Columbia Sportswear Company: Q2 2011 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. Products are sold through wholesale, distributor, direct-to-consumer and licensing channels.
This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. The business is highly seasonal, with approximately 65% of 2010 sales and all profitability generated in the second half of the year.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $268.0 million | $221.8 million | $601.1 million | $522.2 million |
| Gross profit | $112.4 million | $96.9 million | $261.9 million | $224.2 million |
| Gross margin | 41.9% | 43.7% | 43.6% | 42.9% |
| SG&A expense | $134.5 million | $113.5 million | $268.7 million | $229.0 million |
| Operating income (loss) | $(18.6) million | $(14.7) million | $(0.7) million | $(2.2) million |
| Net income (loss) | $(13.6) million | $(10.6) million | $(0.8) million | $(1.4) million |
| Diluted EPS | $(0.40) | $(0.31) | $(0.02) | $(0.04) |
| Operating cash flow | Not separately provided | Not separately provided | $12.0 million | $16.5 million |
Second-quarter sales increased 21%, including an approximately three-percentage-point foreign-exchange benefit. Six-month sales increased 15%, including an approximately two-percentage-point foreign-exchange benefit. The second quarter remained loss-making because seasonal sales are concentrated in the third and fourth quarters.
At June 30, 2011, cash and cash equivalents were $207.4 million, short-term investments were $90.8 million and total assets were $1.31 billion. Inventories were $422.0 million, up from $310.5 million at June 30, 2010. Total liabilities were $296.9 million and shareholders’ equity was $1.02 billion.
No borrowings were outstanding under the company’s unsecured $125.0 million domestic revolving credit facility or its approximately $86.9 million of international operating lines. The company also had $25.0 million of uncommitted import-letter-of-credit capacity with no balance outstanding.
Material changes versus the prior comparable period
- Second-quarter sales grew across all major brands, geographic regions and product categories. Brand growth included Columbia of 20%, Mountain Hardwear of 24% and Sorel of 106%.
- Second-quarter regional growth was strongest in Latin America and Asia Pacific, up 48%, followed by EMEA, up 39%, Canada, up 14%, and the United States, up 4%.
- Six-month regional sales increased 33% in LAAP, 18% in Canada, 15% in EMEA and 8% in the United States.
- Second-quarter gross margin declined 180 basis points to 41.9%, primarily because of a greater mix of lower-margin distributor shipments and close-out sales. Higher direct-to-consumer sales, lower airfreight costs and favorable currency hedges partly offset the decline.
- Six-month gross margin improved 70 basis points to 43.6%, reflecting lower airfreight costs, fewer close-out sales and increased higher-margin direct-to-consumer sales.
- Second-quarter SG&A rose 19%, driven by foreign-currency translation, global direct-to-consumer expansion, ERP and other information-technology initiatives, and additional personnel. Six-month SG&A rose 17%.
- Net cash from operations declined to $12.0 million from $16.5 million, primarily because of higher inventory and lower working-capital liabilities, partly offset by stronger receivables collections.
- Capital expenditures increased to $22.6 million from $14.4 million. The company paid $14.2 million of dividends in the first six months and made no share repurchases, compared with $3.8 million of repurchases in the 2010 period.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. It described the 2011 business outlook as uncertain and identified weather, consumer demand, order cancellations and reorders, product mix, factory and transportation capacity, volatile input costs, higher fixed costs, expedited transportation, direct-to-consumer growth and foreign-exchange rates as key variables.
Management expects SG&A expense to increase in 2011 as the company expands direct-to-consumer operations, marketing and infrastructure. A multi-year ERP implementation and broader information-technology investments are expected to accelerate, creating execution, cost and potential business-interruption risks.
Inventory purchase obligations for open production orders totaled $394.3 million at June 30, 2011. The company relies on independent factories and faces risks from sourcing capacity, raw-material inflation, freight costs, weather, discretionary consumer spending, retailer financial health, currency movements, competition, product quality, legal and regulatory matters, and information-system implementation.
The company reported $6.1 million of deferred net derivative losses in accumulated other comprehensive income expected to be reclassified to earnings over the following twelve months as underlying hedged transactions occur. Foreign-currency translation increased accumulated other comprehensive income to $63.0 million from $36.7 million at June 30, 2010.
Legal proceedings arise in the ordinary course of business; management does not believe their resolution will materially affect financial position, results of operations or cash flows. The filing states that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the significant increase in inventory and the $394.3 million of purchase commitments are supported by firm fall-season demand and can be sold without additional markdowns.
- Whether international distributor shipments pulled forward from the third quarter, foreign-exchange benefits and seasonal timing affect the sustainability of reported sales growth.
- Whether gross-margin pressure from distributor and close-out sales persists despite direct-to-consumer expansion.
- The cost, timetable, controls impact and execution progress of the ERP and other information-technology initiatives.
- Whether operating cash flow is sufficient to fund capital expenditures, dividends and seasonal working-capital requirements without increased borrowing.
- The effect of weather, consumer spending, retailer cancellations, input-cost inflation, freight capacity and currency movements on second-half results.
- The filing’s six-month MD&A statement that the company “recognized net income” conflicts with the financial statements, which report a $0.8 million net loss; investors should verify the intended disclosure.