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Columbia Sportswear (COLM) Troubled by Pandemic-Led Low Traffic

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Columbia Sportswear Company COLM has taken quite a hit from the novel coronavirus. Even after stores reopened following the curbs being lifted, traffic has been sluggish as fears surrounding the virus and continued rise in cases have kept a number of customers confined indoors. Management in its third-quarter earnings call said that it expects 2020 results to bear the brunt of soft consumer demand due to the pandemic. Apart from this, escalated costs have been a concern for Columbia Sportswear.

Nonetheless, the company is benefiting from its direct-to-consumer (DTC) e-commerce business, given customers’ increased preference for online shopping amid the pandemic. This, along with brand enhancement initiatives and efforts to optimize store fleet, has been offering some cushion to the stock of late. While this Zacks Rank #5 (Strong Sell) stock has dropped 4.7% in a year against the industry’s growth of 10.5%, it appears to have seen some revival recently. Evidently, the company’s shares have climbed 0.5% in the past three months.

Factors Hurting Columbia Sportswear

In third-quarter 2020, the company’s top and bottom lines plummeted year over year and fell short of the respective Zacks Consensus Estimate. Most of the company-owned stores were open throughout the third quarter, apart from some isolated temporary closures due to local regulations or safety factors. However, management highlighted that brick-and-mortar traffic was much below the year-ago period’s level. Traffic has been most affected in stores and destination locations, as well as stores operating in markets dependent on tourists. The company expects traffic in these regions to remain soft till the resumption of tourism activities.

Apart from this, the pandemic has resulted in several supply-chain hurdles in terms of production, distribution and logistics. Management expects 2020 results to bear the brunt of soft consumer demand due to the pandemic. Sales volumes are likely to be softer year over year in the fourth quarter. All in all, management expects 2020 results to bear pandemic-led impacts like reduced global net sales, delay of inventory production and fulfillment, and high costs. For the fourth quarter of 2020, the company expects net sales in the range of $850-$880 million, indicating an 8-11% decline from the year-ago period. Further, it envisions earnings per share in the range of $1.07-$1.32 compared with $1.67 reported in the prior-year period.

Additionally, Columbia Sportswear’s gross margin has been declining year over year for a while now. During the third quarter of 2020, gross margin declined 40 basis points to 48.9% due to reduced DTC product margins stemming from elevated promotional activities and higher freight expenses. Though SG&A expenses declined year over year, the same escalated as a percentage of sales from 33% to 37.3%. SG&A expenses were partly impacted by costs associated with the pandemic. Further, the company expects 2020 results to be negatively impacted by COVID-19 costs.

Moreover, the company intends to continue its investments to create demand, drive brand awareness and enhance digital capabilities. Though these investments are likely to fuel growth, they might weigh on margins. In the fourth quarter of 2020, operating income is expected to be $91-$112 million, with an operating margin of 10.7-12.7%. This suggests a decline from the operating income and margin of $138.6 million and 14.5%, respectively, reported in the fourth quarter of 2019.

Factors Acting as Saviors

Columbia Sportswear remains committed to expanding and enhancing its global DTC business through accelerated investments. In the third quarter of 2020, the company’s DTC e-commerce sales soared 55% and formed 12% of the company’s top line. To this end, the company’s increased digital marketing expenditure has been a driver. DTC e-commerce sales surged 50% in the United States. Management said that the DTC e-commerce business is seeing robust momentum with more consumers opting to shop online. This channel is likely to continue performing well in the forthcoming periods.

Certainly, management is focused on its strategic priorities. To this end, it intends to continue with its demand creation investments, enhance consumers’ experience and its digital capacity in all networks and regions, explore growth opportunities in the DTC business, and focus on investing in its people and optimizing the organization across its brand portfolio. Incidentally, Columbia Sportswear is on track to optimize its store fleet and has decided to permanently shut a small number of locations. In 2020 (as of Oct 29), the company had permanently shuttered eight U.S. stores and one European store. Given its spring order book for 2021 and anticipations of returning to growth in its DTC business, management expects net sales growth at a high-teens rate in the first half of 2021.

That being said, it is yet to be seen if such upsides can help Columbia Sportswear battle the abovementioned challenges and stay in investors’ good books. 

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