Columbia Expects Decline in 2006 Earnings Despite Double-Digit Backlog Gains…

Columbia Sportswear shares took a hit last week after the company posted a meager gain in the top-line and a decline in profits. The company offered a fairly mixed view for the year, forecasting double-digit revenue growth, but also suggesting that earnings would decline as a similar rate. While some of the sales increase was derived from the Montrail acquisition, the majority of the growth was organic. Things are expected to get worse on the earnings front in Q2.

Excluding currency exchange rate fluctuations, sales increased 7.7% in the first quarter.

During a conference call with analysts and the media, Columbia management said that the Montrail integration is proceeding as planned. Key product line management and sales positions are in place, and the company anticipates systems and distribution center integration by the end of this year. Bringing Montrail under the Columbia umbrella was slightly dilutive to Columbia's first quarter earnings, primarily due to the unfavorable impact of recording the Montrail inventory at fair value in purchase accounting. The acquisition will be slightly dilutive to 2006 earnings.

Mountain Hardwear sales were $16.1 million during the first quarter, a 36.4% increase over last year. Shipment of Mountain Hardwear spring sportswear and outerwear collections were “very strong” in the first quarter. Fall 2006 bookings were also strong, with healthy increases in the domestic specialty channel, and in international markets. Mountain Hardwear outerwear orders were healthy in international markets, and sportswear bookings were strong globally.

Sorel sales were down 37% to $3.1 million versus $4.9 million last year. The decrease was primarily due to unseasonably warm weather conditions in North America during January. All futures orders for Sorel products increased moderately, driven by growth in Europe, Japan, and distributor markets. Orders for cold weather Sorel footwear in North America were soft due to the warm weather conditions.

Overall, Columbia footwear sales were flat domestically, due to warm weather conditions in January hampered close-outs of cold weather footwear products. Net licensing income was $1 million, compared to $700,000 last year, with solid first quarter sales of Columbia camping gear, hosiery, bicycle, eyewear, and insulated coolers.

The newly acquired Pacific Trail businesses contributed roughly $20 million to Columbia’s backlog numbers at quarter-end. Shortly after acquiring the brands, Columbia sold Pacific Trail’s Dockers brand licenses for $1.7 million. Plans are to distribute Pacific Trail products through an in-house sales organization, primarily to a limited number of potential customers Columbia currently does not sell. The acquisition will be slightly dilutive to COLM 2006 results. Pacific Trail gross margins are expected to be lower than the average across Columbia’s other brands.

Consolidated fall and spring backlog increased 11.9% to $848.9 million, compared to consolidated backlog of $758.9 million last year at this time. Excluding future orders from acquired companies, consolidated backlog increased 8.1%. By product category, sportswear orders for fall products were strong, particularly in the U.S., driving overall backlog growth. Of this total, fall product backlog was up 11.6% to $720.7 million. In spite of this double-digit growth, management said that they were disappointed with the fall order numbers.

Geographically, organic U.S. fall orders increased low-double digits, driven by increases in sportswear bookings. Europe and Canada bookings were essentially flat, and other international bookings increased ahead of the corporate average, led by growth in Japan.

In fact, Japan, which is a component of Columbia’s “other international” division, recorded first quarter sales of $12.4 million, an increase of 19.2%, or approximately 34.9%, excluding changes in currency exchange rates.

The increase in inventory was said to be largely attributed to “higher levels of Fall 2006 inventory for anticipated fall season growth, acquired Montrail inventory, and increased levels of core and replenishment inventory.”

COLM sees Q2 net income of just $1 million compared to $6.6 million in Q2 last year. Sales are expected to increase 10% to 12% for the period and GM are seen declining 250 basis points to approximately 37% of estimated sales.

For the year, the company expects revenue growth of approximately 10%, while net income is expected to decline approximately 10% for 2006.