By Charlie Lunan
Columbia Sportswear Company (Nasdaq: COLM) grew sales 2 percent in the second quarter and beat profit expectations powered by growth of its Columbia, Prana and Mountain Hardwear brands in North America, but weakness elsewhere in the world left it short of expectations.
While Columbia reiterated its full-year forecast, it was cautious about increased promotional activity in the U.S. retail environment as well as weakness in Asia. Investors on the company’s July 29 conference call also noted a 12-percent bump in inventories. All things considered, Columbia Sportswear’s stock slipped 6 percent the day following the afternoon release.
The company reported that net sales reached $388.8 million in the second quarter ended June 30, up 2 percent in both reported and currency-neutral terms compared with the second quarter of 2015. Operating loss grew 31.1 percent to $11.8 million, but the quarter is the company’s smallest, historically accounting for a mid-teens percentage of annual net sales and therefore the least indicative of business trends.
“Our successful first-half results were highlighted by solid growth from three of our four major brands and improved gross margins in a challenging global environment,” said Columbia Sportswear CEO Tim Boyle. “High-single-digit wholesale growth and low-20-percent direct-to-consumer growth in the U.S., combined with mid-20-percent constant-currency growth in Europe-direct markets and 20 percent constant-currency growth in Canada, demonstrate that we gained market share in each of these important geographies during the first half of 2016.”
The company’s total apparel, accessories and equipment division net sales increased 4 percent (both on a dollar and currency-neutral rate) to $321.5 million, but total footwear net sales declined 4 percent (both in dollars and currency-neutral) to $67.3 million.
North America Offsets Declines Overseas
Growth was driven by North America and partly offset by declines in the wholesale business in the rest of the world. In the United States, sales grew 8 percent to $228.8 million, consisting of mid-teen percentage growth in the company’s direct-to-consumer channels and low single-digit percentage growth in wholesale channels. In Canada, net sales grew 20 percent (27 percent currency-neutral) to $13.6 million.
That growth was offset by declines in the rest of the world. Net sales declined 1 percent (2 percent currency-neutral) in the Europe, Middle East and Africa (EMEA) region, as a low-double-digit percentage decline in net sales to distributors more than offset high teens growth (mid-teen currency-neutral) in the company’s Europe-direct business. In the Latin America and Asia Pacific (LAAP) region, net sales declined 10 percent (11 percent currency-neutral), due primarily to declines in Korea and China versus gains in Japan.
Columbia, Prana Offset Sorel, Mountain Hardwear
Total Columbia brand net sales increased 3 percent (2 percent currency-neutral) to $333.4 million in the quarter and were up 6 percent for the first half, reflecting broad-based strength in sportswear, the PFG fishing apparel brand and rain wear, along with trail and PFG footwear, officials said. In Europe, direct sales of apparel and footwear each grew in excess of 20 percent, with trail footwear and rainwear being the strongest categories. Sales in Japan were up mid-single digits. This growth was partially offset by continuing declines in Korea and parts of LAAP and EMEA, where the strong dollar hurt distributor sales. Sales for the Columbia brand declined 1 percent in China (although they gained 1 percent, currency-neutral) in the first half.
Global Prana brand net sales increased 23 percent (23 percent currency-neutral) to $32.2 million, and were up 16 percent through the first half, due primarily to U.S. growth, boosted by a major expansion of its swimwear line.
At Mountain Hardwear, net sales declined 20 percent (20 percent currency-neutral) to $17 million and were down 9 percent (-7 percent currency-neutral) for the January to June period, despite 14 percent growth in North America. The decline overseas, which was due in large part to a continuing contraction of South Korea’s large and very crowded outdoor market, is expected to moderate to low-double-digits for the full year.
Total Sorel brand net sales declined 19 percent (16 percent currency-neutral) to $3.5 million, but were up 22 percent (25 percent currency-neutral) in the first half, thanks to a strong sales in the first quarter of its fall and winter products, and delivery of it new spring line to select, mostly U.S., wholesale customers. Sorel has begun delivering advanced wholesale orders of its fall line, which features a higher proportion of lighter weight, less weather-sensitive fashion styles like the updated Joan wedge collection.
Columbia Sportswear ended the quarter with inventories of $653.6 million, up 12 percent from a year earlier, consisting primarily of current fall 2016 and spring 2016 product. The company generated $102.7 million in operating cash flow in the first half of 2016, and finished the quarter with $428.8 million of cash and short-term investments, up 2.7 percent.
Reiterated Forecast, with a Few Cautions
Columbia reiterated its forecast for the full year despite acknowledging that there will likely be higher levels of promotional activity in the United States due to recent retail bankruptcies and store closures.
“We’ve been modeling the year somewhat more promotionally than we had in prior periods,” Boyle told investors during the company’s conference call. “We expect there to be additional promotional activity.”
As for the Sports Authority liquidation, specifically, Columbia Sportswear CFO Thomas Cusick said the company had been prudent when managing their inventory since the fourth quarter of 2015. “So we believe that we’ve got the inventory that would have otherwise ended up in Sports Authority well-distributed and its disposition is calculated in the guidance we gave you today,” he said. Boyle added that the distribution of extra inventory was included across the company’s wholesale and direct-to-consumer channels. He later noted that the softening in Asia, specifically Korea, was a bigger concern than the retail situation in the United States.
Columbia’s full-year 2016 forecast calls for a mid-single-digit increase in net sales and operating income and a high-single-digit increase in net income, including approximately 1 percentage point negative effect from changes in foreign currency exchange rates, on a base of 2015 net sales of $2.33 billion. Gross margins are expected to improve by up to 10 basis points, while selling, general and administrative expenses (SG&A) are forecast to increase slightly faster than net sales and increase the SG&A to net sales ratio by 15 to 45.
The forecast presumes high-single-digit growth at Sorel in the back half, when the brand earns 90 percent of its revenue. It also anticipates a successful launch of insulated jackets, gloves and more rain shells featuring Columbia’s new Outdry Extreme waterproof breathable technology, which places the membrane on the exterior rather than the interior of the garment to prevent wet outs.
“At next week’s Outdoor Retailer Summer Market in Salt Lake, we’ll be highlighting the extension of the Outdry Extreme platform into soft shells and trail footwear for spring 2017,” Boyle said. Also on display at Outdoor Retailer with be a “dramatically redesigned Mountain Hardwear booth, which is part of a new marketing campaign designed to communicate the brand’s determination to regain its status as a premiere Alpine sports brand.
“Mountain Hardwear’s newly assembled product design and merchandising teams are working hard to reinvent the product line, as rapidly as possible, with a deep lineup of innovative, high performance products targeted for introduction to consumers beginning in full 2017,” Boyle said. Earlier this year, Columbia appointed former Fjallraven North America executive John Wallbrecht to lead the brand’s turn-around.
Columbia is also looking for a bump at next month’s UTMB ultra-running race in France, where the company is a presenting sponsor. Columbia’s brands sponsor 25 athletes from the United States, Hong Kong, Japan, Netherlands, New Zealand, Switzerland, China, Spain and Scotland expected to compete.
“UTMB is the perfect global event to showcase Columbia’s elevated commitment to the trail running category,” Boyle said. “Our new trail running collection took the best features of Montrail, the original trail running brand, and forges in with the best features of our Columbia trail running line to create a versatile assortment of high-performance shoes for endurance athletes.”
Lead photo courtesy Columbia Sportswear
