COLUMBIA SPORTSWEAR CO quarterly report, Q2 FY2022

Columbia Sportswear Company — Q2 2022 Form 10-Q Summary

Business context and reporting period

Columbia Sportswear designs, develops, markets, and distributes outdoor, active, and lifestyle apparel, footwear, accessories, and equipment under the Columbia, SOREL, prAna, and Mountain Hardwear brands. Products are sold in approximately 90 countries through wholesale and direct-to-consumer channels across the U.S., Latin America and Asia Pacific, EMEA, and Canada. This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Results are seasonal, with sales and operating income weighted toward the second half of the year.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net sales	$578.1 million	$566.4 million	$1,339.6 million	$1,192.0 million
Gross profit	$284.2 million	$292.5 million	$662.6 million	$613.9 million
Gross margin	49.2%	51.6%	49.5%	51.5%
Operating income	$8.8 million	$35.0 million	$92.4 million	$105.5 million
Net income	$7.2 million	$40.7 million	$74.0 million	$96.6 million
Diluted EPS	$0.11	$0.61	$1.16	$1.44

• Reported sales increased 2% in Q2 and 12% for the six-month period. On a constant-currency basis, sales increased 4% and 14%, respectively.
• Q2 gross margin declined 240 basis points, primarily from elevated inbound freight costs. Six-month gross margin declined 200 basis points, with inbound freight costs reducing margin by approximately 270 basis points.
• Q2 SG&A increased 7% to $281.3 million and rose to 48.7% of sales from 46.2%. Six-month SG&A increased 12% to $580.3 million but remained 43.3% of sales.
• Six-month income tax expense was $17.9 million versus $9.2 million in 2021; the effective tax rate was 19.5% versus 8.7%. Both periods included discrete tax benefits.
• Q2 DTC sales increased 5% and wholesale sales declined 1% on a reported basis. For the first six months, DTC sales increased 14% and wholesale sales increased 11%.
• Q2 regional sales grew 9% in the U.S. and 69% in Canada, while declining 7% in LAAP and 35% in EMEA. Constant-currency changes were 9%, 74%, 2%, and negative 30%, respectively.

Cash flow, liquidity, debt, and balance sheet

• Cash flow from operations was negative $112.7 million for the first six months, compared with $117.2 million of operating cash flow in 2021. The change primarily reflected a $332.2 million increase in inventory and related working-capital investment.
• Investing activities provided $101.9 million, primarily from net sales and maturities of short-term investments, partially offset by $29.0 million of capital expenditures.
• Financing activities used $325.3 million, including $287.4 million of share repurchases and $37.9 million of dividends.
• Cash and cash equivalents were $413.1 million at June 30, 2022, compared with $763.4 million at December 31, 2021 and $819.8 million at June 30, 2021. Short-term investments were $1.1 million.
• Inventory increased to $962.9 million from $645.4 million at December 31, 2021 and $676.0 million at June 30, 2021. Inventory purchase obligations were $654.4 million.
• The company reported no outstanding balance under its credit facilities at June 30, 2022. Including cash, short-term investments, and committed credit lines, management reported more than $915 million of liquidity.
• In July 2022, the company replaced its $500 million unsecured revolving facility with a new $500 million facility maturing July 12, 2027. Management expected to use borrowings in the third quarter to fund seasonal needs before fourth-quarter collections and DTC sales.
• Planned 2022 capital expenditures were approximately $80 million to $100 million, primarily for digital, supply chain, DTC, and new-store investments.

Material changes versus the prior comparable period

• Sales growth did not translate into profit growth: six-month sales rose 12%, while operating income declined 12% and net income declined 23%.
• Profitability was pressured by freight, product input, wage, and other inflationary costs, as well as strategic investments and higher personnel and technology expenses.
• The company repurchased $286.9 million of stock in the first six months versus $54.5 million in the prior-year period. The board authorized an additional $500 million, leaving $529.4 million available at June 30.
• Shares outstanding declined to 62.1 million from 66.1 million at June 30, 2021, supporting EPS relative to the decline in net income, although diluted EPS still decreased to $1.16 from $1.44 for the six-month period.
• EMEA performance deteriorated materially in Q2, moving from $11.5 million of operating income to a $1.0 million operating loss, principally because shipments to the Russia-based distributor were curtailed.
• China operations were affected by COVID-19-related restrictions, including store closures and an inability to fulfill certain e-commerce, wholesale, and DTC orders.

Guidance, outlook, commentary, and risks

The filing does not provide a clear quantified full-year revenue or earnings guidance figure. Management expects continued pressure from inflation, inbound freight, raw materials, wages, labor shortages, foreign currency translation, and elevated supply-chain costs. Product price increases were implemented for Spring 2022 and more extensively for Fall 2022, but management does not expect them to fully offset gross-margin pressure.

• Retailers began rationalizing inventory as consumer demand softened, resulting in increased Spring 2022 order cancellations. Management planned to reduce future inventory purchases and use outlet stores to sell a significant portion of excess inventory.
• Elevated inventory and uneven receipts were creating capacity pressure in U.S. distribution centers, with expected additional labor, storage, and processing costs.
• Management expected ocean freight costs to moderate later in 2022 but remain above historical norms until capacity imbalances improve.
• The strengthening U.S. dollar was expected to reduce 2022 reported sales growth and profitability through translation effects.
• Potential continuing risks include recessionary consumer spending, unfavorable promotional and wholesale trade terms, excess inventory and markdowns, supply-chain and logistics disruptions, COVID-19 restrictions, geopolitical developments, currency volatility, labor shortages, cybersecurity incidents, and changes in tax or trade regulations.
• The company had $17.4 million of deferred net derivative gains expected to be reclassified into income during the following twelve months, subject to underlying hedged transactions and exchange rates.
• Management stated that ordinary-course litigation was not expected to have a material adverse effect on financial position, results of operations, or cash flows.

Important facts for investors to verify

• Whether elevated inventory converts to sales without significant markdowns, cancellations, storage costs, or inventory write-downs.
• Progression of gross margin as freight, raw-material, wage, and promotional pressures develop.
• Seasonal third- and fourth-quarter operating cash flow and the potential need for revolver borrowings.
• Updated full-year revenue, earnings, margin, and capital-expenditure expectations, which are not clearly quantified in this filing.
• Regional recovery, particularly in EMEA and China, and the effect of continued restrictions or geopolitical developments.
• The sustainability of aggressive share repurchases and dividends relative to operating cash flow and inventory requirements.
• Compliance with the new revolving-credit facility’s funded-debt-ratio covenant and any restrictions on future dividends or buybacks.