Foolish Forecast: Will Columbia Conquer?

Have you ever met a "perfect" stock? If not, then allow me to introduce you to Motley Fool Hidden Gems recommendation Columbia Sportswear (Nasdaq: COLM  ) . According to Earnings.com, this clothier has never missed an earnings target, marking six years and nine months of consistent outperformance. Tomorrow, the company tries to put the cap on lucky year No. 7.

What analysts say:

  • Buy, sell, or waffle? Twenty analysts follow Columbia, which garners seven buy ratings, 11 holds, and a pair o' sells.
  • Revenues. On average, analysts expect to see quarterly sales grow 3% to $372.2 million.
  • Earnings. Meanwhile, profits are predicted to slip 6% to $1.00 per share.

What management says:
Deviating from my usual practice here, I'll tell you what Columbia didn't say in last quarter's earnings report, but later revealed in its 10-Q SEC filing: the amount of cash profit it earned through Q3 2007. As it turned out, the 10-Q confirmed that through the end of the fiscal third quarter, Columbia earned no cash profits last year. To the contrary, it burned through more than $86 million.

What management does:
That was quite a tumble. At the end of the first half of the year, the company still had more than $58 million in positive free cash flow under its belt. Looks like Columbia managed to burn through $144 million in Q3 alone. Continuing with the bad news, gross margin stumbled in Q3, causing operating margin to slip as well, and stopping net margin improvement in its tracks.

Margins

6/06

9/06

12/06

3/07

6/07

9/07

Gross

43.2%

42.4%

42.0%

42.2%

42.7%

42.5%

Operating

15.0%

14.4%

14.0%

14.4%

14.8%

14.7%

Net

10.7%

9.8%

9.6%

9.8%

10.2%

10.2%

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

One Fool says:
Now before you throw yourself out a window over those numbers, keep a few facts in mind. First and foremost, a stumble is not a collapse. And even if Columbia's margins were to collapse in the future, they would have to fall quite a distance before they resembled the margins posted by the company's rivals.

Columbia remains at the head of the pack for margins, eclipsing Timberland (NYSE: TBL  ) , Nike (NYSE: NKE  ) , and Wolverine (NYSE: WWW  ) in footwear business, and Quiksilver (NYSE: ZQK  ) , VF (NYSE: VFC  ) , and Under Armour (NYSE: UA  ) in apparel.

Second, on the subject of free cash flow, the numbers in Q3 2007 looked awful -- but they always look awful in Q3. Searching the company's financials, I can assure you that Q3 of any given fiscal year is the proverbial "darkest before the dawn" moment for Columbia. Cash profits tend to perk up quite a bit in Q4.

How much they perk up this time is the real question, especially given management's announced intention to sink significant cash into tripling its store base. If those stores do get built, I suspect we'll be disappointed with the free cash flow number.

Of course, unless management deigns to include a cash flow statement in tomorrow's release, we'll have to wait another couple of weeks to learn the exact extent of that disappointment.

What did we expect out of Columbia last quarter, and what did we get? Find out in:


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