After notching a strong second-quarter performance tied to the company’s ability to ship Q3 orders early for retailers, Columbia Sportswear found itself on the deficit end of the supply chain issues impacting most companies in the third quarter.
Sales for the quarter came up short of internal and Wall Street expectations and continued challenges in the supply chain will undoubtedly continue to plague the parent company of the Columbia, Mountain Hardwear, Sorel, and Prana brands into the fourth quarter as well, prompting a pullback in full-year sales growth estimates. Still, even as Columbia Sportswear (COLM) moderates its top-line view, the company boosted its bottom-line estimates for the year based on stronger-than-expected gross margin performance and lower expense spending.
“Our updated 2021 outlook contemplates a 21.5 percent to 23 percent year-over-year net sales growth,” shared company Chairman and CEO Tim Boyle on a conference call with analysts. “Compared to pre-pandemic 2019 results, our updated 2021 outlook contemplates flat to one percent net sales growth. Looking at the balance of the year, our updated guidance reflects the supply chain disruptions that have intensified in recent months. Inbound shipping times, port congestion and other logistic delays have elongated in transit time from factory to inventory receipt.”
He continued, “Additionally, factory closures in Southern Vietnam have added additional pressures to an already stressed global supply chain.
While Vietnam factories began to reopen in October, the factory downturn impacted the availability of Fall 2021 product and the timing of Spring 2022 production. To date, order cancellations resulting from delayed receipts and deliveries have been minimal. In this high-demand inflationary environment, we remain confident in our ability to profitably sell in-transit inventory in current or future seasons.”
Boyle also noted that the job market “remains very tight,” and staffing challenges across its retail stores and distribution centers presented an additional risk to realizing net sales during the peak holiday sales season.
“Based on year-to-date results and the healthy full-price selling environment, we are raising our gross margin guidance, Boyle said. “For the full year, we now expect gross margin to expand by 190-to-210 basis points. We expect SG&A to grow slower than net sales.” The company raised its diluted earnings per share outlook to $4.80 per share from its previous $4.55 per share guidance.
Consolidated Columbia Sportswear’s third-quarter net sales increased 15 percent to $804.7 million from $701.1 million in the comparable period in 2020. Wall Street’s consensus estimate was $868 million in net sales for the quarter. The increase in net sales primarily reflects direct-to-consumer (DTC) growth and higher Fall 2021 wholesale orders, as it anniversaries prior-year pandemic disruptions. Net sales growth was constrained by supply chain disruptions that resulted in later inventory receipts and reduced wholesale shipments during the quarter.
“I’d emphasize that our net sales shortfall was not a function of consumer demand, which remains robust,” Boyle explained. “Early Fall 2021 sell-through at our North American wholesale customer stores, as well as our own DTC business, has been very encouraging. The retail environment is healthy, with low promotional activity contributing to a higher-than-planned gross margin.
By channel, net sales growth was driven by 25 percent growth in the company’s DTC business and posted a 10 percent growth in its wholesale business, albeit below its internal plan for the channel. Within the DTC business, brick and mortar net sales grew 36 percent, in line with expectations as store traffic levels reportedly improved significantly compared to third quarter 2020. Still, Boyle said they remain below pre-pandemic levels. DTC’s e-commerce net sales grew 6 percent and represented 11 percent of the total sales mix. Boyle said both U.S. DTC channels benefitted from lower promotional activity while its brick and mortar business saw higher average order values.
The growth in the company’s U.S. DTC brick and mortar business reflects year-over-year improvements in store traffic levels and lower promotional activity that resulted in higher-than-expected gross margins. Its U.S. DTC e-commerce business also benefited from significantly less promotional activity compared to the prior year.
“We are encouraged to see sales in this channel remain substantially above 2019 levels as consumers return to in-store shopping,” Boyle said.
Looking at Columbia Sportswear’s regional performance, U.S. net sales increased 15 percent, reflecting mid-30 percent DTC growth and low-single-digit percent wholesale growth. Boyle said that outside the U.S., Q3 sales trends continue to be influenced by each region’s COVID-19 restrictions, vaccination rates and consumers’ willingness to shop in-store.
Canada and Europe reportedly experienced post-lockdown recoveries, while other regions such as China and Japan were impacted by government-mandated COVID-19 restrictions during the quarter.
Latin America and the Asia Pacific (LAAP) region third-quarter net sales increased 10 percent. In China, net sales were up in the mid-teens, primarily reflecting “higher Fall 2021 wholesale shipments, partially offset by lower DTC sales.”
“In the quarter, [China] DTC performance was impacted by lower store traffic, resulting from COVID-19-related government restrictions, as well as isolated flooding and power outages across several provinces,” Boyle shared. “We remain focused on driving growth and enhancing the consumer experience in this important market. For Fall 2021, we’re investing in demand creation, including a digital-first full-funnel marketing campaign, highlighting Omni-Heat Infinity.”
Korea net sales increased in the mid-teens, primarily reflecting higher Fall 2021 wholesale shipments and, to a lesser extent, DTC growth. In Japan, net sales decreased low-single-digits as demand was impacted by the state of emergency declaration that was in place from mid-July through the third quarter-end. “Year-to-date, there were over 200 days with some level of state of emergency restrictions in place in Japan compared to approximately 50 days in 2020,” Boyle explained.
LAAP distributor markets were up in the low-20s, driven by “higher Fall 2021 wholesale order shipments.”
Europe, Middle East and Africa (EMEA) region net sales increased 9 percent in Q3, driven by low-double-digit growth in the company’s Europe DTC business and mid-single-digit growth in the EMEA distributor business. Boyle said EMEA growth was driven by higher Fall 2021 wholesale order shipments and improved DTC performance in its Europe DTC business as lockdown restrictions eased.
Canada net sales reportedly increased 18 percent in the third quarter, primarily driven by “higher Fall 2021 wholesale shipments and improving DTC performance” as the market reopened.
From a brand standpoint, Columbia brand net sales increased 15 percent in the third quarter as DTC brick and mortar growth was reportedly constrained by “supply chain disruptions that impacted wholesale net sales performance.” Boyle said top-performing categories included fleece, sportswear and rainwear with continued strength in PFG products.
Overall, Sorel brand net sales decreased five percent in Q3 as DTC e-commerce growth was said to be “more than offset” by lower Fall 2021 wholesale shipments resulting from supply chain disruptions. Boyle shared that sorel.com net sales increased over 30 percent versus third quarter 2020 and were up over 100 percent compared to the third quarter of 2019. He said the growth was led by sneakers, sandal and wedge category performance,and popular winter-style products like the Out’ N About.
Prana net sales increased 19 percent in the quarter, led by broad-based wholesale growth. Mountain Hardwear’s net sales increased 47 percent in the third quarter. Boyle said growth was led by higher Fall 2021 wholesale shipments that reflected the “team’s tremendous efforts to enhance the product line and extend the brand’s reach into new retailers.”
Consolidated COLM gross margin expanded 180 basis points to 50.7 percent of net sales in Q3 while SG&A expenses grew 7 percent year-over-year, resulting in 440 basis points of operating margin improvement compared to third quarter 2020. Gross margin expansion was reportedly driven primarily by lower DTC promotional levels and favorable wholesale product margins, partially offset by higher inbound freight costs, the non-recurrence of inventory provision activity that benefited third quarter 2020 and unfavorable channel sales mix. The increase in SG&A expenses primarily reflected higher global retail, incentive compensation, demand creation, and personnel expenses, partially offset by a lease termination liability settlement benefit and the non-recurrence of prior year COVID-19-related expenses.
Net income increased 60 percent to $100.6 million, or $1.52 per diluted share, compared to net income of $62.8 million, or 94 cents per diluted share, for the comparable period in 2020. Wall Street was forecasting $1.31 per diluted share.
While the company has not completed its 2022 planning process, Boyle said it could achieve mid-teens or better net sales growth in 2022 on top of the low-20 percent growth they anticipate this year.
“Our Spring 2022 wholesale sales forecast continued to improve since the last update and now reflects over 30 percent growth, compared to Spring 2021 sales levels,” Boyle outlined. “Based on the momentum we see across the business, we believe mid-teens or better net sales growth for the full year is attainable. Looking at gross margin performance, we expect higher product and freight costs, as well as the likelihood of a more normalized promotional environment, will create gross margin pressure in 2022. We do not expect planned price increases will fully offset these inflationary headwinds. We are also planning to make investments across the business, including demand creation, retail store expansion, supply chain, and digital capabilities to add to our overall spending levels. On the digital front, we’re accelerating our digital and analytics capabilities to leverage consumer data, enhance the consumer experience across our platforms and drive efficiencies across the organization. We’re also investing in supply chain capabilities to expand distribution capacity, improve inventory management and adapt to shifts in our sales mix.
“With these factors in mind, we’re currently planning our 2022 operating margin to be similar to the range provided in our 2021 financial outlook. It’s important to reiterate that we are maintaining this level of operating performance despite significant cost pressures and growth investments across the business. In summary, I’m confident we have the right strategy in place to drive sustainable and profitable long-term growth, (we’re investing in our strategic priorities to drive global brand awareness and sales growth through increased focused demand creation investments); enhance consumer experience and digital capabilities in all of our channels and geographies; expand and improve global direct-to-consumer operations with supporting processes and systems; and invest in our people and optimize our organization across our portfolio of brands.”
Photo courtesy Columbia Sportswear