Columbia Sportswear: A Bright Spot In Retail After Strong 2018 Finish
Summary
- North American revenue growth crushed expectations and company reported Q4-18 revenue growth of 18%, sending the stock up more than 15% in one day.
- Metrics across the board improved for the company as revenue grew 14% for the year (vs. 10% expectation) and margins expanded.
- The company committed 5% of sales to demand creation in 2018 and will boost that to 5.5% of sales in 2019.
- The company expects China revenue to shrink in 2019 as the new head of the China business takes over in late February.
Thesis
Columbia Sportswear (NASDAQ:COLM) crushed Q4-18 and FY revenue growth expectations. The beat was largely due to an additional $50 million in unexpected North American sales, which saw a boost in part thanks to colder weather in some areas of the country. Q4 sales strength in North America was seen in both direct-to-consumer (DTC) and wholesale. That said, it was a strong quarter globally for the company as well, even in China where the company has historically struggled and in this quarter saw a slight uptick in revenue. And Canada had a record boost in sales of 26%.
The company had expected a strong finish to the year, but not to this degree. This sets up for an interesting 2019 in which the company will boost demand creation from 4.5% of sales to 5.5% of sales. The company's practice of developing targeted marketing campaigns by product/region has worked well and the company will expand the scope of those efforts in 2019. Though the sales comps become tougher, it's hard to bet against Columbia. The company is well managed and financial metrics have been improving across the board. DTC is thriving and the company has seen strong sales growth in both apparel and footwear.
The biggest challenge for the company will probably be China, where it expects revenue to contract in 2019. It remains to be seen if the company's new China leader, who starts in late February, will be able to reverse the China sales issues.
2018 Highlights
North American sales provided an unexpected boost in Q4. Revenue for the year grew 14%, vs. a 10% expectation going into Q4. Compare this 14% sales growth to sales growth of 4% from the two prior years. The company had a great year. The company noted that metrics have improved across the board. The below snapshot illustrates that point.
| 2018 | 2017 | Difference | |
| Revenue | $2.8B | $2.47B | 13.6% |
| Ops Margin | 12.5% | 10.7% | 180 basis points |
| Net Margin | 9.6% | 4.5% | 510 basis points |
One of the focuses on the call was demand creation. The company has developed focused marketing campaigns to boost product awareness by geographic region. In 2018, demand creation expenses comprised 4.5% of sales. The company plans to boost that marketing spend in 2019 to 5.5% of sales. The company noted that competitors typically devote 10% of sales to demand creation.
The demand creation emphasis was part of an overall strategy overhaul developed by the company in 2017 as part of its Project CONNECT initiative. The goal of Project CONNECT is to accomplish the following:
- Drive brand awareness and sales growth through focused demand creation.
- Enhance consumer experience and digital capabilities.
- Expand and improve direct-to-consumer (DTC) sales.
- Invest in people and optimize portfolio across Columbia brands.
Viewing 10% as the industry standard, the company believes it has some wiggle room to spend more on marketing. That said, the boost to 5.5% this year will probably impact operating margins by 10 basis points. It also remains to be seen just how much money the company will need to spend in China to gain some real traction there as Columbia expects China revenue to fall in 2019.
"We continue to believe China represents one of Columbia's largest regional growth opportunities, and as such we remain committed to investing in that business to ensure long-term success." - CEO Tim Boyle.
Strong Balance Sheet, Stock Buybacks Continue
The company is an excellent financial condition. Columbia is sitting on $700 million in cash and has no long-term debt. The company bought $200 million worth of stock in 2018, has $130 million remaining on a preexisting stock repurchase plan, and has approved an additional $200 million in repurchases.
2019 Guidance
Columbia expects sales growth of 6-8% and full year earnings per share of $4.30 to $4.45. This would equal low-end EPS growth of 12.9%.
Valuation
Columbia looks reasonably valued at $105 on a free cash flow basis after the Q4 stock price surge. Revenue growth has been stellar the last couple of years. However, the great growth is setting up tougher comps for 2019. And the company will spend approximately $30 million more on marketing in 2019 to continue the strong revenue growth. Additionally, China remains a concern. The company has struggled to grow revenue in China and expects 2019 to be a down year before things turn around. It remains to be seen how much the company will need to invest in China to really gain traction in that market.
Conclusion
Though the company has been around for decades, Columbia Sportswear is a bright spot in retail. It is achieving strong sales growth, has healthy margins, a strong balance sheet, and is buying back stock. It looks reasonably valued and it will be interesting to see how the China story evolves in 2019.
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