Columbia Sportswear reported sales increased 16% in the third quarter to $504.0 million from $434.5 million a year ago. Net income advanced 11% to $52.2 million, or $1.53 per diluted share, including a benefit of 10 cents a share, from a lower income tax rate. With Spring 2011 wholesale backlog ahead 12%, Columbia revised its full year 2010 outlook for net sales to increase 17 to 18% and for operating margin to be approximately 6.2 to 6.6% of sales.
Changes in foreign currency exchange rates did not have a material effect on the year-over-year comparison. The lower income tax rate was a result of the recognition of tax benefits associated with statute of limitations expirations during the third quarter. The company reported net income of $46.9 million, or $1.38 per diluted share, for the same period of 2009.
Tim Boyle, Columbia's president and chief executive officer, commented, “We achieved quarterly sales of over $500 million for the first time in the company's 72-year history, highlighted by the global launch of our innovative Omni-Heat warmth technologies. During the quarter we also added another technology to our expanding platform of innovations with the acquisition of OutDry Technologies, which we plan to introduce across our brand portfolio in Fall 2011.”
Boyle continued, “The increase in 2010 net sales and much of the pressure on 2010 operating margins are the result of investments we have chosen to make to claim market share; to shift our business toward more innovative and premium products; to drive consumer demand for all of our major brands, particularly the Columbia brand; and to improve business systems and processes. We believe we are achieving many of our goals in the marketplace, and have therefore begun to invest more heavily in our infrastructure and systems. To successfully secure market share and retail floor space for our Fall 2010 innovations, we chose to expedite manufacturing and shipping in a capacity-constrained environment, which has had a particularly pronounced impact on our 2010 profitability.”
Wholesale Backlog
The company reported that as of September 30, 2010, Spring wholesale backlog was $394.2 million, an increase of $43.4 million, or approximately 12%, compared with Spring wholesale backlog of $350.8 million at September 30, 2009. Changes in currency exchange rates did not have a material effect on the year-over-year backlog comparison. Spring wholesale backlog increased in every region, led by a low-double-digit percentage increase in the U.S.
Wholesale backlog in the Latin America & Asia Pacific (LAAP) region increased mid-twenty percent, including a mid-single-digit percentage point benefit from exchange rates. Spring wholesale backlog in the Europe, Middle-East & Africa (EMEA) region increased high-single-digits percent, including a mid-single-digit percentage point negative effect from exchange rates. Canada wholesale backlog increased mid-single-digit%, including a mid-single-digit percentage point benefit from exchange rates. Global apparel and footwear wholesale backlog increased low-double-digit and high-teens percent, respectively.
Boyle commented, “We are encouraged by the 12% increase in our Spring wholesale backlog with growth in every region, product category and major brand.”
Consolidated wholesale backlog, which includes both global fall and spring orders at September 30, 2010, was $667.4 million, a 13% increase compared with consolidated wholesale backlog of $590.0 million at September 30, 2009. Changes in currency exchange rates did not have
a material effect on the year-over-year comparison.
Wholesale backlog is not necessarily indicative of changes in total sales for subsequent periods due to the mix of advance and “at once” orders, exchange rate fluctuations and order cancellations, which may vary significantly from quarter to quarter, and because the company's retail operations are not included in wholesale backlog.
Review of Third Quarter Results
The 16% increase in third quarter 2010 net sales was led by a 22% increase in the U.S. to $325.6 million. Sales in the LAAP region increased 33%, to $59.0 million, including a 6 percentage point benefit from changes in currency exchange rates. These increases were partially offset by a 4% decline in Canada to $53.1 million, including a 4 percentage point benefit from changes in currency exchange rates, and a 2% decline in the EMEA region to $66.3 million, including an 8 percentage point negative effect from changes in currency rates compared with the third quarter of 2009.
Compared with the third quarter of 2009, third quarter 2010 sportswear net sales increased 18% to $168.2 million, outerwear net sales increased 12% to $223.9 million, footwear net sales increased 18% to $82.8 million and accessories & equipment net sales increased 31% to $29.1 million.
Third quarter 2010 Columbia brand net sales increased 16% to $430.3 million, net sales of Sorel footwear increased 24% to $33.4 million, and Mountain Hardwear brand net sales increased 9% to $38.2 million, compared with the third quarter of 2009.
The company ended the quarter with $236.3 million in cash and short-term investments, compared with $210.5 million at September 30, 2009. Accounts receivable increased $44.5 million, or 14%, to $364.0 million, and days sales outstanding improved to 65 days from 66 days, compared with September 30, 2009. Consolidated inventories increased 19% to $358.2 million at September 30, 2010, compared with $301.5 million at September 30, 2009.
During the quarter, the company completed the previously announced acquisition of OutDry Technologies S.r.l., from Nextec S.r.l., based near Milan, Italy. OutDry Technologies S.r.l. owns the intellectual property and other assets comprising the OutDry brand and related business. The transaction is not expected to have a material effect on the company's 2010 operating results.
2010 Financial Outlook
The current economic environment in key markets, coupled with challenging capacity constraints across the independent manufacturing and transportation segments of the company's supply chain, have reduced the predictability of its business throughout 2010. In addition, the company's fourth quarter results are more variable because they rely more heavily on fall weather patterns and the pace of retail sell-through, which can stimulate customer reorders or, conversely, result in cancellations. In addition, sales from the company's own retail stores represent a larger part of its fourth quarter business than they have historically. All projections related to anticipated future results are forward-looking in nature and are based on backlog and forecasts, which may change, perhaps significantly.
The company revised upward its outlook for full year 2010 net sales to increase 17 to 18% compared with 2009, based primarily on actual results through September 30, 2010, the previously announced 19% increase in Fall 2010 order backlog, and anticipated direct-to-consumer sales.
2010 gross margins are now expected to increase up to 20 basis points compared with 2009 gross margins of 42.1%, due to an increased proportion of direct-to-consumer sales, improved gross margins on close-out sales, and more favorable foreign currency hedge rates, largely offset by increased costs to expedite production and delivery of Fall orders to retail customers.
Selling, general and administrative (SG&A) expenses are expected to increase approximately 50 to 75 basis points as a percentage of sales due to a combination of several factors, including the effect of the company's retail expansion, increased marketing investments to support the global launch of the company's Fall 2010 products, reinstatement of personnel and benefit programs that were curtailed or postponed in 2009, incremental costs related to information technology (IT) infrastructure and business process initiatives in preparation for a new multi-year ERP implementation, and transitional costs associated with internalizing the sales organizations in North America and Europe.
As a result, full year 2010 operating margin is now expected to be between approximately 6.2% and 6.6% of sales. The company is currently planning a full-year income tax rate of approximately 26%, leading to expected full year 2010 diluted earnings per share of $2.00 to $2.15.
The company expects fourth quarter 2010 sales to increase 20 to 23% compared with the fourth quarter of 2009, driven by the previously announced increase in advance seasonal orders, coupled with increased direct-to-consumer sales. Fourth quarter 2010 operating margin is expected to contract between approximately 65 to 205 basis points compared with the fourth quarter of 2009. This expected operating margin contraction consists of approximately 65 to 135 basis points of gross margin contraction and up to 70 basis points of SG&A expansion. The anticipated gross margin contraction is due primarily to incremental costs to expedite production and delivery of Fall 2010 orders and a higher proportion of close-out sales. Fourth quarter SG&A expansion is comprised of the same factors contributing to the increase in full year SG&A.
Share Repurchase Program
During the third quarter of 2010, the company repurchased approximately 203,000 shares of common stock at an aggregate purchase price of $10.0 million. Through September 30, 2010, the company has repurchased a total of approximately 9.2 million shares at an aggregate purchase price of $421 million since the inception of the stock repurchase program in 2004 and approximately $79 million remains under the current repurchase authorization. The repurchase program does not obligate the company to acquire any specific number of shares or to acquire shares over any specified period of time.
Dividend
The board of directors approved a fourth quarter dividend of 20 cents per share, an increase of 2 cents per share, or 11%, from the prior quarterly dividend rate, payable on November 24, 2010 to shareholders of record on November 10, 2010.
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||||||||
| (In thousands, except per share amounts) | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
| Net sales | $ | 504,028 | $ | 434,473 | $ | 1,026,265 | $ | 885,707 | |||||||||||||
| Cost of sales | 289,747 | 245,874 | 587,758 | 512,306 | |||||||||||||||||
| Gross profit | 214,281 | 188,599 | 438,507 | 373,401 | |||||||||||||||||
| 42.5 | % | 43.4 | % | 42.7 | % | 42.2 | % | ||||||||||||||
| Selling, general, and administrative expenses | 148,072 | 124,184 | 377,069 | 318,439 | |||||||||||||||||
| Net licensing income | 2,334 | 1,322 | 4,878 | 5,283 | |||||||||||||||||
| Income from operations | 68,543 | 65,737 | 66,316 | 60,245 | |||||||||||||||||
| Interest income, net | 147 | 319 | 1,073 | 1,799 | |||||||||||||||||
| Income before income tax | 68,690 | 66,056 | 67,389 | 62,044 | |||||||||||||||||
| Income tax expense | (16,485 | ) | (19,141 | ) | (16,560 | ) | (18,109 | ) | |||||||||||||
| Net income | $ | 52,205 | $ | 46,915 | $ | 50,829 | $ | 43,935 | |||||||||||||
| Earnings per share: | |||||||||||||||||||||
| Basic | $ | 1.55 | $ | 1.39 | $ | 1.51 | $ | 1.30 | |||||||||||||
| Diluted | 1.53 | ||||||||||||||||||||
