I wasn't nearly as enthusiastic as most investors about Columbia Sportswear's (NASDAQ:COLM) earnings report in April. Three months later, it seems a lot of people are starting to agree with me... just in time for me to reverse my previous opinion.

Last quarter, it seemed investors were willing to believe the rosy forecasts of Columbia's too-optimistic analysts, taking their word over that of company management itself. This time around, they're listening to management as it talks ever more conservatively about the economy -- but perhaps they're not listening closely enough. To explain, let's take a gander at the Q2 2008 earnings report beginning with the highlights:

  • Starting at the top, sales dropped 3% in comparison to last year's second quarter.
  • Meanwhile, last year's quarterly profit became this year's $0.05 loss.
  • And Columbia has backtracked significantly on its April prediction of $3.15 to $3.20 in per-share profits for this fiscal year. The latest guesstimate: $2.65 or thereabouts, on a 4% slip in sales.

Ouch
Yep. Bad news all around -- so why am I yet again taking issue with Wall Street's reaction to the news?

Last quarter, investors jumped on the Columbia bandwagon despite management attributing a 14% rise in inventories "to support the company's planned 2008 retail store openings" -- store openings, the cost of which would crimp profits significantly. This time around, investors are selling off the stock on the earnings walk-back -- but it sounds to me like management is laying the groundwork for progress.

According to CEO Tim Boyle, cash levels are up significantly at Columbia, thanks in part to a 6% decline in accounts receivable, and a 12% paring of inventories. You'll notice that relative to the 3% drop in sales, these moves are twice, and four times as large, respectively. So while rivals like Sears Holdings (NASDAQ:SHLD) and Under Armour (NYSE:UA) are still busy talkingabout cutting inventories and tightening up free cash flow, Columbia is actually doing it. (Meanwhile, with its own inventories up faster than sales in the most recent quarter, it would appear that Nike (NYSE:NKE) isn't doing either.)

Foolish takeaway
Yes, lower sales will hurt profits. Also true, cutting inventories is going to hurt gross margins further (management predicts a 50 basis point contraction for the year.) But bullets are hard little buggers; it hurts when you bite 'em. Kudos to Columbia for taking the pain now rather than later.

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

Fool contributor Rich Smith does not own shares of any company named above, but Columbia Sportswear is a Motley Fool Hidden Gems recommendation. Under Armour is, too, as well as a Motley Fool Rule Breakers pick and a holding of The Motley Fool proper. Sears Holdings is a Motley Fool Inside Value selection. The Motley Fool has a disclosure policy.