Columbia Sportswear Co. slashed its guidance as sales weakness in June continued into July, with the blame being attributed to inflation and recessionary concerns. Officials told analysts the lower earnings guidance also reflected continued supply chain disruption and heightened promotion risks due to elevated market inventories.

”As the second quarter progressed, it became increasingly clear that the operating environment is evolving,” said Tim Boyle, chairman, president, and CEO, on a quarterly call. “In the U.S., inflationary pressures, rising interest rates and recession fears are weighing on consumer and retailer sentiment.”

The updated outlook for the year includes:

  • Sales are expected to increase 10-to 12-percent (prior 16-to-18 percent) to $3.44 billion to $3.50 billion (prior $3.63 billion to $3.69 billion).
  • Gross margin is expected to contract 210-to-180 basis points (before approximately 130 bps contraction) to a range of 49.5 percent to 49.8 percent
  • SG&A expenses are expected to increase roughly in line with net sales growth. SG&A expense as a percent of sales is expected to be 37.6-to-38.0 percent (prior 37.3-to-37.7 percent), compared with 37.8 percent in 2021.
  • Operating income is expected to be $415 million to $449 million (prior $477 million to $502 million), resulting in an operating margin of 12.1-to-12.8 percent (prior 13.2-to-13.6 percent). In 2021, the operating margin was 14.4 percent.
  • Net income is expected to be $315 million to $340 million (prior $363 million to $382 million), resulting in an EPS of $5.00 to $5.40 (prior $5.70 to $6.00).

Boyle said the updated outlook contemplates higher order cancellation risk and more conservative DTC assumptions. It also assumes a more promotional environment as the marketplace seeks to rationalize inventory levels.

Asked about the consumer spending trends, Jim Swanson, EVP and CFO, said sales were “still quite healthy” in April and May of the second quarter but began weakening in June. Swanson said, “As the economic news, inflation in particular, and just risk of recession has continued to weigh on the minds of at least the U.S. consumer, we began seeing some of that trickle through in the form of lighter traffic levels and softness in demand in the latter part of the quarter, and we’ve seen that to some degree. That trend has continued in the early part of July.”

The updated outlook also reflects continued supply chain challenges that are expected to continue throughout the year. Boyle said, “We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners. West Coast port labor contract negotiations could further complicate freight logistics. We have diversified our port exposure and expect less than 40 percent of our second half inventory will go through West Coast ports, covered by the ILWU labor contract.”

Columbia also now has a more conservative outlook for China for the balance of the year as zero-COVID policy restrictions there resulted in a sharp net sales decline in the second quarter. Foreign currency exchange headwinds are now expected to unfavorably impact full-year net sales growth by 3 percent and diluted earnings per share by 15-to-20 cents per share.

“We have navigated numerous economic cycles in our company’s 84-year history,” said Boyle. “I’m confident that our differentiated brand portfolio, operating discipline, and strong financial position will enable us to effectively manage this.”

Second-Quarter Sales Miss Plan
In the second quarter ended June 30, sales increased 2 percent (4 percent constant currency) to $578.1 million but were short of Columbia’s outlook, primarily reflecting shortfalls in the U.S. and China. Analysts’ consensus estimate has been $592 million.

The growth in the quarter reflects robust growth in many markets, tempered by essentially no Russia-based distributor, shipments, the impact of zero-COVID restrictions in China and foreign currency exchange headwinds.

Growth in the U.S. was hampered by later receipts and deliveries of Spring 2022 product, which constrained inventory availability and sell-through. The U.S. market also faced difficult comparisons as government stimulus, which boosted consumer demand last year, were anniversaried.

By channel, wholesale net sales decreased 1 percent, including the impact of substantially lower Russia-based distributed net sales. Excluding distributor markets, global wholesale increased low teens percent, reflecting shipments of its spring 2022 order book.

DTC sales grew 5 percent year over year in the quarter, driven by 11 percent brick-and-mortar DTC sales, partially offset by a 5 percent decrease in DTC e-commerce sales. Brick and mortar growth exceeded e-commerce growth in the quarter due to consumers’ increased desire to shop in-store. E-commerce’s decline was due to lower product and China e-commerce sales.

Operating income fell 75 percent to $8.8 million against tough comparisons and higher freight costs but still slightly exceeded the company’s internal forecast.

Gross margin contracted 240 basis points, with the largest driver of contraction being higher inbound freight expenses. Gross margin performance was roughly in line with Columbia’s forecast, and the overall commercial environment remained favorable during the quarter.

SG&A expenses increased 7 percent and represent 48.7 percent of sales, compared to 46.2 percent in the year-ago second quarter. The increase in SG&A expenses reflects broad-based growth across the enterprise to support sales growth and technology and supply chain capabilities. Personnel expense growth was driven by incremental headcount as well as wage increases.

Net income decreased 82 percent to $7.2 million, or 11 cents per share, ahead of Wall Street’s consensus target of 4 cents.

U.S. Sales Impacted By Delayed Shipments, Weakening Demand
By region, U.S. sales increased 9 percent, with wholesale increasing low teens percent and DTC increasing low-single-digit percent. U.S. wholesale growth reflects shipments of its robust spring 2022 order book.

Boyle said, “Early season sell-through of spring merchandise was impacted by later shipments of inventory stemming from Vietnam factory closures in 2021 and logistic delays. As the spring season progressed, mounting inflationary pressures and economic uncertainty appeared to temper demand in the marketplace. Retail or on-hand inventories increased year-over-year as we anniversary prior-year inventory shortages. With higher marketplace inventories and a rapidly changing economic environment, retailers rationalize their inventory needs.”

Boyle said despite these pressures, retail product margins in the U.S. remained healthy in the second quarter. Low single-digit U.S. DTC growth reflected higher brick-and-mortar net sales, partially offset by a modest decline in e-commerce sales. Added Boyle, “Our DTC business remained generally healthy across both channels in April and May before softening in June.”

In the Latin America and the Asia Pacific (LAAP) region, sales increased 2 percent.

China was down high 40 percent due to the strict pandemic-related restrictions. Columbia’s China headquarters and distribution center located in Shanghai were locked down for several weeks. In addition to store closures, Columbia was unable to fulfill e-commerce orders for a lengthy period of time. Shanghai began reopening in June, several weeks later than initially expected. Boyle said, “Retail traffic trends are still recovering. On a positive note, the 618 online sales event was a success with double-digit year-over-year growth.”

Among other countries in the LAAP region, Japan’s sales jumped mid-30 percent, driven by strong consumer demand and the lapping of state of emergency declarations, which hindered sales in the prior year. Korea grew high-teen percentage points, led by strong DTC performance. Boyle said, “The pandemic has reinvigorated consumer interest in outdoor activities in Korea.”

LAAP distributor markets were up low-double-digit percent, driven by shipment of higher fall 2022 orders.

In Europe, the Middle East and Africa (EMEA) region, sales decreased 30 percent. The decline was driven by substantially lower sales to its Russian-based distributor, partially offset by strength in its Europe-direct business. Europe-direct grew low 30 percent, fueled by Columbia brand momentum and a recovery in consumer demand. Boyle said, “We experienced strong performance in brick and mortar across both DTC and wholesale channels. Robust growth with strategic partners in the sporting goods channel was notable.”

Columbia’s EMEA distributor business was down low 70 percent.

Canada’s sales increased 74 percent, with high growth across wholesale and DTC as we anniversary prior-year pandemic-related disruptions.

Columbia Brand’s Revenues Flat In Second Quarter
By brand, the flagship Columbia Sportswear brand saw flat growth in the second quarter. Strong growth in many markets was tempered by essentially no Russia-based distributor business, the zero-COVID restrictions in China and foreign currency exchange headwinds.

Product highlights include another Star Wars collaboration marrying the PFG Tamiami shirt with elements of Star War comics, including Star Wars characters, Chewbacca, R2D2 and Hanover. The Columbia brand also recently collaborated with Madhappy, a lifestyle brand, to launch a new summer 2022 outdoor collection.

During the quarter, several Columbia products were featured in consumer and industry publications, highlighting the brand’s sun protection technology. The PFG fish flag recently unveiled on the NASCAR car of sponsor Bubba Wallace, has become the brand’s top-selling baseball cap, with millions of units sold since its launch.

Looking ahead, the Columbia brand will focus this fall on building momentum around its Omni-Heat Infinity technology.

“We will be running a worldwide integrated marketing campaign featuring Omni-Heat Infinity as the gold standard in warmth, focused on how the technology works and why it matters for consumers,” said Boyle. “As you know, poly fleece is one of the largest outdoor product categories. We believe introducing Omni Heat Helix this fall will bring disruptive innovation to this largely undifferentiated category. Omni Heat Helix is the first of its kind patented visible technology. It utilizes highly efficient insulation cells to maximize warmth and provide breathability.”

Sorel’s sales jumped 24 percent in the quarter, despite supply chain challenges and strong wholesale and DTC performance. By category, growth for Sorel was driven by year-round and summer categories, including sneakers, widgets, and sandals. Said Boyle, “Sorel’s potential to become a $1 billion footwear brand is evident, and we’re investing in demand creation and products designed to fuel that growth.”

Among its emerging brands, Prana’s sales increased 3 percent, with growth constrained by delayed shipments of spring ’22 inventory. Boyle said, “The Prana team is working to reposition the brand in the marketplace in the coming seasons.”

Mountain Hardwear’s sales climbed 18 percent in the second quarter. Boyle said Mountain Hardwear found success with the introduction of the Kor AirShell Show collection, which quickly became the brand’s top-performing shell. Mountain Hardwear’s Mineral King tent was called out by The New York Times Wirecutter Product Review.

Inventory’s Soar 42 Percent
Inventory closed the quarter ahead 42 percent year over year, reflecting increased purchases in anticipation of sales growth for the spring and fall 2022 season, lower than normal inventory levels at the same time last year, and lower than initially expected year-to-date sales due to a combination of factors, including the lower EMEA distributor shipments, the COVID-restrictions in China and softer-than-expected sales in the U.S.

Exiting the quarter, finished good inventory at distribution centers was up 36 percent, while in-transit inventory was ahead 46 percent. Columbia is adjusting future inventory purchases to right-size inventory levels.

“We’re monitoring retail trends and our order book against this uncertain backdrop,” said Boyle. “I’m confident in the quality of our inventory, which includes a high proportion of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. We also have a fleet of outlet stores, which enables us to sell the remaining high-quality inventory profitably.”

Boyle added that Columbia is focused on ”restraining expense growth to manage profitability” to account for the weakening demand signals but remains optimistic about selling in the back half. The CEO said, “I’m excited to launch our innovative product in the marketplace as we head into the important fall season. Outerwear and winter merchandise inventories are very lean at retail after an exceptional sell-through last season. We have a robust fall 2022 order book to deliver against, and retailers are keen to get initial floor sets in place ahead of weather-driven consumer demand.”

For the third quarter, Columbia expects net sales growth of approximately 20 percent, primarily driven by the sale of its fall 2022 order book and modest DTC growth. For the overall second half, sales are expected to increase by 9-to-12 percent year over year. EPS is projected at $3.85 to $4.25 compared to the second half of 2021 EPS of $3.91.

Photo courtesy Columbia Sportswear/Bubba Wallace