Business Context and Reporting Period
Columbia Sportswear Company designs, sources, markets and distributes outdoor and active lifestyle apparel, footwear, accessories and equipment under the Columbia, SOREL, prAna and Mountain Hardwear brands. The company sells through wholesale, direct-to-consumer (DTC) and international distributor channels. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods.
The business is highly seasonal: management reported that approximately 60% of 2017 net sales and approximately 90% of operating income were generated in the second half of the year.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $481.6 million, versus $398.9 million | $1,088.9 million, versus $942.7 million |
| Gross profit | $228.6 million; 47.5% margin | $528.1 million; 48.5% margin |
| Income from operations | $9.7 million, versus $(17.3) million | $69.1 million, versus $30.7 million |
| Net income attributable to Columbia | $9.7 million, or $0.14 diluted EPS | $54.8 million, or $0.77 diluted EPS |
| Operating cash flow | Not separately presented | $99.3 million, versus $157.0 million |
- Reported second-quarter sales increased 21%; constant-currency sales increased 19%. Six-month sales increased 16%; constant-currency sales increased 13%.
- Wholesale sales increased 23% in the quarter and 12% year to date. DTC sales increased 18% in the quarter and 20% year to date. DTC represented approximately 46% of second-quarter sales and 44% of six-month sales.
- Second-quarter gross margin increased from 45.3% to 47.5%; six-month gross margin increased from 46.6% to 48.5%. Drivers included more full-price sales and favorable foreign-currency hedge rates.
- SG&A was $222.2 million, or 46.1% of sales, in the quarter, and $465.6 million, or 42.8% of sales, for six months. Expenses included ASC 606 classification effects and Project CONNECT costs.
- Cash and cash equivalents were $510.7 million at June 30, 2018, supplemented by $264.0 million of short-term investments. Total current assets were $1.66 billion versus $486.3 million of current liabilities.
- No borrowings were outstanding under the domestic revolving credit line or international subsidiary credit lines. The domestic line averaged approximately $100 million of available commitments, and international lines had combined limits of approximately $88 million.
- Six-month investing cash outflow was $198.8 million, including $169.2 million of net short-term investment purchases and $29.6 million of capital expenditures. Financing cash outflow was $60.1 million, including $30.9 million of dividends and $40.1 million of share repurchases.
- Inventory was $570.5 million, up from $457.9 million at December 31, 2017. Inventory purchase obligations were $425.0 million at June 30, 2018.
Material Changes Versus the Prior Comparable Period
- Profitability improved materially from a second-quarter 2017 operating loss of $17.3 million and net loss attributable to Columbia of $11.5 million to second-quarter 2018 operating income of $9.7 million and net income of $9.7 million.
- Columbia brand sales increased 22% in the quarter and 17% for six months. SOREL sales increased 90% and 27%, respectively; prAna increased 9% in both periods. Mountain Hardwear declined 1% in the quarter and 8% for six months.
- All geographic regions grew in the second quarter. The United States increased 18%, LAAP 27% reported, EMEA 26% and Canada 12%. EMEA was the fastest-growing region for the first six months, up 28% reported.
- On January 1, 2018, the company adopted ASC 606 using the modified retrospective method. Certain LAAP concession fees were reclassified from net sales to SG&A, increasing reported second-quarter sales and SG&A by $7.5 million and six-month amounts by $15.7 million, without a material expected change in revenue timing.
- The company also adopted new income-tax and hedge-accounting guidance. Management expects the income-tax adoption to increase future effective tax-rate volatility.
- Operating cash flow declined despite higher earnings, primarily because of inventory receipts and changes in other assets. Cash was also reallocated into short-term investments.
- Project CONNECT expenses were approximately $1.4 million after tax in the quarter and $9.8 million after tax for six months, compared with approximately $2.6 million and $3.4 million, respectively, in 2017.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear quantified full-year 2018 revenue or earnings guidance figure. Management expects profitability to remain heavily concentrated in the second half of the year and believes existing cash, operating cash flow and borrowing arrangements will cover liquidity needs for at least the next 12 months.
- Strategic priorities include demand creation, enhanced digital and consumer capabilities, global DTC expansion, organizational optimization and improved gross and operating margins.
- Project CONNECT is expected to provide more meaningful financial value capture in 2019 and beyond, while savings are being partly reinvested in demand creation and growth initiatives.
- The global ERP rollout was substantially completed through the Europe-direct implementation in June 2018. The C1 global retail platform and X1 e-commerce initiative were targeting regional implementations beginning in the first half of 2019.
- The company announced its intention to acquire Swire’s remaining 40% interest in the China joint venture, subject to conditions including regulatory approval in China, with completion expected in early 2019. The filing does not provide a clear purchase price.
- Key risks include seasonal demand and weather variability, wholesale order cancellations, inventory excess or shortages, retailer financial weakness, foreign-currency movements, tariffs and trade policy, sourcing and transportation costs, contract-manufacturer capacity, competitive pressure, DTC execution, cybersecurity and privacy regulation, ERP implementation, tax uncertainty related to the Tax Cuts and Jobs Act, and the ability to complete the China joint-venture buyout.
- Legal matters arise in the ordinary course, but management believes their resolution will not materially adversely affect the consolidated financial statements.
Important Facts for Investors to Verify
- Reconcile reported growth and margins for the $7.5 million quarterly and $15.7 million year-to-date ASC 606 presentation effects.
- Assess second-half execution given the company’s concentration of sales and operating income in the third and fourth quarters.
- Monitor inventory of $570.5 million and purchase obligations of $425.0 million against demand, weather and cancellation trends.
- Evaluate cash conversion, including the decline in operating cash flow and substantial short-term investment purchases.
- Track the financial impact and remaining costs of Project CONNECT, C1, X1 and ERP implementation.
- Verify the terms, funding source, regulatory status and accounting consequences of the proposed China joint-venture buyout.
- Review currency, tariff, sourcing, retailer-credit, cybersecurity and product-liability exposures, including the company’s derivative positions and related sensitivity disclosures.