Columbia Sportswear Company — Q1 2014 Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The business is highly seasonal, with sales and profitability weighted toward the third and fourth quarters.
The company’s 60%-owned China joint venture with Swire began operations on January 1, 2014 and is consolidated in the results. The United States ERP implementation was completed in early April 2014.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $424.1 million | $348.3 million | Up 22% |
| Gross profit | $197.1 million | $153.3 million | Up 29% |
| Gross margin | 46.5% | 44.0% | Up 250 basis points |
| Income from operations | $35.5 million | $12.7 million | Up 179% |
| Operating margin | 8.4% | 3.7% | Up 470 basis points |
| Net income attributable to Columbia | $22.3 million | $10.1 million | Up 120% |
| Diluted EPS | $0.63 | $0.29 | Up $0.34 |
| Net cash from operating activities | $43.5 million | $65.8 million | Down $22.3 million |
| Capital expenditures | $17.8 million | $14.8 million | Up $3.0 million |
SG&A increased 14% to $163.4 million, but declined to 38.5% of sales from 41.0%. The effective tax rate increased to 32.6% from 17.4%, primarily because Q1 2013 benefited from recognition of the reinstated research and development tax credit and Q1 2014 reflected a higher anticipated U.S. mix of taxable income.
Cash and cash equivalents were $528.0 million at March 31, 2014, compared with $437.5 million at December 31, 2013 and $303.7 million at March 31, 2013. Short-term investments were $39.5 million. Approximately 40% of cash and short-term investments were held by foreign subsidiaries and were intended to be indefinitely reinvested outside the United States.
No borrowings were outstanding under the company’s $125.0 million domestic revolving credit facility or its approximately $102.5 million of international operating lines. A $15.7 million note payable to Swire, bearing fixed interest at 7% and maturing December 31, 2018, was recorded in connection with the China joint venture.
Material changes versus the prior comparable period
- U.S. sales increased 20% to $241.2 million, led by direct-to-consumer and wholesale sales. The company operated 72 retail stores versus 63 a year earlier.
- LAAP sales increased 41% to $116.8 million, including $42.4 million of incremental sales from the China joint venture. Foreign exchange reduced the reported LAAP growth rate by approximately five percentage points.
- EMEA sales declined 4% to $39.2 million, while Canada increased 13% to $26.9 million.
- Apparel, accessories and equipment sales increased 20% to $353.7 million; footwear sales increased 30% to $70.4 million.
- Columbia brand sales increased 25% to $376.0 million. Mountain Hardwear, Sorel and other brand sales increased 1%, 4% and 4%, respectively.
- Gross-margin expansion reflected less promotional direct-to-consumer activity, China joint venture sales being recorded in gross profit rather than licensing income, and a lower proportion of lower-margin distributor sales. Unfavorable foreign currency hedge rates partially offset these benefits.
- Operating results benefited from the absence of approximately $2.0 million of restructuring charges recorded in Q1 2013, equivalent to approximately $0.06 per diluted share after tax.
- Operating cash flow decreased despite higher earnings, primarily because collections of accounts receivable were lower than in Q1 2013.
- Foreign currency translation reduced other comprehensive income by $5.9 million in Q1 2014, compared with a $12.7 million reduction in Q1 2013.
Outlook, commentary, risks and unusual items
Management did not provide specific full-year revenue or earnings guidance in the filing. It expects 2014 profitability to remain heavily concentrated in the second half of the year. Expected factors include China joint venture sales and costs, continued direct-to-consumer investment, renewed wholesale growth, higher demand-creation spending, ERP-related depreciation and support costs, and the expected impact of the pending prAna acquisition.
On April 29, 2014, the company announced a definitive agreement to acquire prAna Living LLC for approximately $190.0 million in cash, subject to customary adjustments, conditions and regulatory approvals. The company expected to fund the acquisition with available cash and anticipated closing in the second quarter of 2014.
Key risks include weather-driven and seasonal demand volatility, discretionary consumer spending, order cancellations, inventory forecasting, foreign currency movements, international political and economic conditions, supply-chain and production capacity, ERP implementation and cybersecurity, competition, product quality and regulatory compliance, and integration of the China joint venture and prAna acquisition.
Inventory purchase obligations were $541.4 million at March 31, 2014. The company reported approximately $100,800 of expected settlement payments to the EPA related to inadvertent product-labeling violations. Management stated that other litigation and legal matters were not expected to have a material adverse effect.
The company paid a quarterly dividend of $0.28 per share, or $9.8 million, during the quarter. No shares were repurchased. Since inception of the repurchase program, the company had repurchased 9.6 million shares for approximately $441.4 million against a $500.0 million authorization.
Important facts for investors to verify
- Whether the unusually strong Q1 sales growth, including shifted spring shipments, translates into comparable full-year demand rather than timing-related acceleration.
- The profitability, cash needs and operating performance of the China joint venture, including the effect of non-controlling interest and related-party service fees.
- The closing, funding, purchase accounting and integration costs associated with the approximately $190 million prAna acquisition.
- The effect of the U.S. ERP implementation on order fulfillment, internal controls, operating costs and future capital expenditures.
- Whether gross-margin improvement is sustainable if promotional activity, distributor mix or foreign currency hedge rates change.
- Cash availability for acquisitions and operations, including the tax implications of foreign-held cash and the company’s currently undrawn credit facilities.
- Exposure to the $541.4 million of inventory purchase obligations, order cancellations, excess inventory and seasonal weather risk.
- Foreign exchange exposure, particularly in EMEA, Japan, Korea and South American distributor markets, and the effectiveness of the company’s hedging program.