Columbia Sportswear Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing is unaudited. Columbia designs, sources, markets, and distributes outdoor and active-lifestyle apparel, footwear, accessories, and equipment under the Columbia, SOREL, prAna, and Mountain Hardwear brands. Results are seasonal, with sales and operating income weighted toward the second half of the year.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $795.8 million | $747.4 million | $1,884.7 million | $1,690.1 million |
| Gross profit | $383.7 million | $349.2 million | $911.8 million | $788.5 million |
| Gross margin | 48.2% | 46.7% | 48.4% | 46.7% |
| Income from operations | $129.1 million | $122.9 million | $198.2 million | $153.6 million |
| Operating margin | 16.2% | 16.4% | 10.5% | 9.1% |
| Net income attributable to Columbia | $100.2 million | $87.7 million | $155.0 million | $112.2 million |
| Diluted EPS | $1.42 | $1.25 | $2.19 | $1.59 |
- Q3 sales increased 6% reported and 7% in constant currency; nine-month sales increased 12% reported and 10% in constant currency.
- Direct-to-consumer sales increased 23% in Q3 and 21% for the nine-month period, substantially outperforming wholesale sales growth.
- Q3 SG&A increased 13% to $259.3 million and represented 32.6% of sales, compared with 30.8% in the prior-year quarter. Nine-month SG&A was $724.8 million, or 38.5% of sales.
- Effective tax rates were 22.7% in Q3 and 21.7% for the first nine months, compared with 26.4% and 24.2%, respectively, in the prior-year periods.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $182.2 million at September 30, 2018, versus $673.2 million at December 31, 2017. Short-term investments increased to $269.3 million from $95.0 million.
- Cash, cash equivalents, and restricted cash totaled $196.1 million at September 30, 2018.
- Operating cash flow was negative $98.1 million for the first nine months, compared with negative $12.4 million in the prior-year period. The deterioration primarily reflected increased inventory purchases and working-capital investment.
- Investing cash flow was negative $218.7 million, including $173.6 million of net short-term investment purchases and $45.2 million of capital expenditures.
- Financing cash flow was negative $152.7 million, including $107.2 million of share repurchases, $46.2 million of shareholder dividends, and approximately $19.9 million of dividends paid to the China joint venture’s non-controlling interest.
- Short-term borrowings were $8.3 million, related to the China joint venture. No balance was outstanding under the company’s domestic revolving credit line, which had average monthly availability of approximately $100 million. International subsidiary credit lines had an aggregate limit of approximately $108.5 million.
- Inventory was $617.2 million, up from $457.9 million at December 31, 2017 and $558.6 million at September 30, 2017. Accounts receivable was $552.4 million.
- Management stated that liquidity requirements for at least the next 12 months are expected to be covered by existing cash, operating cash flow, and borrowing arrangements.
Material Changes Versus the Prior Comparable Period
- Q3 net sales increased $48.4 million, or 6%, while nine-month sales increased $194.6 million, or 12%.
- Gross margin expanded by 150 basis points in Q3 and 170 basis points for the nine-month period, driven by a higher full-price and DTC mix, favorable currency hedge rates, and the presentation effects of ASC 606.
- ASC 606 adoption added $6.9 million to Q3 sales and SG&A and $22.7 million to nine-month sales and SG&A. The adoption did not materially change the timing of revenue recognition but shifted certain LAAP concession fees from net sales to SG&A.
- U.S. Q3 sales rose 9%; EMEA sales rose 15%; LAAP sales declined 4%; and Canada was flat on a reported basis, or up 3% in constant currency.
- Q3 DTC sales grew 23% to $251.0 million, while wholesale sales were approximately flat. The company operated 135 retail stores at September 30, 2018, compared with 127 a year earlier.
- Q3 brand performance was mixed: Columbia increased 7%, SOREL increased 12%, prAna increased 8%, and Mountain Hardwear declined 22%. For nine months, Mountain Hardwear declined 13%.
- Net income attributable to Columbia increased 14% in Q3 and 38% for the nine-month period. The quarter included a $3.3 million after-tax insurance recovery benefit, $1.5 million of incremental TCJA-related tax expense, and approximately $0.9 million of after-tax Project CONNECT expenses and discrete costs.
- The company repurchased 1.26 million shares for $107.2 million during the first nine months and had $230.7 million remaining under its repurchase authorization at September 30, 2018.
Guidance, Outlook, Commentary, and Risks
- The filing does not provide a clear numerical full-year revenue or earnings guidance figure. Management expects 2018 profitability to remain heavily concentrated in the second half because of seasonality.
- Strategic priorities include demand creation, enhanced digital and consumer capabilities, expansion of global DTC operations, and investment in personnel and organizational efficiency.
- Project CONNECT is expected to provide more meaningful financial value capture in 2019 and beyond, although the company expects to reinvest some savings in demand creation and other growth initiatives.
- The C1 global retail platform and X1 e-commerce initiative are targeting regional implementations beginning in North America and EMEA in the first half of 2019.
- The company expects to complete its purchase of Swire’s 40% interest in the China joint venture in early 2019, subject to conditions including regulatory approval in China. Approximately $14.0 million was placed in escrow for the transaction.
- The company expects adoption of ASC 842 lease accounting on January 1, 2019 to materially increase reported assets and liabilities, with no material expected effect on operating results or cash flows.
- Principal risks include weather-driven demand volatility, consumer discretionary spending, wholesale customer financial health and order cancellations, inventory accumulation, foreign-exchange movements, tariffs and trade policy, sourcing and transportation costs, contract-manufacturer capacity, cybersecurity and privacy compliance, ERP and e-commerce implementation risks, competition, product quality and warranty claims, and execution of the China joint-venture buyout.
- Inventory purchase obligations were approximately $333.7 million at September 30, 2018. Management does not expect pending litigation to have a material adverse effect, but legal outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Whether strong Q3 and nine-month growth, particularly in DTC, is sustained through the seasonally important fourth quarter.
- Whether elevated inventory and negative operating cash flow normalize after the fall selling season without increased markdowns or inventory write-downs.
- The underlying profitability impact of ASC 606 classification changes, the insurance recovery, TCJA-related tax adjustments, and Project CONNECT costs.
- Progress, funding, regulatory approval, and final purchase price for the planned China joint-venture buyout.
- The effect of tariffs, currency movements, sourcing costs, and weather on gross margin and full-year results.
- Execution and financial impact of the C1, X1, ERP, and other technology initiatives, including the expected balance-sheet impact of ASC 842.