Columbia Sportswear Company — 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. The filing covers the quarter and six months ended June 30, 2013, with unaudited results compared with the same periods in 2012. The business is highly seasonal, with sales and profitability concentrated in the third and fourth quarters.
Financial performance and liquidity
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net sales | $280.5 million | $290.4 million | $628.8 million | $623.5 million |
| Gross profit | $120.3 million | $117.9 million | $273.6 million | $265.8 million |
| Gross margin | 42.9% | 40.6% | 43.5% | 42.6% |
| Income (loss) from operations | $(10.0) million | $(10.7) million | $2.7 million | $(5.4) million |
| Net income (loss) attributable to Columbia | $(7.1) million | $(7.9) million | $3.0 million | $(4.0) million |
| Diluted EPS | $(0.21) | $(0.23) | $0.09 | $(0.12) |
Six-month net cash provided by operating activities was $135.7 million, compared with $18.7 million in the prior-year period. Capital expenditures were $31.5 million, and net cash used in investing activities was $76.3 million, primarily reflecting purchases of short-term investments and capital expenditures. Cash and cash equivalents totaled $340.4 million at June 30, 2013, and short-term investments totaled $90.2 million.
Inventories were $423.8 million, up from $363.3 million at December 31, 2012 but down from $523.1 million at June 30, 2012. Total liabilities were $317.6 million. No balance was outstanding under the $125.0 million domestic revolving credit facility or the approximately $106.6 million of international subsidiary lines at quarter-end. The company reported no material debt outstanding, other than normal short-term credit activity during the period.
The company paid $15.1 million in cash dividends during the first six months, including a quarterly dividend of $0.22 per share. Approximately 43% of cash and short-term investments were held by foreign subsidiaries and were intended to remain reinvested outside the United States.
Material changes versus the prior comparable period
- Second-quarter sales declined 3% year over year, while six-month sales increased 1%. Foreign currency movements reduced the quarterly and year-to-date sales comparisons by approximately one percentage point.
- Second-quarter sales increased 6% in the United States and 52% in Canada, but declined 3% in LAAP and 24% in EMEA. EMEA weakness primarily reflected shipment timing, economic conditions and efforts to revitalize Columbia brand sales.
- Gross margin expanded 230 basis points in the quarter and 90 basis points for the six months, driven by a greater direct-to-consumer mix, fewer distributor shipments, higher full-price margins and lower promotional activity.
- SG&A declined 1% for both the quarter and six months, although SG&A as a percentage of sales increased in the second quarter because of lower revenue and restructuring costs.
- Net licensing income declined to $1.7 million in the quarter and $4.0 million for the six months, primarily because licensed-product production and delivery shifted into the third quarter.
- Restructuring charges were $2.3 million in the second quarter and $4.7 million for the six months, primarily related to European employee and contract termination costs.
- Cash flow from operations improved substantially, primarily because of lower inventory purchases, favorable accounts receivable changes and improved earnings.
Guidance, outlook and management commentary
- Management’s 2013 outlook assumed net sales could decline by up to 2.5% versus 2012.
- Full-year gross margin was expected to expand by approximately 10 basis points, while SG&A was expected to increase approximately 1.5% and licensing income to be comparable with 2012.
- Management projected a full-year tax rate of approximately 26%, capital expenditures of approximately $65 million and operating margin of approximately 6.8%. Excluding restructuring charges, China joint-venture pre-operating costs and related income deferrals, adjusted operating margin was expected to be approximately 7.6%.
- Currency movements, particularly the Japanese yen, were expected to reduce 2013 net sales by approximately 2% and operating income by approximately 3%.
- The 60%-owned China joint venture with Swire was expected to begin operations on January 1, 2014, subject to regulatory and other 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.
- Management expected approximately $3.5 million of China joint-venture pre-operating expenses during 2013 and anticipated deferral of approximately $6.2 million of income into future periods, including approximately $2.3 million of gross profit and $3.9 million of licensing income.
Risks, contingencies and unusual items
- The company’s results are exposed to weather, discretionary consumer spending, order cancellations, inventory excess, promotional activity and seasonal shipment timing.
- Key international risks include European economic weakness, South American import and currency restrictions, foreign exchange volatility and regulatory approval and execution risks related to the China joint venture.
- Inventory purchase obligations were $262.2 million at June 30, 2013. Management did not expect pending litigation to have a material adverse effect, but actual outcomes cannot be predicted with certainty.
- The company uses currency forward contracts to hedge anticipated purchases and foreign-currency exposures. Approximately $6.0 million of deferred net derivative gains were expected to be reclassified into income during the following twelve months, subject to exchange rates and underlying transactions.
- ERP and related information-technology implementations are ongoing and may cause higher costs, business interruptions, reporting-process changes or control risks. Management stated that disclosure controls were effective at quarter-end.
- Product quality, warranty, recall, intellectual-property, factory capacity, supply-chain, cybersecurity and customer-credit risks could adversely affect results.
Most important facts for investors to verify
- Whether second-half sales, particularly fall shipments, offset the second-quarter decline and support the 2013 sales outlook.
- Whether EMEA sales and profitability recover and whether the China transition causes the expected income deferrals and additional costs.
- Whether gross-margin improvement persists despite currency pressure, closeout sales and potential promotional activity.
- Inventory levels, purchase commitments and the risk of future markdowns or write-downs.
- Actual capital expenditures, operating cash flow and utilization of available credit facilities.
- Regulatory approval, funding, operational execution and financial contribution of the China joint venture.
- Foreign-exchange effects, tax-rate changes and the realization timing of deferred derivative gains.