Columbia Sportswear Co. reported sales in the third quarter ended September 30 came in below Wall Street’s targets as supply chain constraints impacted U.S. wholesale shipments. Earnings, however, topped estimates due to favorable gross margins, expense management and early-season Fall 2021 sell-through which has been healthy.
The company raised its EPS guidance while lowering its sales outlook for the year.
Chairman, President and CEO Tim Boyle commented, “Our third-quarter results reflect high consumer demand for our products and strong operating performance amidst unprecedented supply chain challenges. Despite delayed inventory receipts, which impacted U.S. wholesale shipments, favorable gross margin performance and expense management fueled above plan earnings. Early-season Fall 2021 sell-through has been encouraging. and our global marketing campaign to support the largest innovation launch in our company’s history, Omni-Heat Infinity, is off to a great start.
“As we finish the year and look forward to 2022, I’m excited about our innovative product pipeline and the momentum we see across the brand portfolio. Based on this strength, we believe we can achieve mid-teens or better net sales growth in 2022, on top of the low-20s percent growth we anticipate in 2021.
“Our profitable growth trajectory and fortress balance sheet, with cash and short-term investments of over $600 million and no borrowings, provide a foundation of strength and 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.”
COVID-19 and Supply Chain Updates
The company said its top priority during the pandemic remained 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 were open during the third quarter 2021. Overall brick and mortar store traffic improved compared to the third quarter 2020 but still remains below pre-pandemic levels.
During the quarter, government-mandated factory closures in Vietnam disrupted its manufacturing partner’s operations and impacted the production of Fall 2021 and Spring 2022 products. Supply chain constraints continue to impact operations, resulting in delayed receipt and delivery of products for its Fall 2021 and Spring 2022 collections. Demand for ocean freight and containers continues to outstrip available capacity, resulting in significant year-over-year increases in ocean freight costs.
Third Quarter 2021 Financial Results
(All comparisons are between third quarter 2021 and third quarter 2020 unless otherwise noted.)
- Net sales increased 15 percent to $804.7 million from $701.1 million for the comparable period in 2020. The increase in net sales primarily reflects direct-to-consumer (DTC) growth and higher Fall 2021 wholesale orders, as it anniversaries prior-year pandemic disruptions. Net sales growth was constrained by supply chain disruptions that resulted in later inventory receipts and reduced wholesale shipments during the quarter.
- Gross margin expanded 180 basis points to 50.7 percent of net sales from 48.9 percent of net sales for the comparable period in 2020. Gross margin expansion was primarily driven by lower DTC promotional levels and favorable wholesale product margins, partially offset by higher inbound freight costs, the non-recurrence of inventory provision activity that benefited third quarter 2020 and unfavorable channel sales mix.
- SG&A expenses increased 7 percent to $280.1 million, or 34.8 percent of net sales, from $261.2 million, or 37.3 percent of net sales, for the comparable period in 2020. The increase in SG&A expenses primarily reflected higher global retail, incentive compensation, demand creation, and personnel expenses, partially offset by a lease termination liability settlement benefit and the non-recurrence of prior year COVID-19-related expenses.
- Operating income increased 56 percent to $133.5 million, or 16.6 percent of net sales, compared to operating income of $85.6 million, or 12.2 percent of net sales, for the comparable period in 2020.
- Income tax expense of $33.3 million resulted in an effective income tax rate of 24.9 percent, compared to a $22.1 million expense, or an effective tax rate of 26.1 percent, for the comparable period in 2020.
- Net income increased 60 percent to $100.6 million, or $1.52 per diluted share, compared to net income of $62.8 million, or $0.94 per diluted share, for the comparable period in 2020.
EPS of $1.52 topped Wall Street’s consensus estimate of $1.31. Revenues of $804.7 million came ni short of Wall Street’s consensus estimate of $868 million.
First Nine Months 2021 Financial Results
(All comparisons are between the first nine months of 2021 and the first nine months of 2020 unless otherwise noted.)
- Net sales increased 26 percent to $1,996.7 million from $1,585.9 million for the comparable period in 2020.
- Gross margin expanded 320 basis points to 51.2 percent of net sales from 48.0 percent of net sales for the comparable period in 2020.
- SG&A expenses increased 5 percent to $796.3 million, or 39.9 percent of net sales, compared to $755.7 million, or 47.6 percent of net sales, for the same period in 2020.
- Operating income of $238.9 million, or 12.0 percent of net sales, compared to operating income of $13.4 million, or 0.8 percent of net sales, for the same period in 2020.
- Income tax expense of $42.5 million resulted in an effective income tax rate of 17.7 percent, compared to a $4.0 million income tax expense, or an effective tax rate of 24.8 percent, for the same period in 2020.
- Net income of $197.1 million, or $2.96 per diluted share, compared to net income of $12.3 million, or $0.18 per diluted share, for the same period in 2020.
Balance sheet as of September 30, 2021
- Cash, cash equivalents and short-term investments totaled $600.6 million, compared to $314.5 million at September 30, 2020;
- The company had no borrowings as of September 30, 2021 or 2020;
- Inventories decreased 7 percent to $720.9 million, compared to $771.7 million at September 30, 2020. The reduction in inventory was driven by increased sales and to a lesser extent, delayed Fall 2021 inventory production resulting from the cumulative effects of supply chain disruptions. Exiting the quarter, finished goods inventory in our distribution centers was down 35 percent, year-over-year, while in-transit inventory increased 127 percent, year-over-year. Inventory at quarter-end primarily consisted of current and future season product. Aged inventories represent a manageable portion of our total inventory mix.
Cash flow for the nine months ended September 30, 2021
- Net cash flow used in operating activities was $15.6 million, compared to net cash flow used in operating activities of $198.0 million for the same period in 2020; and
- Capital expenditures totaled $20.4 million, compared to $25.2 million for the same period in 2020.
Share repurchases for the nine months ended September 30, 2021
- The company repurchased 1,254,081 shares of common stock for an aggregate of $127.2 million, at an average price per share of $101.44;
- At September 30, 2021, $355.0 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
Its Board of Directors approved a regular quarterly cash dividend of $0.26 per share, payable on December 2, 2021 to shareholders of record on November 18, 2021.
Full Year 2021 Financial Outlook
- Net sales are expected to increase 21.5 to 23.0 percent (prior 25.0 percent to 26.5 percent) to $3.04 to $3.08 billion (prior $3.13 billion to $3.16 billion) from $2.50 billion in 2020;
- Gross margin is expected to improve 190-to-210 basis points (prior 95-to-115 basis points) to 50.8 to 51.0 percent of net sales (prior approximately 49.9 percent to50.1 percent) from 48.9 percent of net sales in 2020;
- SG&A expenses are expected to increase at a slower rate than net sales growth. SG&A expenses, as a percent of net sales, is expected to be 38.5 percent to 38.8 percent (prior 38.4 percent to 38.7 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 $384 million to $405 million (prior $365 million to $386 million), resulting in an operating margin of 12.6 percent to 13.2 percent (prior 11.7 percent to 12.2 percent) compared to an operating margin of 5.5 percent in 2020;
- The effective income tax rate is expected to be approximately 21.5 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; and
- Net income is expected to be $302 million to $319 million (prior $287 million to $304 million), resulting in diluted earnings per share of $4.55 to $4.80 (prior $4.30 to $4.55).
Foreign Currency
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 $250 to $270 million (prior $260 to $280 million).
- Capital expenditures are planned to be $45 to $50 million (prior $45 to $60 million).
Fourth Quarter 2021 Financial Outlook
- Net sales of $1.04 billion to $1.08 billion, representing net sales growth of 14 percent to 18 percent.
- Diluted earnings per share are expected to be $1.60 to $1.85.
The preliminary full-year 2022 commentary
Columbia said, “The company is providing limited commentary regarding early planning efforts for 2022. Our Spring 2022 wholesale sales forecast reflects over 30-percent growth. We anticipate ongoing supply chain disruptions will continue to impact the timing of receipts and shipments of Spring 2022 inventory and may result in higher than planned cancellations that would impact net sales performance. We recently commenced our Fall 2022 order-taking process. It is important to note that Fall 2021 sell-through performance can have a material impact on our Fall 2022 orders and resulting Fall 2022 wholesale sales forecast.
“Based on the momentum we see across the business, we believe mid-teens percent or better net sales growth for the full year is attainable.
“Given our current view of product and freight costs as well as the likelihood of a more normalized promotional environment, we anticipate gross margin pressure in 2022. We do not expect planned price increases will be able to fully offset these headwinds. We are also planning to make investments across the business, including demand creation, supply chain and digital capabilities that will add to our overall spending levels.
“With these factors in mind, our preliminary planning for 2022 contemplates an operating margin similar to the range provided in our 2021 financial outlook.
“Assuming no changes to current tax rates or discrete tax items, we currently anticipate our 2022 effective tax rate to be in the mid-twenties percent range.”
Photo courtesy Columbia Sportswear