Columbia Sportswear Company: Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2014. Columbia designs, sources, markets and distributes outdoor and lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel, Montrail and prAna brands. Operations are reported across the United States, Latin America and Asia Pacific, EMEA and Canada.
The business is highly seasonal: sales and substantially all profitability are generally concentrated in the third and fourth quarters. Results for the first half are therefore not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net sales | $324.2 million | $280.5 million | $748.3 million | $628.8 million |
| Gross profit | $144.0 million | $120.3 million | $341.1 million | $273.6 million |
| Gross margin | 44.4% | 42.9% | 45.6% | 43.5% |
| SG&A expense | $162.2 million | $131.9 million | $325.6 million | $274.8 million |
| Operating income (loss) | $(17.0) million | $(10.0) million | $18.5 million | $2.7 million |
| Net income (loss) attributable to Columbia | $(6.3) million | $(7.1) million | $15.9 million | $3.0 million |
| Diluted EPS | $(0.18) | $(0.21) | $0.45 | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $63.0 million | $135.7 million |
Q2 operating margin was approximately negative 5.2%, compared with negative 3.6% in the prior-year quarter. First-half operating margin was approximately 2.5%, compared with 0.4% in 2013. Q2 net loss included a $5.6 million non-recurring tax benefit and approximately $2.9 million of after-tax acquisition, purchase-accounting and integration effects.
At June 30, 2014, cash and cash equivalents were $367.2 million, short-term investments were $27.2 million, total assets were $1.69 billion and total liabilities were $407.3 million. Inventories were $456.4 million, compared with $423.8 million at June 30, 2013. The company had no outstanding balance under its $125.0 million domestic revolving credit facility or its approximately $103.2 million of international operating lines. A $15.7 million related-party note payable was outstanding.
Material Changes Versus the Prior Comparable Period
- Q2 sales increased 16%; first-half sales increased 19%. Foreign exchange reduced the consolidated comparison by less than one percentage point in Q2 and approximately one percentage point for the first half.
- Growth was led by Columbia brand sales, international markets, footwear and the newly acquired prAna brand. Q2 regional sales increased 5% in the United States, 18% in LAAP, 37% in EMEA and 39% in Canada.
- Gross margin expanded by 150 basis points in Q2 and 210 basis points for the first half, primarily due to more full-price sales and lower promotional activity, partly offset by international distributor mix and unfavorable currency hedge rates.
- SG&A rose 23% in Q2 and 18% for the first half. Drivers included China joint-venture costs, prAna acquisition and operating costs, global direct-to-consumer expansion, ERP implementation costs and higher incentive compensation.
- First-half operating cash flow declined by $72.7 million, primarily because of increased inventory purchases and lower receivable collections.
- Cash declined by $70.3 million during the first half, principally reflecting the $188.5 million cash acquisition of prAna and $25.0 million of capital expenditures, partly offset by operating cash flow and sales of short-term investments.
Acquisition, Outlook and Management Commentary
On May 30, 2014, Columbia acquired 100% of prAna Living LLC for $188.5 million net of acquired cash. The preliminary allocation included $114.5 million of identifiable intangible assets and $54.8 million of goodwill. PrAna contributed $5.5 million of sales and a $1.1 million net loss from May 31 through June 30. The acquisition was funded with cash on hand and is intended to diversify the brand portfolio and reduce seasonal concentration.
The company provided no specific full-year revenue or earnings-per-share guidance in the filing. Management expects 2014 profitability to remain heavily weighted to the second half and identified the China joint venture, prAna, direct-to-consumer investment, wholesale growth, demand-creation spending and ERP implementation costs as important factors.
The U.S. ERP system went live in April 2014. Management expects the next global ERP phase, involving the global distributor business, in 2015. Management believes existing cash, operating cash flow and available credit facilities will cover liquidity requirements for at least the next 12 months.
Risks, Contingencies and Unusual Items
- The company failed the tangible-net-worth covenant on its domestic credit facility following the prAna acquisition, received a waiver and was seeking to amend the credit agreement. It was in compliance with the other stated covenants.
- Approximately 54% of cash and short-term investments were held by foreign subsidiaries and intended to remain reinvested outside the United States; repatriation could generate significant tax expense.
- Operating lease commitments totaled $305.7 million and inventory purchase obligations totaled $400.9 million at June 30, 2014.
- The China joint venture began operations in January 2014. Columbia owns 60%, while Swire provides services and holds a related-party note with a principal balance of $15.7 million, maturing December 31, 2018 at a fixed 7% interest rate.
- Key risks include seasonality and weather, consumer discretionary spending, inventory forecasting, order cancellations, international currency and political conditions, competition, independent factory and supply-chain dependence, ERP implementation and cybersecurity.
- The company agreed in July 2014 to pay a $100,800 EPA fine related to inadvertent product-labeling violations. Management did not expect other disclosed litigation to have a material adverse effect.
- The board authorized a two-for-one stock split, payable September 26, 2014 to shareholders of record September 8, 2014.
Investor Verification Priorities
- Verify the final purchase-price allocation and integration performance of prAna, including goodwill, intangible-asset amortization and realized synergies.
- Monitor inventory growth, inventory reserves, customer receivables and operating cash conversion ahead of the seasonal second half.
- Confirm amendment and ongoing compliance status for the domestic credit facility covenant waiver.
- Assess whether China joint-venture growth and profitability offset related operating costs and related-party obligations.
- Separate recurring earnings trends from the $5.6 million non-recurring tax benefit and acquisition-related costs.
- Evaluate ERP implementation costs, control changes, potential disruptions and the effect on future operating margins.
- Review exposure to weather, currency movements, international distributor constraints, customer concentration and the $305.7 million of lease commitments and $400.9 million of inventory purchase obligations.