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.
Sales growth was primarily driven by sportswear and outerwear in the U.S. and to a lesser extent sportswear in Europe and Outerwear sales through international distributors. On a currency-neutral basis, sales increased 9.1% during the quarter.
The integration of order management, manufacturing, and distribution for Pacific Trail and Montrail were said to be on-plan. The systems and operations integration will be complete by year-end. In spite of a high level of complexity in Pacific Trails order book, Columbia was able to deliver the majority of the companys product this fall. Montrails team is now entirely located in Columbias Portland, Ore. headquarters.
Montrail contributed $3.5 million to the top line during the quarter, while Pacific Trail contributed $13.5 million. Without the contribution of these two recently acquired brands, COLM sales would have 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. SG&A was flat to last year.
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 traditional sporting goods channels; however, the sportswear business is also the most dependent on Columbias brand strength, because it is the easiest product to replace with private label. Footwear was driven almost entirely by the addition of Montrail and strong results at Sorel.
By brand, 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. Montrails 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 SEW that both U.S. and international sales increased, with hardgoods showing the largest increase. The vast majority of the 150% increase in Columbias hardgoods category was due to MTHs new backpack line extension, which had a particularly successful back-to-school selling season.
Columbias 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 with U.S. and international distributors showing strong apparel growth. By category, sportswear orders were strongest, followed by outdoor apparel. Footwear pre-season orders were below average and actually declined on an organic basis, excluding the Montrail brand.
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 management expects revenue growth for the first quarter of 2007 of 11% and diluted earnings per share of 55 cents to 58 cents.
Editors Note: For more information on Mountain Hardwear, see this weeks issue of The B.O.S.S. Report.
|Third Quarter Results|
|(in $ millions)||2006||2005||Change|
|Gross Margin||43.7%||46.0%||-230 bps|
|*at quarter end|