Columbia Sportswear Company: 2011 Q3 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Columbia designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Results are highly seasonal, with sales and profitability weighted toward the second half of the year.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $566.8 million | $504.0 million | $1,167.9 million | $1,026.3 million |
| Gross profit | $249.6 million | $214.3 million | $511.5 million | $438.5 million |
| Gross margin | 44.0% | 42.5% | 43.8% | 42.7% |
| Income from operations | $86.6 million | $68.5 million | $85.9 million | $66.3 million |
| Operating margin | 15.3% | 13.6% | 7.4% | 6.5% |
| Net income | $67.5 million | $52.2 million | $66.8 million | $50.8 million |
| Diluted EPS | $1.98 | $1.53 | $1.95 | $1.49 |
Q3 sales increased 12%, operating income increased 26%, and net income increased 29%. Nine-month sales increased 14%, while net income increased 31%. The effective tax rate declined to 22.4% from 24.0% in Q3 and to 23.4% from 24.6% for the nine-month period, primarily because a greater proportion of earnings came from lower-tax foreign jurisdictions.
- Q3 sales growth was led by Sorel, up 116%, and Mountain Hardwear, up 17%; Columbia increased 4%.
- Q3 footwear sales increased 55% to $128.6 million, primarily due to Sorel. Outerwear declined 1%.
- Q3 regional growth was strongest in EMEA, up 51%, followed by LAAP, up 23%, Canada, up 13%, and the United States, up 2%.
- SG&A increased 13% in Q3 and 16% for the first nine months, driven by global direct-to-consumer expansion, information technology and ERP initiatives, foreign currency translation and additional staffing.
- Net licensing income increased to $4.4 million in Q3 and $10.4 million for nine months, primarily from higher LAAP apparel and footwear licensing income.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $87.9 million at September 30, 2011, compared with $234.3 million at December 31, 2010 and $173.9 million at September 30, 2010. Short-term investments were $2.4 million, down from $68.8 million at year-end 2010.
- Net cash used in operating activities was $142.0 million for the first nine months, compared with $108.1 million in 2010. Working-capital investment included $122.0 million in receivables and $123.0 million in inventories.
- Net cash provided by investing activities was $26.3 million, including $66.3 million of net proceeds from short-term investment sales, partially offset by $41.4 million of capital expenditures.
- Net cash used in financing activities was $28.9 million, including $21.7 million of dividends and $19.3 million of share repurchases, partially offset by stock-plan proceeds.
- No balance was outstanding under the $125.0 million unsecured committed domestic revolving credit facility or the approximately $90.4 million of international operating lines at September 30, 2011. Interest expense was nominal.
- Approximately 35% of cash and short-term investments were held outside the United States and could incur significant tax costs if repatriated.
- Inventory was $432.1 million, up from $358.2 million at September 30, 2010. Open inventory purchase obligations were $328.9 million.
Material changes, outlook and risks
Management reported a 7% increase in spring wholesale backlog to $420.7 million at September 30, 2011. The backlog increased across major brands, most product categories and three of four regions, but excludes direct-to-consumer sales and remains subject to cancellations, supply constraints, currency changes and economic conditions.
The filing does not provide a specific full-year earnings or revenue guidance figure. Management described the 2011 outlook as uncertain because of weather, consumer demand, product mix, volatile input and transportation costs, higher fixed costs, direct-to-consumer expansion, lower relative U.S. department-store volume and currency movements. Management expected SG&A to increase in 2011 and anticipated continued investment in its global ERP and information-technology infrastructure.
- Gross margin benefited from lower airfreight costs, favorable hedge rates and a greater mix of direct-to-consumer sales, but faced pressure from increased product costs and close-out sales.
- The business is increasingly dependent on fourth-quarter winter footwear and direct-to-consumer sales, increasing exposure to weather, cancellations and consumer spending.
- Key risks include discretionary demand, weather, excess inventory, retailer financial health and cancellations, independent-factory capacity and quality, raw-material and freight inflation, foreign exchange, international operations, competition, intellectual property, product liability and ERP implementation.
- Currency derivatives had gross notional amounts of $156.0 million designated as cash-flow hedges and $63.2 million not designated as hedges at September 30, 2011. Approximately $2.3 million of deferred net derivative gains were expected to be reclassified into income over the following twelve months.
- Routine litigation and regulatory matters were not expected by management to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $420.7 million spring wholesale backlog converts to revenue without significant cancellations, delays or markdowns.
- Whether footwear-led growth, particularly Sorel, remains sustainable and offsets relatively weak U.S. wholesale and outerwear performance.
- Whether elevated inventory, receivables and purchase commitments generate sufficient seasonal cash flow in the fourth quarter.
- The effect of declining cash and short-term investments, foreign cash repatriation taxes and ongoing capital allocation through dividends and repurchases.
- Whether ERP and other infrastructure investments increase fixed costs or create implementation disruptions.
- The sensitivity of gross margins to product-cost inflation, freight costs, close-out sales and foreign currency movements.