Columbia Sportswear Company was able to cut deeply into the excess outerwear inventories left over from the 2004 fourth quarter and moved quickly to liquidate any sportswear issues from the Spring/Summer 2005 lines. The action helped boost second quarter revenues more than expected, but gross margins suffered considerably and the resulting bottom line shrunk more than 41% for the period.
While Q2 is the smallest quarter of the year, the picture doesnt look much better for the third quarter when the company expects sales to decline 3% to 4% versus Q3 last year and net income to decrease in the 12% to 14% range compared to Q3 2004. Sales are expected to grow approximately 5% for the full year, while net income is forecast to decline 8% to 12% when compared to 2004.
The U.S. business was driven by “healthy increases” in Sportswear sales, particularly in mens woven shirts and shorts. They continue to see weakness in the youth Outerwear business for fall, which typically ships in the later part of Q2.
Canada posted a 28.3% decline in sales when measured in currency-neutral terms and Europe posted an 0.8% decrease in revenues, excluding FX rate changes.
Canada saw business slide across all categories in Q2, thanks to a tough retail environment. Sportswear sell-through was described as “solid” for the period, but Footwear was “challenging.” Given the upside potential of Forzanis commitment to outerwear for fall, SEW would expect Columbia to see some opportunity in that category. The second quarter was also hurt by a shift in timing of shipments that saw more orders move to the first quarter this year. First half sales are “essentially flat” for Columbia in Canada.
The Europe business is seen as increasingly promotional. COLM acquired its Swiss distributor on July 1 for roughly $1.2 million. They have already commenced selling directly to retail.
The Other International business, which includes the international distributors and Japan, saw the most activity for the quarter with a 41.2% currency-neutral increase for the quarter. International distributors posted a 55.2% increase in Q2 to $23.9 million, compared to $15.4 million in the year-ago period. Japan sales increased 24% to $9.3 million for the quarter, or 22.7% when excluding the impact of FX rates .
Excluding changes in currency, total consolidated sales increased 7.1% for the period.
Mountain Hardwear sales increase 27.9% in the quarter to $8.7 million. Management said the brand saw strong sales of spring sportswear and outerwear in the quarter, driven both by further penetration of existing businesses as well as expansion of new opportunities in the specialty channel, both domestically and internationally.
COLM said the Spring 06 MH line has been well received, but nothing was said about one of the most anticipated product launches in the outdoor specialty channel in years Mountain Hardwears new pack line.
Sorel sales jumped 73.3% to $2.6 million for Q2.
Licensing income was up 16.1% to $907,000, with strong gains in the camping and hosiery businesses.
Gross margins were certainly impacted by the increased close-out activity, but also took a hit from a shift in product mix from Outerwear to the lower margin Sportswear and Footwear categories and a move to more distributor sales on the International stage. Spring close-outs represented “well over half” of the GM contraction. SG&A was up 140 basis points on higher sales expenses from more direct sales and the associated commissions and advertising costs. One positive was the lack of commissions paid on the off-price goods sold.
By product category, Columbia saw Outerwear weakness in the North American market more than offset upside in Europe and the Other International business, while strength in Sportswear in the U.S. drove the increase for that category, primarily in woven shirts and shorts. The Footwear growth was said to be driven by international distributors in Q2. COLM said they had very little business in the footwear specialty channel in the U.S., but do see an opportunity to grow there. Still, they said the Footwear category will probably grow most rapidly with the sporting goods retailers.
|Second Quarter Results|
|(in $ millions)||2005||2004||Change|
|Gross Margin||39.5%||42.8%||-330 bps|
|Inventories @ Qtr-End||$215.9||$209.4||+3.1%|