Columbia Sportswear (COLM -1.95%) and VF (VFC -2.73%), leaders in the outdoor apparel industry, have each seen their stocks hurt by COVID-induced lockdowns and economic slowdown. In their respective earnings calls, each company's CEO pointed to their "fortress balance sheets" and said they'd come through the crisis even stronger. But while both stocks may be fortified against the current downturn, only one has the enduring brand power to drive long-term success.
What's Columbia Sportswear's strategy?
Columbia Sportswear is small compared to rival VF, about a tenth the size by market capitalization. It also only manages four brands compared to VF's 19. Its strategy is simple: Invest heavily into digital, e-commerce, and direct-to-consumer (DTC) while nurturing and growing its brands' relevance with consumers.
Columbia Sportswear's four brands each have their own unique strategy and message to consumers:
- Mountain Hardwear: High-performance gear
- SOREL: Fashionable footwear
- prAna: Sustainable athleisure for the yogi
- The namesake Columbia: Reliable performance at a value price
For the quarter ended March 31, 2020, all of Columbia Sportswear's brands' sales were down. But CEO Timothy Boyle shared some optimism for the future: SOREL's overall sales subsequently rose in April amid a surge in online orders. Indeed, companywide online sales were up 60% in April 2020 over the prior year. This underscores the opportunity and the need for Columbia Sportswear to ensure that its consumers enjoy a great digital experience.
The company touts its continued investment in e-commerce technology and platforms, sticking to those investments even as it suspends its dividend and share repurchases. However, it provides less specific detail on how this spending is translating into greater brand awareness and demand. Potential investors should keep an eye on digital sales growth when Columbia reports again near the end of July 2020.
What's VF's strategy?
VF is narrowing its focus. After spinning off its Lee and Wrangler denim brands last year, early in 2020 the company announced its intent to spin off its "occupational workwear" brands, which would make it almost exclusively an outdoor and activewear company -- and a cleaner comparison to Columbia Sportswear.
Its remaining brands, led by The North Face and Vans, are also focused on the e-commerce experience, helping these brands post "double-digit" online sales growth in its most recent quarter, slower than Columbia but from a much larger base.
VF isn't just focused on scaling down its number of brands, but also on making sure it's better positioned to drive relevance of and engagement with its brands, namely its flagship brand The North Face. Quantifying brand power is not impossible, but it is at least equal parts art and science.
The North Face recently gained considerable brand awareness when it joined outdoor retailer REI and its own rival, Patagonia, as the first in a wave of companies to boycott Facebook, taking a stand against the spread of misinformation and hate speech. It is impossible to tell whether such a move adds directly to earnings, but it does put a spotlight on the company's values, which could help it keep existing customers and attract new ones.
The North Face also boasts more and higher-profile sponsorship agreements with outdoor athletes, such as climber Alex Honnold from the acclaimed documentary Free Solo, than Columbia Sportswear's brands. Ultimately, all apparel faces constant threats of commoditization, so brands must keep their stories and values alive and evolving. VF is a leader here, and when it becomes solely an outdoor and activewear company, it may be able to focus on its brands even more.
Which fits your portfolio?
Both companies are likely to survive this major downturn. Columbia Sportswear has a net cash position, with $671 million in the bank and only $174 million in short-term debt. VF's debt-to-cash ratio is much more tenuous, with $1.3 billion in cash against $3.8 billion in debt, but VF typically generates enough free cash flow -- nearly $1.5 billion in its most recent fiscal year -- to cover the payments on that debt. However, with the economy struggling, VF may not see that kind of cash generation again for a while; free cash flow dropped to less than $600 million over the trailing 12 months.
The planned sale of VF's uniform business could help its cash position. That side segment is small for VF, representing about 8% of revenue, but it generates largely recurring revenue from government agencies, making it a good business for the right buyer. VF needs to fetch a good price for this division if it wants to pay down debt and leave some room for more strategic investments.
Both VF and Columbia Sportswear should consider adding growing brands to their portfolios. Some new outdoor clothing brands such as Cotopaxi are growing quickly and could make a great opportunity for either potential acquirer.. Without acquisitions, each company will need to rely on and nurture its existing brands. In this respect, VF, with its richer media, partnerships, and publicity, could win out.
There is reason to believe that the outdoor apparel industry will continue to grow, but perhaps not very quickly. Allied Market Research expects this niche market to grow at around 4% through 2025. To post market-beating returns, one of these brands will have to take share and potentially expand the market.
VF looks better positioned to do this, with a head start internationally and high-profile brand ambassadors. Cautious investors may want to wait for a cleaner look at VF's financials after the spinoff of its uniform businesses before trying on its stock.