Columbia Sportswear reported record sales numbers for the third quarter due to promising Fall 2009 backlog orders and strong early sell-through for its new winter line, led by Omni-Heat.
Columbia revised its full year 2010 outlook for sales to increase 17% to 18%, based primarily on year-to-date results, the previously announced 19% increase in Fall 2010 order backlog, and anticipated direct-to-consumer sales. Looking further ahead, spring wholesale backlog was up 12% to $394.2 million, led by a low-double-digit percentage increase in the U.S.
On the downside, the company lowered its expectation for operating margin for the full year to a range of 6.2% to 6.6% of sales compared to a prior forecast of 7% of sales, due to investments to support its renewed growth and challenges managing capacity constraints in Asia. Earnings rose 11.3% but missed Wall Street's consensus estimate partly because the company chose to ship product early, resulting in large freight costs.
“We needed to hit early demand and needed to airfreight,” said COO Bryan Timm on Columbia's conference Q3 call with analysts. “The part we didn’t know about was when air carriers increased their rates and the mix of footwear that grew this year, it led to an increase in freight…Carriers were aggressive in their pricing. But ocean freight rates also increased in the late summer months of this year.”
The bottom line benefited from a tax benefit of 10 cents a share as a result of the recognition of tax benefits associated with statute of limitations expirations during the third quarter. Excluding the benefit, earnings would have been $1.43 versus Wall Street's consensus estimate of $1.47.
On the call, company President and CEO Tim Boyle said sales growth this year and much of the pressure on margins are the result of investments Columbia has chosen to make to reclaim market share, as well as a shift toward more innovative and premium products. He particularly highlighted the early success of its Omni-Heat launch, backed by the largest marketing effort in its history.
“We are seeing very gratifying sales results even though the merchandise is just really hitting the floor and where we have the highest visibility is on our own stores where the Omni-Heat is performing multiple percentage points sell-through better than our non-Omni-Heat products,” said Boyle.
The 16.0% sales gain in the quarter was led by a 21.8% increase in the U.S. to $325.6 million, driven primarily by growth in wholesale and direct-to-consumer sales for the Columbia brand. U.S. wholesale sales registered a high-teens percentage increase while U.S. direct-to-consumer sales increased in the low-40s, including strong same-store growth, the benefit of an expanded e-commerce platform, and four more U.S.-based retail stores compared to the same period last year. COLM now has 48 stores in the U.S. region.
In the EMEA region, sales decreased 2.1% to $66.3 million, including an eight percentage point negative effect from changes in currencies. This region was negatively impacted by later receipts of inventory due to sourcing capacity constraints in Asia, resulting in a shift in timing of Fall product shipments into the fourth quarter. The EMEA direct business showed a low-single-digit percent decline as unfavorable changes in foreign currency exchange rates offset gains in local currencies. EMEA distributor sales remained relatively flat.
Sales in the Latin America/Asia Pacific region increased 33.2%, to $59.0 million in Q3, including a six-point benefit from changes in currency exchange rates. Sales to LAAP distributors saw high-60s percentage growth due in part to a higher volume of Fall shipments occurring in Q3 this year versus Q2 last year, reflecting sourcing capacity constraints. Canada sales declined 36.% to $53.1 million, including a four percentage point benefit from foreign currency exchange rates. The decrease was primarily due to capacity constraints.
Sportswear sales jumped 17.7% to $168.2 million, primarily driven by increased U.S. and LAAP Columbia-branded net sales. Outerwear increased 12.5% to $223.9 million, driven by increased U.S. Columbia-branded net sales.
Columbia Footwear sales climbed 18% to $82.8 million, reflecting growth by Sorel in the U.S. and EMEA regions, and increased Columbia-branded sales in the U.S. and LAAP regions. Accessories & equipment sales increased 31.1% to $29.1 million, driven by Columbia and Mountain Hardwear brands in the U.S.
By brand, Columbia brand sales increased 16.2% to $430.3 million, sales of Sorel footwear increased 23.7% to $33.4 million, and Mountain Hardwear brand sales increased 8.5% to $38.2 million. Other brands including Montrail and Pacific Trail logged sales of $2.1 million versus $2 million a year earlier.
Gross margins decreased 90 basis points to 42.5% of sales, primarily due to incremental costs to expedite production and delivery of Fall orders, partially offset by favorable foreign currency hedge rates and increased direct-to-consumer sales at higher gross margins.
SG&A expense grew 19.2% – accounting for 29.4% of sales versus 28.6% a year ago partly due to an increase in global personnel costs related to the reinstatement of personnel and benefit programs that were curtailed or postponed in 2009. The increase also reflected an increased advertising spend; incremental IT costs in preparation for a multi-year ERP implementation; and direct-to-consumer expansion.
Inventories at quarter-end increased 18.8% from one year ago, higher than its backlog rate. Having secured more timely manufacturing capacity for Spring 2011, Columbia expects to receive a higher percentage of its Spring 2011 production in the fourth quarter versus the prior period.
“We took deliberate steps to increase our replenishment inventory volumes after we exited 2009 with abnormally low replenishment inventory levels and experienced stock-outs of some key replenishment styles,” said CFO Tom Cusick “We plan to carry a larger volume of excess Fall inventory into 2011 than we did last year, and sell it primarily through our own retail outlet stores where we tend to generate higher gross margins than when we sell excess inventory through independent close-out channels.” Cusick also indicated that cancellation rates “are actually down a little bit” season-to-date through the fourth quarter.
Consolidated wholesale backlog, which includes both Fall and Spring orders at quarter-end., was $667.4 million, a 13% increase.
Looking ahead, the expected sales gain is based primarily on year-to-date results, the increase in Fall 2010 backlog, and anticipated direct-to-consumer sales. Gross margins are now expected to increase up to 20 basis points compared with 2009 gross margins of 42.1% of sales, due to an increased proportion of direct-to-consumer sales, improved margins on close-out sales, and more favorable foreign currency hedge rates, largely offset by increased costs to expedite production. SG&A expenses are expected to increase approximately 50 to 75 basis points as a percentage of sales, reflecting retail expansion, increased marketing investments, reinstatement of personnel and benefit programs, investments in IT, and transitional costs associated with internalizing its sales organizations in North America and Europe.
Fourth quarter sales are expected to climb 20% to 23% and GM is expected to decline 65 to 135 basis points.
