Columbia Sportswear Company — Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets, and distributes outdoor and active-lifestyle apparel, footwear, accessories, and equipment under the Columbia, SOREL, prAna, and Mountain Hardwear brands. Products are sold through wholesale, direct-to-consumer, e-commerce, company-operated stores, and independent international distributors. The filing covers the three and nine months ended September 30, 2017, with comparable periods in 2016. Results are seasonal, with sales and profitability weighted toward the third and fourth quarters.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $747.4 million | $745.7 million | $1,690.1 million | $1,659.6 million |
| Gross profit | $349.2 million | $345.7 million | $788.5 million | $772.7 million |
| Gross margin | 46.7% | 46.4% | 46.7% | 46.6% |
| Income from operations | $122.9 million | $123.6 million | $153.6 million | $156.1 million |
| Operating margin | 16.4% | 16.6% | 9.1% | 9.4% |
| Net income attributable to Columbia | $87.7 million | $83.6 million | $112.2 million | $107.2 million |
| Diluted EPS | $1.25 | $1.18 | $1.59 | $1.52 |
Q3 SG&A increased 3% to $230.4 million, or 30.8% of sales, from 30.1%. Nine-month SG&A increased 3% to $643.9 million, or 38.1% of sales, from 37.5%. The effective tax rate declined to 26.4% in Q3 from 29.7% and to 24.2% for nine months from 27.7%, primarily because a greater proportion of taxable income was generated internationally.
- Q3 regional sales: United States $456.0 million, down 6%; LAAP $123.0 million, up 9%; EMEA $87.5 million, up 20%; and Canada $80.9 million, up 8%.
- Q3 brand sales: Columbia $598.3 million, up 2%; SOREL $81.7 million, down 7%; prAna $36.8 million, down 3%; and Mountain Hardwear $29.4 million, down 4%.
- At September 30, 2017, cash and cash equivalents were $411.8 million and short-term investments were $18.5 million. Approximately 68% of cash and short-term investments were held by foreign subsidiaries and intended to remain invested outside the United States.
- Total liabilities were $442.4 million, including no short-term borrowings and no outstanding balance under the domestic revolving credit line or international subsidiary credit lines. Available domestic commitments averaged $100 million, and international lines had approximately $90.1 million of combined capacity.
- Nine-month operating cash flow was negative $12.4 million versus negative $85.2 million in 2016. Investing cash flow was negative $59.4 million, including $41.8 million of capital expenditures. Financing cash flow was negative $74.9 million, including $37.6 million of dividends, $35.5 million of share repurchases, and $14.2 million repayment of a related-party note.
- Inventory was $558.6 million and accounts receivable were $466.9 million at September 30, 2017. Open inventory purchase obligations totaled $300.4 million.
Material changes versus the prior comparable period
- Q3 sales were essentially flat, while nine-month sales increased 2%. International growth offset weaker U.S. wholesale sales, partly reflecting shipment timing and customer bankruptcies, liquidations, and store closures.
- Gross margin improved modestly due to favorable sourcing and foreign-currency hedge rates, partly offset by a less favorable sales-channel mix and, for the nine-month period, increased U.S. promotional activity to liquidate aged inventory.
- Q3 operating income declined slightly despite higher gross profit because SG&A increased. Nine-month operating income declined 2.0% as SG&A growth exceeded gross-profit growth.
- Net income attributable to Columbia increased 5% in both Q3 and the first nine months, aided by lower effective tax rates and higher interest income. Q3 results included approximately $2.1 million after-tax, or $0.03 per diluted share, of Project CONNECT costs; nine-month results included approximately $5.4 million after-tax, or $0.08 per diluted share.
- The company repaid the $14.2 million related-party note in June 2017, leaving no balance at September 30, 2017.
- The company repurchased 665,095 shares for $35.5 million during the first nine months, compared with no repurchases in the comparable 2016 period. No shares were repurchased during Q3 2017.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific numerical full-year sales or earnings forecast in the filing. Management expects 2017 profitability to remain heavily concentrated in the second half of the year and believes existing cash, operating cash flow, and credit facilities will cover liquidity needs for at least the next 12 months.
- Project CONNECT is intended to streamline processes, improve sales growth, enhance gross margin, and increase SG&A efficiency over the next two to three years. Management expects to reallocate resources toward demand creation and other growth investments.
- The company began designing a global retail platform in Q2 2017, with regional implementations planned to begin in the first half of 2019. ERP implementation continued, including China in Q2 2017 and planned European implementation in mid-2018.
- Key uncertainties include weather-driven demand, wholesale order cancellations and timing, retailer financial distress, promotional activity, consumer spending, foreign-currency movements, sourcing and transportation costs, and performance in Korea, prAna, and Mountain Hardwear.
- Management identified risks from contract manufacturers, raw-material and production capacity constraints, inventory forecasting, supply-chain disruptions, cybersecurity, information-system implementations, competition, intellectual-property matters, tax changes, and international political and economic conditions.
- The company reported a February 2017 cybersecurity incident involving the prAna.com e-commerce website and notified potentially affected customers.
- Currency hedges had gross notional amounts of $390.5 million for designated cash-flow hedges and $181.0 million for non-designated contracts at September 30, 2017. Approximately $8.7 million of deferred net derivative losses were expected to be reclassified into income over the following 12 months.
- Adoption of the new revenue standard on January 1, 2018 was expected to have no material impact on net sales, but would change the presentation of certain concession fees, customer refund provisions, and returned-inventory costs. Lease accounting adoption is expected to materially increase reported assets and liabilities.
- Management stated that pending litigation and other legal matters were not expected to have a material adverse effect on consolidated financial statements.
Important facts for investors to verify
- Whether the shipment timing shift and weaker U.S. wholesale environment normalize in Q4, and whether international growth and direct-to-consumer expansion offset wholesale pressure.
- Fourth-quarter weather, consumer demand, promotions, cancellations, returns, and inventory liquidation, given the company’s strong seasonal dependence.
- The effect of Project CONNECT, ERP, and global retail platform investments on future SG&A, operating margins, cash flow, and execution risk.
- Cash availability by jurisdiction, including the tax cost and practical limitations of repatriating foreign-held cash.
- Accounts receivable, inventory levels, the $300.4 million of purchase obligations, and exposure to financially distressed wholesale customers.
- Future foreign-currency movements, hedge performance, sourcing costs, transportation costs, and potential tariff or trade-policy changes.
- Progress and potential balance-sheet effects from upcoming revenue, income-tax, lease, and derivatives accounting standards.