Columbia Sportswear Company — Q1 2016 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. The filing covers the three months ended March 31, 2016, with comparative results for the three months ended March 31, 2015. Results are highly seasonal, with approximately 60% of 2015 sales and 90% of profitability generated in the second half of the year.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $525.1 million | $479.0 million | Up 10%; 12% constant currency |
| Gross profit | $247.4 million | $228.8 million | Up 8% |
| Gross margin | 47.1% | 47.8% | Down 70 basis points |
| Income from operations | $44.3 million | $44.1 million | Essentially flat |
| Operating margin | 8.4% | 9.2% | Down 80 basis points |
| Net income attributable to Columbia | $31.8 million | $26.5 million | Up 20% |
| Diluted EPS | $0.45 | $0.37 | Up $0.08 |
| Net cash from operating activities | $97.0 million | $28.7 million | Up $68.3 million |
SG&A increased 10% to $205.0 million and represented 39.0% of sales, compared with 38.9% in the prior year. The effective tax rate decreased to 22.5% from 33.6%, principally because adoption of ASU 2016-09 generated a $4.1 million excess tax benefit, or approximately $0.06 per diluted share.
At March 31, 2016, cash and cash equivalents were $430.0 million and short-term investments were $21.2 million. Approximately 57% of cash and short-term investments were held by foreign subsidiaries and intended to remain indefinitely reinvested outside the United States. The Company had no borrowings under its $125.0 million domestic revolving credit facility or its approximately $87.8 million of international operating lines. It had a $15.1 million note payable to related party, maturing December 31, 2018, bearing interest at 7%.
Total inventory was $412.2 million, accounts receivable were $268.9 million and total liabilities were $306.8 million at March 31, 2016. Inventory purchase obligations were $609.2 million. Capital expenditures were $10.0 million, and the Company paid $11.8 million in cash dividends, or $0.17 per share.
Material Changes Versus the Prior Comparable Period
- United States sales increased 18% to $336.2 million, led by Columbia and direct-to-consumer growth. Retail stores increased to 110 from 95.
- LAAP sales declined 10% reported and 7% in constant currency to $101.8 million, principally because of weakness in Korea and distributor shipment timing.
- EMEA sales increased 7% reported and 14% in constant currency; Canada increased 4% reported and 18% in constant currency.
- Sales increased across all brands: Columbia up 9%, SOREL up 35%, prAna up 12% and Mountain Hardwear approximately flat on a reported basis.
- Footwear sales increased 14% to $91.1 million, while apparel, accessories and equipment increased 9% to $434.0 million.
- Gross margin contracted because of unfavorable foreign-currency hedge rates and higher slow-moving inventory provisions in Korea. Higher direct-to-consumer mix and lower closeout sales partially offset the pressure.
- Operating margin declined despite sales growth because SG&A increased with direct-to-consumer expansion, personnel additions and information-technology investments.
- Operating cash flow improved substantially, driven by favorable changes in accounts receivable, inventory and prepaid assets, partly offset by payments of accounts payable.
- Other non-operating expense decreased to $0.4 million from $2.2 million, reflecting lower foreign-currency remeasurement and intercompany transaction losses.
- The Company early-adopted ASU 2016-09, changing the treatment of share-based-payment tax benefits and increasing Q1 2016 operating cash flow by approximately $4.1 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific full-year revenue or earnings guidance. Management expects 2016 profitability to remain heavily concentrated in the second half of the year and describes the global business climate as uncertain.
Management deferred the planned 2016 Japan ERP implementation and accelerated China implementation to 2017. The change is expected to modestly reduce 2016 capital spending and operating costs. The Company continues investing in its global ERP and related systems.
- Key outlook factors include brand performance, direct-to-consumer expansion, weather, customer order cancellations, consumer spending, wholesale customer financial health, international economic conditions and foreign-currency movements.
- Currency volatility affected gross margin and remains a significant risk despite the use of forward and option contracts. Approximately $2.0 million of deferred net hedge losses were expected to be reclassified into income over the following twelve months, subject to exchange rates.
- Wholesale orders are generally cancellable before shipment, and the Company may face excess inventory, markdowns or receivable losses if demand or customer financial health deteriorates.
- The Company relies on contract manufacturers, limited-source materials and third-party transportation and distribution providers, creating production, quality, capacity and logistics risks.
- Other principal risks include seasonality, unseasonable weather, retail and consumer weakness, competition, cybersecurity and system implementation failures, intellectual-property disputes, product liability, tariffs, labor disruptions and tax-law changes.
- Management believes pending legal matters will not have a material adverse effect, although litigation outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Whether strong U.S. and direct-to-consumer growth continues to offset weakness in LAAP and other international markets.
- Whether gross-margin pressure from currency hedges, Korean inventory provisions and input costs persists.
- The extent to which the $4.1 million ASU 2016-09 tax benefit affects comparability of reported EPS and tax rates.
- Progress, cost and control implications of the multi-year ERP implementation, particularly the 2017 China rollout.
- Inventory quality, customer order cancellations and exposure associated with $609.2 million of inventory purchase obligations.
- Foreign cash concentration and the potential tax cost of repatriating funds held outside the United States.
- Execution and returns from the expanding store and e-commerce operations, including the 110-store footprint.
- Foreign-currency exposure, hedge positions and the effect of exchange rates on reported sales, margins and earnings.