Columbia Sportswear Company — Q2 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Columbia designs, sources, markets and distributes outdoor and active lifestyle apparel, footwear, accessories and equipment under the Columbia, Sorel, Mountain Hardwear, prAna and Montrail brands. The business is highly seasonal, with sales and profitability concentrated in the third and fourth quarters.
The company operates through geographic segments comprising the United States, Latin America and Asia Pacific, Europe, Middle East and Africa, and Canada. The prAna acquisition completed in May 2014 contributed materially to the year-over-year comparison. A 60%-owned China joint venture is consolidated.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $380.2 million | $324.2 million | $859.2 million | $748.3 million |
| Gross profit | $171.3 million | $144.0 million | $400.1 million | $341.1 million |
| Gross margin | 45.1% | 44.4% | 46.6% | 45.6% |
| Income from operations | $(9.0) million | $(17.0) million | $35.2 million | $18.5 million |
| Operating margin | (2.4%) | (5.2%) | 4.1% | 2.5% |
| Net income attributable to Columbia | $(6.5) million | $(6.3) million | $19.9 million | $15.9 million |
| Diluted EPS | $(0.09) | $(0.09) | $0.28 | $0.23 |
| Operating cash flow | Not separately provided | Not separately provided | $24.1 million | $63.0 million |
Q2 sales increased 17% year over year, or 21% on a constant-dollar basis. The six-month increase was 15%, or 19% constant-dollar. Gross margin improved due primarily to better channel and product mix, selective price increases and improved direct-to-consumer margins, partly offset by Korean promotions and inventory provisions and unfavorable currency hedge rates.
SG&A increased 12% to $181.5 million in Q2 and 13% to $368.0 million for the six-month period, reflecting higher direct-to-consumer, personnel, prAna and demand-creation costs. SG&A as a percentage of sales declined to 47.7% from 50.0% in Q2 and to 42.8% from 43.5% for the six-month period.
At June 30, 2015, cash and cash equivalents were $371.1 million and short-term investments were $46.4 million. Approximately 55% of cash and short-term investments were held by foreign subsidiaries and intended to remain reinvested outside the United States. Inventory was $581.0 million, up from $456.4 million at June 30, 2014. Total liabilities were $467.2 million and total equity was $1.351 billion.
The company had no outstanding balance on its $125.0 million unsecured committed domestic revolving credit facility and no outstanding balance on approximately $103.5 million of internationally guaranteed operating lines. Debt consisted primarily of a $15.7 million related-party note payable, maturing December 31, 2018, at a fixed 7% interest rate.
Operating cash flow declined principally because of increased inventory purchases. Investing cash use was $47.3 million, including $28.4 million of capital expenditures and $19.0 million of net short-term investment purchases. Financing cash use was $19.5 million, including $21.1 million of dividends and $14.5 million of share repurchases, partly offset by stock-plan proceeds and tax benefits.
Material changes versus the prior comparable period
- United States Q2 sales rose 45% to $212.1 million, driven by Columbia, prAna, wholesale sales and direct-to-consumer growth. Retail stores increased to 95 from 79.
- Q2 LAAP sales increased 1% reported and 7% constant-dollar; Korea remained weak and promotional, while China joint-venture sales benefited from discounted pricing and e-commerce.
- Q2 EMEA sales declined 18% reported and 11% constant-dollar, largely due to reduced sales to the Russian distributor and difficult regional economic conditions.
- Six-month sales growth was led by the United States, up 28%, and Canada, up 27%; LAAP declined 1% and EMEA declined 4% on a reported basis.
- Q2 prAna sales were $26.1 million versus $5.5 million in the prior-year period; six-month prAna sales were $63.2 million versus $5.5 million.
- Q2 net loss attributable to Columbia was broadly unchanged despite materially higher sales. The 2014 quarter included a $5.6 million non-recurring tax benefit and approximately $2.1 million of after-tax prAna acquisition costs.
- Six-month net income attributable to Columbia increased 25% to $19.9 million, despite higher tax expense and the absence of the prior-year non-recurring tax benefit.
- The company repurchased 258,874 shares for $14.5 million during the first six months; $229.0 million remained authorized for future repurchases at June 30, 2015.
- The international distributor businesses were moved onto the new ERP system in May 2015. Japan was planned for transition in 2016.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical full-year revenue or earnings forecast in the filing. It expected 2015 profitability to be influenced by Columbia and Sorel growth, direct-to-consumer expansion, prAna results, economic and competitive conditions in Russia, Korea and China, and foreign currency movements. Management expected profitability to remain heavily concentrated in the second half of 2015.
At June 30, 2015, inventory purchase obligations were $364.4 million. Management believed liquidity for at least the next 12 months would be adequately covered by existing cash, operating cash flow and available borrowing arrangements. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- Seasonality and weather can materially affect consumer demand, order cancellations, inventory levels, promotional activity and profitability.
- Currency fluctuations, particularly in Russia and other international markets, can affect sales, margins, operating income and the value of foreign-held cash.
- Economic weakness and intense competition in Korea, China, Russia and other markets may pressure sales and margins.
- Inventory growth and demand-forecasting errors could lead to write-downs, excess product and increased discounting.
- The multi-year ERP and information-technology implementation creates risks of disruption, data errors, higher costs and internal-control challenges.
- The company relies on contract manufacturers, limited sources for certain materials, third-party transportation and international supply chains.
- Direct-to-consumer store and e-commerce expansion increases fixed costs and execution risk.
- Foreign cash may incur significant tax costs if repatriated to the United States.
Important facts for investors to verify
- Whether second-half demand, particularly fall and winter sell-through, supports management’s expected seasonal profitability.
- Inventory growth, inventory provisions and the effect of promotional activity in Korea and other challenged markets.
- The sustainability of the improved gross margin and the impact of currency hedges and exchange rates.
- Progress, cost and control implications of the global ERP rollout, including the planned Japan implementation.
- PrAna integration, growth and contribution to consolidated profitability relative to acquisition-related costs.
- Performance and credit exposure related to Russia, Korea, China and the EMEA distributor business.
- Cash conversion, capital expenditures, share repurchases, dividends and use of available credit facilities.
- The $364.4 million of inventory purchase obligations and potential exposure to order cancellations, supply-chain disruption and excess inventory.