Columbia Sportswear Company — Form 10-K Summary
Business context and reporting period
Columbia Sportswear Company designs, sources, markets, and distributes outdoor, active, and everyday lifestyle apparel, footwear, accessories, and equipment through the Columbia, SOREL, Mountain Hardwear, and prAna brands. Products are sold in approximately 90 countries through wholesale and direct-to-consumer channels, including more than 450 retail stores and e-commerce sites.
This annual report covers the fiscal year ended December 31, 2019. The business is seasonal, with approximately 60% of annual sales and 75% of operating income generated in the second half of the year. The fourth quarter generated net sales of $954.9 million and net income attributable to Columbia of $114.0 million.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $3.042 billion | $2.802 billion | Up 9% |
| Gross profit | $1.516 billion | $1.386 billion | Up 9% |
| Gross margin | 49.8% | 49.5% | Up 30 bps |
| Income from operations | $395.0 million | $351.0 million | Up 13% |
| Operating margin | 13.0% | 12.5% | Up 50 bps |
| Net income attributable to Columbia | $330.5 million | $268.3 million | Up 23% |
| Diluted EPS | $4.83 | $3.81 | Up 27% |
| Net cash from operations | $285.5 million | $289.6 million | Down 1% |
| Capital expenditures | $123.5 million | $65.6 million | Up $57.9 million |
Net income benefited from lower income tax expense of $74.9 million and an effective tax rate of 18.5%, compared with 23.8% in 2018. The 2019 rate included a $6.6 million benefit related to Swiss tax reform, favorable foreign tax audit resolutions, and a reduction in the U.S. minimum foreign tax liability.
Cash and cash equivalents increased to $686.0 million from $437.8 million. Short-term investments declined to $1.7 million from $262.8 million, primarily reflecting sales and maturities of investments. Inventories increased 16% to $606.0 million, while accounts receivable increased to $488.2 million.
The Company had no borrowings outstanding under its credit facilities at year-end. Available facilities included a domestic revolving line averaging $50.0 million during the year and international lines totaling approximately $107.2 million. Total operating lease liabilities were $435.5 million at December 31, 2019.
Financing cash outflows included $121.7 million of share repurchases and $65.1 million of dividends. The Company repurchased 25.3 million shares for $884.9 million cumulatively through year-end and had approximately $215.1 million remaining under its repurchase authorization.
Material changes versus the prior comparable period
- U.S. net sales increased 12% to $1.943 billion; EMEA increased 5% reported and 9% constant-currency; Canada increased 5% reported and 8% constant-currency; LAAP was essentially flat reported and increased 2% constant-currency.
- Wholesale sales increased 11% to $1.783 billion, while direct-to-consumer sales increased 6% to $1.260 billion. E-commerce represented 11.1% of sales versus 10.9% in 2018.
- Columbia brand sales increased 9% to $2.488 billion; SOREL increased 21% to $314.2 million; prAna declined 4% to $151.5 million; Mountain Hardwear was essentially flat at $89.1 million.
- Footwear sales increased 15% to $701.3 million, while apparel, accessories, and equipment sales increased 7% to $2.341 billion.
- Gross margin improved primarily from Project CONNECT benefits, including design-to-value, assortment optimization, and manufacturing efficiencies. Benefits were partly offset by higher promotional and closeout sales and a lower DTC sales mix.
- SG&A expense increased 8% to $1.136 billion, driven by global DTC expansion, personnel, information technology, demand creation, and strategic projects. SG&A declined modestly as a percentage of sales to 37.3% from 37.5%.
- The Company purchased the remaining 40% interest in its China joint venture for approximately $17.9 million, making the China business wholly owned from January 2019.
- The Company adopted the new lease accounting standard, recognizing $394.5 million of operating lease right-of-use assets and $435.5 million of operating lease liabilities at year-end. The adoption did not materially affect earnings or cash flows.
Guidance, outlook, risks, and unusual items
Management did not provide a clear numerical 2020 revenue or earnings forecast in the filing. It expected 2020 capital expenditures of approximately $90 million to $110 million and expected future capital spending to be funded with cash, operating cash flow, and credit facilities.
Strategic priorities include increased demand creation, enhanced digital and omnichannel capabilities, expansion and improvement of global DTC operations, and investment in personnel and organizational effectiveness. The C1 retail platform was rolled out to North American Columbia, SOREL, and Mountain Hardwear stores in 2019. The X1 e-commerce platform was implemented across 10 European countries and for prAna in the U.S.; North American implementation was expected to continue in 2020.
The filing states that the COVID-19 outbreak had already affected China through store closures and reduced traffic, and was affecting Japan, Korea, global tourism-related stores, contract manufacturing, raw-material sourcing, fulfillment, and logistics. Management expected 2020 results to be significantly affected, but stated that the duration and financial impact were difficult to forecast.
- Demand is sensitive to discretionary spending, weather, consumer preferences, retail traffic, competition, and wholesale customer cancellations or financial distress.
- Inventory was a significant working-capital exposure: year-end inventory increased to $606.0 million, and the Company had $337.2 million of inventory purchase obligations, primarily due in 2020.
- Supply-chain concentration is material. Approximately 50% of apparel, accessories, and equipment production was in Vietnam and China; five footwear manufacturers accounted for approximately 85% of footwear production, with the largest accounting for approximately 45%.
- Tariffs, trade policy, foreign currency movements, Brexit-related uncertainty, geopolitical events, and public-health disruptions may affect costs, sales, and margins.
- The prAna trademark and goodwill were not impaired, but the prAna trademark had an estimated fair value approximately 20% above carrying value, making future performance and valuation assumptions important.
- Operating lease commitments totaled $505.5 million, and additional leases commencing in 2020 represented $6.8 million of commitments.
- Legal matters were described as arising in the ordinary course, with management not expecting a material adverse outcome. The Company disclosed indemnities and guarantees for which no liability had been recorded.
Important facts for investors to verify
- Assess the effect of COVID-19, including store closures, wholesale cancellations, manufacturing delays, freight costs, and later-season demand.
- Monitor inventory growth, markdowns, closeout sales, sales reserves, and the $337.2 million of inventory purchase obligations.
- Evaluate the sustainability of the 49.8% gross margin and the extent to which Project CONNECT benefits offset promotional pressure, tariffs, freight, and currency effects.
- Review performance of prAna and Mountain Hardwear, as well as LAAP markets, particularly China, Korea, and Japan.
- Consider the concentration of manufacturing and sourcing in Vietnam and China and the concentration of footwear production among a small number of suppliers.
- Separate recurring earnings from the 2019 tax benefits, full ownership of China, foreign tax audit resolutions, and other nonrecurring items.
- Review liquidity after capital expenditures, dividends, share repurchases, lease payments, and potential working-capital needs.
- Consider the sensitivity of prAna goodwill and trademark valuations to weaker sales or profitability.