Previewing Thursday's Q3 earnings release from Motley Fool Hidden Gems recommendation Columbia Sportswear
As it turned out, Columbia did not miss guidance -- on either revenues or earnings. The company beat both the analysts' projections and its own, growing sales 4% and profits 3% (which wouldn't be impressive, but for the fact that Columbia expected its profits to decline in Q3).
And yet, despite defying the odds and upholding its record of never missing an estimate, Columbia's stock got pummeled last week. By close of trading yesterday, Columbia had lost a good 7% of its value -- more than $135 million worth of market capitalization gone poof. The "why" of this, however, had less to do with Columbia's sterling Q3 performance, and more to do with worries that we won't see a repeat next year.
According to CEO Tim Boyle, Columbia aims to surpass low-single-digit growth next year. In a two-pronged effort to boost sales, the firm will: (1) ramp up advertising spending, and (2) open five new retail outlet stores in the U.S. by year-end, preparatory to rolling out further expansion at the rate of up to 15 new stores per year "over the next few years."
For a firm that insists its "primary focus is to remain a wholesale business ... dedicated to serving our wholesale customers," this looks like a significant change in the business plan. At last count, Columbia had only 10 outlet stores in operation around the world. Now we're looking at the possibility of that number growing 200% in the next 15 months.
andWachovia analysts parsing the news seem most concerned with Boyle's admonition that these initiatives will "preclude us from achieving operating margin leverage in 2008." But with operating margins already comfortably higher than those of rivals Timberland
Personally, I'm more worried about the cost of opening the new stores, and what it will do to Columbia's free cash flow. Columbia failed to include a cash flow statement with its earnings report, so we don't have the most recent number. But at $58.2 million for the first half of the year, it was already down from the same six months in 2006. Now it could be headed lower still.