Columbia Sportswear Company: Q1 2013 Form 10-Q Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. The company sells through wholesale, distributor and direct-to-consumer channels and reports four geographic segments: United States, Latin America and Asia Pacific, Europe/Middle East/Africa, and Canada. This unaudited filing covers the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012.
Results are seasonal: sales and profitability are weighted toward the third and fourth quarters. Accordingly, first-quarter results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $348.3 million | $333.1 million | Up 5% |
| Gross profit | $153.3 million | $147.9 million | Up 4% |
| Gross margin | 44.0% | 44.4% | Down 40 basis points |
| Income from operations | $12.7 million | $5.4 million | Up 138% |
| Operating margin | 3.7% | 1.6% | Up 210 basis points |
| Net income | $10.1 million | $3.9 million | Up 159% |
| Diluted EPS | $0.29 | $0.11 | Up $0.18 |
| Operating cash flow | $65.8 million | $22.2 million | Up $43.6 million |
SG&A declined 1% to $142.9 million, or 41.0% of sales versus 43.4% in the prior-year quarter. Net licensing income increased to $2.3 million from $2.0 million. The effective tax rate was 17.4%, compared with 30.4%, primarily because the company recognized the benefit of the reinstated U.S. research and development tax credit for 2012 activities.
At March 31, 2013, cash and cash equivalents were $303.7 million and short-term investments were $71.0 million, compared with $240.7 million and $12.0 million, respectively, at March 31, 2012. Approximately 34% of cash and short-term investments were held by foreign subsidiaries and intended to remain indefinitely reinvested outside the United States.
Net cash used in investing activities was $41.0 million, including $26.3 million of net short-term investment purchases and $14.8 million of capital expenditures. Net cash used in financing activities was $3.0 million, including $7.5 million of dividends. No balance was outstanding under the $125.0 million domestic revolving credit facility or the approximately $107.2 million of international subsidiary credit lines at quarter-end. Total liabilities were $208.4 million, and shareholders’ equity was $1.164 billion.
Material changes versus the prior comparable period
- United States sales increased 4% to $200.5 million, supported by direct-to-consumer growth; retail stores numbered 63 versus 51 a year earlier.
- LAAP sales increased 8% to $83.1 million, while EMEA sales increased 7% to $40.9 million. Canada sales declined 6% to $23.8 million.
- Apparel, accessories and equipment sales rose 4% to $294.3 million; footwear sales rose 11% to $54.0 million.
- Sorel sales increased 94% to $12.4 million. Columbia sales rose 3% to $301.1 million, and Mountain Hardwear sales rose 5% to $32.1 million.
- Gross margin contracted because of increased promotional and close-out sales, a higher proportion of lower-margin distributor shipments and deferred profit on China-related inventory sales. Favorable foreign currency hedge rates partly offset these pressures.
- Restructuring charges declined to approximately $2.4 million from $4.0 million, primarily reflecting employee termination costs in Europe. Management stated that the charges reduced Q1 2013 diluted EPS by approximately $0.06 after tax, versus approximately $0.08 in Q1 2012.
- Inventories declined to $325.2 million from $366.6 million at March 31, 2012, while accounts receivable declined to $238.3 million from $253.3 million.
- Accumulated other comprehensive income declined to $35.4 million from $49.6 million at March 31, 2012, primarily because of a $12.7 million unfavorable foreign currency translation adjustment during Q1 2013.
Guidance, outlook, commentary and risks
Management’s preliminary full-year 2013 outlook called for a slight decline in net sales versus 2012, including lower North American wholesale sales, continued European weakness and lower LAAP sales. Direct-to-consumer expansion was expected to offset part of these declines.
- Gross margin was expected to be approximately flat with 2012, including an estimated $3.0 million of gross profit deferred into 2014 because of the China joint venture transition.
- SG&A was expected to increase approximately 3%, including about $3.7 million of China joint venture pre-operating costs and approximately $4.1 million of restructuring charges.
- Licensing income was expected to be comparable with 2012, despite approximately $4.0 million of income expected to be deferred into 2014 in connection with the China transition.
- Currency movements, particularly the Japanese yen, were expected to reduce 2013 net sales by approximately 1.5% and operating income by approximately 4.0%.
- The projected full-year operating margin was approximately 6.6%, or approximately 7.5% excluding anticipated restructuring charges, China pre-operating costs and approximately $7.0 million of China-related income deferrals.
- Management expected a full-year tax rate of approximately 26% and capital expenditures of approximately $65 million.
The China joint venture with Swire Resources was expected to begin operations effective January 1, 2014, subject to regulatory approval and other conditions. Columbia expected to fund approximately $50 million of its share of capitalization in 2013 and early 2014. The transition was expected to defer certain sales, gross profit and licensing income and create execution, regulatory, staffing and partner-dependence risks.
Key risks include weather-driven demand volatility, consumer discretionary spending, order cancellations, inventory markdowns, economic weakness in Europe, foreign currency fluctuations, promotional pressure, reliance on independent factories and suppliers, transportation and input-cost inflation, customer credit risk, product liability and warranty claims, intellectual property disputes, ERP implementation and cybersecurity risks, and the ability to execute the China joint venture. Inventory purchase obligations totaled $372.7 million at March 31, 2013. Management did not expect existing legal proceedings to have a material adverse effect, but stated that actual outcomes could differ from estimates for taxes, warranty costs, inventory, receivables and other critical accounting matters.
Important facts for investors to verify
- Whether full-year sales, margin and operating-margin guidance was achieved, particularly given the stated expectation of slight sales decline.
- The realized financial impact and timing of the China joint venture, including the approximately $50 million funding requirement and deferred income.
- Trends in North American wholesale orders, EMEA direct sales, Japan, Canada and direct-to-consumer expansion.
- Gross-margin development, promotional activity, close-out sales and the effect of foreign currency hedges.
- Execution costs, disruptions and control implications associated with the multiyear global ERP implementation.
- Inventory levels, purchase commitments, order cancellations and potential markdown or warranty exposure.
- The proportion of cash held overseas and any tax consequences if foreign funds must be repatriated.
- Progress under the $500 million share-repurchase authorization; no shares were repurchased during Q1 2013, and approximately $58.6 million of authorization remained based on the reported cumulative purchases.