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COLM > SEC Filings for COLM > Form 10-Q on 4-Nov-2011All Recent SEC Filings

Show all filings for COLUMBIA SPORTSWEAR CO

Form 10-Q for COLUMBIA SPORTSWEAR CO


4-Nov-2011

Quarterly Report


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report contains forward-looking statements. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including any statements regarding anticipated sales across markets, distribution channels and product categories, access to raw materials and factory capacity, financing and working capital requirements and resources and our exposure to market risk associated with interest rates and foreign currency exchange rates.

These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors may cause actual results to differ materially from those projected in forward-looking statements, including the risks described below in Part II, Item 1A, Risk Factors. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

Our Business

As one of the largest outdoor apparel and footwear companies in the world, we design, source, market and distribute active outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Our products are sold through a mix of wholesale distribution channels, independent distributors, our own direct-to-consumer channels and licensees.

The popularity of outdoor activities, changing design trends and consumer adoption of innovative performance technologies affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by adjusting the mix of available product offerings, developing new products with innovative performance features and designs, and creating persuasive and memorable marketing communications to generate consumer awareness and demand. Failure to anticipate or respond to consumer needs and preferences in a timely and adequate manner could have a material adverse effect on our sales and profitability.

Seasonality and Variability of Business

Our business is affected by the general seasonal trends common to the outdoor industry and is heavily dependent upon discretionary consumer spending patterns. Our products are marketed on a seasonal basis and our product mix is weighted substantially toward the fall season, while our operating costs are more equally distributed throughout the year. The expansion of our direct-to-consumer operations since 2008 has increased the proportion of sales and profits that we generate in the fourth calendar quarter. As a result, our sales and profits tend to be highest in the third and fourth calendar quarters. In 2010, approximately 65 percent of our net sales and all of our profitability were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs.

Our quarterly net sales comparisons often vary significantly due to shifts in the timing of fall season shipments to international distributors that occur late in the second quarter or early in the third quarter and shifts in the timing of spring season shipments to international distributors that occur late in the fourth quarter or early in the first quarter. In addition, as our direct-to-consumer, Sorel and Columbia winter footwear businesses grow, we expect a greater proportion of net sales and operating income to occur in the fourth quarter.

Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of persistent volatility in economic conditions. Sales of our products are subject to substantial cyclical fluctuation, the effects of unseasonable weather conditions, and the continued popularity of outdoor activities as part of an active lifestyle in key markets. The current economic environment in key markets, coupled with inflationary cost pressures, has reduced the predictability of our business.

Business Outlook

The business climate continues to present us with a great deal of uncertainty, with a number of variables that we rely on for planning purposes moving in opposing directions, making it more difficult to predict future results. Factors that could significantly affect our full year 2011 outlook include:

Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on order cancellations and reorders;

Changes in mix and volume of full price sales in contrast with closeout product sales;

Volatile input costs across our supply chain;


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Increased fixed costs to support growth and our multi-year business process, supply chain and information technology infrastructure investments and projects;

Costs of expedited transportation;

Lower relative volume of department store sales in the United States;

Incremental sales through our expanding direct-to-consumer operations, which are not included in backlog;

Changes in consumer spending activity and sales fluctuations in our own retail stores; and

Fluctuating currency exchange rates.

Like other branded consumer product companies, our business is heavily dependent upon discretionary consumer spending patterns. Continuing high levels of unemployment and concerns about increasing consumer inflation rates in our key markets continue to pose significant challenges and risks.

Over the past two years we have made significant investments in our go-to-market process to position us for growth. Among other things we have:

Sharpened our focus on product innovation;

Built a multi-channel and multi-country direct-to-consumer platform, including expanded retail store and e-commerce operations;

Refocused our marketing efforts behind new brand campaigns and media strategies for each of our major brands; and

Restructured our sales organizations to build relationships with new partners and strengthen those with existing accounts.

As a result of these continuing efforts, we expect our selling, general and administrative ("SG&A") expenses in 2011 to increase compared to 2010. In addition, we have begun to make improvements to our operational processes, involving significant investments in initiatives to improve our information technology infrastructure and our enterprise data and information management, which are designed to improve operational flexibility and performance. These investments are the foundation for a multi-year implementation of a new global enterprise resource planning, or ERP, system that began in late 2010.

As our business model and strategies have evolved, management expects certain trends to continue to affect our business and operating results, including:

A higher amount of fixed operating expenses to support, among other things, direct-to-consumer and direct sales activities and our multi-year ERP implementation;

A lower relative volume of U.S. department store sales;

An increasing percentage of growth from markets outside the U.S.; and

Increasing product input costs.

These factors and others may have a material effect on our financial condition, results of operations, or cash flows, particularly with respect to quarterly comparisons.

Wholesale Backlog

We generally solicit orders from wholesale customers and independent distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand for each of our selling seasons. Twice each year we report our backlog of advance orders, representing the results of these seasonal order-taking processes.

We typically ship the majority of our advance fall season orders to wholesale customers and independent distributors beginning in late June and continuing through November. Similarly, the majority of our advance spring season orders ship to wholesale customers and independent distributors beginning in late December and continuing through late May. Generally, orders are subject to cancellation prior to the date of shipment.


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Our spring wholesale backlog at September 30, 2011 increased $26.5 million, or 7%, to $420.7 million from $394.2 million at September 30, 2010. Changes in foreign currency exchange rates compared with 2010 affected the spring wholesale backlog comparison by less than 1%. Our spring wholesale backlog reflects growth across each major brand, product category and three of our four regions. By product category, the spring wholesale backlog increase was led by sportswear, followed by outerwear, accessories and equipment and footwear. By brand, the spring wholesale backlog increase was led by the Columbia brand, followed by the Mountain Hardwear brand and Sorel brand. Wholesale backlog does not include anticipated sales to consumers through our own direct-to-consumer channels. Although we cannot predict with certainty any future results, our reported spring wholesale backlog is one indicator of our anticipated net sales for the spring 2012 selling season. Many factors, however, could cause actual wholesale sales to differ materially from the reported spring wholesale backlog, including the potential cancellation of orders by customers, capacity constraints in our supply chain resulting in delivery delays, changes in foreign currency exchange rates and changes in macro-economic conditions. Moreover, our spring wholesale backlog should not be used in forecasting sales beyond the spring 2012 selling season.

Results of Operations

The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying Notes that appear elsewhere in this quarterly report. All references to quarters relate to the quarter ended September 30 of the particular year.

Highlights of the Third Quarter of 2011

Net sales for the third quarter of 2011 increased $62.8 million, or 12%, to $566.8 million from $504.0 million for the third quarter of 2010, including approximately a three percentage point benefit from changes in foreign currency exchange rates.

Net income for the third quarter of 2011 increased 29% to $67.5 million, or $1.98 per diluted share, compared to $52.2 million, or $1.53 per diluted share, for the third quarter of 2010.

Spring wholesale backlog at September 30, 2011 increased $26.5 million, or 7%, to $420.7 million compared to September 30, 2010. Changes in foreign currency exchange rates compared with 2010 affected the spring wholesale backlog comparison by less than 1%.

We paid quarterly cash dividends of $0.22 per share, or $7.4 million, in the third quarter of 2011.

The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our condensed consolidated statements of operations:

                                                  Three Months  Ended           Nine Months  Ended
                                                     September 30,                September 30 ,
                                                   2011           2010          2011           2010
Net sales                                            100.0 %       100.0 %        100.0 %       100.0 %
Cost of sales                                         56.0          57.5           56.2          57.3

Gross profit                                          44.0          42.5           43.8          42.7
Selling, general and administrative expense           29.5          29.4           37.3          36.7
Net licensing income                                   0.8           0.5            0.9           0.5

Income from operations                                15.3          13.6            7.4           6.5
Interest income, net                                   0.1           0.0            0.1           0.1

Income before income tax                              15.4          13.6            7.5           6.6
Income tax expense                                    (3.5 )        (3.3 )         (1.8 )        (1.6 )

Net income                                            11.9 %        10.3 %          5.7 %         5.0 %

Quarter Ended September 30, 2011 Compared to Quarter Ended September 30, 2010

Net Sales: Consolidated net sales increased $62.8 million, or 12%, to $566.8 million for the third quarter of 2011 from $504.0 million for the comparable period in 2010. Net sales increased across each of our major brands, all geographic regions and three of our four product categories. Changes in foreign currency exchange rates compared with the third quarter of 2010 contributed approximately a three percentage point benefit to the consolidated net sales comparison.

Sales by Brand

Net sales by brand are summarized in the following table:



                                      Three Months Ended September 30,
                                 2011                    2010           % Change
                                (In millions, except for percentage changes)
        Columbia            $         447.8         $         430.3             4 %
        Mountain Hardwear              44.7                    38.2            17 %
        Sorel                          72.0                    33.4           116 %
        Other                           2.3                     2.1            10 %

                            $         566.8         $         504.0            12 %


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The net sales increase was led by the Sorel brand, followed by the Columbia brand and Mountain Hardwear brand. The Sorel brand net sales increase was led by the EMEA region, followed by the United States, Canada and the LAAP region.

Sales by Geographic Region

Net sales by geographical region are summarized in the following table:



                                    Three Months Ended September 30,
                                                                       %
                                  2011                2010          Change
                                   (In millions, except for percentage
                                                changes)
              United States   $       333.6       $       325.6           2 %
              LAAP                     72.8                59.0          23 %
              EMEA                    100.3                66.3          51 %
              Canada                   60.1                53.1          13 %

                              $       566.8       $       504.0          12 %

Net sales in the United States increased $8.0 million, or 2%, to $333.6 million for the third quarter of 2011 from $325.6 million for the comparable period in 2010. The increase in net sales in the United States was concentrated in footwear and the Sorel brand. The net sales increase by channel consisted of a net sales increase in our direct-to-consumer business, partially offset by a slight net sales decrease in our wholesale business. The net sales increase in our direct-to-consumer business was driven by strong comparable store sales growth, increased e-commerce sales and the addition of 3 new outlet stores. The net sales decrease in our wholesale business was the result of a planned shift in the timing of shipments of fall 2011 advance orders between the third and fourth quarters, compared with fall 2010.

Net sales in the LAAP region increased $13.8 million, or 23%, to $72.8 million for the third quarter of 2011 from $59.0 million for the comparable period in 2010. Changes in foreign currency exchange rates compared with the third quarter of 2010 contributed approximately a nine percentage point benefit to the LAAP net sales comparison. The net sales increase in the LAAP region was spread across all product categories and was primarily concentrated in the Columbia brand. The LAAP net sales increase was led by Japan, followed by Korea, partially offset by a net sales decrease in our LAAP distributor business. The net sales increase in Japan was due to increased sales of Columbia brand product and the favorable effect of foreign currency exchange rates. The increase in Korea net sales was primarily due to increased retail sales of the Columbia and Mountain Hardwear brands. The net sales decrease in our LAAP distributor business reflected a shift in the timing of shipments as a higher percentage of fall 2011 advance orders were shipped and recorded as sales in the second quarter of 2011, while a higher percentage of fall 2010 advance orders were shipped and recorded as sales in the third quarter of 2010.

Net sales in the EMEA region increased $34.0 million, or 51%, to $100.3 million for the third quarter of 2011 from $66.3 million for the comparable period in 2010. Changes in foreign currency exchange rates compared with the third quarter of 2010 contributed approximately a thirteen percentage point benefit to the EMEA net sales comparison. The net sales increase in the EMEA region was concentrated in footwear and was driven by the Sorel brand, followed by the Columbia brand. The EMEA net sales increase was concentrated in our direct business, followed by our distributor business.

Net sales in Canada increased $7.0 million, or 13%, to $60.1 million for the third quarter of 2011 from $53.1 million for the comparable period in 2010. Changes in foreign currency exchange rates compared with 2010 contributed approximately a nine percentage point benefit to the Canada net sales comparison. The increase in net sales was concentrated in the Sorel brand. By product category, the increase in net sales was concentrated in footwear.

Sales by Product Category

Net sales by product category are summarized in the following table:



                                                           Three Months Ended September 30,
                                                  2011                   2010                 % Change
                                                     (In millions, except for percentage changes)
Outerwear                                   $          222.5         $       223.9                      (1 )%
Sportswear                                             179.8                 168.2                       7 %
Footwear                                               128.6                  82.8                      55 %
Accessories and Equipment                               35.9                  29.1                      23 %

                                            $          566.8         $       504.0                      12 %


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Net sales of outerwear decreased $1.4 million, or 1%, to $222.5 million for the third quarter of 2011 from $223.9 million for the comparable period in 2010. Decreases in outerwear net sales in the United States and, to a lesser degree, Canada were partially offset by net sales increases in the LAAP and EMEA regions.

Net sales of sportswear increased $11.6 million, or 7%, to $179.8 million for the third quarter of 2011 from $168.2 million for the comparable period in 2010. The increase in sportswear net sales was concentrated in our regions outside the United States and was led by the Mountain Hardwear brand, followed by the Columbia brand.

Net sales of footwear increased $45.8 million, or 55%, to $128.6 million for the third quarter of 2011 from $82.8 million for the comparable period in 2010. The increase in footwear net sales was primarily concentrated in the Sorel brand, followed by the Columbia brand and was led by the EMEA region, followed by the United States, Canada and the LAAP region. The net sales increase in footwear in the EMEA region was concentrated in our direct business. The footwear net sales increase in the United States region was led by our wholesale business, followed by our direct-to-consumer business.

Net sales of accessories and equipment increased $6.8 million, or 23%, to $35.9 million for the third quarter of 2011 from $29.1 million for the comparable period in 2010. The increase in accessories and equipment net sales was spread across all regions and was primarily concentrated in the Columbia brand.

Gross Profit: Gross profit, as a percentage of net sales, increased to 44.0% for the third quarter of 2011 from 42.5% for the comparable period in 2010 predominantly driven by lower air freight costs. Other factors favorably impacting gross margin included:

A lower proportion of shipments to EMEA and LAAP distributors, which carry lower gross margins than direct wholesale and direct-to-consumer sales;

Increased direct-to-consumer sales at higher gross margins; and

Favorable foreign currency hedge rates;

partially offset by:

A higher volume of close-out product sales at lower gross margins; and

Increased product costs.

Our gross profits may not be comparable to those of other companies in our industry because some include all of the costs related to their distribution network in cost of sales, while we, like many others, include these expenses as a component of SG&A expense.

Selling, General and Administrative Expense:SG&A expense includes all costs associated with our design, merchandising, marketing, distribution and corporate functions, including related depreciation and amortization.

SG&A expense increased $19.3 million, or 13%, to $167.4 million for the third quarter of 2011 from $148.1 million for the comparable period in 2010. The SG&A expense increase was primarily due to:

The expansion of direct-to-consumer operations globally,

The unfavorable effect of foreign currency translation,

Information technology initiatives, including our ERP implementation, and

Additions to staff and other expenses to support business initiatives and growth.

SG&A expense increased to 29.5% of net sales for the third quarter of 2011 from 29.4% of net sales for the comparable period in 2010. Depreciation and amortization included in SG&A expense totaled $10.9 million for the third quarter of 2011, compared to $9.3 million for the same period in 2010.

Net Licensing Income: Net licensing income increased $2.1 million to $4.4 million for the third quarter of 2011 from $2.3 million for the same period in 2010, primarily due to increased apparel and footwear licensing income in the LAAP region.

Interest Income, Net: Net interest income was $0.5 million for the third quarter of 2011 compared to $0.1 million for the same period in 2010. Interest income increased due to higher average interest rates on cash equivalents and short-term investments and interest on income tax refunds compared to the same period in 2010. Interest expense was nominal for the third quarter of 2011 and for the comparable period in 2010.


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Income Tax Expense: Income tax expense increased to $19.5 million for the third quarter of 2011 from $16.5 million for the comparable period in 2010. Our effective income tax rate was 22.4% for the third quarter of 2011 compared to 24.0% for the same period in 2010. Our effective income tax rate decreased primarily because we earned a higher proportion of our income from foreign jurisdictions with tax rates that are generally lower than the U.S. tax rate.

Net Income: Net income increased $15.3 million, or 29%, to $67.5 million for the third quarter of 2011 from $52.2 million for the comparable period in 2010. Diluted earnings per share was $1.98 for the third quarter of 2011, compared to $1.53 for the third quarter of 2010.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Net Sales: Consolidated net sales increased $141.7 million, or 14%, to $1,167.9 million for the nine months ended September 30, 2011 from $1,026.2 million for the comparable period in 2010. Net sales increased across each of our major brands, all geographic regions and all product categories. Changes in foreign currency exchange rates, compared with the nine months ended September 30, 2010, contributed approximately a three percentage point benefit to the consolidated net sales comparison.

Sales by Brand

Net sales by brand are summarized in the following table:



                                       Nine Months Ended September 30,
                                  2011                    2010          % Change
                                (In millions, except for percentage changes)
        Columbia            $           975.0         $       897.4             9 %
        Mountain Hardwear                99.1                  82.1            21 %
        Sorel                            86.0                  39.2           119 %
        Other                             7.8                   7.5             4 %

                            $         1,167.9         $     1,026.2            14 %

The net sales increase was led by the Columbia brand, followed by the Sorel brand and Mountain Hardwear brand. The Columbia brand net sales increase was led by the LAAP region, followed by the EMEA region, the United States and Canada.

Sales by Geographic Region

Net sales by geographical region are summarized in the following table:



                                     Nine Months Ended September 30,
                                2011                   2010           % Change
                              (In millions, except for percentage changes)
          United States   $          655.1         $       622.5              5 %
          LAAP                       216.7                 166.9             30 %
          EMEA                       198.3                 151.8             31 %
          Canada                      97.8                  85.0             15 %

                          $        1,167.9         $     1,026.2             14 %

Net sales in the United States increased $32.6 million, or 5%, to $655.1 million for the nine months ended September 30, 2011 from $622.5 million for the comparable period in 2010. The increase in net sales in the United States by product category was led by footwear and included increased net sales in all product categories. The net sales increase by brand was led by the Sorel brand, followed by the Mountain Hardwear brand and the Columbia brand. The net sales increase by channel consisted of a net sales increase in our direct-to-consumer business, partially offset by a slight net sales decrease in our wholesale business. The net sales increase in our direct-to-consumer business was driven by strong comparable store sales growth, increased e-commerce sales and the addition of 3 new outlet stores.


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Net sales in the LAAP region increased $49.8 million, or 30%, to $216.7 million for the nine months ended September 30, 2011 from $166.9 million for the comparable period in 2010. Changes in foreign currency exchange rates compared with the nine months ended September 30, 2010, contributed approximately a nine percentage point benefit to the LAAP net sales comparison. The net sales . . .

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