Foolish Forecast: Columbia's Chill

Better button up, Columbia Sportswear (Nasdaq: COLM  ) investors. Wall Street is expecting a bit of a cold front to come in with the company's Q1 2006 earnings release tomorrow afternoon. Here's what you need to know to dress appropriately for the news.

What analysts say:

  • Buy, sell, or waffle? Twenty analysts follow Columbia, and their opinions are all over the map. Eight say buy, nine say hold, and three recommend selling your shares.
  • Revenues. Sales are expected to edge up just 1% to $248.8 million.
  • Earnings. Profits are predicted to decline 15% to $0.44 per share.

What management says:
Back in January, CEO Tim Boyle said much the same thing as analysts are now predicting, guiding investors to expect 1% sales growth and a 25% decline in profits, 10% of which would be due to the introduction of stock options expensing. (And yes, "analysts" really do collect paychecks for regurgitating what management has already said publicly. Nice work if you can get it, eh?)

Boyle went on to remind investors that "spring product sales account for a relatively small percentage of our overall business; the bulk of our revenues and profits historically come in the second half of the year."

What management does:
Columbia has had it pretty rough in recent quarters. Over the last 18 months, rolling gross margins are down 240 basis points. The operating margins are looking even worse, as selling, general, and administrative expenses (SG&A) pull away from sales growth. In the last six months, for example, sales increased 7% year over year, while SG&A rose nearly 11%.

Margins %

10/04

1/05

4/05

7/05

10/05

12/05

Gross

46

45.5

45.1

44.5

44

43.6

Op.

19.2

19.3

18.7

17.9

16.8

16.1

Net

12.5

12.7

12.3

11.8

11.7

11.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

The Fool says:
Let's revisit Mr. Boyle's attempt to paint tomorrow's expected "bad" news as statistically insignificant. Is it true that Columbia makes most of its sales in H2 of the fiscal year? Yes. But is it misleading? I'd argue yes as well. Q1, while a seasonally "light" quarter, isn't all that light -- and it's getting heavier. Over the past three years, Q1 sales amounted to 18%, 19%, and 21% of annual sales.

Meanwhile, the "bulky" second half has been slimming down, accounting for 66% of total sales in 2003, 65% in 2004, and 63% in 2005. So while the second half is still more important than the first, the gap is narrowing. And while the first quarter isn't as important as Q3 or Q4, the gap is narrowing there, too. In sum, a weak result tomorrow, if it happens, will still have a material impact on the year.

Competitors:

  • Deckers (Nasdaq: DECK  )
  • Fortune Brands (NYSE: FO  )
  • Nike (NYSE: NKE  )
  • Oakley (NYSE: OO  )
  • Polo Ralph Lauren (NYSE: RL  )
  • Timberland (NYSE: TBL  )

ColumbiaSportswear is a Motley Fool Hidden Gems pick. To take the newsletter dedicated to small caps for a 30-day free spin, click here.

Fool contributor Rich Smith does not own shares of any company named above.


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