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Columbia Sportswear (COLM) Q1 Earnings Miss on Coronavirus Woes

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Columbia Sportswear Company (COLM - Free Report) reported dismal first-quarter 2020 results, wherein both top and bottom lines deteriorated year over year and fell short of the Zacks Consensus Estimate. Results were largely affected by concerns related to the coronavirus outbreak. Also, management withdrew its first half and 2020 guidance on account of the uncertainties and disruptions related to coronavirus. The company expects net sales and operating loss to be significantly marred by the pandemic in the second quarter.

Quarter in Detail

Columbia Sportswear Company Price, Consensus and EPS Surprise

This designer, marketer and distributor of outdoor and active lifestyle apparel, footwear and accessories posted breakeven earnings compared with the year-ago period’s reported figure of $1.07. The Zacks Consensus Estimate stood at 45 cents.

Net sales dropped 13% to $568.2 million and fell short of the consensus mark of $594 million. Sales declined across all brands, categories, channels and regions.


In the reported quarter, DTC channels displayed a sales decline of 17%, while wholesale net sales fell 10%.

Gross margin declined 360 basis points (bps) to 47.8% due to coronavirus-led impacts. These include reduced DTC product margins due to elevated promotional activities and increased inventory obsolescence provisions related to unsold inventory.

SG&A expenses rose 10% to $27.8 million. As a percentage of sales, the same escalated from 38.5% to 48.7%. The company reported an operating loss of $2 million against an operating income of $88 million in the year-ago period. The current period loss includes increased bad-debt expenses and escalated inventory obsolescence provision of $21.5 million and $9.2 million, respectively. 

Regional Segments

In the United States, net sales fell 9% to $375.9 million. Latin America/Asia Pacific (LAAP) net sales fell 23% (down 22% at cc) to $102.6 million. Further, net sales dropped 22% (down 20% at cc) to $55.8 million in Europe/Middle East/Africa (EMEA). In Canada, net sales were down 11% to $33.9 million.

Sales by Product Category & Brand

Net sales in the Apparel, Accessories and Equipment category declined 14% to $452.2 million, while the same for Footwear fell 10% to $116 million.

Further, the Columbia and prAna brands saw sales declines of 15% and 11%, respectively. Meanwhile, sales dropped 2% each at Mountain Hardwear and Sorel brands.

Other Financial Updates

Columbia Sportswear ended the quarter with cash, cash equivalents and short-term investments of $706.9 million and total equity of $1,696.6 million. The company also had short-term borrowings of $174.4 million in its balance sheet. During the quarter, the company generated cash from operating activities of $12.8 million, while it incurred capital expenditures of $9.5 million.

Further, the company paid out dividends of $17.2 million and repurchased 1,557,184 shares for an aggregate of $132.9 million during the first three months of 2020. However, management has suspended share buyback activities and quarterly dividend payments for the time being, as part of its efforts to preserve capital amid the COVID-19 crisis.

COVID-19 Update

First-quarter results were largely affected by COVID-19, which kept increasing throughout the quarter. Coronavirus adversely impacted performance in China in late January, Japan and Korea at the beginning of February, and North America and Europe in March. While retail store closures in North America and Europe were commenced in mid-March, traffic started declining from the early days of the month.

As of Apr 30, 2020, most of the stores reopened in China and Korea, though many of them work for limited hours. While retail traffic is improving in these regions, it is still well below the pre-coronavirus level. However, stores remain closed in North America and most parts of Europe. Nonetheless, the company’s e-commerce platform has been largely operational during the pandemic, except for some distribution center closures.

The company is taking several actions to curtail costs and fortify capital position in the wake of this crisis. To this end, it has suspended dividend payouts and share buybacks, reduced operating and discretionary expenses, among others, and reduced planned inventory purchases for fall 2020. The company expects its sales and margins to be hurt by elevated promotions to clear off excess inventory. It is also battling supply-chain disruptions, primarily due to temporary raw material and finished goods supplier shutdowns in Asia.

Outlook

Management intends to continue its investments to create demand, drive brand awareness and enhance digital capabilities. It will also continue exploring growth opportunities in the DTC business and improve support processes.

Columbia Sportswear began investing in its X1 initiative in 2018. The company remains on track with this initiative, which is aimed at enhancing e-commerce operations to keep pace with the evolving consumer environment. The company is focused on implementing X1 in a phased manner. In this regard, the initiative was implemented across 10 countries in Europe-direct and for the prAna brand in the United States in 2019. The company expects to keep implementing X1 in North America in 2020. It anticipates this platform to become operational for Columbia, SOREL and Mountain Hardwear brands ahead of the holiday season peak.   

Price Performance

Shares of this Zacks Rank #5 (Strong Sell) company have lost 27.3% year to date compared with the industry’s decline of 31.7%.

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