Columbia Sportswear Company — Q3 2015 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, Mountain Hardwear, prAna and Montrail brands. Products are sold through wholesale, direct-to-consumer and independent-distributor channels. This filing covers the quarter and nine months ended September 30, 2015; financial statements are unaudited. Results are highly seasonal, with sales and profitability concentrated in the second half of the year.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Net sales | $767.6 million | $675.3 million | +14%; +18% constant currency |
| Gross profit | $356.5 million | $306.8 million | +16% |
| Gross margin | 46.4% | 45.4% | +100 basis points |
| Income from operations | $132.3 million | $98.3 million | +35% |
| Operating margin | 17.2% | 14.6% | +260 basis points |
| Net income attributable to Columbia | $91.1 million | $65.6 million | +39% |
| Diluted EPS | $1.28 | $0.93 | +38% |
| Metric | Nine months 2015 | Nine months 2014 | Change |
|---|---|---|---|
| Net sales | $1.627 billion | $1.424 billion | +14%; +19% constant currency |
| Gross profit | $756.6 million | $647.9 million | +17% |
| Gross margin | 46.5% | 45.5% | +100 basis points |
| Income from operations | $167.4 million | $116.7 million | +43% |
| Operating margin | 10.3% | 8.2% | +210 basis points |
| Net income attributable to Columbia | $111.0 million | $81.6 million | +36% |
| Diluted EPS | $1.56 | $1.15 | +36% |
Q3 sales growth was led by the United States, which increased 26%, and Canada, which increased 16%. Reported sales declined 11% in LAAP and 14% in EMEA, although constant-currency declines were 5% and 3%, respectively. By brand, Q3 sales increased 48% for Sorel, 22% for prAna, 12% for Mountain Hardwear and 10% for Columbia. Footwear sales increased 36%, compared with 9% growth in apparel, accessories and equipment.
SG&A expense increased 8% in Q3 to $226.8 million but declined to 29.5% of sales from 31.2%. Nine-month SG&A increased 11% to $594.8 million and declined to 36.6% of sales from 37.7%. Q3 effective tax rate was 28.9%, versus 31.3% in the prior-year quarter; the result included a non-recurring $6.3 million tax benefit, or approximately $0.09 per diluted share, from a reduction in valuation allowances on international net operating losses.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $173.4 million at September 30, 2015, compared with $413.6 million at December 31, 2014 and $185.2 million at September 30, 2014.
- Short-term investments were $0.6 million, versus $27.3 million at December 31, 2014.
- Cash used in operating activities was $210.9 million for the first nine months, compared with $108.5 million in the prior-year period. The increase primarily reflected higher accounts receivable and inventory and lower accounts payable associated with earlier receipt and payment of fall inventory.
- Capital expenditures were $47.8 million, compared with $42.8 million in the prior-year period.
- Cash dividends paid were $31.7 million, or $0.45 per share. The Q3 dividend was $0.15 per share.
- The company repurchased 258,874 shares for $14.5 million during the first nine months. No shares were repurchased during Q3.
- Total liabilities were $455.4 million and total equity was $1.422 billion at September 30, 2015. Current liabilities included $21.0 million of short-term borrowings.
- The company had a $125.0 million unsecured committed revolving credit facility, with $10.0 million outstanding, and subsidiary credit lines totaling approximately $101.8 million, with $11.0 million outstanding. The company reported compliance with all covenants.
- Approximately 86% 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
- Sales, operating income and earnings increased substantially, driven primarily by U.S. wholesale and direct-to-consumer growth, improved supply-chain execution, Sorel and Columbia demand, and the inclusion of a full year of prAna results.
- Gross margin expanded by 100 basis points in both Q3 and the first nine months, helped by direct-to-consumer margin improvement, channel mix and selective price increases. Offsets included unfavorable foreign-currency hedge rates and increased promotional activity and inventory provisions in Korea.
- Foreign exchange remained a significant headwind: reported international sales declined in LAAP and EMEA despite roughly flat or positive constant-currency results in the nine-month period.
- Other non-operating expense changed to $1.6 million in Q3 and $3.3 million for the first nine months, compared with income of $0.7 million and $0.2 million, respectively, primarily because of foreign-currency remeasurement and intercompany settlement losses.
- Cash used in operations increased materially because of working-capital investment, while the prior-year investing period included the $188.5 million prAna acquisition.
- Accumulated other comprehensive income declined to a $14.9 million loss from income of $15.8 million at December 31, 2014, primarily reflecting foreign-currency translation losses and derivative effects.
Outlook, commentary and risks
Management expected 2015 profitability to be influenced by growth in Columbia and Sorel across U.S., Canadian and European wholesale channels; continued direct-to-consumer growth; 16 planned new U.S. stores and one Canadian store; a full year of prAna results; difficult conditions in Russia, Korea and China; and foreign-currency movements. Management stated that existing cash, operating cash flow and borrowing arrangements were expected to cover liquidity needs for at least the next 12 months.
The company implemented an ERP phase for international distributor businesses in May 2015 and planned to transition Japan next. Management identified implementation costs, potential business interruptions, supply-chain execution, store productivity, weather, consumer spending, order cancellations, inventory levels, promotional activity, currency volatility and the ability to control operating expenses as significant uncertainties.
Inventory purchase obligations were $354.5 million at September 30, 2015. The company was involved in ordinary-course legal matters and stated that their resolution was not expected to have a material adverse effect. Principal disclosed risks include seasonal and weather sensitivity, consumer-discretionary demand, competition, contract manufacturing and sourcing capacity, product quality and recalls, customer credit and cancellations, international markets including Russia and China, currency fluctuations, tax audits, ERP and cybersecurity risks, and execution of the prAna acquisition and China joint venture.
Important facts for investors to verify
- Whether the strong U.S. and footwear growth persisted after Q3 and offset weakness in Korea, Russia, China and other international markets.
- The extent to which Q3 earnings benefited from the non-recurring $6.3 million tax benefit and whether reported margins were sustainable.
- Fourth-quarter sell-through, inventory aging, promotional activity and potential provisions, given the company’s seasonal concentration.
- Working-capital trends, especially accounts receivable, inventory and accounts payable, and the resulting impact on operating cash flow.
- ERP implementation progress, including the Japan transition, and any related operational, reporting or control disruptions.
- Foreign-exchange effects on sales, gross margin, operating income and accumulated other comprehensive income.
- Utilization of credit facilities, foreign cash repatriation constraints and the company’s ability to fund planned stores, ERP investments and capital expenditures.
- Execution and integration of prAna and the operating performance and risks of the 60%-owned China joint venture.