Columbia Sportswear Company raised its 2014 outlook after announcing record first quarter net sales, a sharp increase in first quarter profits, surging wholesale demand, a strong launch of its Chinese joint venture and the acquisition of rapidly growing prAna apparel company.
The company reported net sales of $424.1 million, an increase of 22 percent compared with first quarter 2013 net sales of $348.3 million. First quarter 2014 net income totaled $22.3 million, or $0.63 per diluted share, an increase of 120 percent compared with first quarter 2013 net income of $10.1 million, or $0.29 per diluted share, which included restructuring charges of approximately $2.0 million, after-tax, or $0.06 per diluted share.
In a separate press release issued earlier today, the company announced it has signed a definitive agreement to purchase prAna Living LLC in a cash transaction valued at $190 million, which is subject to customary working capital adjustments. The transaction is expected to close during the second quarter of 2014, subject to customary conditions and regulatory approvals.
"Our outstanding first quarter results reflect robust demand for the Columbia and Sorel brands, especially across U.S. wholesale and direct-to-consumer channels, and the successful launch of our China joint venture," said Tim Boyle, Columbia's president and chief executive officer. "Wholesale demand for our Fall 2014 products has accelerated in many key markets around the world, prompting us to increase our sales and operating income expectations for the full year. Excluding the anticipated financial effects of the prAna acquisition, we now expect 16 to 18 percent sales growth and approximately 25 percent growth in operating income in 2014, driven by renewed growth in our wholesale businesses and continued expansion of our global direct-to-consumer business, coupled with incremental contributions from our China joint venture.
Columbia finished the quarter with cash and investments totaling a record $568 million, and inventories that were 11 percent lower than at the same time last year. The strong balance sheet is enabling the company to invest with confidence in its existing brands, product innovation, and our global operations to fuel sustainable, profitable growth, Boyl said.
First quarter results
Consolidated net sales increased 22 percent to $424.1 million compared with net sales of $348.3 million for the same period in 2013. Changes in currency exchange rates had a 1 percentage point negative effect on the net sales comparison.
First quarter U.S. net sales increased $40.7 million, or 20 percent. Net sales in Canada increased $3.1 million, or 13 percent, including an 11 percentage point negative effect from changes in currency exchange rates. Latin America/Asia Pacific (LAAP) region net sales increased $33.7 million, or 41 percent, including incremental sales from the company's new China joint venture and a 5 percentage point negative effect from changes in currency exchange rates. These increases were partially offset by a $1.7 million, or 4 percent, decrease in Europe/Middle East/Africa (EMEA) region net sales, including a 2 percentage point benefit from changes in foreign currency exchange rates. (See "Geographical Net Sales" table below.)
Apparel, Accessories & Equipment net sales increased $59.4 million, or 20 percent, to $353.7 million, and Footwear net sales increased $16.4 million, or 30 percent, to $70.4 million. (See "Categorical Net Sales" table below.)
Columbia brand net sales increased $74.9 million, or 25 percent, to $376.0 million. Sorel brand net sales increased $0.5 million, or 4 percent, to $12.9 million. Mountain Hardwear net sales increased $0.3 million, or 1 percent, to $32.4 million. (See "Brand Net Sales" table below.)
First quarter net income totaled $22.3 million, or $0.63 per diluted share. Net income for the same period in 2013 totaled $10.1 million, or $0.29 per diluted share, including restructuring charges of approximately $2.0 million, after-tax, or $0.06 per diluted share. The effective income tax rate in the first quarter of 2014 was 32.6 percent, compared with 17.4 percent in the first quarter of 2013, reflecting differences in the geographic mix of income and a benefit in the first quarter of 2013 from the reinstatement of the U.S. R&D tax credit.
Balance sheet
The company generated $43.5 million in operating cash flow during the quarter ended March 31, 2014 and ended the quarter with a record $567.6 million in cash and short-term investments, compared with $374.6 million at March 31, 2013.
Consolidated inventories of $290.2 million at March 31, 2014 were 11 percent lower than the $325.2 million balance at March 31, 2013. Excluding approximately $19.9 million of incremental inventory in the company's China joint venture that commenced January 1, 2014, consolidated inventories at March 31, 2014 were approximately 17 percent lower compared to March 31, 2013.
"Our strong financial position enabled us to approach prAna ?a rapidly growing lifestyle apparel brand ?to join our portfolio of authentic, active outdoor brands," Boyle noted. "PrAna fits Columbia's strategic priorities to expand into categories that appeal to complementary consumer segments, reduce our dependence on cold-weather products, and leverage Columbia's global operational platforms to expand across key geographic markets. We look forward to completing the transaction and teaming with prAna to unlock the brand's global potential."
"I'm also pleased to report that our U.S. ERP implementation took place on schedule in early April. We are very proud of the exceptional efforts of our global business transformation teams and are currently receiving and shipping inventory, invoicing customers, collecting receivables and paying vendors at volumes typical for this time of year."
2014 Guidance updated
Excluding anticipated effects of the pending prAna acquisition, the company currently expects 2014 net sales growth of 16 to 18 percent compared to 2013 net sales of $1.68 billion, with slightly more than half of that growth anticipated to come from incremental sales by the new China joint venture and the remainder from the company's global direct-to-consumer and wholesale businesses.
Also excluding effects of the pending prAna acquisition, the company expects fiscal year 2014 gross margins to improve by approximately 50 basis points, and to generate approximately 50 basis points of operating expense leverage. Based on those assumptions, the company expects operating income to increase approximately 25 percent, resulting in 2014 operating margin of approximately 8.25 percent of net sales.
PrAna forecast
Assuming the transaction closes in the second quarter of 2014, Columbia expects to recognize incremental prAna net sales of approximately $55 million over the remainder of 2014, which is expected to contribute low double-digit operating margin to Columbia's consolidated 2014 results, excluding the effect of one-time transaction fees, purchase accounting adjustments, and other integration costs. One-time transaction fees are expected to total approximately $4 million in 2014. In addition, under GAAP purchase accounting methods, amortization of certain acquired assets and other integration costs are expected to total approximately $9 million in 2014. In 2015, Columbia expects prAna's annual sales to increase at a double-digit rate over 2014 and operating margin to be in the low-teens, excluding purchase accounting amortization and other integration costs of approximately $5 million, resulting in accretion to Columbia's consolidated earnings in 2015.
The transaction is subject to customary conditions and applicable regulatory approvals.
