Columbia Sportwear - A Solid Company Despite Cash Flow Concerns

| About: Columbia Sportswear (COLM)

Summary

Net sales have increased steadily over the past few years.

The company has increased emphasis on higher margin means of selling.

The business has a strong track record of making important acquisitions.

However, a recent decrease in cash flow from operations raises some concerns.

Overview

Columbia Sportswear Company (NASDAQ:COLM) is one of the largest outdoor and active lifestyle apparel and footwear companies in the world. They design, source, market, and distribute outdoor and active lifestyle apparel footwear, accessories, and equipment under the brand names Columbia, Sorel, Mountain Hardwear, prAna, as well as some other minor sub-brands.

The Columbia brand is the company's largest, and offers a wide variety of products. The Sorel brand, acquired in 2000, offers premium products, mostly for young women. The Mountain Hardwear brand sells premium apparel and equipment for mountaineering enthusiasts. The prAna brand offers active lifestyle apparel with a focus on sustainable materials.

The company also owns the Montrail, OutDry, and Pacific Trail brand, which function as a sub-brand to Columbia, help provide patents to the main brands, and a means of licensing to third parties, respectively.

The vast majority of the company's cash flow comes from the second half of the year.

The company looks at its products in two principle categories: apparel, accessories, and equipment and footwear.

Apparel, Accessories, and Equipment

This segment encompasses most of the products the company sells, accounting for roughly 80% of net sales. And sales growth has been strong over the past few years. Net sales saw an increase in sales of 21.9% from 2013 to 2014 and 8.7% from 2014 to 2015.

Footwear

The footwear segment accounts for roughly 20% of net sales, and it was also seen strong sales growth over the past few years. Net sales increased 36.7% from 2013 to 2014 and by 19% from 2014 to 2015.

Regional

The company divides its regional segments into the United States, Latin America and Asia Pacific, Europe, Middle East, and Africa, and Canada.

Every single segment but the Europe, Middle East, and Africa segment have experienced growth in net sales over the past two years. The US is the company's largest regional segment and accounted for 62.6% of net sales in 2015. Latin America and the Asia Pacific is the next biggest segment, accounting for roughly 20% of net sales. Europe, Middle East, and Africa is the third largest, accounting for 10% of all net sales. Canada accounted for 7.2% of net sales in 2015.

Production

The company doesn't own any of its manufacturing facilities. It uses contract manufacturers outside the United States much like Apple does with Foxconn. Although this does substantially decrease the potential book value or value of current assets, the company feels like using contract manufacturers decreases its invested capital, helps it avoid costs, and gives it greater flexibility in terms of production capacity. This does make sense, and the division of labor does take the burden off of the company.

However, the company does own six distribution and corporate facilities. It also leases its European headquarters. It's a good sign, however, that the company does own nearly all of its facilities.

Earnings

As mentioned before, the company has had strong net sales growth over the past few years. It's margins have also increased steadily over the past few years. Net income as a percentage of net sales has increased from 5.6% in 2013 to 6.5% in 2014 to 7.5% in 2015. Much of the growth was a result of greater direct-to-consumer sales, which result in higher margins than sales to third party distributors. In addition to e-commerce selling, the company also increased its brick-and-mortal presence from 93 retail stores to 107 stores. It only had 72 stores in 2013.

However, net cash provided by operations paints a much different picture. The figure went from $185.8 million in 2014 to $95.1 million in 2015, a nearly 50% drop. The company says the drop was a result of increased inventory levels and related payments for accounts payable, and increased income taxes. These were partially offset by an increase in net income. There was also a similar drop for similar reasons from 2013 to 2014.

COLM Net Income (Annual) Chart

COLM Net Income (Annual) data by YCharts

The above graph shows both cash from operations and net income. Cash flow has decreased significantly over the past two years whereas net income has increased steadily over the past few years.

Balance Sheet

The company's book value has increased steadily over the past few years. Book value increased slightly from 2014 to 2015, but the increase over the past few years has been impressive and is a good sign for the company.

COLM Book Value (Annual) Chart

COLM Book Value (Annual) data by YCharts

Acquisitions

The company also has a strong history of making acquisitions. It acquired Sorel in 2000, which helped expand its business and customer base. It acquired Mountain Hardwear in 2003, and prAna in 2014. All of these acquisitions helped the company increase its customer base and line of products while also staying true to its usual product line.

Cash Flow from Operations

Cash is king, especially in business. Ultimately, what determines the health of a business is whether or not more money is coming in than is going out. In that sense, cash flow from operations is a very important number.

Unfortunately for Columbia, cash flow from operations has gone from well above $200 million in 2013 to under $100 million in 2015. Meanwhile, net sales and net income have grown steadily and rapidly. This might potentially be a red flag for any investor. Net income figures are much easier to manipulate and inflate than cash flow figures are and a giant discrepancy between the two might potentially indicate some foul play.

The company says the rapid declines in cash flow from operations over the past two years is a result of increased inventory levels and related payments for accounts payable, and increased income taxes. And this is supported by the cash flow statement. The company has had much higher income taxes and accounts receivable over the past two years which have negatively impacted its cash flow.

This effectively takes some of the pressure of the company. However, it's still unclear if the current pattern of decreasing cashflows will continue. The company has gone through short term periods of sharp cash flow decline in the past - most recently around 2011 - and cash flows do regain their strength swiftly.

Verdict

Overall, Columbia seems like a solid stock and a solid company. It's a family run business that has survived for decades and continued to be one of the biggest players in its respective field. Net sales have been increasing. The company has seen increased net income over the past few years, has expanded its highest margin means of selling, and has a solid track record of making strategic and robust acquisitions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.