Columbia Sportswear Company — 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2020. Columbia designs, markets and distributes outdoor, active and lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands through wholesale and direct-to-consumer channels across the U.S., LAAP, EMEA and Canada. Results are highly seasonal, with sales and operating income weighted toward the second half of the year.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $701.1 million | $906.8 million | $1,585.9 million | $2,087.6 million |
| Gross profit | $342.9 million | $446.7 million | $760.9 million | $1,037.0 million |
| Gross margin | 48.9% | 49.3% | 48.0% | 49.7% |
| Income from operations | $85.6 million | $152.0 million | $13.4 million | $256.3 million |
| Operating margin | 12.2% | 16.8% | 0.8% | 12.3% |
| Net income | $62.8 million | $119.3 million | $12.3 million | $216.5 million |
| Diluted EPS | $0.94 | $1.75 | $0.18 | $3.15 |
Q3 sales declined 23% year over year, while nine-month sales declined 24%. Wholesale sales declined 28% in Q3 and 27% for the nine months; direct-to-consumer sales declined 10% and 19%, respectively. Global DTC e-commerce sales grew 55% year over year in Q3 and represented 12% of global sales.
Q3 gross margin contracted modestly due primarily to elevated promotional activity and freight costs. Nine-month gross margin declined due to higher closeout sales, promotional activity and lower wholesale and DTC product margins, partly offset by a greater mix of higher-margin e-commerce sales.
SG&A declined 13% in Q3 and 4.6% for the nine months, but increased substantially as a percentage of sales to 37.3% for Q3 and 47.6% for the nine months. Cost reductions, lower demand creation spending, lower retail personnel costs and lower incentive compensation were partly offset by $24.7 million of increased bad-debt expense and $21.7 million of additional COVID-19-related expenses for the nine months.
Net cash used in operating activities was $198.0 million for the nine months, essentially unchanged from $198.2 million in the prior-year period. Cash used in investing activities was $23.6 million, compared with $159.7 million of cash provided in the prior year, reflecting lower short-term investment sales and reduced capital expenditures of $25.2 million versus $104.5 million. Financing cash use was $152.3 million, including $132.9 million of share repurchases and $17.2 million of dividends.
Cash and cash equivalents were $313.4 million at September 30, 2020, down from $686.0 million at December 31, 2019 but above $239.3 million at September 30, 2019. Inventories were $771.7 million, up from $717.4 million a year earlier. Accounts receivable were $479.4 million, with an allowance of $29.8 million compared with $9.7 million at September 30, 2019. Total liabilities were $929.5 million and shareholders’ equity was $1.72 billion.
The company had no borrowings outstanding under its domestic or international credit facilities at September 30, 2020. It reported approximately $530.2 million of committed borrowing availability and nearly $1 billion of total liquidity when cash, short-term investments and available committed and uncommitted facilities are included. The company was in compliance with its credit covenants.
Material Changes Versus the Prior Comparable Period
- COVID-19-related store closures, reduced traffic, wholesale order cancellations and lower consumer demand drove broad declines across regions, brands, categories and channels.
- Q3 operating income fell 44% and net income fell 47%; nine-month operating income fell 95% and net income fell 94%.
- All geographic regions reported lower nine-month sales: U.S. down 23%, LAAP down 27%, EMEA down 20% and Canada down 30%.
- Allowance for doubtful accounts increased materially, reflecting heightened wholesale-customer credit risk.
- Retail-store impairment charges were $0.1 million in Q3 and $6.7 million for the nine months. No prAna trademark or goodwill impairment was recognized, but the company identified reduced valuation cushion.
- Share repurchases were suspended in mid-March 2020; no shares were repurchased in Q3. Quarterly dividends were also suspended after $17.2 million was paid during the first nine months.
- The company reduced planned capital expenditures and targeted more than $100 million of 2020 operating-expense reductions before COVID-19-related expenses.
- The X1 e-commerce platform was implemented in North America during Q3.
Guidance, Outlook, Commentary and Risks
The company provided no specific numerical full-year sales or earnings guidance. Management expected continued sequential improvement in Q4 absent further pandemic deterioration, but anticipated sales volumes would remain below prior-year levels. Management also expected 2020 profitability to be heavily concentrated in the second half of the year.
Management expects to meet the next twelve months of cash needs through cash, investments, operating cash flow and available credit facilities, but noted that prolonged pandemic disruption could affect liquidity. The company expects inventory to be sold through wholesale customers, e-commerce and stores, including outlet stores, although elevated promotional activity and closeout sales could pressure margins and brand perception.
Key risks include renewed COVID-19 restrictions, lower discretionary demand, wholesale customer cancellations or defaults, excess inventory, impairment of stores or brand assets, supply-chain and logistics disruptions, labor shortages, e-commerce execution and cybersecurity risks, foreign-currency volatility, adverse weather, tariffs and other global economic or regulatory developments. Tax benefits in certain foreign jurisdictions may require additional valuation allowances if projected losses continue.
Facts Investors Should Verify
- Whether Q4 sales, e-commerce growth and store traffic improve as expected and whether profitability remains concentrated in the second half.
- Inventory aging, markdown rates, closeout activity and the adequacy of inventory reserves.
- Wholesale customer credit quality, collections and the elevated accounts-receivable allowance.
- Compliance with the $200 million minimum liquidity requirement during the credit-agreement covenant suspension period and the April 2021 maturity of the $400 million Revolving B Loan.
- Timing of any reinstatement of dividends or share repurchases and the effect on liquidity.
- Potential future impairment charges for retail stores, lease assets, prAna goodwill or the prAna trademark.
- Whether cost reductions are sustainable or whether incentive compensation and other discretionary expenses return in 2021.