Again boosted by expanding gross margins and solid growth in its flagship brand, Columbia Sportswear reported fourth-quarter earnings that easily topped Wall Street’s targets. In its initial forecast, Columbia said it expects 4 percent earnings growth on 4 percent sales growth for 2017.
On Friday, shares of Columbia were up about 12 percent on mid trading on the over-the-counter market.
Earnings in the quarter jumped 33.7 percent to $84.7 million, or $1.20 a share in its fourth quarter, topping Wall Street’s consensus estimate of $1.10. Sales improved 2.6 percent to $717.5 million, coming in below the Street’s target of $756.8 million. On a currency-neutral basis, sales were up 2 percent.
In the U.S., sales increased 2 percent to $455.4 million. A low-double-digit increase in direct-to-consumer (DTC) sales was offset by a mid-single-digit decline in wholesale sales. The gains primarily reflected growth from the Columbia brand.
Net sales in the LAAP region increased 1 percent to $151.9 million but eased 1 percent on a currency-neutral basis. The gains were driven by mid-teen growth in Japan (low-single-digit constant-currency) and a high-single-digit net sales increase in China (mid-teen constant-currency). These increases were partially offset by a low-teen percentage net sales decline in Korea (mid-teen constant-currency) due to preferences in that country moving away from the outdoor category that has created industry-wide excess inventory levels. Net sales to LAAP distributors also saw a mid-teen decline due to a shift in the timing of shipments of increased spring 2017 advance orders.
Sales in the Europe, Middle East, Africa (EMEA) region jumped 20 percent, to $70.1 million. Sales increased low-20 percent in Europe-direct markets, representing an eighth consecutive quarter of growth greater than 15 percent. Net sales to EMEA distributors increased by a high-teen percentage, primarily due to a favorable shift in the timing of shipments of increased spring 2017 advance orders and stabilizing conditions in Russia.
Sales in Canada declined 12 percent (11 percent constant-currency), to $40 million, reflecting lower wholesale sales.
By brand, Columbia’s sales in the quarter increased 4 percent to $552.3 million. The gain primarily reflected increased U.S. DTC sales combined with increased sales in the EMEA region, Japan and China, partially offset by lower wholesale sales in the U.S. and Canada, as well as lower sales in Korea and to LAAP distributors.
Sorel sales decreased 1 percent (2 percent constant-currency) to $103.8 million, primarily due to sales declines in the U.S. and Canada, partially offset by increases in Europe-direct markets and Japan.
Prana’s sales increased 2 percent to $28.2 million, due largely to growth in the U.S. Mountain Hardwear’s sales decreased 11 percent (12 percent constant-currency) to $31.3 million, primarily reflecting declines in the U.S., China and Korea, partially offset by increases in Japan and EMEA.
Among categories, global apparel, accessories & equipment sales increased 4 percent to $535.8 million as increased Columbia, Sorel and Prana sales offset a low-double-digit percentage decline in Mountain Hardwear. Footwear sales decreased 1 percent (2 percent constant-currency) to $181.6 million, reflecting a 3 percent decline in Sorel, partially offset by 1 percent growth at Columbia.
Gross margin expanded 175 basis points to 47.1 percent. The improvement was due to a favorable mix of full-price versus closeout product sales, a higher proportion of DTC sales, a lower proportion of sales to international distributors, select price increases and favorable sourcing environment. Those factors offset headwinds from currencies in Europe, Canada, China and Japan.
SG&A expenses were reduced to 33.6 percent of sales from 33.9 percent. Its expense rate was helped by cost containment efforts instituted throughout the year, lower incentive compensation and lower information technology investments. Operating income increased 22 percent $100.4 million.
For the full year, net income advanced 22 percent to $191.9 million, or $2.72. Sales inched up 0.5 percent to $238 billion.
On a conference call with analysts, Tim Boyle, CEO, noted that the year marked the company’s third consecutive year of record sales and its second consecutive year of record operating income and record net income, driven by the gross margin improvement.
“We are especially proud of these accomplishments because they were achieved despite unique challenges in several of our largest markets, specifically Korea, Russia and our North American wholesale business where wholesale customers’ bankruptcies, and unseasonable weather added significant impact,” said Boyle.
Boyle called out the performance in Europe, which produced its second consecutive year of 20 percent plus constant currency sales growth and saw its direct business return to operating profitability.
Another highlight was DTC channels, which grew more than 10 percent and represented 37 percent of global sales in 2016, up from 34 percent in 2015. Within that, its combined global e-commerce business grew more than 20 percent to approximately $220 million, which represented more than 9 percent of global sales for the year.
“Our outstanding 2016 results demonstrate our ability to navigate a wide variety of market conditions by capitalizing on the strengths of our brand, leveraging our operating platforms and prioritizing our investments to drive continued profitable growth across our diverse global business while maintaining a strong balance sheet,” said Boyle.
Among brands, Boyle noted that Columbia’s 2 percent growth in 2016 consisted of 4 percent growth in North America, more than 20 percent growth in Europe direct markets, high-single-digit constant-currency growth in China, and low-single-digit constant currency growth in Japan. Those gains were offset by double-digit declines in Korea, LAAP distributor markets and Russia. For 2017, the Columbia brand is expected to show mid-single-digit constant-currency sales growth, with all four geographic regions contributing.
Boyle said Columbia’s OutDry Extreme Eco technology received strong recognition from leading media following its introduction at Outdoor Retailer. An Eco marketing campaign with REI featuring a partnership with hip hop artist Macklemore drove over 40 million impressions and numerous placements in major publications. Said Boyle, “Along with our key wholesale partners, we will drive consumer awareness of the innovative technology as we approach the spring and early summer months when raingear sales hit their annual peak.”
On the marketing front, Boyle noted that Columbia’s Tested Tough brand platform’s social engagement metrics continued to outpace its outdoor competitors on Instagram and YouTube, while media impressions resulting from its PR efforts more than doubled in 2016 to an all-time high for the Columbia brand.
Particularly drawing attention last year was Columbia brand’s partnership with Manchester United last fall and Columbia Montrail co-brand’s sponsorship of The Annual Ultra-Trail du Mont-Blanc (UTMB). Just entering its second season, Columbia’s Directors of Toughness campaign has already more than doubled the social media results of season one, driving more than 200 million editorial impressions and millions of views on YouTube, Facebook and Instagram.
The brand’s partnership with Star Wars that made Columbia the exclusive designer and distributor of a limited collection of Rogue One inspired apparel also drew wide coverage.
At the store level, the Columbia brand completed the first wave of installations of enhanced in-store environments during the fourth quarter, with current plans to roll out approximately 200 additional sites during 2017.
Among other brands, Sorel grew 2 percent in 2016, on top of 26 percent growth in 2015, and efforts continue to reduce its dependence on cold weather. In 2016, it completed a successful pilot launch of spring offerings with Nordstrom and has expanded its spring offerings to nearly 800 doors across North America this year.
“Despite the challenging North American wholesale backdrop, we expect Sorel to return to healthy low-double-digit sales growth in 2017, with the bulk of that growth coming in the second half, led by its lighter weight fall fashion styles, led by the Lea Wedge, Addington and Out N About collections,” said Boyle.
Prana grew 12 percent in 2016, its sixth consecutive year of double-digit growth despite the negative impacts of U.S. wholesale bankruptcies during 2016. Growth was helped by the launch of an expanded swimwear line. Its men’s yoga, fitness and lifestyle business grew faster than women’s in 2016. Another year of low-double-digit growth is projected from Prana in 2017.
At Mountain Hardwear, the search for a new brand president is nearing conclusion while repositioning efforts continue.
“Mountain Hardware’s wholesale partners remain confident about the brand based on its heritage and its reputation for superior high altitude performance and have expressed their support for the team strategy and vision to refocus that DNA,” said Boyle. “We also know the brand remains strong loyalty – remains with strong loyalty among its core consumers. We still have a lot of work to do before we can expect the sales trend to reverse. Accordingly, we anticipate modest declines from the Mountain Hardware brand in 2017.”
Looking to 2017, Columbia expects 2017 sales growth of approximately 4 percent overall, including approximately 1 percentage point negative effect from changes in foreign currency exchange rates. Gross margins are projected to improve 25 basis points. SG&A expenses are expected to increase at a rate slightly faster than net sales, resulting in approximately 20 basis points of SG&A expense deleverage, including a planned increase in global demand creation spend from 5 percent of sales in 2016.
Operating income is expected to increase up to 5 percent, to between $260 million and $270 million, resulting in anticipated 2017 operating margin of up to 10.9 percent. Net income is expected to land between $192 million and $200 million, or approximately $2.72 to $2.82 per diluted share, which compares to $2.72 in 2016.
Photo courtesy Columbia
