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COLM > SEC Filings for COLM > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for COLUMBIA SPORTSWEAR CO


7-Nov-2012

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, expenses, input costs and cost containment measures, effects of unseasonable weather on our results of operations, investments in our business, including commencement of our China joint venture, investments in our information technology systems and our direct-to-consumer channels, 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 and our own direct-to-consumer channels. In addition, we license our Columbia trademarks across a range of apparel, footwear, accessories and equipment.
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 our 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 weather and discretionary consumer spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the fall season, while our operating costs are more equally distributed throughout the year. Since 2008, the expansion of our direct-to-consumer operations 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 2011, 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.
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 in planning manufacturing volumes to meet demand for each of our selling seasons. We typically ship the majority of our advance fall season orders to wholesale customers and independent distributors beginning in June and continuing through November. Similarly, the majority of our advance spring season orders ship to wholesale customers and independent distributors beginning in December and continuing through May. Generally, orders are subject to cancellation prior to the date of shipment. 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, the relative popularity of competitors' brands, and the continued popularity of outdoor activities as part of an active lifestyle in key markets. Volatile economic environments in key markets coupled with inflationary or volatile input costs reduce the predictability of our business. Business Outlook
The global business climate continues to present us with a great deal of uncertainty, making it difficult to predict future results. Factors that could significantly affect our full year 2012 outlook include:
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on order cancellations, sales returns, reorders, direct-to-consumer sales and suppressed demand in subsequent seasons;

Changes in mix and volume of full price sales in relation to close-out product sales and promotional sales activity;


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Increased costs to support supply chain and information technology infrastructure investments and projects, including our multi-year global enterprise resource planning ("ERP") system implementation;

Our ability to implement and maintain effective cost containment measures in order to limit the growth of selling, general and administrative ("SG&A") expenses to a rate comparable to or lower than sales growth;

Continued economic uncertainty, which is creating headwinds in key global markets, particularly in Europe as it relates to our EMEA direct business where we have ongoing efforts to revitalize the Columbia brand;

The rate of sales growth through our expanding direct-to-consumer operations;

Changes in consumer spending activity, including consumer acceptance of increased prices of our products; 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 potential increases in consumer prices in our key markets continue to pose significant challenges and risks for us. We believe the potential for growth in our full year 2012 net sales compared to 2011 is limited primarily as a result of the unseasonably warm 2011/2012 winter and a challenging economic environment, particularly in Europe, both of which subdued retailers' confidence as they placed their advance orders for the fall 2012 season. We expect full year 2012 SG&A expenses to decrease slightly compared to 2011, driven by cost containment measures executed in the first quarter of 2012 and a continued focus on SG&A expense control throughout the year. Cost containment efforts included a reduction in global headcount, curtailment of various compensation and benefit increases and reduction in travel, event and other discretionary spending.
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.
We remain firmly committed to:
Creating innovative solutions that keep people warm, cool, dry and protected so they can enjoy the outdoors longer;

Focusing on product design, utilizing our innovations to differentiate our brands from competitors;

Ensuring that our products are sold through brand enhancing distribution partners around the world;

Increasing the impact and amount of consumer communications to drive demand for our brands and sell-through of our products;

Making sure our products are merchandised and displayed in the best way possible in every retail environment; and

Continuing to build a world class direct-to-consumer business.

Our business has evolved significantly in recent years, including a broader geographic scope, larger international distributor and direct-to-consumer operations, increased automatic replenishment programs and changes in the multiple data points we use to plan our business. We have concluded that providing two seasonal wholesale backlog reports at March 31 and September 30, as we previously did through 2011, is not material to an understanding of our company and our future expectations.
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 2012

Net sales for the third quarter of 2012 decreased $21.8 million, or 4%, to $545.0 million from $566.8 million for the third quarter of 2011. Changes in foreign currency exchange rates compared with the third quarter of 2011 negatively affected the consolidated net sales comparison by approximately two percentage points.

Net income for the third quarter of 2012 decreased 5% to $64.4 million, or $1.88 per diluted share, compared to net income of $67.5 million, or $1.98 per diluted share, for the third quarter of 2011.

We paid a quarterly cash dividend of $0.22 per share, or $7.5 million, in the third quarter of 2012.

On August 6, 2012, we entered into an agreement with Swire Resources Limited to form a joint venture with the purpose of supporting the development of our business in the People's Republic of China, excluding the administrative territories of Hong Kong and Macau. The joint venture is expected to begin operations January 1, 2014, subject to regulatory approval in the People's Republic of China and other conditions customary in transactions of this size and type. We will hold a 60 percent ownership interest in the joint venture. The joint venture will replace distributor agreements with Swire Resources Limited. 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:


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