Columbia Sportswear Company lifted its guidance for the year after reporting a surprise profit in the second quarter ended June 30.
Highlights of the quarter include:
- Second-quarter 2021 net sales increased 79 percent to $566.4 million, compared to second quarter 2020. Wall Street’s consensus estimate had been $500.33 million.
- Second-quarter 2021 operating income of $35.0 million, or 6.2 percent of net sales, compared to a second-quarter 2020 operating loss of $70.3 million, or (22.2) percent of net sales. Wall Street’s consensus estimate had called for a loss of 12 cents.
- Second-quarter 2021 diluted earnings per share reached 61 cents, compared to a net loss per share of 77 cents in second quarter 2020.
- Exited the quarter with $820.9 million in cash and short-term investments and no borrowings.
Chairman, President and CEO Tim Boyle commented, “Our record financial performance clearly reflects the powerful fundamental recovery that is underway in our business. Second-quarter results exceeded our expectations, driven by better than planned performance in our U.S. wholesale and DTC brick & mortar businesses. We eclipsed pre-pandemic first half 2019 financial results, marking an important milestone in our recovery. It is clear that our brand portfolio is resonating with consumers and we are well-positioned to benefit from current consumer and outdoor trends.
“Overall, our Spring sell-through has been exceptional and our Fall 21 and Spring 22 order books point to continued momentum in the business. We are raising our full-year financial outlook for 2021 despite ongoing pandemic-related supply chain disruptions and higher ocean freight costs.
“Our fortress balance sheet remains strong, with cash and short-term investments totaling $821 million with no bank borrowings at quarter-end. We are committed to driving sustainable and profitable long-term growth and investing in our strategic priorities to drive brand awareness and sales growth through increased, focused demand creation investments; enhance consumer experience and digital capabilities in all our channels and geographies; expand and improve global direct-to-consumer operations with supporting processes and systems; and invest in our people and optimize our organization across our portfolio of brands.”
The company’s said its top priority during the pandemic remains to protect the health and safety of its employees, families, customers, and communities. While there were isolated temporary store closures resulting from local regulations or safety concerns, the majority of the company’s owned stores remained open throughout the second quarter 2021. Overall brick and mortar store traffic trends improved during the quarter but remained below pre-pandemic levels. In recent months, ocean freight costs significantly exceeded its expectations and limited upside to its full-year financial outlook. Rising COVID-19 cases in sourcing countries across southeast Asia could further disrupt product availability and deliveries. Port congestion and logistics constraints also continue to impact the timing of inventory receipts and deliveries.
Second Quarter 2021 Financial Results
- Net sales increased 79 percent to $566.4 million from $316.6 million for the comparable period in 2020. Net sales growth primarily reflects a strong fundamental recovery in the U.S. wholesale and direct-to-consumer (DTC) brick and mortar channels and fewer pandemic related disruptions and temporary store closures compared to the second quarter 2020.
- Gross margin expanded 540 basis points to 51.6 percent of net sales from 46.2 percent of net sales for the comparable period in 2020. Gross margin expansion was primarily driven by decreased inventory reserve provisions relative to elevated levels in the second quarter 2020 and, to a lesser degree, lower DTC promotional levels and favorable wholesale product margins, partially offset by unfavorable channel sales mix.
- SG&A expenses increased 20 percent to $261.8 million, or 46.2 percent of net sales, from $217.7 million, or 68.7 percent of net sales, for the comparable period in 2020. The increase in SG&A expenses primarily reflects the variable component of the company’s SG&A expense structure which correlates with changes in sales volume. SG&A expense growth included an increase in global retail, demand creation, personnel, and incentive compensation expenses, partially offset by the non-recurrence of prior year COVID-19 related expenses and a decrease in bad debt expense.
- Operating income of $35.0 million, or 6.2 percent of net sales, compared to an operating loss of $70.3 million, or 22.2 percent of net sales, for the comparable period in 2020.
- Income tax benefit of $5.4 million, resulted in a negative effective income tax rate of 15.3 percent, compared to a $19.5 million benefit, or an effective tax rate of 27.7 percent, for the comparable period in 2020. The second quarter 2021 income tax benefit was primarily driven by a non-recurring decrease in accrued foreign withholding taxes.
- Net income of $40.7 million, or $0.61 per diluted share, compared to a net loss of $50.7 million, or $(0.77) per share, for the comparable period in 2020.
First Half 2021 Financial Results
- Net sales increased 35 percent to $1,192.0 million from $884.8 million for the comparable period in 2020.
- Gross margin expanded 430 basis points to 51.5 percent of net sales from 47.2 percent of net sales for the comparable period in 2020.
- SG&A expenses increased 4 percent to $516.2 million, or 43.3 percent of net sales, compared to $494.5 million, or 55.9 percent of net sales, for the same period in 2020.
- Operating income increased 246 percent to $105.5 million, or 8.8 percent of net sales, compared to an operating loss of $72.3 million, or (8.2) percent of net sales, for the same period in 2020.
- Income tax expense of $9.2 million resulted in an effective income tax rate of 8.7 percent, compared to an $18.1 million income tax benefit, or an effective tax rate of 26.4 percent, for the same period in 2020.
- Net income increased 291 percent to $96.6 million, or $1.44 per diluted share, compared to a net loss of $50.5 million, or $(0.76) per share, for the same period in 2020.
Balance Sheet As Of June 30, 2021
- Cash, cash equivalents and short-term investments totaled $820.9 million, compared to $475.8 million at June 30, 2020.
- The company had no borrowings, compared to short-term borrowings of $2.8 million at June 30, 2020.
- Inventories decreased 16 percent to $676.0 million, compared to $806.9 million at June 30, 2020. The reduction in inventory was driven by increased sales combined with delayed Fall 2021 inventory receipts due to ongoing supply chain disruptions. Inventory at quarter-end primarily consisted of current and future season products. Aged inventories represent a manageable portion of our total inventory mix and excess inventory decreased significantly compared to the same period in 2020.
- Cash Flow for the Six Months Ended June 30, 2021
- Net cash flow from operating activities was $117.2 million, compared to net cash flow used in operating activities of $37.3 million for the same period in 2020.
- Capital expenditures totaled $12.4 million, compared to $21.0 million for the same period in 2020.
Share Repurchases For The Six Months Ended June 30, 2021
- The company repurchased 528,609 shares of common stock for an aggregate of $54.9 million, at an average price per share of $103.79.
- At June 30, 2021, $427.4 million remained available under our current stock repurchase authorization, which does not obligate the company to acquire any specific number of shares or to acquire shares over any specified period of time.
Quarterly Cash Dividend
The Board of Directors approved a regular quarterly cash dividend of $0.26 per share, payable on August 26, 2021 to shareholders of record on August 12, 2021.
Full Year 2021 Financial Outlook
- Net sales are expected to increase 25.0 to 26.5 percent (prior 21.5 to 23.0 percent) to $3.13 to $3.16 billion (prior $3.04 to $3.08 billion) from $2.50 billion in 2020.
- Gross margin is expected to improve 95 to 115 basis points (prior 110 to 130 basis points) to 49.9 to 50.1 percent of net sales (prior approximately 50.0 to 50.2 percent) from 48.9 percent of net sales in 2020. This revised range includes the impact of approximately $40 million of incremental ocean freight costs that were not contemplated in the previous outlook. Ocean freight rates have increased dramatically over the past 60 days, exceeding estimates included in the prior financial outlook. The updated financial outlook reflects the impact of current and estimated future freight rates.
- SG&A expenses are expected to increase at a slower rate than net sales growth. SG&A expenses as a percent of net sales are expected to be 38.4 to 38.7 percent (prior 38.7 to 39.1 percent), compared to SG&A expenses as a percent of net sales of 43.9 percent in 2020. Demand creation as a percent of net sales is anticipated to be 6.0 percent in 2021, compared to 5.7 percent in 2020.
- Operating income is expected to be $365 to $386 million (prior $347 to $369 million), resulting in an operating margin of 11.7 to 12.2 percent (prior 11.4 to 12.0 percent) compared to an operating margin of 5.5 percent in 2020.
- Effective income tax rate is expected to be approximately 21.5 percent (prior 22 percent). The effective income tax rate may be affected by unanticipated impacts from changes in international, federal or state tax policies, changes in the company’s geographic mix of pre-tax income, other discrete events, as well as differences from our estimate of the tax benefits associated with employee equity awards and our estimate of the tax impact of various tax initiatives.
- Net income is expected to be $287 to $304 million (prior $271 to $288 million), resulting in diluted earnings per share of $4.30 to $4.55 (prior $4.05 to $4.30).
Foreign currency is expected to have essentially no impact on earnings as favorable net sales growth of 120 basis points due to foreign currency translation impacts are anticipated to be offset by SG&A translation and negative foreign currency transactional effects from hedging of production.
Balance Sheet and Cash Flows
- Operating cash flow is expected to be $260 to $280 million (prior $250 to $270 million).
- Capital expenditures are planned to be $45 to $60 million (prior $60 to $80 million). The reduction in planned capital expenditures is primarily due to a shift in timing related to certain capital projects.
Second Half 2021 Commentary
The company expects a low-20 percent year-over-year net sales growth in the second half 2021. The timing of Fall 2021 inventory receipts and wholesale shipments can have a significant impact on quarterly financial performance. Based on current forecasted product delivery dates, the company anticipates that both third and fourth quarter year-over-year net sales growth will be in the low-20 percent range.
Photo courtesy Columbia Sportswear