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Bear of the Day: Columbia Sportswear (COLM)

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Columbia Sportswear Company (COLM - Free Report) is getting hit globally due to COVID-19 impacts. This Zacks Rank #5 (Strong Sell) has taken steps to boost its liquidity and prepare for reopening of the global economy. 
 
Columbia Sportswear is a global retailer in the active outdoor lifestyle apparel, footwear, accessories and equipment industry. It operates in 90 countries through its four brands: Columbia, Mountain Hardwear, SOREL and PrAna. The company has both online and brick and mortar stores. 
 
Global Impacts of COVID-19
 
Columbia got hit earlier than some other retailers due to its business in Asia which began to feel the impacts of COVID-19 in late January in China, early February in Korea and Japan and in March in North America and Europe. 
 
Retail traffic trends declined in North America and Europe, even before the official store closures which happened in mid-March. 
 
As of Apr 30, the vast majority of its stores in China and Korea have reopened but many are still operating with reduced store hours. 
 
In those markets, traffic trends have been improving but remain well below the pre-COVID levels. 
 
Japan experienced a similar improving recovery until earl April when a spike of new cases in and around Tokyo prompted store closures. 
 
As of Apr 30, the vast majority of its North American and Europe stores remained closed, as did its wholesale customers.
 
It's online business has mostly stayed operational during this period. 
 
First Miss in Five Years in Q1
 
On Apr 30, the company reported its first quarter results and it missed the Zacks Consensus by 45 cents. Earnings were flat, or $0.00, compared to the Zacks Consensus of $0.45.
 
This was Columbia's first earnings miss in 5 years. 
 
 
No one stays perfect for forever on earnings. It was a great run. COVID-19 is just the perfect storm for a global retailer. 
 
Net sales fell 13% to $568.2 million from $654.6 million a year ago. 
 
Gross margin contracted 360 basis points to 47.8% from 51.4% of net sales in Q1 of 2019. 
 
Inventory Guidance
 
Given the slowdown in consumer demand, and the actions taken by their wholesale customers, aka the department stores, to preserve their capital and liquidity, Columbia anticipates significant Spring and Fall 2020 sales orders cancellations.
 
To mitigate the impacts of the cancellations, Columbia has curtailed planned Fall 2020 inventory purchases. 
 
Because of the elevated inventory within its own stores, it expects to increase the amount of clearance inventory that is sold through their outlet stores. 
 
The current environment is very promotional. Who hasn't seen 50% to 70% off already from the apparel retailers? Because of that, it anticipates impacts to its net sales and gross margin. 
 
Additionally, Columbia also has seen supply chain disruptions at some finished goods suppliers due to closures in Asia from COVID-19. Those disruptions will likely affect Columbia's ability to timely fulfill some Fall 2020 orders. 
 
Withdrew Guidance for 2020
 
It's not a surprise that due to the COVID-19 uncertainties, it withdrew its full year guidance. 
 
Columbia did provide some "color" on the second quarter, however. 
 
Q2 is historically their seasonally lowest sales volume period. It expects, based on current and anticipated store closures and uncertainty regarding traffic at the stores as they reopen, to see a significant decline in second quarter sales and an operating loss. 
 
What Does the Balance Sheet Look Like?
 
As of Mar 31, 2020, it had cash and equivalents of $706.9 million. 
 
Previously, the company had no short-term debt but it now has short-term borrowings of $174.4 million.
 
Dividend and Share Buybacks Suspended
 
In the first quarter, the company had repurchased $132.9 million in shares and still had $82.2 million available under the stock purchase authorization. 
 
That has been suspended. 
 
The dividend has also been suspended.
 
Combined with reduced capital expenditures, the company is expected to see reduced capital outflows of about $130 million in 2020 from these actions. 
 
Earnings Estimates Cut
 
Given the hit to demand, it's not surprising that the analysts moved to cut earnings estimates for 2020 and 2021.
 
6 estimates were lowered after the earnings report for 2020 pushing the Zacks Consensus down to $2.00 from $4.83 just 90 days ago. 
 
That's an earnings decline of 58% as the company made $4.83 last year. 
 
Analysts are split on what 2021 might look like with 4 cutting and 2 raising over the last month, which still pushed the 2021 Zacks Consensus Estimate down to $3.91. 
 
Shares at 3-Year Lows
 
Shares of all retailers have been pummeled. 
 
Columbia shares have fallen 34% year-to-date to 3-year lows. 
 
 
Given the earnings estimate cuts, they now trade with a forward P/E of 33.9, so they're not exactly "cheap" on a P/E basis. 
 
Competitor VF Corporation VFC, which owns Timberland and North Face, is also a Zacks Rank #5 (Strong Sell) and it's also expensive on a P/E basis, trading at 30x. 
 
There's really nowhere to hide in 2020 for the retailers.
 
Cash and brand strength are key for investors digging around for bargains.
 
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