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Introduction

In this article, I argue that Columbia Sportswear (NASDAQ:COLM) provides a unique combination of strong fundamentals, growth prospects and moderate valuation. With its long history of earnings and dividends, unlevered balance sheet, and strong free cash flow, the company deserves the attention of investors. While sales took a hit during the recession, the cyclical nature of the company's business indicates that revenues should soon recover to pre-recession levels as the global economy continues to improve and management expands into new and largely untapped markets. Columbia's strong and well-established global brand provides it with a significant advantage in the outdoor apparel market over smaller and lesser known competitors.

Business Overview

Columbia Sportswear is a global leader in the outdoor apparel and footwear market. The company designs, sources, markets and distributes active outdoor apparel, footwear, accessories and equipment in the United States, Latin America, the Asia Pacific, Europe, the Middle East, Africa and Canada. The company provides its products for outdoor activities such as skiing, snowboarding, hiking, camping, hunting, water sports and adventure travel under four primary brands: Columbia, Mountain Hardwear, Sorel and Montrail. Columbia's products are designed to protect consumers from the elements and make outdoor activities more enjoyable using proprietary innovative technologies. Columbia constantly invests in research and development and consults with specialists in various engineering fields to develop and maintain the technologies and designs that have helped build brand loyalty and recognition with consumers throughout the world. The company sells its products through wholesale distribution channels, direct-to-consumer channels, independent distributors and licensees. The company also operates its very own network of branded and outlet retail stores that provide high brand visibility and build stronger brand loyalty with consumers over time.

Strong Balance Sheet

As of June 30, 2013, Columbia had over $340 million in cash and zero long-term debt. With ~34 million shares outstanding, that's about $10 of cash per share, which comprises ~16% of the company's total market capitalization. With a working capital position of over $850 million and no long-term debt, the company is in an excellent position for investment in further expansion, as it has a comfortable working capital cushion and can tap the credit markets with relative ease. With no preferred stock ahead of the common, shareholders are in a prime position to benefit from an increased dividend or increased profit margins.

Operating Performance

Columbia has reliably generated positive earnings for the past decade, with its high point being 2007's net income of $144 million. During the recession, net income decreased, as the company averaged ~$80 million of net income from 2008-2010. As a branded consumer products company, Columbia's operating performance is very cyclical in nature, as sales and profits are in large part determined by consumer demand for products, which fluctuates along with the macroeconomic cycle. The relatively poor performance from 2008-2010 is in large part explained by the economic downturn and subsequently anemic recovery in both the United States and Europe. In 2011 and 2012, as the economy started to see signs of recovery, net income began to return to pre-recession levels, as the company earned ~$103 million and ~$100 million, respectively. Continued reduction in unemployment and GDP increase in the United States, coupled with Europe emerging from its own economic malaise, would indicate that Columbia could soon return to its pre-recession levels of revenue and income as the global economy continues to improve.

Columbia's cash flows certainly indicate that the company is on the upswing, as the company started to generate positive free cash flow in 2012. In the last three years, the company's free cash flows were ~$(5.3) million in 2010, ~$(14.6) million in 2011, and ~$98.2 million in 2012, a vast improvement. The trend has continued in 2013, as the company generated ~$104.2 million of free cash flow in the first two quarters of 2013. As performance continues to improve with the economy, Columbia's increasing free cash flow will allow management to enhance shareholder value with increased dividends or share buybacks.

Expansion

Currently, Columbia operates primarily in the United States, Canada, Latin America, the Asia Pacific region, Europe, the Middle East and Africa. Management is currently taking steps to increase market share in those markets and expand into new markets in order to generate sales growth. In August 2012, the company entered into an agreement with Swire Resources to establish a joint venture for development of the business in China. Expected to begin operations in January 2014, this venture will allow the company access to a largely untapped Chinese market that will further serve to increase global brand recognition and sales. Columbia has also announced on August 7, that it has signed an agreement with Chogori India Retail (CIRL), based in New Delhi, India, to serve as the company's exclusive distributor in India. This deal will allow Columbia to penetrate the world's second-most-populous country, where it should find high demand for the company's warmer-weather clothing such as its Performance Fishing Gear line, which sells well in warmer regions of the United States. Access to markets with a large and rapidly expanding middle class in China and India, along with an overall improvement in global macroeconomic conditions in the United States and Europe, should result in increased revenue growth, positioning the company to take full advantage of the increased consumer demand that results from a global economic recovery.

Columbia has also launched a major marketing campaign in the past year for its Omni-Freeze Zero fabric, designed to cool the skin when it comes into contact with sweat. According to the company's website, "Omni-Freeze Zero is the industry's leading cooling technology. The Omni-Freeze Zero blue rings capitalize on your sweat to lower the overall temperature of the material…and provide an instant and prolonged cooling." The Omni-Freeze fabric could provide Columbia with an increased economic moat over its competitors in the outdoor apparel market.

Valuation

Trading at a price/earnings multiple of ~20 and a free cash flow yield of over 8%, the company's recent growth in sales and cash flow are not yet priced into the stock. Further, with a market cap of just over $2 billion, there is still large room for growth. Contrast this with competitors such as Nike (NYSE:NKE) and V.F. Corporation (NYSE:VFC), who trade at steeper P/E multiples, have lower free cash flow yields and larger market caps with less room for growth.

Conclusion

Columbia's strong balance sheet and prominent global brand will allow the company to take full advantage of increased consumer demand as the global economy continues to improve. Its performance from 2008-2010 during the recession, while relatively worse than other years, demonstrated the company's ability to remain profitable during poor business conditions. As Columbia continues to generate free cash flow and business conditions improve, investors should expect to see significant appreciation in the stock price, along with a reliable dividend.

Source: Bundle Up This Winter With Columbia Sportswear