Columbia Sportswear Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; filed November 3, 2016. Results are unaudited and seasonally weighted toward the third and fourth quarters. The company designs, sources, markets and distributes outdoor and active-lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, Mountain Hardwear and prAna brands.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $745.7 million | $767.6 million | $1,659.6 million | $1,626.8 million |
| Gross profit | $345.7 million | $356.5 million | $772.7 million | $756.6 million |
| Gross margin | 46.4% | 46.4% | 46.6% | 46.5% |
| Income from operations | $123.6 million | $132.3 million | $156.1 million | $167.4 million |
| Operating margin | 16.6% | 17.2% | 9.4% | 10.3% |
| Net income attributable to Columbia | $83.6 million | $91.1 million | $107.2 million | $111.0 million |
| Diluted EPS | $1.18 | $1.28 | $1.52 | $1.56 |
- Cash flow: Nine-month operating cash flow was negative $85.2 million versus negative $210.9 million in the prior-year period. Investing cash flow was negative $35.5 million, including $35.6 million of capital expenditures. Financing cash flow was negative $31.6 million, including $35.5 million of dividends and $1.9 million of net credit-facility repayments.
- Liquidity: Cash and cash equivalents were $219.2 million at September 30, 2016, compared with $369.8 million at December 31, 2015. Short-term investments were $0.5 million. Approximately 82% of cash and short-term investments were held by foreign subsidiaries and intended to remain indefinitely reinvested outside the United States.
- Debt and credit: The company had no borrowings under its $125.0 million unsecured committed domestic revolving facility and less than $0.1 million outstanding under international subsidiary lines. It also had a $14.6 million related-party note payable, bearing 7% interest and maturing December 31, 2018.
- Working capital: Accounts receivable were $486.2 million and inventories were $588.0 million at quarter-end. Inventory purchase obligations totaled $282.1 million.
- Dividends and repurchases: The quarterly dividend was $0.17 per share; nine-month dividends paid totaled $35.5 million. Only 200 shares were repurchased during the nine months, leaving approximately $173.5 million available under the repurchase authorization.
Material changes versus the prior comparable period
- Q3 sales declined 3%, or $21.9 million, to $745.7 million; constant-currency sales also declined 3%. The decrease was primarily in the United States, where sales fell 6%, partly because fall wholesale shipments shifted into Q4 and some wholesale customers entered bankruptcy proceedings.
- Nine-month sales increased 2% on a reported basis and 3% in constant currency. U.S. sales increased 4%, while LAAP sales declined 6% and EMEA sales increased 5%.
- Q3 net income attributable to Columbia declined 8% and diluted EPS declined from $1.28 to $1.18. Nine-month net income declined 3% and diluted EPS declined from $1.56 to $1.52.
- Gross margin was stable in Q3 and increased modestly for the nine-month period, supported by direct-to-consumer mix, selective price increases and sourcing conditions, partly offset by unfavorable currency hedge rates.
- SG&A declined 1% in Q3 but increased 5% for the nine-month period. Nine-month SG&A rose to 37.5% of sales from 36.6%, reflecting direct-to-consumer expansion, personnel, information technology and strategic investments.
- Brand performance was mixed: Q3 Columbia sales declined 4% and Mountain Hardwear declined 12%, while SOREL increased 2% and prAna increased 11%. For the nine months, Columbia increased 2%, SOREL 5% and prAna 14%, while Mountain Hardwear declined 10%.
- The company recorded $3.3 million of long-lived-asset impairment charges during the nine months for certain underperforming U.S. retail stores.
- The company early-adopted ASU 2016-09, which increased nine-month income tax benefits by $4.9 million and increased reported operating cash flow by approximately $5.0 million through classification changes.
Outlook, commentary and risks
Management did not provide a specific numerical full-year sales or earnings forecast in the filing. It expected 2016 profitability to remain heavily concentrated in the second half of the year and stated that the uncertain global business climate made future results difficult to predict. The company continued investments in global direct-to-consumer operations, its ERP implementation and supply-chain and information-technology platforms.
- Key near-term variables include shipment timing, weather, consumer demand, wholesale order cancellations, retailer financial health and the mix of full-price versus promotional sales.
- Management identified financial stress, restructuring and bankruptcy among certain U.S. wholesale customers as a continuing risk. It also cited weak or uncertain conditions in Russia, Korea and other international markets.
- Foreign-currency movements affect translated sales, inventory costs, gross margins and non-operating results. Currency forwards and options were used as hedges; approximately $3.1 million of deferred hedge losses were expected to be reclassified into income over the following twelve months.
- ERP and related systems implementations create risks of business interruption, data issues, higher costs and changes to internal controls. Disclosure controls were deemed effective, although the company continued monitoring controls during the phased implementation.
- Other material risks include seasonal weather dependence, inventory forecasting and excess inventory, contract-manufacturer and supply-chain disruptions, product quality and warranty claims, cybersecurity, intellectual-property disputes, retail-store returns, international regulation and tax exposures.
Important facts for investors to verify
- Whether the Q3 wholesale shipment timing shift was recovered in Q4 and whether customer bankruptcies caused additional cancellations or credit losses.
- Inventory growth, sell-through, markdown exposure and the company’s ability to manage the $282.1 million of inventory purchase obligations.
- Progress and costs of the global ERP implementation and any resulting operational or control disruptions.
- Performance of Mountain Hardwear, Korea, Russia and the LAAP region, as well as the sustainability of growth in prAna, SOREL and direct-to-consumer channels.
- Availability and geographic location of cash, including the tax cost and practical constraints of repatriating foreign-held funds.
- Future effects of currency movements, hedge settlements, weather patterns and wholesale-customer financial conditions on margins and cash flow.