Columbia Sportswear Reduces FY Guidance

Columbia Sportswear Company reported second-quarter earnings that topped Wall Street’s estimate but reduced its sale and EPS guidance for the year due to growing economic uncertainty.

Financial Highlights

• Net sales increased 2 percent (4 percent constant-currency) to a record $578.1 million compared to the second quarter 2021;
  
• Operating income decreased 75 percent to $8.8 million, or 1.5 percent of net sales, compared to the second quarter of 2021 operating income of $35.0 million, or 6.2 percent of net sales;
  
• Diluted earnings per share decreased 82 percent to $0.11, compared to $0.61 in the second quarter of 2021; and
  
• The company repurchased $69.6 million of common stock during the second quarter and $286.9 million during the first six months of 2022.
  

Earning of 11 cents a share topped Wall Street’s consensus estimate of 4 cents. Sales of $578.1 were below analysts’ consensus estimate of $592 million.

Full Year 2022 Financial Outlook

• Net sales of $3.44 billion to $3.50 billion (prior $3.63 to $3.69 billion) represent net sales growth of 10-to-12 percent (prior 16-to-18 percent) compared to 2021;
  
• Operating income of $415 million to $449 million (prior $477 million to $502 million), representing an operating margin of 12.1-to-12.8 percent (prior 13.2-to-13.6 percent);
  
• Diluted earnings per share of $5.00 to $5.40 (prior $5.70 to $6.00).
  

Chairman, President and CEO Tim Boyle commented, “First half net sales increased 12 percent, reflecting the strength of our brand portfolio amidst a rapidly changing and increasingly challenging economic environment. All of our brands contributed to this growth, with SOREL leading the charge, surging 33 percent, fueled by the brand’s bold new summer and year-round styles. During the second quarter, which is our lowest volume sales quarter, performance trends varied greatly by region. Many markets continued to experience meaningful sales growth, while others were impacted by external headwinds and shipment delays. As we head into the important Fall sales season, we are eager to get our innovative product into the marketplace.

“Our confidence in our strategies and ability to unlock tremendous long-term growth opportunities remains intact. However, as 2022 has progressed, it is increasingly clear that the operating environment has become more challenging. Based on growing economic uncertainty, we believe it is prudent to take a more conservative approach to our financial outlook for the balance of the year.

“Our profitable growth trajectory and global team of talented employees provide a foundation of strength from which we will continue to invest 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.”
  

Second Quarter 2022 Financial Results
(all comparisons are between the second quarter of 2022 and the second quarter of 2021, unless otherwise noted)

• Net sales increased 2 percent (4 percent constant-currency) to $578.1 million from $566.4 million for the comparable period in 2021. The increase in net sales primarily reflects growth across the U.S., Canada, Europe-direct, Japan, and Korea, partially offset by substantially lower Russia-based distributor and China net sales.
• Gross margin contracted 240 basis points to 49.2 percent of net sales from 51.6 percent of net sales for the comparable period in 2021. Gross margin contraction was primarily driven by higher inbound freight costs and lower wholesale margins, partially offset by favorable channel and regional sales mix.
• SG&A expenses increased 7 percent to $281.3 million, or 48.7 percent of net sales, from $261.8 million, or 46.2 percent of net sales, for the comparable period in 2021. SG&A expense growth primarily reflects broad-based increases across the enterprise led by personnel expenses, which were driven by incremental headcount and wage increases.
• Operating income decreased 75 percent to $8.8 million, or 1.5 percent of net sales, compared to operating income of $35.0 million, or 6.2 percent of net sales, for the comparable period in 2021.
• Income tax expense of $0.7 million resulted in an effective income tax rate of 8.6 percent, compared to an income tax benefit of $5.4 million, or a negative effective tax rate of 15.3 percent, for the comparable period in 2021.
• Net income decreased 82 percent to $7.2 million, or $0.11 per diluted share, compared to net income of $40.7 million, or $0.61 per diluted share, for the comparable period in 2021.

First Half 2022 Financial Results
(all comparisons are between the first six months of 2022 and the first six months of 2021 unless otherwise noted)

• Net sales increased 12 percent (14 percent constant-currency) to $1,339.6 million from $1,192.0 million for the comparable period in 2021.
• Gross margin contracted 200 basis points to 49.5 percent of net sales from 51.5 percent of net sales for the comparable period in 2021.
• SG&A expenses increased 12 percent to $580.3 million, or 43.3 percent of net sales, compared to $516.2 million, or 43.3 percent of net sales, for the same period in 2021.
• Operating income decreased 12 percent to $92.4 million, or 6.9 percent of net sales, compared to operating income of $105.5 million, or 8.8 percent of net sales, for the comparable period in 2021.
• Income tax expense of $17.9 million resulted in an effective income tax rate of 19.5 percent, compared to a $9.2 million expense, or an effective tax rate of 8.7 percent, for the comparable period in 2021.
• Net income decreased 23 percent to $74.0 million, or $1.16 per diluted share, compared to net income of $96.6 million, or $1.44 per diluted share, for the comparable period in 2021.

Balance Sheet As Of June 30, 2022

• Cash, cash equivalents and short-term investments totaled $414.2 million, compared to $820.9 million as of June 30, 2021.
• The company had no borrowings as of June 30, 2022 or 2021.
• Inventories increased 42 percent to $962.9 million, compared to $676.0 million as of June 30, 2021. Inventory growth reflects increased inventory purchases in anticipation of sales growth for our Spring and Fall 2022 merchandise, lower than normal inventory levels at the same time last year, and lower than initially expected year-to-date net sales due to a combination of factors including substantially lower Russia-based distributor shipments, the impact of zero-COVID restrictions in China and softer than expected net sales in the U.S. Increased Fall ’22 in-transit inventory was also a meaningful contributor to increased inventory. With anticipated higher inventory levels, we are adjusting future inventory purchases and planning to more heavily utilize our outlet stores to sell excess merchandise.

Cash Flow For The Six Months Ended June 30, 2022

• Net cash used in operating activities was $112.7 million, compared to net cash provided by operating activities of $117.2 million for the same period in 2021.
• Capital expenditures totaled $29.0 million, compared to $12.4 million for the same period in 2021.

Share Repurchases For The Six Months Ended June 30, 2022

• The company repurchased 3,235,327 shares of common stock for an aggregate of $286.9 million, or an average price per share of $88.69.
• At June 30, 2022, $529.4 million remained available under our 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 $0.30 per share, payable on August 31, 2022 to shareholders of record on August 17, 2022.

Full Year 2022 Financial Outlook
(additional financial outlook details can be found in the CFO commentary and financial review presentation.)

• Net sales are expected to increase 10 to 12 percent (prior 16 to 18 percent) to $3.44 to $3.50 billion (prior $3.63 to $3.69 billion) from $3.13 billion in 2021.
• Gross margin is expected to contract 210 to 180 basis points (prior to approximately 130 bps contraction) to 49.5 to 49.8 percent (prior to approximately 50.3 percent) of net sales from 51.6 percent of net sales in 2021.
• SG&A expenses are expected to increase roughly in line with net sales growth. SG&A expense as a percent of net sales is expected to be 37.6 to 38.0 percent (prior 37.3 to 37.7 percent), compared to SG&A expenses as a percent of net sales of 37.8 percent in 2021. Demand creation as a percent of net sales is anticipated to be 6.0 percent in 2022, compared to 5.9 percent in 2021.
• Operating income is expected to be $415 to $449 million (prior $477 to $502 million), resulting in an operating margin of 12.1 to 12.8 percent (prior 13.2 to 13.6 percent), compared to an operating margin of 14.4 percent in 2021.
• Effective income tax rate is expected to be approximately 24.0 to 24.5 percent (unchanged). 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 and 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 $315 to $340 million (prior $363 to $382 million), resulting in diluted earnings per share of $5.00 to $5.40 (prior $5.70 to $6.00). This diluted earnings per share range are based on the estimated weighted average diluted shares outstanding of 63.0 million (prior 63.6 million).

Foreign Currency

• Foreign currency translation is anticipated to reduce 2022 net sales growth by approximately 300 basis points.
  
• Foreign currency is expected to have a $0.15 to $0.20 negative impact on earnings due to unfavorable foreign currency translation impacts, anticipated to be partially offset by favorable foreign currency transactional effects from hedging of production.
  

Balance Sheet and Cash Flows

• Operating cash flow is expected to be approximately $150 million.
• Capital expenditures are planned to be between $80 to $100 million.

Second Half 2022 Financial Commentary

• Net sales are expected to increase by 9-to-12 percent compared to the second half of 2021;
  
• Gross margin is anticipated to contract by 220-to-170 basis points compared to the second half of 2021;
  
• SG&A expenses are anticipated to increase roughly with net sales growth, resulting in flat to modest SG&A leverage;
  
• Diluted earnings per share are expected to be $3.85 to $4.25 compared to the second half of 2021 diluted EPS of $3.91.
  

The company’s brands include Columbia Sportswear Company, Mountain Hard Wear, Sorel, and Prana.

Photo courtesy Columbia Sportswear Company