Columbia Sportswear Company — Q2 2020 Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, markets and distributes outdoor and active-lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands. The filing covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, including store closures, reduced retail traffic, wholesale order cancellations and supply-chain disruption. The business is seasonal, with sales and operating income weighted toward the second half of the year.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $316.6 million | $526.2 million | $884.8 million | $1,180.8 million |
| Gross profit | $146.2 million | $253.6 million | $417.9 million | $590.3 million |
| Gross margin | 46.2% | 48.2% | 47.2% | 50.0% |
| Operating income (loss) | $(70.3) million | $16.4 million | $(72.3) million | $104.3 million |
| Operating margin | (22.2)% | 3.1% | (8.2)% | 8.8% |
| Net income (loss) | $(50.7) million | $23.0 million | $(50.5) million | $97.2 million |
| Diluted EPS | $(0.77) | $0.34 | $(0.76) | $1.41 |
| Net cash from operating activities | $(37.3) million for six months | $2.6 million for six months 2019 |
- Q2 sales declined 40%; six-month sales declined 25%. Constant-currency declines were 39% and 25%, respectively.
- Q2 global e-commerce sales increased 72% year over year and represented 28% of global sales, partially offsetting store and wholesale weakness.
- Q2 SG&A declined 10% to $217.7 million, but increased to 68.7% of sales from 45.8% because of lower revenue. Six-month SG&A increased slightly to $494.5 million and included higher bad-debt and pandemic-related expenses.
- Cash and cash equivalents were $474.8 million at June 30, 2020, compared with $686.0 million at December 31, 2019 and $386.2 million at June 30, 2019. Short-term investments were $1.0 million.
- Inventories were $806.9 million, up 7% from June 30, 2019. Accounts receivable were $217.5 million, net of a $28.8 million allowance.
- Total liabilities were $969.6 million and shareholders’ equity was $1.65 billion. The company had approximately $525 million of committed domestic borrowing availability and approximately $631 million of total committed and uncommitted facilities; approximately $2.8 million was outstanding under a Japanese overdraft facility.
- Capital expenditures were $21.0 million for the six months, down from $50.8 million in the prior-year period.
Material changes versus the prior comparable period
- All geographic regions reported lower Q2 sales: U.S. sales declined 42%, LAAP 34%, EMEA 36% and Canada 56% on a reported basis.
- Q2 wholesale sales declined 46% and direct-to-consumer sales declined 32%; e-commerce growth partially offset declines in physical retail.
- Apparel, accessories and equipment sales declined 44% in Q2, while footwear sales declined 23%.
- Gross margin contracted because of higher inventory reserves and lower direct-to-consumer product margins from increased promotional activity, partly offset by favorable e-commerce mix and fewer wholesale close-out sales.
- Accounts receivable provisions increased, reflecting heightened customer credit risk. The company also recorded $6.6 million of impairment charges for certain underperforming retail stores in Q2.
- Cash flow was pressured by the net loss, inventory investment and lower operating earnings. Financing outflows included $132.9 million of share repurchases and $17.2 million of dividends during the six months, although both programs were suspended in mid-March.
Guidance, outlook, commentary and risks
- Management withdrew the ability to estimate full-year results with reasonable accuracy because of continued pandemic uncertainty. It expects sales to remain below prior-year levels for the balance of 2020, with year-over-year declines expected to moderate in the second half absent further deterioration.
- Management targeted 2020 operating-expense reductions of more than $100 million versus 2019, excluding incremental extraordinary pandemic-related costs. Actions included lower personnel expenses, reduced demand-creation spending, lower discretionary spending and reduced capital expenditures.
- The company expects elevated inventory and promotional risk to continue. It has curtailed inventory purchases and expects to sell remaining inventory through wholesale customers, e-commerce and outlet stores.
- Lease concessions were being negotiated for affected stores. The company expects additional pandemic-related costs, including bad-debt provisions, severance, restructuring and other operating expenses.
- On July 10, 2020, the credit agreement was amended. From July 1 through December 31, 2020, funded-debt and interest-coverage covenants were suspended, subject to a minimum monthly liquidity requirement of $200 million. The amendment also permitted up to $350 million of additional unsecured indebtedness and revised collateral and LIBOR-floor terms.
- Potential risks include renewed store closures or outbreaks, weak consumer demand, wholesale customer cancellations or defaults, excess inventory and markdowns, supply-chain and logistics disruption, foreign-exchange volatility, covenant compliance after the suspension period, retail-store impairment and possible prAna trademark or goodwill impairment if performance deteriorates.
- Management stated that legal proceedings are not expected to have a material adverse effect, but actual outcomes cannot be predicted with certainty.
Investor verification checklist
- Verify the pace of store reopening, retail traffic, e-commerce growth and wholesale order recovery after June 30, 2020.
- Assess inventory aging, reserves, markdown activity and the effect of elevated promotions on future gross margin.
- Review accounts-receivable collections, customer credit quality and changes in the allowance for doubtful accounts.
- Confirm compliance with the amended credit agreement, minimum liquidity requirement and post-December 2020 covenant requirements.
- Monitor whether dividend payments and share repurchases remain suspended and how capital allocation priorities change.
- Evaluate potential additional retail, prAna trademark or goodwill impairment charges and the realizability of foreign deferred tax assets.
- Consider the company’s dependence on second-half sales, continued COVID-19 effects, supply-chain capacity, wholesale cancellations and foreign-currency movements.