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Columbia Sportswear Up About 20% YTD: What Awaits for 2020?

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Brand-enhancing efforts, focus on Project CONNECT and a solid international presence have been working well for Columbia Sportswear Company COLM. Also, this provider of outdoor and active lifestyle apparel and footwear, among others, has been gaining from its strong direct-to-consumer (DTC) business. These factors have helped Columbia Sportswear put up a solid show in the past.

However, we cannot ignore the high SG&A costs, which are weighing on profits. Additionally, volatile currency movements and potential tariff impacts related to the China operations remain threats.

Let’s analyze and see how Columbia Sportswear is placed for 2020. Markedly, this Zacks Rank #3 (Hold) stock has rallied 19.8% year to date, while the industry grew 36.8%. Also, Columbia Sportswear has a long-term earnings per share growth rate of 10.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Driving Columbia Sportswear?

Columbia Sportswear’s brand-enhancing and unique marketing initiatives have been strengthening its presence in the apparel industry. We note that the company’s Columbia brand is steadily gaining market share. Further, it expects continued growth in the SOREL brand through constant upgrades and effective strategies. On the technology front, the company initiated the “Consumer First” retail platform or C1 in its North America stores. The company also implemented the new mobile platform experience first or X1 across its Europe-direct and product e-commerce businesses.

Further, Columbia Sportswear is progressing well with its Project CONNECT program, which is aimed at driving sales and earnings, alongside strengthening the company’s financial position. Markedly, the program comprises design to value, assortment optimization and manufacturing efficiency endeavors. During the third quarter, Project CONNECT aided the company’s gross margin, which expanded nearly 110 bps to 49.3%. The company is optimistic about generating substantial financial value from this project in 2019 and beyond.

Moving on, Columbia Sportswear is committed to expanding and enhancing its global DTC business, through accelerated investments. Within the DTC business, both brick-and-mortar and e-commerce businesses have been strong. Management expects this channel to continue performing well in the forthcoming periods. Apart from this, the company’s widespread global reach provides it with a solid business foundation and enables it to seek new opportunities. Net sales outside the United States increased 11% during the third quarter owing to growth in all international regions. Well, textile-apparel players like lululemon athletica LULU, Ralph Lauren RL and Hanesbrands (HBI - Free Report) are also benefiting from their solid international presence.

Headwinds Likely to be Countered

However, due to exposure in international markets, Columbia Sportswear is prone to currency fluctuations. In 2019, management anticipates currency fluctuations to negatively impact net revenue growth by 90 bps. Also, the company intends to maintain its ties with its partners in China, given the hurdles related to local manufacturing. Thus, any adverse tariff impacts stemming from the trade war are likely to have a detrimental impact on Columbia Sportswear’s business, vendors and consumers in the future.

Nonetheless, the company is taking steps to mitigate the impact of the same. Moreover, we expect the aforementioned drivers, especially Project CONNECT, to help the company counter high SG&A costs. Evidently, SG&A expenses increased 14% on a year-over-year basis during the third quarter, caused by higher investments to improve global DTC operations, project-related expenses and other demand creation spending.

All said, we expect Columbia Sportswear to touch new records in 2020.

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