Columbia Sportswear (COLM, Financial) has re-entered our Value Leaders Rankings. The outdoor apparel company is undergoing a significant turnaround to address challenges in its U.S. market, which accounts for about two-thirds of its sales. Despite projecting Q3 figures below consensus, COLM has maintained its FY24 outlook.
After a weak Q2, COLM's issues seem to be subsiding, allowing the company to refocus on growth.
- Cost containment and inventory reduction are yielding benefits. COLM's Q2 inventory was down 29% year-over-year, reducing discounting and boosting margins. The profit improvement program is on track to save $75-90 million in FY24, supporting plans for over $350 million in operating cash flow.
- COLM's turnaround parallels V.F. Corp (VFC, Financial), which has more significant challenges. Unlike VFC, COLM has a lower debt-to-equity ratio of about 19%, compared to VFC's 193%. This lower debt allows COLM to invest in its brands, while VFC focuses on debt reduction.
- Non-core brands SOREL, prAna, and Mountain Hardwear saw declining sales last year. However, COLM is stabilizing SOREL and laying the groundwork for growth. prAna's turnaround is showing positive signs, particularly in future season orders.
- COLM's consistent FY24 guidance suggests a stronger second half of the year. Management's optimistic tone and incremental progress each quarter, coupled with the back-to-school and holiday seasons, could help COLM end FY24 positively.
Attracting a younger demographic is key to COLM's strategy. By focusing on the outdoor lifestyle, COLM aims to appeal to younger consumers who prioritize experiences over possessions. Despite the current climate of suppressed discretionary spending, COLM's solid financials, zero short-term debt, and robust cash flow position it well to navigate short-term uncertainties. A stop loss limit of 15-20% is advisable.
