Columbia Sportswear reported first-quarter earnings and sales that topped Wall Street’s targets, but the company still slightly scaled back its sales guidance for 2017 due to a number of store closings, in part due to bankruptcies in the sector.
“The slight reduction in top-line expectations primarily reflects the incremental bankruptcies, liquidations and store closures that we’ve become aware of as well as a more cautious posture adopted by our U.S. wholesale customers since February,” said CEO Tim Boyle on a conference call with analysts.
Shares of Columbia Sportswear lost $3.15, or 5.3 percent, on Friday to close at $56.62.
He noted that the first quarter still represented “a good start to 2017” given the challenges. Boyle added, “Despite these headwinds, in the U.S. we believe global consumers will continue to be drawn to strong innovative brands. While each of our brands is affected to varying degrees by these structural changes, our strategies for addressing them are consistent and include partnering with strong wholesale customers and distributors in each geographic region, who are also committed to our brands and our growth strategies.”
Earnings rose 13.6 percent to $36 million, or 51 cents a share, easily exceeding Wall Street’s consensus estimate of 41 cents. Revenues increased 3.6 percent to $543.8 million.
By region, sales in the U.S. were down 0.8 percent to $333.2 million due to a decline in wholesale net sales, partially offset by an increase in direct-to-consumer sales.
Boyle said that in the U.S., the company was up against “very difficult comparisons,” with extended cold weather boosting year-ago sales by 18 percent in the region, including an even stronger performance by its e-commerce channel.
“While we’re pleased with the low-single-digit increase in our direct-to-consumer sales during the quarter, it did not fully offset a mid-single-digit decline in the wholesale channel resulting in a combined decline of 1 percent in our U.S. business,” said Boyle. The low-single-digit increase in U.S. direct-to-consumer sales was led by its outlet stores, partially offset by the e-commerce business’ inability to match last year’s weather-aided surge in demand.
On the U.S. wholesale front, the mid-single-digit decline was primarily due to a handful of significant customers closing doors, entering bankruptcy or in the process of liquidating. Said Boyle, “By our count roughly 800 doors that previously carried our brands have or are in the process of closing. Importantly factoring out those store reductions, the balance of our U.S. wholesale business grew modestly. As a result, fall 2017 advance orders for our U.S. wholesale customers came in below where we anticipated, leading to the 1 percent reduction in our full-year expectations of sales compared with our February outlook.”
In other regions, the highest gain on a currency-neutral basis was seen in LAAP, ahead 17 percent on a currency-neutral basis to $118.3 million. The performance in the region was helped growth in net sales to LAAP distributors combined with growth in China and Japan, partially offset by a net sales decline in Korea.
On a currency-neutral basis, EMEA grew 10 percent $55.4 million, including growth in the company’s Europe-direct business, partially offset by a decline in net sales to EMEA distributors. Canada dipped 1 percent to $36.9 million.
By brand, Columbia grew 2.7 percent to $449.1 million and was up 3 percent in local currencies. Increased sales to LAAP distributors (aided by a favorable shift in timing of shipments of increased Spring 2017 advance orders), and higher net sales in China, Europe-direct markets, Japan and the U.S. DTC business helped offset lower U.S. wholesale net sales, and lower net sales to EMEA distributors (attributable to an unfavorable shift in timing of shipments of increased Spring 2017 advance orders).
Boyle said its spring marketing campaign for Columbia brand focuses on its rain-gear and its Performance Fishing Gear (PFG) collection. PFG, a $120 million franchise in the U.S. alone and over $130 million globally, “helps to differentiate and diversify the Columbia brand compared with many of its core outdoor competitors. Our strength in PFG is one of the many ways that the Columbia brand is established year around relevance with wholesale customers and consumers,” said Boyle.
Also supporting the Columbia brand’s awareness is season two of its Directors of Toughness campaign. Combined video views across YouTube, Facebook and Instagram have already quadrupled last year’s totals, and the campaign has driven more than 80 million impressions on Columbia social channels alone.
Also on the social media side, the Columbia brand last month launched a short film on the Ultra-Trail du Mont-Blanc (UTMB) race sponsored by Columbia that has already attracted one million video views and generated nearly 30 million impressions.
At the store level, the Columbia brand is rolling out updated Columbia branded in-store environments in partnership with its leading wholesale customers and independent distributors as well as in its own brick-and-mortar stores in the U.S., China, Canada, Europe, Japan and Korea. Said Boyle, “Our current plan calls for more than 300 such installations in 2017 with approximately 200 of those planned for the third quarter.”
The top performance among its smaller brands came from Sorel, running up 50.3 percent to $27.2 million and ahead 50 percent on a currency-neutral basis. The strong performance came in the brand’s historically smallest quarter and was aided by the successful launch of its expanded spring season assortment featuring sandals and lightweight low backup profile shoes. Said Boyle, “Early sell-through results from Sorel wholesale customers are very encouraging and we’re excited about continuing to de-winterize Sorel’s business as we expand its spring franchise.”
Prana’s revenues were down 6.5 percent to $38.7 million and was off 7 percent on a currency-neutral basis. The decline was primarily a function of the challenging U.S. wholesale market, partially offset by growth in DTC sales. Prana’s women’s and men’s pants and swim lines were strong performers, as expected, at both wholesale and direct to consumer channels. Said Boyle, “The Prana team is focused on expanding the brands business with U.S. key sporting goods and specialty wholesale customers, but also working to improve its brick-and-mortar and e-commerce businesses.”
Mountain Hardwear’s sales reached $27.7 million, up 9.9 percent on a reported basis and advance 10 percent on a currency-neutral basis. The gains were driven by increased closeout sales to U.S. wholesale customers and through its own DTC channels.
Boyle noted that the company appointed industry veteran Joe Vernachio in early April as Mountain Hardwear’s new brand President. Said Boyle, “Joe shares our vision of the brand’s potential and has begun working with his team to execute our strategy to reinvigorate the brand around its rich heritage as a leading Alpine climbing brand. We are encouraged to have Joe on board to lead the brands rebuilding efforts from its headquarters in Richmond, CA.”
The company continues to expect Mountain Hardwear to post high-single-digit sales decline for the full year.
By category, sales in Apparel, Accessories and Equipment were up 1.4 percent to $440 million and inched up 1 percent on a currency-neutral basis. Faring better was Footwear, where sales rose 13.9 percent to $103.8 million and ahead 15 percent on a currency-neutral basis.
First-quarter income from operations increased 8.4 percent to $48 million.
Gross margin increased 40 basis points to 47.5 percent due to favorable sourcing environment and selective price increases in various product categories and geographies. SG&A expenses increased 4 percent and increased 10 basis points as a percent of sales to 39.1 percent. The higher operating expenses reflected investments in DTC, changes in the timing of receipt of local tax subsidies related to the company’s China joint venture, and increased demand creation expenses.
Looking ahead, Columbia expects 2017 net sales growth of approximately 3 percent, to of $2.38 billion. Previously, it expected growth of approximately 4 percent.
Operating income is now projected to increase approximately 3 percent, to between $256 million and $265 million, resulting in anticipated 2017 operating margin of approximately 10.8 percent. Under its former guidance, operating income was targeted at up to 5 percent, to between $260 million and $270 million, representing operating margin of up to 10.9 percent of net sales.
On the positive side, the full-year effective tax rate is expected to be approximately 23 percent versus 24 percent in the former forecast. As a result, Columbia still expects net income between $192 million and $200 million, or approximately $2.72 to $2.82 per diluted share.
Photo courtesy Columbia Sportswear