Columbia Sportswear Company 2017 Q1 Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets and distributes outdoor and active-lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands. Products are sold through wholesale, direct-to-consumer and international distributor channels. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The business is highly seasonal, with sales and profitability concentrated in the second half of the year.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $543.8 million | $525.1 million | Up 4% |
| Gross profit | $258.5 million | $247.4 million | Up 4% |
| Gross margin | 47.5% | 47.1% | Up 40 basis points |
| Income from operations | $48.0 million | $44.3 million | Up 8% |
| Operating margin | 8.8% | 8.4% | Up 40 basis points |
| Net income | $38.9 million | $34.2 million | Up 14% |
| Net income attributable to Columbia | $36.0 million | $31.8 million | Up 13% |
| Diluted EPS | $0.51 | $0.45 | Up $0.06 |
| Operating cash flow | $88.2 million | $97.0 million | Down $8.8 million |
SG&A increased 4% to $212.8 million and represented 39.1% of sales versus 39.0% in the prior-year quarter. The effective tax rate declined to 20.1% from 22.5%, primarily due to the resolution of tax audits in certain jurisdictions. The company paid a quarterly dividend of $0.18 per share, or $12.5 million.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $556.0 million at March 31, 2017, compared with $551.4 million at December 31, 2016 and $430.0 million at March 31, 2016.
- Short-term investments were $34.5 million, up from $0.5 million at year-end 2016 and $21.2 million at March 31, 2016.
- Total liabilities were $296.1 million and total equity was $1.592 billion. The company had no balance outstanding under its $125.0 million domestic revolving credit facility or its approximately $85.0 million of international subsidiary lines of credit.
- Approximately 55% of cash and short-term investments were held by foreign subsidiaries and were intended to remain indefinitely reinvested outside the United States.
- Operating cash flow was $88.2 million. Investing cash outflows were $45.1 million, including $33.8 million of short-term investment purchases and $11.3 million of capital expenditures.
- Financing cash outflows were $41.2 million, primarily reflecting $33.0 million of share repurchases and $12.5 million of dividends, partially offset by stock-plan proceeds.
- The company repurchased 616,152 shares for $33.0 million during the quarter. Approximately $140.5 million remained available under the authorized repurchase program at March 31, 2017.
- Inventory purchase obligations totaled $533.3 million. The company also had a $14.2 million note payable to related party, bearing fixed interest at 7% and maturing December 31, 2018.
Material changes versus the prior comparable period
- Sales growth was driven by LAAP, EMEA, SOREL and footwear, partly offset by lower United States sales and weaker prAna sales.
- United States sales declined 1% to $333.2 million, reflecting wholesale customer bankruptcies, liquidations and store closures, as well as subdued cold-weather demand. Direct-to-consumer sales increased, and the company operated 120 retail stores versus 110 a year earlier.
- LAAP sales increased 16% to $118.3 million, or 17% on a constant-currency basis, aided by shipment timing, China ERP-related accelerated shipments and growth in Japan. Korea declined.
- EMEA sales increased 8% to $55.4 million, or 10% in constant currency. Canada increased 3% on a reported basis but declined 1% in constant currency.
- By brand, Columbia sales increased 3%, SOREL increased 50%, Mountain Hardwear increased 10%, and prAna declined 7%.
- Footwear sales increased 14% to $103.8 million, while apparel, accessories and equipment increased 1% to $440.0 million.
- Gross margin benefited from favorable sourcing conditions and selective price increases. SG&A increased due to direct-to-consumer expansion, China joint-venture tax-subsidy timing and higher demand-creation expenses.
- Operating cash flow declined despite higher earnings, primarily because of less favorable accounts-receivable and accounts-payable changes.
Guidance, outlook, commentary and risks
Management did not provide a specific quantitative full-year 2017 sales or earnings outlook in the filing. Management expects 2017 profitability to remain heavily concentrated in the second half of the year and states that the uncertain global business climate makes future results difficult to predict.
- Key outlook factors include direct-to-consumer performance, weather, wholesale customer cancellations, retailer financial health, foreign exchange, competitive conditions in Korea and other international markets, prAna growth, Mountain Hardwear performance and the operating-model assessment initiated in Q1.
- The company began a thorough operating-model assessment with an outside consulting firm and expected to provide updates as the project progressed.
- The company continued its multi-year global ERP implementation and planned to transition the China joint venture to the ERP system during Q2 2017. Implementation may create operational disruption, data or control issues, higher costs and delayed shipments.
- A cybersecurity incident involving the prAna.com e-commerce website was reported in February 2017 and referred to the FBI; potentially affected customers were notified.
- Material risks include seasonality and weather sensitivity, discretionary consumer spending, wholesale customer bankruptcies and cancellations, inventory forecasting, foreign currency movements, sourcing and transportation costs, tariffs, contract-manufacturer capacity and quality, cybersecurity, intellectual-property disputes, tax changes, direct-to-consumer execution and competition.
- Management believes existing cash, operating cash flow and available borrowing arrangements will cover liquidity needs for at least the next 12 months.
- Management stated that pending litigation and other legal matters were not expected to have a material adverse effect on the company’s financial position, results of operations or cash flows.
Important facts for investors to verify
- Whether the strong Q1 international and SOREL growth reflects sustainable demand or shipment timing, including accelerated China shipments and distributor-order shifts.
- Progress in restoring U.S. wholesale sales, managing retailer credit exposure and improving the Mountain Hardwear and prAna brands.
- Second-half sales, gross-margin performance and the effects of weather, promotions and inventory levels.
- Execution and financial impact of the ERP rollout and operating-model assessment.
- Cash location and potential tax costs associated with repatriating foreign-held funds.
- Exposure to the $533.3 million of inventory purchase obligations and the company’s ability to manage seasonal inventory risk.
- Developments related to the prAna cybersecurity incident, data protection, litigation and other contingencies.