Columbia Sportswear Company — Q3 2013 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. Products are sold through wholesale, distributor and direct-to-consumer channels across the United States, Latin America and Asia Pacific, EMEA and Canada. This unaudited report covers the quarter and nine months ended September 30, 2013. Results are highly seasonal, with sales and profitability concentrated in the third and fourth quarters and materially affected by weather and discretionary consumer spending.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $523.1 million | $545.0 million | $1,151.9 million | $1,168.5 million |
| Gross profit | $232.3 million | $243.7 million | $505.9 million | $509.5 million |
| Gross margin | 44.4% | 44.7% | 43.9% | 43.6% |
| Income from operations | $76.9 million | $87.8 million | $79.6 million | $82.4 million |
| Operating margin | 14.7% | 16.1% | 6.9% | 7.1% |
| Net income attributable to Columbia | $54.6 million | $64.4 million | $57.6 million | $60.4 million |
| Diluted EPS | $1.57 | $1.88 | $1.66 | $1.77 |
For the nine months, net cash provided by operating activities was $23.7 million versus cash used of $110.6 million in the prior-year period. Capital expenditures were $49.2 million, primarily for the ERP implementation and direct-to-consumer expansion. Net cash used in investing activities was $33.2 million, and net cash used in financing activities was $1.7 million, including $22.7 million of dividends.
At September 30, 2013, cash and cash equivalents were $274.2 million, short-term investments were $29.0 million and total liabilities were $314.6 million. No balance was outstanding under the $125.0 million domestic revolving credit facility or the approximately $102.9 million of international subsidiary lines. The company stated that existing cash, operating cash flow and available borrowing arrangements should cover liquidity needs for at least the next 12 months. Approximately 47% of cash and short-term investments were held by foreign subsidiaries and intended to remain reinvested outside the United States.
Material changes versus the prior comparable period
- Q3 net sales declined 4%, while nine-month sales declined 1%. Foreign exchange reduced the comparisons by approximately one percentage point.
- Q3 net income attributable to Columbia declined 15%, and diluted EPS declined from $1.88 to $1.57. Nine-month net income declined 5% and diluted EPS declined from $1.77 to $1.66.
- Q3 gross margin contracted 30 basis points because of unfavorable foreign-currency hedge rates and a greater mix of lower-margin distributor shipments. Higher direct-to-consumer sales and fewer closeout sales partly offset the pressure.
- Nine-month gross margin expanded 30 basis points, supported by higher full-price direct-to-consumer margins and a larger direct-to-consumer mix.
- Q3 SG&A increased 2% to $163.0 million, rising to 31.2% of sales from 29.4%. The increase reflected global direct-to-consumer expansion, incentive compensation and ERP costs.
- Q3 U.S. sales declined 7% and LAAP sales declined 15%; EMEA sales increased 29%, partly due to shipment timing, while Canada declined 4%.
- Footwear sales declined 18% in Q3 and 10% for the nine months, primarily due to lower cold-weather advance orders following mild winter weather in 2012. Apparel, accessories and equipment sales were approximately flat in Q3 and increased less than 1% for the nine months.
- The company operated 68 retail stores at September 30, 2013, compared with 58 a year earlier.
Guidance, outlook, commentary and unusual items
- Management’s 2013 outlook assumed net sales declining up to 1.5% versus 2012, gross-margin expansion of approximately 50 basis points, SG&A growth of approximately 2.0%, licensing income comparable with 2012, a tax rate of approximately 27.5% and capital expenditures of approximately $65 million.
- Reported full-year operating margin was expected to be approximately 7.25%. Excluding approximately $5.2 million of restructuring charges, $3.7 million of China joint-venture pre-operating costs and $5.6 million of related operating-income deferrals, management expected operating margin of approximately 8.1%.
- Currency changes were expected to reduce full-year sales by approximately 2% and operating income by approximately 4%. Management cited continued uncertainty in Europe, South American import and currency restrictions, consumer spending, weather, distributor performance and direct-to-consumer store expansion.
- The 60%-owned China joint venture with Swire was expected to begin operations January 1, 2014, subject to regulatory approval and customary conditions. Columbia contributed $12 million and Swire contributed $8 million during the second quarter. Additional proportionate shareholder loans totaling up to $40 million were expected in the fourth quarter.
- China-related organizational and pre-operating costs were approximately $2.1 million through nine months, with approximately $1.6 million of additional costs expected in Q4. Sales, licensing income and profit associated with inventory transferred to the joint venture may be deferred into future periods.
- Inventory purchase obligations were $240.2 million at September 30, 2013. Management believed litigation would not have a material adverse effect, but noted ordinary-course legal, warranty, tax and other contingencies.
- Principal risks include seasonality and weather, demand forecasting and excess inventory, foreign exchange, economic weakness, distributor and customer credit, supply-chain and factory capacity, input and transportation costs, ERP implementation and business interruption, cybersecurity, product liability, competition and execution of the China joint venture.
Important facts for investors to verify
- Whether Q4 weather, wholesale order trends and direct-to-consumer growth support the 2013 sales and margin outlook.
- The timing and regulatory completion of the China joint venture, required shareholder loans, inventory transfers and the amount of profit and licensing-income deferrals.
- Inventory quality and aging, particularly against $410.1 million of inventory and $240.2 million of purchase obligations.
- Execution costs, disruptions and capitalization effects from the multi-year ERP implementation.
- Foreign-exchange exposure, hedge results and the impact of currency restrictions in Japan, South America and other international markets.
- The sustainability of operating cash flow after $49.2 million of nine-month capital expenditures and ongoing store, technology and China investments.
- Potential tax consequences of foreign cash held outside the United States and the company’s stated intention to indefinitely reinvest those funds.