Business Context and Reporting Period
Columbia Sportswear Company filed its Form 10-K for the fiscal year ended December 31, 2012. The company designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Products were sold in approximately 100 countries through wholesale, distributor, licensing and direct-to-consumer channels.
The business is highly seasonal: approximately 63% of 2012 net sales and all profitability were generated in the second half of the year. Fourth-quarter 2012 net sales were $501.1 million and net income was $39.5 million, compared with $526.1 million and $36.7 million, respectively, in the fourth quarter of 2011.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $1,669.6 million | $1,694.0 million | Down 1% |
| Gross profit | $716.4 million | $735.3 million | Down 3% |
| Gross margin | 42.9% | 43.4% | Down 50 bps |
| Income from operations | $133.5 million | $136.4 million | Down 2% |
| Operating margin | 8.0% | 8.1% | Down 10 bps |
| Net income | $99.9 million | $103.5 million | Down 3% |
| Diluted EPS | $2.93 | $3.03 | Down 3% |
| Operating cash flow | $148.7 million | $63.8 million | Up $84.9 million |
| Capital expenditures | $50.5 million | $78.4 million | Down $27.9 million |
| Cash and cash equivalents | $290.8 million | $241.0 million | Up $49.7 million |
| Short-term investments | $44.7 million | $2.9 million | Up $41.8 million |
| Total assets | $1,458.8 million | $1,382.5 million | Up 6% |
SG&A expense declined 3% to $596.6 million, or 35.7% of sales, from $614.7 million, or 36.3% of sales. Net licensing income declined 13% to $13.8 million. The effective tax rate increased to 25.4% from 24.8%.
Liquidity remained strong. The company had no borrowings under its $125.0 million domestic revolving credit facility and only $156,000 outstanding under international lines of credit. Total liabilities were $292.7 million and shareholders’ equity was $1,166.2 million at year-end.
Cash dividends paid totaled $29.8 million, or $0.88 per share. Since inception of the repurchase program, the company had repurchased 9.6 million shares for approximately $441.4 million; 2012 repurchases were only $206,000.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of mild winter weather, cautious consumer spending, higher wholesale order cancellations and fewer reorders.
- LAAP sales increased 11% to $377.6 million, while EMEA sales declined 16% to $230.6 million and Canada sales declined 11% to $114.7 million. U.S. sales were essentially flat at $946.7 million.
- Apparel, accessories and equipment sales increased 1% to $1,347.0 million, but footwear sales declined 10% to $322.6 million.
- Sorel sales declined 16% to $127.0 million, primarily due to mild winter weather in 2011 and 2012. Columbia brand sales were essentially flat at $1,391.1 million.
- Gross margin contracted because of increased promotional activity and higher product input costs, partly offset by higher wholesale pricing, lower airfreight costs and favorable currency hedges.
- Operating cash flow improved substantially as accounts receivable and inventory declined, compared with increases in those balances during 2011.
Guidance, Outlook, Risks and Unusual Items
Management’s preliminary 2013 outlook assumed net sales comparable to 2012 and an operating margin of approximately 7.5% to 8.0%. The outlook assumed lower North American wholesale sales following consecutive mild winters, offset by growth in global direct-to-consumer operations and LAAP.
The planned China joint venture with Swire is expected to begin operations on January 1, 2014, subject to regulatory and other conditions. Columbia expected to fund approximately $50 million of its share of the joint venture capitalization during 2013 and early 2014. Inventory transfers and fourth-quarter 2013 shipments could defer recognition of sales, gross profit and licensing income; these effects were not included in the preliminary 2013 outlook.
- Principal operating risks include weather volatility, discretionary consumer spending, fashion and product demand, inventory forecasting, order cancellations and promotional selling.
- The company relies heavily on independent factories, with China and Vietnam accounting for approximately 67% of apparel production and 93% of footwear production. The five largest footwear factory groups represented approximately 79% of footwear production.
- Foreign currency, raw-material, labor, transportation, tariff and import risks may affect costs and margins. Derivative contracts are used to hedge currency exposures.
- The company is implementing a multi-year global ERP system, creating risks of implementation delays, higher costs, business interruptions and temporary effects on internal processes and controls.
- At year-end, inventory purchase obligations totaled $255.3 million and future operating lease commitments totaled $270.1 million.
- Approximately 30% of cash and short-term investments were held by foreign subsidiaries and intended to remain indefinitely reinvested abroad. Undistributed foreign earnings totaled approximately $284.6 million, with an estimated unrecognized U.S. tax liability of $70.2 million if repatriated.
- Legal proceedings were described as arising in the ordinary course, with management not expecting a material adverse outcome. The company received notice that certain U.S. federal tax returns were selected for audit.
- Management and Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Items
- Verify whether the expected 2013 sales and operating-margin range was achieved, particularly in North American wholesale and EMEA operations.
- Monitor the effect of weather patterns, Sorel and footwear demand, promotional activity and inventory levels on gross margin.
- Assess execution, capitalization, accounting effects and regulatory approval of the China joint venture with Swire.
- Review ERP implementation costs, internal-control changes and any resulting operational disruptions.
- Evaluate liquidity after capital expenditures, inventory commitments, lease obligations, dividends and the planned approximately $50 million China investment.
- Track foreign-currency exposure, supply-chain concentration, customer credit quality and potential tax liabilities associated with foreign earnings and audits.