Columbia Sportswear posted a solid second quarter but the company is indicating that the need to air freight its new line of Omni-Heat apparel and footwear to retailers in time for a global launch this fall will eat into its profit margin in the back half of the year. COLM expects operating margin to contract approximately 200 basis points in the third quarter compared with the third quarter of 2009 as gross margins contract 100 basis points and SG&A as a percentage of sales expands 100 points, due largely to incremental costs to expedite production and delivery of Fall 2010 orders for the Omni-Heat launch. The disclosure is the latest indication that a labor shortage in China, where Columbia sources about one-third of its product, could delay deliveries in advance of the critical holiday season.
In other news, the company said it would launch a Mountain Hardwear e-commerce site this summer.
Columbia reported net sales of $221.8 million for second quarter, an increase of 24 % compared to net sales of $179.2 million for the same period of 2009. Net losses reached $10.6 million, or 6.6% of net sales, for the quarter ended June 30, compared to a net loss of $9.9 million, or 8.9% of net sales for the same period of 2009.
COLM’s normally reports a net loss for the second quarter, which typically accounts for only 15% of its annual sales.
The low volume of sales means delayed shipments can have an outsized effect on results. It said gross margins increased by 220 basis points to 43.7% during primarily to higher relative volume of full-priced product sales at higher gross margins and a higher volume of retail sales at higher gross margins through its growing retail stores.
Improved margins were driven by lower and more targeted markdowns in the company’s outlet channel.
“Results for the second quarter, our smallest revenue quarter of the year, were better than our April outlook, primarily due to stronger reorders and fewer cancellations in our U.S. wholesale business and higher than expected sales from our retail stores, leading to double-digit growth in every product category,” said Tim Boyle, Columbia’s president and CEO.
Sales growth was driven by a 27% increase in the U.S., where sales reached $123.7 million, thanks in large part to an increase in wholesale revenues in the low 20% range.
Outerwear sales rose by 24%, while accessories and equipment sales rose 45% and footwear sales rose by 16%. Sales of Columbia branded product grew by 23%, while Mountain Hardwear net sales increased by 39% and Sorel, Montrail, Pacific Trail net sales were insignificant. Sales at U.S. retail stores rose 50%, thanks largely to the opening of nine more stores.
Sales in Latin America, Asia and the Pacific rose 30% to $51.8 million, including a nine percentage point bump from favorable currency exchange rates. Europe, Middle East and Africa sales rose 15 % to $38.6 million, due largely to a shift in shipments from the first quarter and despite unfavorable exchange rates which shaved a point off the growth rate. The increases were partially offset by a 3% decline in sales to Canada to $7.7 million, including a 13 point benefit from changes in exchange rates.
Noting that two-thirds of its business usually falls in the back half of the year, CFO Thomas Cusick said he now expects net sales to increase 14% to 16% for the full year over 2009. The guidance assumes ASPs will rise in the mid-single digits in the back half and reflects YTD growth of 16% as well as the previously announced 19% increase in the Fall order backlog and rising direct-to-consumer sales.
Much of the backlog was driven by the fall launch of Omni-Heat footwear and apparel lines. The Omni-Heat story and broader distribution with fashion and other channels has driven the backlog for Sorel footwear up 60%, Boyle said.
COLM expects operating margins to remain at 7% of sales as a 75-point increase in SG&A margins offsets an equal increase in gross margins as a percentage of sales.
Columbia lowered its forecast for full-year gross margin expansion to 75 basis points from a previous forecast of 100 basis points, noting that it expects to spend more to air freight goods to meet fall delivery deadlines. Margin growth is being driven by a higher proportion of full price sales in the wholesale business, an increased proportion of direct-to-consumer sales and more favorable foreign currency hedge rates.
