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Columbia Sportswear (NASDAQ: COLM ) shares have grown 14% this year and 30% since the beginning of 2012. Moving forward, the stock has solid potential given two company initiatives: inventory management and international growth.
Inventory management means better margins
Columbia Sportswear is the largest public outdoor apparel provider in the world. With any apparel manufacturing company, controlling inventory is crucial to maintaining strong margins, reducing clearance items, and generating strong sales. Moving forward, the company has noted that inventory management is one of their key priorities. The company is launching a global ERP platform and "flowing...inventory receipts to correlate more closely with customers' requested delivery dates."
Columbia Sportswear has seen gross margins expand from 42.1% in 2009 to 43.2% in the TTM, and the company wants to see more of that growth moving forward. A global ERP (enterprise resource planning) platform is a system that uses software to see how order processing, inventory, and production are working together. A system like this is very important for a company like Columbia to maintain all the inputs in their production. Especially as the company begins to push into a global platform, inventory management will be crucial to the company maintaining and increasing margins.
The benefits of launching a new global ERP platform is:
1. Instant capacity, lower costs
2. Better use of IT
3. Business agility
Columbia, through this new platform, will be able to reduce their infrastructure costs, reduce the management team with more virtualization, and have a larger scale of workflow. For investors, this means that the company is cutting costs and growing margins. The company has taken a very complex system and streamlined all into one new ERP system that will allow them to better manage their supply chain and more quickly respond to business requests.
This move is very important for Columbia because the company is attempting to bring a lot of growth in a lot of new markets, and this ERP platform can bridge the gap for the company that was not previously there.
Growth in emerging markets
Outside of margin expansion for the company, Columbia's growth in emerging markets is the second-leading reason that this stock is attractive. In the past fourteen months, Columbia has launched new business in India and grown its footprint in China that can lead to a multi-year cycle of growth.
The outdoor apparel retail market is very small in China as the middle-class consumer is just starting to whet their appetite for this industry. Most outdoor activities, such as rock climbing, cycling, sailing, hunting, and fishing require larger amounts of discretionary income. Therefore, for many years, they have not been as popular. In 2012, the outdoor apparel market was about $1B market with around 5% of the Chinese population engaging in these activities. That number compares to 50% in the USA.
In 2012, Columbia had around 600 stores, but the outdoor apparel market is expected to grow by 20-30% per year through 2016. The company has partnered with a Chinese based firm, Swire, to help distribute for the company. They launched a 60/40 joint venture with this company in August of 2012, and the company is expected to help them grow dealer-operated and Columbia retail locations as 600 stores is very small. Toread, a Chinese-based outdoor retailer, has nearly double that number of stores and is still expanding. Competition is strong in China with VF Corp (NYSE: VFC ) North Face in the market as well as Nike (NYSE: NKE ) strong there as well, but Columbia offers a more unique product that focuses on outdoor activities like fishing, hunting, and marina life, which differs from VF and Nike.
The potential is gigantic in China and should be attractive to investors that want to take advantage of the burgeoning middle class there. India is another great opportunity. The company launched a deal with an Indian distributor in 2013. Markets like India, Brazil, and China are the backbone of growth for Columbia and should entice investors.
The question for investors, therefore, is whether Columbia's stock is currently pricing in the expansion of revenue and margins at the same time. Currently, the stock has a 19+ price-to-earnings ratio. That number compares to an industry average for apparel manufacturing companies at 23.8. As we can see, Columbia trails the industry average. What is even more compelling about this valuation is that Columbia is a growth stock that is expecting to triple its business in the next ten years. Most apparel manufacturing companies are growing at much lower rates than outdoor apparel.
Further, if margins do expand as the company predicts, the growth of revenue will look even better in terms of margins. For example, if the company sees a CAGR of 8-10% in revenue over the next five year, in 2017 their revenue will be around $2.3 billion. If net margins can even just expand 100 basis points to 7.4% from 6.4% currently, the company would be looking at net income of $170 million. That converts to an EPS 4.85 (keeping shares the same). When we take current price divided by that EPS, P/E drops to 12.4. If the company maintains a 19 P/E, that means shares have 50%+ growth potential over the next few years.
Columbia is a growing apparel company in a secular growth industry. The company is focused on margins as they expand their business, which is a smart decision. They are optimizing their business before they see massive growth, and that will allow for them to expand income as they also grow. With demand accelerating for outdoor sports in emerging markets where Columbia does business, the outlook is quite bright.
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