Columbia Sportswear Company — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Columbia Sportswear designs, develops, markets, and distributes outdoor, active, and lifestyle apparel, footwear, accessories, and equipment through the Columbia, SOREL, Mountain Hardwear, and prAna brands. The company operates in approximately 90 countries across four geographic segments: United States, Latin America and Asia Pacific, Europe, Middle East and Africa, and Canada. This unaudited report covers the three months ended March 31, 2022; results are seasonal and are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $761.5 million | $625.6 million | 22% |
| Gross profit | $378.4 million | $321.4 million | 18% |
| Gross margin | 49.7% | 51.4% | Down 170 bps |
| Operating income | $83.7 million | $70.5 million | 19% |
| Operating margin | 11.0% | 11.3% | Down 30 bps |
| Net income | $66.8 million | $55.9 million | 20% |
| Diluted EPS | $1.03 | $0.84 | 23% |
| Net cash used in operating activities | $(33.8) million | $110.9 million provided | Down $144.7 million |
- Reported sales increased 22%; constant-currency sales increased 24% to $772.8 million.
- Sales grew across all regions, led by the U.S. at $501.9 million, EMEA at $94.7 million, LAAP at $121.7 million, and Canada at $43.2 million.
- Apparel, accessories, and equipment sales rose 21% to $565.9 million; footwear sales rose 25% to $195.6 million.
- Wholesale sales increased 22% to $408.2 million, while direct-to-consumer sales increased 22% to $353.3 million. Global DTC e-commerce sales grew 21% and represented 20% of global sales.
- SG&A expense increased 18% to $299.1 million, but declined to 39.3% of sales from 40.7%, partly reflecting operating leverage. Demand-creation spending increased $10.1 million.
- Cash, cash equivalents, and short-term investments totaled $610.3 million at March 31, 2022, compared with $894.5 million at December 31, 2021.
- Total assets were $2.8 billion and total shareholders’ equity was $1.8 billion at March 31, 2022.
- Inventory increased to $714.4 million from $645.4 million at December 31, 2021 and $525.7 million at March 31, 2021.
- No borrowings were outstanding under the $500 million domestic revolving credit facility or the international credit facilities at March 31, 2022. Management reported more than $1 billion of total liquidity, including available committed credit lines.
Material Changes Versus the Prior Comparable Period
- Sales and earnings improved substantially, supported by higher Spring 2022 orders, DTC growth, late-season cold-weather demand, and improved footwear manufacturing capacity.
- Gross margin declined 170 basis points, primarily because of higher inbound freight costs, unfavorable inventory-provision comparisons, and regional sales mix. Higher DTC margins and lower promotional activity partially offset these pressures.
- Operating cash flow shifted from $110.9 million provided to $33.8 million used. The change primarily reflected increased inventory purchases, lower accrued liabilities, and working-capital investment to support demand and wholesale orders.
- Investing cash outflows increased to $56.8 million, including $43.9 million of net purchases of short-term investments and $12.9 million of capital expenditures.
- Financing cash outflows increased to $237.9 million, primarily because of $217.3 million of share repurchases and $19.2 million of dividends, compared with $11.2 million and $17.3 million, respectively, in Q1 2021.
- Shares outstanding declined to 62.9 million from 65.2 million at December 31, 2021, reflecting the repurchase of 2.3 million shares during the quarter.
Guidance, Outlook, Commentary, and Risks
- The filing does not provide specific full-year revenue or earnings guidance.
- Management expects a gradual normalization of promotional activity and wholesale trading terms, but does not expect conditions to return fully to 2019 or earlier levels.
- Supply-chain disruptions, port congestion, manufacturing constraints, labor shortages, and elevated freight costs are expected to continue affecting product receipts, sales timing, and gross margin during 2022. Management expects some transit-time improvement by late 2022 and lower ocean freight charges in the latter part of the year, although costs are expected to remain above historical norms.
- Footwear demand is expected to exceed available manufacturing capacity in 2022; management anticipates more adequate supply in 2023.
- Inflation in freight, wages, raw materials, and other product inputs is expected to pressure margins. Spring 2022 prices increased by a mid-single-digit percentage in the U.S., while Fall 2022 increases were generally high-single-digit to low-double-digit percentages; management does not expect price increases to fully offset cost inflation.
- Management expects 2022 capital expenditures of approximately $80 million to $100 million, focused on digital, supply-chain, DTC, information systems, and new-store investments.
- Following Russia’s invasion of Ukraine, the company paused new orders from its Russia-based third-party distributor. That distributor generated $66.6 million of revenue in 2021.
- Key risks include discretionary consumer demand, weather, changing consumer preferences, wholesale order cancellations, excess or insufficient inventory, contract-manufacturer and logistics disruptions, inflation, foreign-exchange movements, labor shortages, COVID-19 impacts, geopolitical developments, cybersecurity, information-system failures, and product or regulatory issues.
- The company is exposed to currency risk and had currency-forward-contract notionals of $767.8 million at March 31, 2022. Approximately $5.1 million of deferred net derivative gains were expected to be reclassified into income during the following twelve months.
- Routine litigation and regulatory matters were not expected by management to have a material adverse effect on financial position, results of operations, or cash flows. Disclosure controls were assessed as effective.
- The board approved an additional $500 million share-repurchase authorization in April 2022, after $99 million remained available under the prior authorization at March 31, 2022.
Important Facts for Investors to Verify
- Whether strong sales growth can continue as stimulus-related spending benefits fade and consumer spending normalizes.
- Inventory levels, inventory purchase commitments of $876.3 million, and the risk of shortages, delayed receipts, markdowns, or inventory reserves.
- The extent to which freight, labor, raw-material, and other inflationary costs continue to reduce gross margin despite pricing actions.
- Progress against the $80 million to $100 million capital-expenditure plan and the return generated by DTC, digital, and supply-chain investments.
- Operating cash flow conversion and liquidity after substantial share repurchases and dividends.
- The effects of the Russia-related order pause, COVID-19 restrictions, geopolitical developments, and foreign-currency movements on international sales.
- The sustainability of demand growth in footwear, DTC e-commerce, and the Columbia and SOREL brands relative to manufacturing capacity.