Business Context and Reporting Period
Columbia Sportswear Company designs, markets and distributes outdoor and active lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands. This unaudited Form 10-Q covers the three months ended March 31, 2020. Results are seasonal, with sales and operating income weighted toward the second half of the year.
First-quarter results were materially affected by the COVID-19 pandemic, including store closures, lower retail traffic and consumer demand, wholesale order cancellations, supply-chain disruptions and increased credit and inventory risk.
Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $568.2 million | $654.6 million | Down 13% |
| Gross profit | $271.7 million | $336.7 million | Down $65.0 million |
| Gross margin | 47.8% | 51.4% | Down 360 basis points |
| SG&A expense | $276.8 million | $251.8 million | Up 10% |
| Income from operations | $(2.0) million | $88.0 million | Declined $89.9 million |
| Operating margin | (0.3)% | 13.4% | Down 1,370 basis points |
| Net income | $0.2 million | $74.2 million | Down $74.0 million |
| Diluted EPS | $0.00 | $1.07 | Down $1.07 |
| Operating cash flow | $12.8 million | $58.6 million | Down $45.9 million |
| Capital expenditures | $9.5 million | $25.2 million | Down $15.7 million |
Sales declined across all regions: U.S. sales fell 9% to $375.9 million; LAAP declined 23% to $102.7 million; EMEA declined 22% to $55.8 million; and Canada declined 11% to $33.9 million. Wholesale sales declined 10% and direct-to-consumer sales declined 17%.
At March 31, 2020, cash and cash equivalents were $671.1 million, short-term investments were $35.8 million, accounts receivable were $313.0 million and inventory was $577.1 million. Current liabilities were $610.4 million, including $174.4 million of short-term borrowings. Shareholders' equity was $1.70 billion.
Material Changes Versus the Prior Comparable Period
- Net sales fell $86.4 million, primarily because of COVID-19-related demand reductions and, to a lesser extent, warmer weather.
- Gross margin contracted because of higher inventory obsolescence provisions and increased promotional activity in the direct-to-consumer channel.
- SG&A increased $25.1 million, driven by higher bad debt expense, personnel costs and information technology spending, partly offset by lower incentive compensation and demand-creation spending.
- The accounts receivable allowance increased to $27.6 million at March 31, 2020 from $8.4 million at March 31, 2019, reflecting heightened customer credit risk.
- Cash flow from operations declined to $12.8 million. Financing cash flow was positive because of credit-facility borrowings, despite $132.9 million of share repurchases and $17.2 million of dividends paid during the quarter.
- The company repurchased 1.56 million shares for $132.9 million before suspending repurchases in mid-March. The quarterly dividend was also suspended.
- Inventory purchase obligations increased to $505 million from $337 million at December 31, 2019, although planned fall 2020 purchases were subsequently curtailed.
Guidance, Outlook, Risks and Unusual Items
- Management expects a significant decline in second-quarter 2020 net sales and an operating loss, with the second quarter historically being the company's lowest-sales period.
- The company withdrew its ability to estimate full-year 2020 results with reasonable accuracy because of pandemic-related uncertainty.
- Management expects further impacts from lower global sales, delayed production and fulfillment, order cancellations, promotional pressure, bad-debt provisions, severance or restructuring costs and other pandemic-related expenses.
- On April 15, 2020, the company amended and restated its credit agreement, providing a $125 million revolving A loan, a $400 million revolving B loan and an uncommitted $100 million incremental facility. It borrowed $200 million under the B loan, but those borrowings were subsequently repaid; at filing, no balance was outstanding under the restated agreement.
- The restated facility is secured by substantially all assets of the company and Columbia Brands USA, LLC, subject to exclusions, and contains funded-debt, interest-coverage and asset-coverage covenants. Management stated it was currently compliant but could not assure future compliance.
- Management reported $631 million of total committed and uncommitted borrowing capacity, including $525 million committed, after the credit amendments.
- No significant retail-location impairments were identified. The prAna trademark and goodwill also passed first-quarter impairment testing, but the excess of estimated fair value over carrying value declined; additional deterioration could result in an impairment charge.
- The effective tax rate increased to 86.4% from 19.2%, reflecting jurisdictional earnings mix, deferred-tax valuation allowance changes and tax-rate arbitrage. A $1.5 million valuation allowance adjustment was recorded.
- Legal proceedings are described as arising in the ordinary course, and management does not expect them to have a material adverse effect.
Important Facts for Investors to Verify
- Whether store reopenings and consumer traffic recover sufficiently to support second-half sales and reduce promotional activity.
- The magnitude of wholesale order cancellations, customer credit losses and inventory markdowns or obsolescence.
- Compliance with the amended credit agreement's financial covenants as pandemic-related earnings pressure continues.
- The timing and terms for any reinstatement of quarterly dividends or share repurchases.
- Whether supply-chain disruptions delay fall 2020 orders or create additional freight, production or fulfillment costs.
- Potential impairment of prAna goodwill or trademark, retail lease assets, or other long-lived assets if projected performance deteriorates.
- The filing does not provide a clear full-year 2020 earnings or revenue forecast.