Columbia Sportswear Company cheered investors last week when it said it expects operating margins to hit double digits for the full year following stronger than expected first quarter sales of its Columbia and Sorel gear in the United States and Europe.
COLM raised its full year outlook after reporting record gross margins, operating profits and net income and sales growth of 13 percent, or 17 percent currency-neutral (c-n) in the first quarter ended March 31. The Prana brand, which the company acquired on May 30, 2014, contributed about two thirds of incremental net sales, but Columbia and Sorel sales grew 7 and 4 percent respectively compared with the year earlier quarter and easily offset a steep decline at Mountain Hardwear.
“I'm even more encouraged by the strong sell-through of the large volume in spring season, Columbia brand products we delivered to the market during the first quarter, despite the lingering cold weather,” CEO Tim Boyle said during the company's quarterly earnings call. “The vast majority of our North American and wholesale customers are reporting double-digit sell-through increases in our sportswear, performance fishing gear, outerwear, footwear and accessories.
The strength is evident across all North American wholesale channels, including specialty, sporting goods, hunt, fish, camp and department stores. We believe this reflects our progress in gradually reducing the Company's dependence on winter weather.”
Region and brand breakdown
Net sales in Canada increased $7.4 million, or 28 percent, in the quarter, including $4.0 million of incremental Prana net sales and a 12 percentage point negative effect from changes in currency exchange rates. Latin America/Asia Pacific (LAAP) region net sales decreased $3.7 million, or 3 percent, including a 6 percentage point negative effect from changes in currency exchange rates. Europe/Middle East/Africa (EMEA) region net sales increased $8.6 million, or 22 percent, including $2.0 million of incremental Prana net sales and a 15 percentage point negative effect from changes in foreign currency exchange rates.
At Mountain Hardwear sales fell 23 percent due to significantly lower closeout sales in North America and very challenging conditions in Korea. Nevertheless, COLM expects Mountain Hardwear's full-year 2015 net sales to be comparable to 2014, as its North American business returns to growth in the second half and a new executive takes over its Korean business, which is working to bring inventory levels back into balance.
Apparel, Accessories & Equipment net sales increased $45.6 million, or 13 percent, to $399.3 million, and Footwear net sales increased $9.3 million, or 13 percent, to $79.7 million.
Columbia and Sorel take market share
CEO Tim Boyle said Columbia benefited from cold winter weather in both North America and Europe.
“Retailers that thought they had fully bought based on their expected carry-overs were obviously short and so we got additional orders late in the season on Columbia apparel and footwear,” he said.
In the United States, Columbia TurboDown jackets have helped the brand grow sales to existing specialty and sporting goods accounts. The jackets layers down on top of Columbia's proprietary Omni-Heat synthetic insulation in an Omni-Heat reflective liner to maximize warmth.
“It's really about additional penetration, taking some market share,” he said. “We have focused a significant amount of time and effort on segmentation of the product line. So we can offer some innovations to mid-tier and high-tier department stores to allow them to share in some of the benefits that these innovations have shown us.
Sorel provided the bigger upside surprise in the form of a rush of late U.S. orders for its fall product.
Gross Margin grew 130 basis points to a record 47.8 percent thanks to growing e-commerce sales, Sorel's growing sales into the women's fashion segment and Prana's higher margins.
Operating income increased 24 percent to $44.1 million, or 9.2 percent operating margin, and net income totaled $26.5 million, or 37 cents per diluted share, up 19 percent compared with first quarter 2014.
Strong Fall book, growing direct business drive earnings upgrade
Boyle said a big jump in inventory compared to a year ago reflected strong demand for its products. Even excluding Prana brand inventory, COLM ended the quarter with consolidated inventories of $345.4 million, up $55.2 million, or 19 percent, from a year earlier.
The vast majority of inventory growth occurred in North America and about two-thirds of it represented Fall 2015 inventory that was in-transit or on-hand to meet earlier requested delivery of increased Fall 2015 advance wholesale orders, to support COLM's own rapidly growing direct-to-consumer business, and to compensate for longer transit times resulting from the West Coast port congestion.
COLM still expects 2015 net sales to grow in the high-single digits, or low teens in currency-neutral terms, compared to 2014. But executives now expect full-year gross margins and operating margins to reach 46.0 and 10.2 percent , up 30 and 50 basis points respectively from its initial estimate issued Feb. 12.
The Columbia brand will launch Therma Coil, a reflective lining focused on mid-range department stores such as JCPenney and Kohl's, which has been emphasizing the brand as part of a major expansion into the active lifestyle market.
“It's a technology that will allow us to be differentiated from other brands in that distribution,” said Boyle. “We think it will also offer the opportunity for our strong customers in the department store channel to differentiate themselves from other purveyors of outerwear.”
COLM is also looking to expand Sorel's distribution in “sit and fit boutique footwear stores” and increase Prana's distribution to additional department and specialty stores.
“We are experiencing exceptional sell-through in North America through the first half of the spring season and our European business has returned to growth,” said Boyle. “Sorel is poised for a very strong second half and full year net sales of more than $200 million, while Prana remains on pace to deliver annualized growth of more than 20 percent.”