MARKET WATCH: Doing Good Business In a Bad Environment

Jeff Harbaugh

• March 02 2009
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Doing Good Business in a Bad Environment- Columbia Sportswear 10K

Columbia Sportswear’s annual report is bracketed by the impact of the recession as, I expect, will be many companies’.

On the first page they note, “Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of the current macro-economic environment…Our net sales volumes have been affected by the volatility of the global economy, its impact on consumer purchasing patterns and placement of advanced orders, order cancellations and seasonal reorders by retailers. Sales tend to decline in periods of recession or uncertainty.”

Almost at the end of the report we see that their charge in 2008 for doubtful accounts was $3.473 million compared to $950,000 in 2007 and $57,000 in 2006. Not a big number for a company with $1.3 billion in sales, but the trend is clear and not really a surprise in this environment.

Sales for the year ended December 31 fell by 2.82% from $1.356 to $1.317 billion. Of this decline of $38.2 million, $21.8 million occurred in the 4th quarter, when sales were $354.9 million. Most of the remainder occurred in the third quarter.

Total gross profit fell by $11.9 million to $567.8 million. As a percentage of sales for the year it rose from 42.8 to 43.1%, though it was only 42.1% in the fourth quarter. They note that close out sales of 2007 merchandise in the fourth quarter of 2007 had a favorable impact on 2008’s gross profit.

In spite of what I’d call a good year under the circumstances at the sale and gross margin level, net income fell from $144.5 to $95 million, a 34% decline. What happened between gross profit and the bottom line?
First, and I’ve talked about this with other companies, they had a noncash charge of $24.7 million for “impairment of acquired intangible assets.” This is for their 2006 acquisitions of Pacific Trail and Montrail.

As the company puts it, “These brands have not achieved their sales and profitability objectives. The deterioration in the macroeconomic environment and the resulting effect on consumer demand has decreased the probability of realizing these objectives in the near future.”

I think that’s clear enough. They are not going to earn as much from these acquisitions as they thought they were.

Next we see that selling, general and administrative expenses increased 11.6% to $430 million. But this was by plan according to the company. “This increase was primarily due to our planned investment in incremental marketing activities in 2008 to drive consumer demand for our brands, together with initial investment and incremental operating costs of our new retail stores.”

In spite of economic conditions, then, Columbia is continuing the strategy it already has in place, and they have the balance sheet to do it. It is essentially unchanged from a year ago. They make a comment on working capital utilization that I think is worth quoting at some length. It says something about why their balance sheet is strong.

“At December 31, 2008, working capital assets accounted for approximately 76% of total assets. As a result, the degree to which we efficiently utilize our working capital assets can have a significant impact on our profitability and return on invested capital. The overall goals of our working capital management efforts are to maintain the minimum level of inventory necessary to deliver goods on time to our customers to satisfy end consumer demand, and to minimize the cycle time from the purchase of inventory from our suppliers to the collection of accounts receivable balances from our customers.”

On the one hand, that’s a blinding glimpse of the obvious and I suppose you shouldn’t have to bother saying it. But really focusing on that takes a lot of work and has huge benefits. It speaks well for Columbia management that they go out of their way to say it.

Income taxes fell by 51% to $31.2 million not only because pretax income fell by $82 million, but because the effective tax rate fell from 30.6% in 2007 to 24.7% in 2008.

Columbia identifies five “Strategic Growth Initiatives:”
• Designing authentic, innovative products for active outdoor enthusiasts.
• Expand the direct-to-consumer business through additional retail stores and launching an e-commerce platform in the summer of 2009.
• “Creating and delivering targeted brand-enhancing advertising and marketing programs…”
• Expanding their global footwear business.
• Increasing demand in their European business.

You read these and inevitably, there’s a lot of overlap with what other larger brands might say. It makes you realize the extent to which differentiation and competitive advantage has to come from just operating better than your competitors. Over the next year or so, we’ll find out who’s doing that.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.