We ran through the numbers from Motley Fool Hidden Gems selection Columbia Sportswear (NASDAQ:COLM) in last week's Fool by Numbers. Now we'll take a deeper look at the company's direction and some of the items covered on its conference call.

The overall 13.6% sales increase for the company was above what was expected and was largely driven by mountain hardware sales (up 26.4%), footwear (25.9% increase), outerwear (8% increase), and sportswear (9.6% increase). The increase in outerwear was the smallest, but it's still very important to track, as it's the company's highest margin product group. The increase in footwear sales is also impressive, given the competition from Nike (NYSE:NKE) and Timberland (NYSE:TBL). In particular, Timberland has had its struggles in the last year.

From a balance sheet perspective, Columbia Sportswear remains quite healthy. Inventory growth relative to sales is a concern, but this is the company's normal ramp-up period for fall sales. As accounts payable growth was in line with inventory growth (about 30%), the total change in working capital isn't terribly important. However, working capital management is something to keep an eye on, as the company has been acquiring a number of small brands.

Going forward, I think investors will want to monitor margins most closely -- with a focus on gross margins. With the acquisitions the company has made and through some merchandising mistakes of its own, the company's margins are 2%-3% below what's historically normal. On the conference call, management talked up the steps it's taking to get margins back on track, but the improvements won't really be seen until fiscal 2007.

It's hard to read too much into one quarter for a company, and it's a mistake to read too much into this company's second-quarter results, as it's the lowest volume quarter for the company. That said, I'll reiterate by paying close attention to the company's gross margins in the coming quarters. The gross margin level is below normal for the company, and I expect that its actions to increase prices on certain items and realign its products will bear fruit.

I also like how the company is positioning its Pacific Trail acquisition to fulfill the product range below its current Columbia Sportswear products. Potential long-term sales growth in the neighborhood of 10% and the potential for expanding margins are a fairly attractive combination and a scenario to consider carefully when valuing the company and where it might go from here.

Columbia Sportswear is a Hidden Gems recommendation. You can view the entire Hidden Gems scorecard with yourfree trial.

At the time of publication Nathan
Parmelee had no interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.