Columbia Sees Margins Impact Bottom Line in Q3, But Company Lifts Guidance…

While Columbia Sportswear saw a high-single-digit decline in their net income during the third quarter, the impact was not as bad as internal projections at the company initially anticipated, thanks to stronger than expected margins at Mountain Hardwear, Montrail, and Pacific Trail. On a currency-neutral basis, sales increased 9.1% during the quarter. The integration of systems and operations for Pacific Trail and Montrail will be complete by year end. Montrail contributed $3.5 million to sales during the quarter, while Pacific Trail contributed $13.5 million. Organically, COLM sales increased 6.7% to $437.1 million.

Gross margins declined, but exceeded expectations by over 70 basis points. The decline was primarily due to 2006 product line inefficiencies caused by an expanded SKU count. An increase in close-out sales and lower margins from the acquired Pacific Trail and Montrail businesses also contributed to declines in gross margin. For fall 2007, Columbia hopes to rectify the decline in margins with a much more targeted offering. The company has yet to see any decline in raw material costs as petroleum prices have started falling.

The 8% increase in outerwear was primarily caused by the addition of Pacific Trail to the mix, while shipments were negatively impacted by a shift from the third to the fourth quarter. Sportswear growth was driven by shipments to domestic customers. Columbia hopes to incrementally add margin to the sportswear business as it increases its volume through department store and sporting goods channels. Footwear was driven almost entirely by Montrail and strong results at Sorel.

Sorel sales were up 12.9% for the quarter to $21 million with distribution to cold-weather markets outside of the U.S. expanding. With the acquisition of Montrail and the new footwear expertise that came with the company, Columbia is shifting management responsibilities for parts of its footwear program. The Sorel management team will now direct product line management for cold weather footwear, water footwear, sandals, and casual footwear under the Columbia and Sorel brands. Montrail’s team will direct product development for Montrail and Columbia branded hiking and trail products.

Mountain Hardwear sales increased 8.4% for the third quarter to $25.8 million due to growth in international distributors, Europe, and Korea. Mike Wallenfels, president of Mountain Hardwear told BOSS that both U.S. and international sales increased, with hardgoods showing the largest increase. The vast majority of the 150% increase in Columbia’s hardgoods category was due to MTH’s new backpack line extension, which actually had a particularly successful back-to-school selling season. Accessories were the second strongest category, with hats and gloves selling well due to the below average temperatures. In the outerwear category, standard fleece is showing strong growth as well as waterproof-breathables, which are out-pacing soft-shells.

MTH retailers are relying more heavily on at-once orders than they have in the past, with smaller pre-season bookings, but much larger re-orders. Wallenfels said that fall re-orders are up 84% this year. Regionally, the west, the Rockies, and the southeast are seen as strongest, with the Northeast showing “fair to poor” results.

Columbia management was also very pleased with the strong gross margin expansion at Mountain Hardwear, which was caused by several back-end efficiencies coming together. Some sourcing efficiencies and quantity negotiation programs that took nearly two years to get in place helped MTH reduce their manufacturing costs while maintaining the same levels of technology.

At the same time, MTH’s international distributors were bringing in better margins while better forecasting allowed the company to reduce close-outs. Wallenfels also said that these cost reductions were partially passed on to retailers, who have higher margins on MTH product as well.

Columbia’s spring backlog is up 15.4% to $414.5 million. On a currency neutral basis, backlog is up 14.1% and organic spring backlog was up 12.7%. Geographically, spring pre-season orders are up in all key markets. By category, sportswear orders were strongest, followed by outdoor apparel. Footwear lagged behind the corporate average, declining on an organic basis excluding Montrail.

Fourth quarter 2006 revenues are expected to grow 14% with net income declining 4% to 7%. For the full year 2006, net sales should grow 11% and diluted earnings per share will be $3.26 to $3.29, compared to previous guidance of $3.22. Based on the reported spring backlog, Columbia expects revenue growth for the first quarter of 2007 of 11% and diluted earnings per share of approximately 55 cents to 58 cents.