COLUMBIA SPORTSWEAR CO quarterly report, Q2 FY2016

Columbia Sportswear Company — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2016. The financial statements are unaudited. Columbia designs, sources, markets and distributes outdoor and active lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, SOREL and prAna brands. Results are highly seasonal, with approximately 60% of 2015 sales and approximately 90% of profitability generated in the second half of the year.

Financial performance

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Net sales	$388.7 million	$380.2 million	$913.9 million	$859.2 million
Gross profit	$179.6 million	$171.3 million	$427.0 million	$400.1 million
Gross margin	46.2%	45.1%	46.7%	46.6%
SG&A expense	$193.3 million	$181.5 million	$398.3 million	$368.0 million
Operating income (loss)	$(11.8) million	$(9.0) million	$32.5 million	$35.2 million
Net income (loss) attributable to Columbia	$(8.2) million	$(6.5) million	$23.6 million	$19.9 million
Diluted EPS	$(0.12)	$(0.09)	$0.33	$0.28

Second-quarter sales increased 2%, including 2% on a constant-currency basis. Six-month sales increased 6%, or 8% on a constant-currency basis.
Q2 operating margin declined to negative 3.0% from negative 2.4%, while six-month operating margin declined to 3.6% from 4.1%, primarily as SG&A grew faster than sales.
Q2 SG&A increased 7% and reached 49.7% of sales, compared with 47.7% in the prior-year quarter. Six-month SG&A increased 8% and reached 43.6% of sales.
Q2 net loss attributable to Columbia increased 26%. Six-month net income increased 19%, including a $4.5 million tax benefit from the early adoption of ASU 2016-09, equivalent to approximately $0.06 per diluted share.
The company paid $0.17 per share, or approximately $11.8 million, in Q2 dividends; six-month cash dividends totaled $23.7 million.

Sales and operating changes

Q2 United States sales increased 8% to $228.8 million, led by Columbia and prAna and by direct-to-consumer sales. The company operated 113 retail stores at June 30, 2016, compared with 97 a year earlier.
Q2 LAAP sales declined 10% to $87.3 million, or 11% in constant currency, reflecting weakness in Korea, shipment timing in China and the distributor business, and reduced advance orders.
Q2 EMEA sales declined 1% to $59.1 million, while Canada sales increased 20% to $13.6 million, or 27% in constant currency.
Q2 brand performance was led by Columbia, up 3%, and prAna, up 23%; SOREL declined 19% and Mountain Hardwear declined 20%.
Q2 apparel, accessories and equipment sales increased 4%, while footwear sales declined 4%.
Management attributed gross-margin improvement to a greater direct-to-consumer mix, selective price increases and favorable sourcing, partly offset by unfavorable foreign-currency hedge rates and lower margins on closeout sales.
SG&A growth reflected direct-to-consumer expansion, personnel costs, strategic initiatives and information-technology investments. The quarter also included $3.3 million of impairment charges for underperforming U.S. retail stores.

Cash flow, liquidity and capital structure

Cash and cash equivalents were $415.9 million at June 30, 2016, compared with $369.8 million at December 31, 2015 and $371.1 million at June 30, 2015. Short-term investments were $12.9 million.
Six-month operating cash flow was $102.7 million, compared with $24.1 million in the prior-year period, primarily due to increased collections of accounts receivable and a smaller inventory build.
Investing cash flow used $35.3 million, including $23.0 million of capital expenditures and $12.4 million of net purchases of short-term investments.
Financing cash flow used $19.0 million, principally for dividends. No common stock was repurchased during the six months, compared with $14.5 million of repurchases in the prior-year period.
The company had $2.4 million outstanding under its $125.0 million unsecured committed domestic revolving line of credit and no amounts outstanding under approximately $87.3 million of international subsidiary credit lines. The company was in compliance with covenants.
Total inventory was $653.6 million at June 30, 2016, compared with $581.0 million a year earlier. Accounts payable was $274.6 million, and inventory purchase obligations were $295.0 million.
The company expects to fund capital expenditures with existing cash, operating cash flow and credit facilities and believes liquidity is adequate for at least the next 12 months.
Approximately 57% of cash and short-term investments were held by foreign subsidiaries and are intended to remain indefinitely reinvested outside the United States; repatriation could generate significant tax expense.

Outlook, risks and unusual items

Management did not provide a specific full-year sales or earnings guidance figure in the filing. It expects 2016 profitability to remain heavily concentrated in the second half.
Key outlook factors include direct-to-consumer performance, weather, customer order cancellations and returns, wholesale customer financial health, currency movements, performance in Russia and Korea, recovery of the Europe direct business, and the effort to re-establish Mountain Hardwear.
The company continues a multiyear global ERP implementation. North American operations, international distributor businesses excluding prAna, and most global supply-chain operations had been implemented. Management identified potential risks of implementation delays, data loss, shipment disruption, higher costs and internal-control changes.
Foreign-currency exposure remains material. At June 30, 2016, currency forward contracts had gross notional amounts of $247.5 million for cash-flow hedges and $79.9 million for non-designated hedges. Approximately $3.6 million of deferred hedge losses were expected to be reclassified into income during the following 12 months.
The company had a $14.7 million note payable to related party, bearing fixed interest at 7% and maturing December 31, 2018.
Brexit-related economic and currency uncertainty, weak international markets, retailer restructurings or bankruptcies, order cancellations, excess inventory, adverse weather, supply-chain disruption, contract-manufacturer dependence, product liability, cybersecurity, intellectual-property disputes and competitive pressures are identified as material risks.
Management does not expect pending litigation to have a material adverse effect, although legal outcomes cannot be predicted with certainty.
The company early adopted ASU 2016-09, which increased six-month operating cash flow by $4.5 million through cash-flow classification and reduced reported income-tax expense through excess share-based compensation tax benefits. Comparisons with 2015 are therefore affected.

Investor verification items

Verify the sustainability of U.S. and direct-to-consumer growth and whether increased store, personnel, ERP and technology spending can be leveraged into improved operating margins.
Monitor inventory growth, closeout sales, order cancellations and the $295.0 million of inventory purchase obligations.
Assess the extent to which six-month earnings benefited from the unusual $4.5 million ASU 2016-09 tax benefit.
Track performance in LAAP, especially Korea and China, EMEA distributor markets including Russia, and the Mountain Hardwear brand.
Evaluate foreign-currency effects, hedge losses and the potential effect of Brexit and other international economic conditions.
Review ERP implementation progress, related internal-control changes and any operational disruptions.
Confirm availability and covenant compliance of credit facilities, the related-party note maturity, and the company’s policy regarding foreign-held cash and potential repatriation taxes.