Columbia Sportswear Company — Q1 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the same period in 2014. Columbia designs, sources, markets and distributes outdoor and active-lifestyle apparel, footwear, accessories and equipment under the Columbia, Sorel, Mountain Hardwear, prAna and Montrail brands. Results are highly seasonal, with sales and profitability concentrated in the third and fourth quarters.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $479.0 million | $424.1 million | +13% |
| Gross profit | $228.8 million | $197.1 million | +16% |
| Gross margin | 47.8% | 46.5% | +130 bps |
| Income from operations | $44.1 million | $35.5 million | +24% |
| Operating margin | 9.2% | 8.4% | +80 bps |
| Net income attributable to Columbia | $26.5 million | $22.3 million | +19% |
| Diluted EPS | $0.37 | $0.32 | +16% |
| Net cash from operations | $28.7 million | $43.5 million | -34% |
Gross margin benefited from a more favorable full-price and closeout sales mix and improved direct-to-consumer margins, partly offset by unfavorable foreign-currency hedge rates and a higher proportion of lower-margin international distributor sales. SG&A increased 14% to $186.5 million, or 38.9% of sales, primarily due to prAna, direct-to-consumer expansion, personnel demand creation and information technology costs.
At March 31, 2015, cash and cash equivalents were $401.6 million and short-term investments were $52.9 million. Approximately 47% of cash and short-term investments were held by foreign subsidiaries and intended to remain invested outside the United States. The company had no borrowings under its $125.0 million domestic revolving credit facility or international subsidiary credit lines. A related-party note payable was $15.7 million and matures December 31, 2018.
Operating cash flow was $28.7 million. Investing cash flow was negative $41.2 million, including $25.8 million of net short-term investment purchases and $15.5 million of capital expenditures. Financing cash flow was positive $1.3 million, including $10.6 million of dividends paid. The company stated that existing cash, operating cash flow and available borrowing arrangements should cover liquidity needs for at least the next 12 months.
Material changes versus the prior comparable period
- Sales growth included $37.1 million of prAna revenue, following the May 30, 2014 acquisition; prAna contributed $3.7 million of net income, including $1.0 million of acquired-asset amortization.
- United States sales increased 18% to $283.8 million, supported by prAna and direct-to-consumer growth. Retail stores increased to 93 from 72.
- LAAP sales decreased 3% to $113.1 million, primarily because of weakness in Korea and unfavorable currency effects in Korea, Japan and China.
- EMEA sales increased 22% to $47.8 million and Canada sales increased 28% to $34.3 million, despite significant currency headwinds.
- Columbia brand sales increased 7% to $401.0 million; Mountain Hardwear sales declined 23% to $25.1 million, partly because of lower closeout sales.
- Foreign-exchange movements reduced the consolidated sales comparison by approximately four percentage points and contributed to $2.2 million of other non-operating expense, versus $0.4 million in the prior-year quarter.
- Foreign-currency translation produced a $16.8 million loss in other comprehensive income, reducing accumulated other comprehensive income to $2.8 million from $15.8 million at December 31, 2014.
- Accounts receivable declined to $251.7 million from $344.4 million at December 31, 2014, while inventory declined to $363.7 million from $384.7 million.
Guidance, outlook, risks and unusual items
The filing does not provide specific numerical full-year 2015 revenue or earnings guidance. Management expects profitability to remain heavily concentrated in the second half of the year. Key outlook factors include Columbia and Sorel growth in North American wholesale channels, direct-to-consumer investment, incremental prAna results, difficult conditions in Russia, Korea and China, and unfavorable currency effects.
The next phase of the global ERP implementation was planned for international distributor businesses in the second quarter of 2015. Management identified potential risks from implementation delays, business interruption, higher costs, supply-chain disruption, west-coast port labor issues, unseasonable weather, order cancellations, consumer discretionary spending, currency volatility, competition, contract-manufacturer capacity and product quality.
Inventory purchase obligations totaled $579.9 million at March 31, 2015. The company was party to ordinary-course legal matters and stated that their resolution was not expected to have a material adverse effect. The company maintained a product-warranty reserve of $10.9 million. No common stock was repurchased during the quarter; cumulative repurchases under the authorization totaled 19.6 million shares for approximately $456.4 million.
Important facts for investors to verify
- Whether second-half seasonal demand, weather and wholesale order timing support management’s outlook.
- The sustainability of gross-margin improvement after considering currency hedging, distributor mix and promotional activity.
- PrAna’s contribution, integration costs and ability to offset the decline in Mountain Hardwear sales.
- Progress and execution risk in the international ERP implementation.
- Foreign-exchange exposure, particularly in Russia, Korea, China, Japan, Canada and Europe.
- The conversion of substantial inventory purchase commitments into sales and cash flow.
- The effect of direct-to-consumer store and e-commerce expansion on SG&A leverage and returns.
- Whether operating cash flow remains sufficient as capital expenditures, dividends and seasonal working-capital requirements increase.