Columbia Sportswear Inc. saw a strong double-digit decline in revenues in the third quarter and resulting net earnings were nearly cut in half versus the year-ago comparable quarter, but company President and CEO Tim Boyle was bullish on the company’s return to solid growth trends in 2021.
The third quarter was clearly a period of transition for Columbia Sportswear as Boyle reported on a conference call with analysts that EVP/COO Tom Cusick would retire next year after 18 years with the company. As part of the transition expected to take place Lisa Kulok, SVP global supply chain will become the EVP of that group and Jim Swanson, SVP and CFO will also add EVP to his title. Both will report directly to Boyle.
“Tom has been a true source of leadership and instrumental to our success over his tenure,” said Boyle. “He will be sorely missed. We are thankful for the time and energy is devoted to elevating Columbia Sportswear to what it is today.”
As part of this transition, a more impactful shift is being implemented as Boyle also reported COLM is making changes to capitalize on its omnichannel growth potential by aligning the organizational structure globally to accelerate the business transformation with a focus on e-commerce and digital. As part of these changes, Franco Fogliato will lead the company focusing on the omnichannel experience by transitioning to EVP, global omnichannel. In this role, he will oversee all Columbia brand sales in direct markets globally
In accordance with the DTC (direct-to-consumer) plans, Boyle said the company successfully completed the deployment of a new e-commerce platform called X1 during the third quarter, following the implementation across 10 countries in Europe Direct and for the Prana brand last year. COLM went live on the platform in North America for the Columbia, Sorel and Mountain Hardwear brands during the third quarter. Boyle said the newly refreshed sites have been aesthetically enhanced, performed exceptionally well and offer consumers improved search, navigation and checkout capabilities, as well as new mobile payment tenders.
For the third quarter, the DTC e-commerce business grew 55 percent with new customers — purchasing products on columbia.com for the first time — grew 65 percent year-over-year. Boyle reported that DTC e-commerce sales grew to 12 percent of total net sales in the quarter, a two-fold increase in penetration relative to last year. “If you include our wholesale partner’s online businesses along with our own e-commerce site, we estimate online sales were about one-third of the Columbia brands U.S. sales mix in the quarter,” Boyle surmised. “We continue to prioritize digital marketing spend within our overall marketing mix to further attract active customers, propel online sales growth and elevate our differentiated brand and product stories.”
Turning to its overall third-quarter business, revenues came in below Wall Street’s consensus target of $767.1 million as net sales decreased 23 percent to $701.1 million in the period, compared to $906.8 million in the 2019 comparable period.
Boyle said that the third quarter is typically a heavy wholesale selling quarter for the fall product line. He reported that the Q3 wholesale business decreased 28 percent year-over-year, driven by “earlier actions to rationalize the wholesale order book and curtail purchases of fall 2020 inventory.” There was also a timing issue with inventory resulting in approximately $45 million of Fall 2020 shipments shifting into the fourth quarter due to production and logistics disruptions related to COVID-19 that resulted in later inventory receipts. Excluding this timing shift, Boyle suggested that total consolidated net sales would have decreased 18 percent for the period. DTC net sales declined 10 percent in the third quarter, but e-commerce was a bright spot, growing 55 percent, while brick & mortar store performance “remained under pressure.”
“The vast majority of our global DTC stores remained open throughout the third quarter,” said Boyle. “Overall, brick & mortar store traffic and sales trends remained well below prior-year levels, stores and destination locations and tourist-dependent markets remain some of the most severely impacted stores. We anticipate traffic in these markets to remain depressed until tourism resumes.” Boyle said they will continue to evaluate their own store fleet and have made the decision to permanently close a small number of locations. “Year-to-date, we’ve permanently closed eight stores in the U.S. and one in Europe,” he reported.
U.S. e-commerce net sales increased by 50 percent while U.S. brick & mortar declined in the mid-30 percent range. While September was said to be the strongest month of the quarter in the U.S. DTC business, Boyle suggested they have not seen a sustained improvement in brick-and-mortar store traffic to-date.
Outside the U.S. the LAAP (Latin America, Asia-Pacific) region saw net sales decrease 27 percent in constant-currency terms. This decline was said to be most pronounced in the region’s wholesale and distributor business while direct-to-consumer net sales performed better “albeit still down year-over-year.” LAAP distributor net sales decreased high 40 percent reflecting the outsized impact of the pandemic in Central and South America as well as geopolitical and economic headwinds in several markets.
In Asia, store traffic trends reportedly improved during the quarter and COLM is now seeing some periods with positive year-over-year traffic growth. By market in constant-currency terms, China’s net sales were down in the mid-20 percent range. Japan declined in the low-20 percent and Korea declined in the high-teens.
In the Europe, the Middle East, Africa (EMEA) region, net sales decreased 8 percent (constant-currency) in the third quarter, reflecting a low double-digit percentage decline in the Europe direct business, partially offset by high 20-percent EMEA distributor net sales growth that was reportedly driven by a greater portion of Fall 2020 shipments falling into the third quarter, which more than offset lower Fall 2020 advanced orders. “We’re closely monitoring the European shutdowns that are occurring in real-time and are not factored into the financial outlook we are providing today,” noted Boyle. In Canada, net sales declined 33 percent in constant-currency terms.
Looking at brand performance outside the Columbia brand:
- Sorel net sales declined 21 percent in the quarter reflecting “lower wholesale sell-in partially offset by strong e-commerce growth;”
- Prana net sales declined 21 percent in the third quarter with lower wholesale performance, partially offset by strong e-commerce growth; and
- Mountain Hardwear was said to be the company’s “best-performing brand in the third quarter,” with net sales declining 15 percent.
Mountain Hardwear generated the fastest e-commerce growth of the brand portfolio in the third quarter, led by equipment, as well as popular outerwear lines like the Stretch Down and Ghost Whisperer insulated collections and apparel styles including the Dynamo pant collection. Boyle said it is increasingly clear the refreshed product line resonates with consumers and brand momentum is building. “This is not only evident in robust PPC e-commerce growth, but it’s also apparent at key wholesale accounts that are embracing the brand’s new product line into action,” he continued.
Overall COLM gross margin contracted 40 basis points to 48.9 percent of net sales in Q3, down 40 basis points from the comparable period in 2019. SG&A expenses decreased 13 percent to $261.2 million, or 37.3 percent of net sales, in Q3, from $299.2 million, or 33.0 percent of net sales, for the comparable period in 2019. Operating income decreased 44 percent to $85.6 million, or 12.2 percent of net sales, from operating income of $152.0 million, or 16.8 percent of net sales, in Q3 2019.
Net income decreased 47 percent to $62.8 million, or 94 cents per diluted share, from net income of $119.3 million, or $1.75 per diluted share, for the comparable period in 2019, falling short of Wall Street’s consensus target of $1.16.
Quarter-end inventories were up 8 percent year-over-year. Nearly 90 percent of the inventory at quarter-end was said to consist of “current and future seasons.” Aged inventories increased year-over-year but reportedly continued to represent a small percentage of the total inventory mix. Unsold inventory as of September 30 was reported to be “slightly elevated year-over-year, but declined sequentially compared to second-quarter 2020.”
COLM reportedly finished the quarter with $315 million in cash and short-term investments, no bank borrowings and nearly $1 billion in total liquidity.
For the fourth quarter, COLM anticipates “continued sequential fundamental improvement.” Net sales are expected to decline 8 percent to 11 percent and the operating margin is expected to be between 10.7 percent and 12.7 percent, compared to 14.5 percent in Q4 2019. Diluted earnings per share are expected to come in between $1.07 and $1.32 a share. For the full-year 2020, COLM anticipates a 19 percent to 20 percent decline in net sales, resulting in diluted earnings per share range of $1.25 to $1.50.
“Despite the significant financial impact of the pandemic that is evident in this outlook, we still anticipate generating approximately $150 million in free cash flow during the year,” concluded Boyle regarding 2020. “While it’s early in our 2021 planning process, I’d like to provide limited commentary in the first half of 2021 net sales. Based on advanced wholesale orders for the Spring 2021 season and plans for our return to growth in our global DTC businesses as we anniversary prior-year store closures, we currently believe we can achieve high-teens percent year-over-year net sales growth in the first half of 2021.”
Photo courtesy Columbia Sportwear