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COLM > SEC Filings for COLM > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for COLUMBIA SPORTSWEAR CO

Form 10-K for COLUMBIA SPORTSWEAR CO


27-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This annual report, including Item 1 of Part I and Item 7 of Part II, 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, gross margins and operating margins across markets, distribution channels and product categories, licensing income, expenses, input costs and cost containment measures, effects of unseasonable weather on our results of operations, inventory levels, investments in our business, including funding and operation of our China joint venture, investments in and implementation of our information technology systems, our direct-to-consumer channels and other capital expenditures, access to raw materials and factory capacity, financing and working capital requirements and resources, tax rates and pre-tax income, 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 above in Item 1A, Risk Factors. We do not undertake any duty either 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 some of our trademarks across a range of apparel, footwear, accessories and equipment.
The popularity of outdoor activities, weather, changing design trends, consumer adoption of innovative performance technologies and the availability and desirability of competitor alternatives 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 and price points of available product offerings, developing new products with innovative performance features and designs, and creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention. 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 third and fourth quarters, while our operating costs are more equally distributed throughout the year. 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 2013, approximately 63 percent of our net sales and nearly 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 to plan manufacturing volumes to meet demand. We typically ship the majority of our advance fall season orders to wholesale customers and independent distributors beginning in July and continuing through December. Similarly, the majority of our advance spring season orders ship to wholesale customers and independent distributors beginning in January and continuing through June. 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, seasonal weather patterns and 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 2014 outlook include:
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on order cancellations, sales returns, customer accommodations, reorders, direct-to-consumer sales and suppressed demand in subsequent seasons;

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

Costs and business interruption risks related to our supply chain and information technology infrastructure investments and projects, including our multi-year global ERP system implementation;

Our ability to effectively manage operating costs;

Continued political and economic uncertainty, which is creating headwinds in key global markets, particularly Europe as it relates to our EMEA direct business where we have ongoing efforts to revitalize the Columbia brand, and in South America with respect to import restrictions and currency constraints in key distributor markets;

The rate of new store expansion and performance of our existing stores and e-commerce sites in our global direct-to-consumer operations;

Changes in consumer spending activity; and

Fluctuating currency exchange rates.

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 expect 2014 profitability to be affected by the following major factors:
incremental sales, operating costs and profits from our new China joint venture;

continued growth and increased investment in our global direct-to-consumer businesses;

renewed growth in our wholesale businesses beginning in the second half of 2014;

increased demand creation costs; and

incremental depreciation expense and post go-live support costs related to our United States ERP implementation beginning in the second quarter of the year.

Consistent with the historical seasonality of the business, we anticipate 2014 profitability to be heavily concentrated in the second half of the year. We continue to expect to complete implementation of our new ERP system in the United States in April 2014 which, when combined with the fully functioning ERP system in our Canadian operation, will bring our North American wholesale business and the majority of our global supply chain operations onto the new platform. The timing of the implementation is scheduled to occur after our spring shipping window and prior to our larger fall wholesale and direct-to-consumer season.
We remain focused on driving sustainable, profitable sales growth by providing innovative products at accessible prices, transforming our global supply chain, including information technology, managing inventory, and nurturing stronger emotional connections with consumers through compelling marketing communications.
Results of Operations


The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and accompanying Notes that appear elsewhere in this annual report. All references to years relate to the calendar year ended December 31. Highlights of the Year Ended December 31, 2013
Net sales increased $15.4 million, or 1%, to $1,685.0 million in 2013 from $1,669.6 million in 2012. Changes in foreign currency exchange rates compared with 2012 negatively affected the consolidated net sales comparison by approximately one percentage point.

Net income attributable to Columbia Sportswear Company decreased 6% to $94.3 million in 2013, including an impairment charge of approximately $5.6 million, net of tax, from $99.9 million in 2012, and diluted earnings per share decreased to $2.72 in 2013, including an impairment charge of $0.16 per share, net of tax, compared to $2.93 in 2012.

We paid cash dividends totaling $31.3 million, or $0.91 per share, in 2013.

Our previously announced joint venture in mainland China with Swire commenced operations effective January 1, 2014. As a majority-owned entity, the joint venture's operations are included in our consolidated financial results. During 2013, our financial results were affected as we transitioned to the joint venture from our previous third-party distributor relationship with Swire. We funded our initial capital contribution of $12.0 million in cash and Swire funded its initial capital contribution of $8.0 million in cash to the joint venture during the second quarter of 2013. Additional capital will be provided in the first quarter of 2014 in the form of proportionate shareholder loans totaling up to $40 million. We incurred approximately $3.7 million of organizational and other pre-operating costs, including personnel costs, professional fees and selling-related expenses, during 2013. Our shipments of spring 2014 inventory for the China market, which began in the fourth quarter of 2013, were sold directly to the joint venture entity. The related sales, gross margin, and licensing income, which we would have recognized in the fourth quarter of 2013 under the historical distributor model, were deferred and will be recognized in future periods as the joint venture sells that inventory to wholesale customers and consumers. As of December 31, 2013, inventory of spring 2014 and prior seasons, totaling $20.6 million, was acquired by the joint venture. During 2013, we deferred gross profit and licensing income related to this inventory totaling $4.9 million, which we will recognize in future periods as the inventory is sold by the joint venture to wholesale customers and consumers. The effects of these deferrals have been included in our 2013 operating results.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Consolidated Statements of Operations:

                                                          Year Ended December 31,
                                                         2013       2012       2011
Net sales                                              100.0  %   100.0  %   100.0  %
Cost of sales                                           55.9       57.1       56.6
Gross profit                                            44.1       42.9       43.4
Selling, general and administrative expense             37.1       35.7       36.3
Net licensing income                                     0.8        0.8        1.0
Income from operations                                   7.8        8.0        8.1
Interest income, net                                       -          -          -
Other non-operating expense                                -          -          -
Income before income tax                                 7.8        8.0        8.1
Income tax expense                                      (2.2 )     (2.0 )     (2.0 )
Net income                                               5.6        6.0        6.1
Net loss attributable to non-controlling interest          -          -          -
Net income attributable to Columbia Sportswear Company   5.6  %     6.0  %     6.1  %

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012


Net Sales: Consolidated net sales increased $15.4 million, or 1%, to $1,685.0 million in 2013 from $1,669.6 million in 2012. Changes in foreign currency exchange rates compared with 2012 negatively affected the net sales comparison by approximately one percentage point.
Sales by Geographic Region
Net sales by geographic region are summarized in the following table:

                               Year Ended December 31,
                             2013                     2012      % Change
                     (In millions, except for percentage changes)
United States $         971.3                      $   946.7       3%
LAAP                    354.4                          377.6      (6)%
EMEA                    240.7                          230.6       4%
Canada                  118.6                          114.7       3%
              $       1,685.0                      $ 1,669.6       1%

Net sales in the United States increased $24.6 million, or 3%, to $971.3 million in 2013 from $946.7 million in 2012. The increase in net sales in the United States consisted of a net sales increase in our direct-to-consumer channel across all brands and both product categories, partially offset by a net sales decrease in our wholesale business across all brands and both product categories. The increase in direct-to-consumer net sales was led by increased net sales within our retail stores, followed by increased e-commerce net sales. At December 31, 2013, we operated 72 retail stores, compared with 63 stores at December 31, 2012. The decrease in net sales in our wholesale business was driven by a decline in advance wholesale orders following mild winter weather in 2012.
Net sales in the LAAP region decreased $23.2 million, or 6%, to $354.4 million in 2013 from $377.6 million in 2012. Changes in foreign currency exchange rates negatively affected the LAAP net sales comparison by approximately seven percentage points. The net sales decrease in the LAAP region was led by a net sales decrease in apparel, accessories and equipment, followed by a net sales decrease in footwear. The LAAP net sales decrease was concentrated in the Columbia brand, followed by the Mountain Hardwear brand, partially offset by a net sales increase in the Sorel brand. The LAAP net sales decrease was led by our LAAP distributor business, followed by Japan, partially offset by a net sales increase in Korea. Net sales to our LAAP distributors decreased primarily due to import restrictions and currency constraints in key South American distributor markets, the transition to a joint venture in China from our previous distributor model and a transition to a new distributor in Australia. The decrease in Japan net sales was due to unfavorable changes in currency exchange rates that more than offset a net sales increase in local currency. The increase in Korea net sales was primarily due to a greater number of retail stores operating during 2013 than in 2012 and a benefit from changes in currency exchange rates.
Net sales in the EMEA region increased $10.1 million, or 4%, to $240.7 million in 2013 from $230.6 million in 2012. Changes in foreign currency exchange rates contributed approximately two percentage points of benefit to the EMEA net sales comparison. The increase in net sales in the EMEA region consisted of a net sales increase in apparel, accessories and equipment, partially offset by a net sales decrease in footwear. The net sales increase consisted of a net sales increase in our EMEA distributor business that was concentrated in the Columbia brand. This increase was partially offset by a net sales decrease in our EMEA direct business reflecting a decline in advance orders placed for the Sorel and Columbia brands.
Net sales in Canada increased $3.9 million, or 3%, to $118.6 million in 2013 from $114.7 million in 2012. Changes in foreign currency exchange rates compared to 2012 negatively affected the Canada net sales comparison by approximately four percentage points. The increase in net sales consisted of an increase in footwear, partially offset by a net sales decrease in apparel, accessories and equipment, and was led by the Sorel brand, followed by the Columbia brand, partially offset by a net sales decrease in the Mountain Hardwear brand. The Canada net sales increase was led by direct-to-consumer sales driven by the opening of a second retail store during 2013, followed by an increase in wholesale net sales.

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

                                       31
--------------------------------------------------------------------------------


                                                             Year Ended December 31,
                                                          2013             2012       % Change
                                                       (In millions, except for percentage
                                                                     changes)
Apparel, Accessories and Equipment                  $       1,374.6     $ 1,347.0        2%
Footwear                                                      310.4         322.6       (4)%
                                                    $       1,685.0     $ 1,669.6        1%

Net sales of apparel, accessories and equipment increased $27.6 million, or 2%, to $1,374.6 million in 2013 from $1,347.0 million in 2012. The increase in apparel, accessories and equipment net sales consisted of a net sales increase in the Columbia brand and was led by the United States, followed by the EMEA region, partially offset by net sales decreases in the LAAP region and Canada. The net sales increase in apparel, accessories and equipment in the United States consisted of a net sales increase in our direct-to-consumer business, partially offset by a net sales decrease in our wholesale business. The apparel, accessories and equipment net sales increase in the EMEA region consisted of an increase in our EMEA distributor business, partially offset by a net sales decrease in our EMEA direct business.
Net sales of footwear decreased $12.2 million, or 4%, to $310.4 million in 2013 from $322.6 million in 2012. The decrease in footwear net sales primarily consisted of a net sales decrease in the Columbia brand. The footwear net sales decrease was led by the United States, followed by the LAAP region and the EMEA region, partially offset by a net sales increase in Canada. The net sales decrease in footwear in the United States consisted of a net sales decrease in our wholesale business, partially offset by a net sales increase in our direct-to-consumer business. The LAAP footwear net sales decrease was led by our LAAP distributor business, followed by Japan, partially offset by a net sales increase in Korea.
Sales by Brand
Net sales by brand are summarized in the following table:

                                   Year Ended December 31,
                                 2013                     2012      % Change
                         (In millions, except for percentage changes)
Columbia          $       1,412.9                      $ 1,391.1       2%
Mountain Hardwear           132.5                          141.5      (6)%
Sorel                       128.7                          127.0       1%
Other                        10.9                           10.0       9%
                  $       1,685.0                      $ 1,669.6       1%

The net sales increase in 2013 compared to 2012 primarily consisted of a net sales increase in the Columbia brand which was favorably affected by cold winter weather in North America late in 2013, resulting in increased direct-to-consumer net sales. The Mountain Hardwear brand net sales decrease was led by the LAAP region, followed by the United States and Canada, partially offset by a net sales increase in the EMEA region.
Gross Profit: Gross profit as a percentage of net sales increased to 44.1% in 2013 from 42.9% in 2012. Gross margin expansion was primarily due to:
Lower provisions for inventory;

A higher proportion of full-price wholesale sales;

A higher proportion of direct-to-consumer sales, which generate higher gross margins; and

Decreased promotional selling activities;

partially offset by:
Unfavorable foreign currency hedge rates.


Our gross profit may not be comparable to those of other companies in our industry because some of these companies 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 $29.1 million, or 5%, to $625.7 million, or 37.1% of net sales, in 2013, from $596.6 million, or 35.7% of net sales, in 2012. The SG&A expense increase was primarily due to:
The expansion of direct-to-consumer operations globally;

Increased incentive compensation; and

Higher impairment charges resulting from the write-down in 2013 of our Europe distribution center;

partially offset by:
Favorable foreign currency exchange rates; and

Decreased operating costs in our Europe operations.

Depreciation and amortization included in SG&A expense totaled $39.6 million in 2013, compared to $39.9 million in 2012.
Net Licensing Income: Net licensing income was flat at $13.8 million in both 2013 and 2012. Increases in domestic licensing income were offset by a decrease in LAAP licensing income due to the deferral of 2013 licensing income that will be recognized in gross profit in future periods beginning in 2014 in connection with our transition to the China joint venture.
Interest Income, Net: Net interest income was $0.5 million in 2013, compared to $0.4 million in 2012. The increase in interest income was primarily driven by higher average cash and investment balances, partially offset by lower average interest rates during 2013 compared to 2012. Interest expense was nominal in both 2013 and 2012.
Income Tax Expense: Income tax expense increased to $37.8 million in 2013 from $34.0 million in 2012. Our effective income tax rate increased to 28.8% from 25.4% in 2012, primarily due to changes in the geographic mix of income and decreased tax benefits from the resolution of uncertain tax positions. Net Income attributable to Columbia Sportswear Company: Net income decreased $5.6 million, or 6%, to $94.3 million in 2013, including an impairment charge of approximately $5.6 million, net of tax, from $99.9 million in 2012. Diluted earnings per share was $2.72 in 2013, including an impairment charge of $0.16 per share, net of tax, compared to $2.93 in 2012.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net Sales: Consolidated net sales decreased $24.4 million, or 1%, to $1,669.6 million in 2012 from $1,694.0 million in 2011. Changes in foreign currency exchange rates compared with 2011 negatively affected the net sales comparison by approximately one percentage point.
Sales by Geographic Region
Net sales by geographic region are summarized in the following table:


                               Year Ended December 31,
                             2012                     2011      % Change
                     (In millions, except for percentage changes)
United States $         946.7                      $   948.0       -%
LAAP                    377.6                          341.0      11%
EMEA                    230.6                          275.4     (16)%
Canada                  114.7                          129.6     (11)%
              $       1,669.6                      $ 1,694.0      (1)%

Net sales in the United States decreased $1.3 million, or less than 1%, to $946.7 million in 2012 from $948.0 million in 2011. The decrease in net sales in the United States consisted of a net sales decrease in our wholesale business across all brands and both product categories, partially offset by a net sales increase in our direct-to-consumer channel across all brands and both product categories. The decrease in net sales in our wholesale business was driven by unseasonably warm winter weather and general consumer caution, resulting in higher cancellations of advance orders and fewer reorders from wholesale customers. The increase in direct-to-consumer net sales was due to a greater number of retail stores operating during 2012 than 2011 and, to a lesser degree, increased sales from existing stores. At December 31, 2012, we operated 63 retail stores, compared with 51 at December 31, 2011.
Net sales in the LAAP region increased $36.6 million, or 11%, to $377.6 million in 2012 from $341.0 million in 2011. Changes in foreign currency exchange rates affected the LAAP net sales comparison by less than one percent. The net sales increase in the LAAP region was led by a net sales increase in apparel, accessories and equipment, followed by a net sales increase in footwear. The LAAP net sales increase was concentrated in the Columbia brand, followed by the Mountain Hardwear brand and the Sorel brand. The LAAP net sales increase was led by Japan, followed by Korea and our LAAP distributor business. The increase in Japan net sales was led by an increase in wholesale net sales, followed by an increase in direct-to-consumer net sales. The increase in Korea net sales was primarily due to a greater number of retail stores operating during 2012 than in 2011, partially offset by the negative effect of foreign currency exchange rates. Net sales to our LAAP distributors increased due to higher demand in key distributor markets, partially offset by a smaller percentage of spring 2013 advance orders shipping in the fourth quarter of 2012 compared to shipments of spring 2012 advance orders in the fourth quarter of 2011.
Net sales in the EMEA region decreased $44.8 million, or 16%, to $230.6 million in 2012 from $275.4 million in 2011. Changes in foreign currency exchange rates negatively affected the EMEA net sales comparison by approximately four percentage points. The decrease in net sales in our EMEA region was led by footwear, followed by apparel, accessories and equipment. The net sales decrease consisted of a net sales decrease in our EMEA direct business reflecting a decline in advance orders due to the effects of the unseasonably warm 2011/2012 winter and a challenging macroeconomic environment, which have hampered our ongoing efforts to revitalize the Columbia brand in key European markets. This decrease was partially offset by a net sales increase in the EMEA distributor business, partially due to higher demand in Russia.
Net sales in Canada decreased $14.9 million, or 11%, to $114.7 million in 2012 from $129.6 million in 2011. Changes in foreign currency exchange rates compared to 2011 affected the Canada net sales comparison by less than one percent. The decrease in net sales was led by apparel, accessories and equipment, followed by footwear, and was led by the Columbia brand, followed by the Sorel and Mountain Hardwear brands. The Canada net sales decrease was primarily a result of a . . .

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