverse effect, although outcomes remain uncertain.
Most important facts for investors to verify
- Whether Fall 2012 wholesale orders and second-half demand support the company’s expectation of limited full-year sales growth.
- Whether excess winter inventory has been reduced without further margin erosion or brand damage.
- The recurring versus nonrecurring components of the $4.0 million restructuring charge and whether cost savings offset ongoing SG&A growth.
- Inventory aging, purchase commitments and potential markdown or impairment exposure.
- Progress, costs and control implications of the worldwide ERP implementation.
- Foreign-currency effects, hedge performance and the tax consequences of foreign-held cash.
- Cash flow conversion, capital expenditures, dividend sustainability and continued availability of unused credit facilities.