Apparently, I just can't get with the program on Columbia Sportswear (NASDAQ:COLM) -- but hey, at least I'm trying.
When investors cheered the company's earnings news in April, I hurled catcalls from the peanut gallery. Only when everyone else turned against the stock in July did I start to get optimistic. "While rivals like Sears Holdings (NASDAQ:SHLD) and Under Armour (NYSE:UA) are still busy talking about cutting inventories and tightening up free cash flow," I wrote, "Columbia is actually doing it. ... it would appear that Nike (NYSE:NKE) isn't doing it, either."
In short, Columbia undertook to address concerns about its swelling inventories in that quarter. In the latest quarter, those efforts began bearing fruit:
- Sales in the third quarter dropped 4% year over year.
- But per-share profits dropped less than half as much, a mere 2% to $1.69 per share -- more than 20% better than Wall Street had predicted.
How did this happen? By paring its inventories early, I suspect that Columbia faced less pressure to sell its wares at cut-rate prices in Q3. As a result, gross margins climbed 150 basis points in comparison with Q3 2007.
Now, the bad news
Of course, it's not all puppies-and-kittens-motif windbreakers at Columbia. The current quarter looks to be a rough one, as the clothier predicts about an 8% tumble in Q4 sales, and a near-halving of per-share profits to no more than $0.70.
But Columbia is already taking further steps to mitigate the damage. "Consolidated backlog," which includes both fall 2008 and spring 2009 product orders, was down 7% for the third quarter. Management cut its inventories more than sales fell once again -- 6%. And accounts receivable dropped 7%. In each case, we see management predicting the expected sales decline, and taking steps to cut its working capital needs three months before the problems actually hit, so as to be ready when they do.
Foolish takeaway
Which is why, after six months of arguing, I finally agree with investors' take on yesterday's news. It was positive. Maybe not as positive as those investors believe -- I continue to think the shares are overvalued from both a P/E and a free cash flow perspective, and that rivals like Timberland (NYSE:TBL) and Wolverine World Wide (NYSE:WWW) offer better multiples to earnings, and stronger growth prospects. But at least Columbia is on the right track now.
Two quarters of smart inventory moves tell me management intends to stay there.
Now try on a few more Columbia articles for size:
