Columbia Sportswear Company — FY2011 Form 10-K Summary
Business context and reporting period
The filing reports fiscal-year results for the year ended December 31, 2011; it is not a quarterly filing, although fourth-quarter data is included in supplementary information. Columbia designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Products were sold in approximately 100 countries through wholesale, direct-to-consumer, distributor and licensing channels.
The business is seasonal and discretionary: approximately 65% of 2011 net sales and all profitability were generated in the second half of the year. Products are manufactured by independent factories outside the United States, with China and Vietnam representing approximately 73% of apparel production and 92% of footwear production.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $1,694.0 million | $1,483.5 million | Up 14% |
| Gross profit | $735.3 million | $629.4 million | Up 17% |
| Gross margin | 43.4% | 42.4% | Up 100 basis points |
| SG&A expense | $614.7 million | $534.1 million | Up 15% |
| Income from operations | $136.4 million | $103.3 million | Up 32% |
| Operating margin | 8.1% | 7.0% | Up 110 basis points |
| Net income | $103.5 million | $77.0 million | Up 34% |
| Diluted EPS | $3.03 | $2.26 | Up 34% |
| Cash dividends per share | $0.86 | $2.24 | 2010 included a $50.5 million special dividend |
Revenue increased across every geographic region, product category and major brand. Footwear grew 33% to $359.1 million, while apparel, accessories and equipment grew 10% to $1,334.9 million. Sorel sales increased 68% to $150.3 million, Mountain Hardwear increased 17% to $142.3 million, and Columbia increased 10% to $1,391.5 million.
Regional sales growth was 8% in the United States, 29% in Latin America and Asia Pacific, 24% in Europe, the Middle East and Africa, and 11% in Canada. Foreign currency translation contributed approximately three percentage points to consolidated sales growth.
Gross margin benefited primarily from lower airfreight costs, favorable currency hedge rates and a greater proportion of higher-margin direct-to-consumer sales. These benefits were partly offset by higher product costs, more close-out sales and a greater proportion of distributor shipments.
Net cash provided by operating activities was $63.8 million, compared with $23.5 million in 2010. Capital expenditures were $78.4 million, and net cash used in investing activities was $12.5 million, including $65.7 million of net short-term investment sales. Financing activities used $39.2 million, including $29.1 million of dividends and $20.0 million of share repurchases.
At December 31, 2011, cash and cash equivalents were $241.0 million, short-term investments were $2.9 million, and total assets were $1.383 billion. Accounts receivable were $351.5 million and inventory was $365.2 million. Total liabilities were $308.0 million. No balance was outstanding on the $125.0 million domestic revolving credit facility or the available international lines of credit.
Fourth-quarter 2011 net sales were $526.1 million, gross profit was $223.8 million, net income was $36.7 million and diluted EPS was $1.08. Fourth-quarter 2010 net sales were $457.3 million, gross profit was $190.9 million, net income was $26.2 million and diluted EPS was $0.77.
Material changes versus the prior comparable period
- Sales increased $210.5 million, or 14%, driven by growth across all regions, categories and major brands.
- Net income increased $26.4 million, or 34%, and diluted EPS rose from $2.26 to $3.03.
- Gross margin expanded from 42.4% to 43.4%, primarily because of lower airfreight costs.
- SG&A increased 15% and rose slightly as a percentage of sales, from 36.0% to 36.3%, reflecting direct-to-consumer expansion, advertising, staffing, ERP and other information-technology initiatives, and currency effects.
- Operating cash flow improved substantially from $23.5 million to $63.8 million, although year-end inventory increased 16% and accounts receivable increased 17%.
- Capital expenditures increased to $78.4 million from $28.8 million, primarily reflecting infrastructure and business investment.
- Cash dividends declined because 2010 included a $50.5 million special dividend; the regular quarterly dividend increased to $0.22 per share in 2011.
- Net licensing income increased 98% to $15.8 million, primarily from expanded LAAP apparel and footwear licensing.
Guidance, outlook, risks and unusual items
Management did not provide a specific numerical 2012 earnings or sales forecast in the filing. It expected 2012 SG&A to increase and was implementing cost-containment measures intended to limit SG&A growth to a rate comparable to anticipated sales growth. Management expected unusually warm winter weather in 2011 and 2012 to reduce retailer confidence in Fall 2012 orders.
Key outlook variables include weather, consumer spending, order cancellations and reorders, full-price versus close-out sales mix, volatile input and transportation costs, currency movements, direct-to-consumer productivity, fixed-cost growth and the multi-year ERP and supply-chain investment program.
Material commitments included $351.9 million of inventory purchase obligations, $250.7 million of future operating lease payments and $2.0 million of outstanding inventory-related letters of credit. The company also reported approximately $15.4 million of net unrecognized tax benefits and approximately $50.1 million of potential U.S. tax on undistributed foreign earnings that were considered indefinitely reinvested.
Principal risks include dependence on discretionary consumer spending and favorable weather; inventory forecasting and seasonal order cancellations; independent factories and supplier concentration; raw-material, labor, freight and tariff inflation; foreign exchange volatility; international operations; retailer financial health and consolidation; competition; product liability and recalls; intellectual-property matters; information-technology and ERP implementation risk; and distribution-center disruptions.
The company reported no unresolved SEC staff comments and stated that ordinary-course litigation was not expected to have a material adverse effect. Management and Deloitte & Touche LLP concluded that internal control over financial reporting was effective, and the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Whether 2012 sales and margin growth can offset higher SG&A, ERP costs, input costs and transportation expenses.
- Inventory levels, purchase commitments and the risk of close-out sales following warm-weather conditions or retailer order cancellations.
- The sustainability of direct-to-consumer growth and its contribution to gross margin and fixed costs.
- Exposure to China and Vietnam manufacturing concentration, supplier dependencies, tariffs and freight capacity.
- Operating cash-flow conversion, capital-expenditure requirements and the effect of working-capital growth.
- Foreign earnings reinvestment, potential tax liabilities and the timing of uncertain tax-position settlements.
- Currency-hedging effectiveness and sensitivity to exchange-rate changes.
- The remaining authorization and future activity under the $500 million share-repurchase program, under which approximately $58.8 million remained available at December 31, 2011.