By Eric Smith
Columbia Sportswear Co. launched an ambitious transformation plan, Project Connect, one year ago, and so far the project has delivered the results the global apparel and footwear company sought, according to executive comments made during Thursday’s earnings call with analysts.
“The majority of Project Connect initiatives are being implemented throughout the business and are a part of our sustained go-forward operational strategy,” CEO Tim Boyle said on the call. “We are realizing some of the financial benefits for Project Connect this year and continue to expect a more meaningful financial value capture in 2019 and beyond.
“We remain confident that the expected financial results from Project Connect will enable continued incremental investment while delivering consolidated profit improvement.”
Project Connect was designed to help Columbia “intensify its focus on the customer”; improve retail partnerships; create “enhanced collaboration, teamwork and accountability” throughout the company and “identify growth opportunities and improve the efficiency and effectiveness of our day-to-day operations,” Boyle said a year ago when outlining the program.
Specifically, Columbia expects Project Connect to deliver solid gross margin pickup in 2019 and beyond, but the program has already had an impact on the company, primarily in site traffic and conversion.
“This is one of the areas where we’ve seen some of the first fruits of our Project Connect business and the taxonomy and other technical aspects of the business were impacted positively to give us the kinds of conversion rate improvement and business improvements,” Boyle said. “And we expect that those will increase over time. And certainly we expect to have those kinds of positive things happen in the second half.”
Added Jim Swanson, Columbia’s CFO: “I’d also note the site traffic that we’ve seen has been quite positive and the conversion. We’ve been able to convert that traffic on the site and the performance we’ve seen both from a desktop and mobile perspective has been quite fruitful through the second quarter.”
Some of the fruits of that initiative could be seen in Columbia’s stellar second quarter ended June 30. The company reported net income of $9.7 million, or 14 cents per share, compared with a net loss of $11.5 million, or (17) cents per share, the same quarter a year ago. Non-GAAP second quarter 2018 net income increased to $11.3 million, or 16 cents per share, compared with non-GAAP net loss of $9 million, or (13) cents per share, in the prior-year quarter. That beat analysts’ consensus estimates by 26 cents a share
The company reported net sales of $481.6 million for the quarter, an increase of 21 percent (19 percent constant-currency), compared with net sales of $398.9 million for the second quarter of 2017. Non-GAAP net sales of $474.1 million increased 19 percent (17 percent constant-currency). Columbia beat analysts’ consensus revenue estimates by $36 million.
First half 2018 net income increased 124 percent to $54.8 million, or 77 cents per share, compared to $24.5 million, or 35 cents per share, in the first half of 2017. Non-GAAP net sales through the first six months of 2018 grew $130.5 million, or 14 percent (11 percent constant-currency), to $11 billion, compared to $942.7 million in the first half of 2017. First half 2018 non-GAAP net income increased 136 percent to $65.8 million, or 93 cents per share, compared to $27.9 million, or 40 cents per share, in the first half of 2017.
Through the first six months of 2018, net sales grew 16 percent (13 percent constant-currency), to $1.1 billion compared to the first half of 2017.
“Our better-than-expected second quarter and record first half results reflect continued momentum across our brand portfolio,” Boyle said. “Our first half revenue surpassed the $1 billion dollar mark for the first time in company history led by growth in the Columbia brand driven by solid performance in the United States across all channels as well as strong growth internationally led by our Europe-direct business. We are also pleased with strong first half performance for both Prana and Sorel, including a positive consumer response to Sorel’s spring 2018 assortment and progress in evolving to a year-round brand. With the strength in the first half performance we are pleased to increase our full year 2018 financial outlook.”
The company’s “powerful balance sheet, with $775 million in cash and short-term investments and no long-term debt,” Boyle said, will allow Columbia Sportswear to continue investing in growth initiatives such as Project Connect. According to Boyle, Columbia Sportswear’s four strategic priorities are to:
- drive brand awareness and sales growth through increased, focused demand creation investments;
- enhance consumer experience and digital capabilities in all channels and geographies;
- expand and improve global direct-to-consumer operations with supporting processes and systems and
- invest in the company’s people and optimize the company’s organization across our portfolio of brands.”
“We are excited about the second half of 2018, which we expect to include broad based revenue growth, increased demand creation spending and continued investment in our strategic priorities,” Boyle said.
One area that has Columbia bullish on the company’s outlook is China, which remains the “largest geographic opportunity for the company,” Boyle said. And Project Connect is at the heart of the company’s growth potential there.
“As our Project Connect work continues and we’re able to strengthen the product offering globally to be more focused, we think that the opportunity to have a much more robust business in China is quite significant,” Boyle said. “It’s an important part of our future. And we’ve invested in that business with people and processes to get us to the next level. About 10 percent of the stores that we operate in China are our own stores. We’ve added personnel to bring our stores up to a higher quality level. And I honestly believe that that’s going to be a real shining star in our future growth.”
The company’s earnings report, including the Project Connect success, caught of the eye of such investors as Jim Duffy of Stifel, who wrote in a note to investors: “We believe DTC progress (+16 percent currency neutral vs. 8 percent store growth buoyed by better low 20s e-commerce growth) reflects early evidence traction with Project Connect initiatives.”
Based on the strength of the first half, the company raised guidance for the remainder of 2018. Columbia now expects 2018 net sales growth of approximately 9 percent to 10.5 percent (prior expectation was 8 percent to 10 percent) from 2017 net sales of $2.5 billion. Columbia expects non-GAAP net sales growth of approximately 7.5 percent to 9 percent (prior 6.5 to 8.5 percent), excluding approximately $40 million in net sales associated with the new revenue accounting standard.
The company expects full year 2018 gross margin to improve by up to 140 basis points and non-GAAP gross margin to improve by up to 60 basis points, excluding approximately $40 million of benefit to gross profit associated with the new revenue accounting standard.
Columbia expects 2018 net income between approximately $223 million and $230 million (prior between $213 million and $220 million), and non-GAAP net income between approximately $239 million and $246 million (prior between $231 million and $238 million), or diluted earnings per share between approximately $3.15 and $3.25 (prior between $3.01 and $3.11), and non-GAAP diluted earnings per share between $3.37 and $3.47 (prior between $3.27 and $3.37).
However, that outlook still falls shy of expectations, as cost pressures weigh on the company, whose shares tumbled 8 percent Friday following cost concerns related to tariffs.
“We do face cost increases related to some accessories. And we are anticipating immaterial cost increases for some construction and fixturing as a result of steel and aluminum tariffs,” Boyle said. “That said, the escalating global trade battles have the potential to be very disruptive to our business as well as our vendors, our customers and to many of the countries where we do business including the United States.”
Photo courtesy Columbia Sportswear