COLM - Columbia Sportswear Company - Safe Long-Term Play

2024-01-07 12:24:45 ET

Summary

• Columbia's CEO, Tim Boyle, has been in charge since 1988 and has delivered strong returns for shareholders.
• The company aims to be the number one outdoor brand in the world but faces intense competition from brands like North Face and Patagonia.
• Although growth has slowed, the company has effectively reduced inventory levels and grown the Columbia and Sorel brands while paying a dividend to investors.

Today I’d like to discuss an outdoor apparel company that been around since the 1930’s. This historic company has risen tremulously under the tenure of it’s long-time CEO.

However, the last five years have been rough as the company has under-performed the market and like many retailers has struggled managing inventory.

That organization is Columbia Sportswear Company! Let’s dig into the details to see if this company is poised for a comeback.

The Company

Columbia Sportswear Company ( COLM ) is a leader in providing outdoor apparel, footwear and equipment. The company was founded in Portland, Oregon back in the late 1930’s and is still going strong. Columbia has an interesting backstory as the company has been run by one family since inception. The company’s current CEO is Tim Boyle who began working at Columbia in 1971. Tim’s grandfather and father had previously run the company. Acting alongside his mother, Gret, Tim helped turn the struggling company into a powerhouse. Tim has been at the helm since 1988 and his son Joe is the current Columbia Brand President.

Columbia’s four main brands are Sorel, Mountain Hard Wear, prAna and the original Columbia brand. The various brands have different missions, but all are relatively similar to the main Columbia’s brand mission which is to, “ Unlock the outdoors for everyone.”

Growing up in the West, I am very familiar with Columbia and have purchased numerous coats and jackets from the company over the years. I think their apparel is very high quality and aligns very well with the company’s mission. Their apparel is perfect for being outdoors and exploring nature.

Moat and Opportunity

As stated on a previous investor presentation , Columbia believes they have an addressable market of $40 billion:

Columbia’s goal is to be the number one outdoor brand in the world. To get there the company is focused on creating iconic products, driving brand engagement, enhancing consumer experiences, and amplifying marketplace excellence. In reading the company’s investor presentation, it was tough to get any real substance on how the organization was going to execute on these goals.

I don’t believe Columbia has a moat. Perhaps at one point the organization might have in the earlier years since going public but now the marketplace is extremely competitive with the likes of North Face and Patagonia. Plus you have companies like Lululemon ( LULU ) and Nike ( NKE ) also competing at least with some products.

Management

As noted below Tim Boyle is the current CEO of Columbia Sportswear. Boyle has been at the helm since 1988 and if you had invested when Boyle brought the company public in 1998, you’d be one happy investor as the stock has returned over a 900% return.

As you can see from these Glassdoor ratings , Columbia is viewed as an great place work and employees at the company clearly approve of Boyle:

As my followers will know, I’m a fan of founder led companies and companies focused on returns to shareholders. Despite, the revenue growth being subpar over the last 5 years (which I’ll discuss in more depth below), the company has delivered shareholder returns as the company’s ROE is 15%, the ROCE is nearly 17% and the company’s ROIC is nearly 20%.

Additionally, in looking at Columbia’s latest proxy filing , you can see Tim and Joe Boyle hold nearly 40% of the company’s common stock so there is certainly an incentive to grow the share price.

Financials

If you’ve been a long-term Columbia investor, you’re likely rather happen as the company has generated a 9% net sales CAGR since 1998:

However, the last five years have been different as the stock down over the latest five year period and 2023 was a struggle with inventory issues.

In Q3 2023, net sales came in at roughly $986 million which is a 3% increase compared to the third quarter prior year. However net income was lower compared to Q3 2022 as SG&A expenses grew 10%.

This holds true for the nine-month period as well. Despite revenues increasing and gross margin improving the company’s higher SG&A costs, which management noted were due to direct-to-consumer expenses, demand creation investments and supply chain, led to lower net income:

On the company’s Q3 2023 investor presentation it was noted that both apparel and equipment have increased during the 9-month period which is a positive although not all the brands are performing as well as you can see below:

Columbia has a rock-solid balance sheet with enough current assets to cover all of the company’s liabilities as you can see below:

Also, you can see the company’s inventory levels have dropped. Management noted the company’s inventory reduction plan is working as inventory is down 16% year-over-year.

Risks

There are numerous risks which the company covers in detail in their 10K filing . I’m going to discuss two concerns I have about Columbia.

First, this is an extremely competitive market. I think there was less competition when Boyle took over but now there are large competitors such as Patagonia and North Face with many smaller players entering the outdoor apparel market.

As it relates to competition, I worry Columbia isn’t staying relevant. Yeti ( YETI ) is a company I follow, and this is a graphic from their latest investor presentation:

As you can see Columbia is far below their two main rivals and even below Yeti and the popular running brand Hoka in terms of followers. To me this is worrisome as it shows the company lacks foresight regarding the importance of social media and having your brand be visible and relevant.

Management and strategy are my next concern. There is no doubt Tim Boyle has done an excellent job during his tenure as the stock’s performance since Columbia's IPO indicates . However, Tim is in his 70’s now and won’t stay on forever. Will his son take over or will an individual outside the family finally run the organization? I’m a long-term investor and thus having a new CEO take over in the next 3-5 years with different prioritizes or strategies could significant alter one’s investment thesis.

Valuation

As you can see from the below valuation metrics from Seeking Alpha, the overall value grade for Columbia is a “D+.”

I actually think Columbia seems reasonable. Using a reverse discounted cash flow model with a discounted rate of 10% and a terminal rate of 3% and assumed growth of 8% I come to estimated intrinsic value of roughly $94 a share:

Now 8% growth for a company such as Columbia might be aggressive. The company noted they were aiming for 7-9% growth in the next three years. However, even if you use 6% or 7% the estimated intrinsic value of the share price is greater than today's value.

Conclusion

Columbia is not a stock for all investors. I do think the company Tim Boyle has run since the 1980’s won’t see the type of growth experienced in the prior decades. There is simply too much competition.

However, I do think Columbia has several positives. The company has a great balance sheet and as management noted it will continue to reward investors by paying dividends and buying back shares.

Columbia makes excellent products and as long as a Boyle runs the company, I’d bet that continues as the family has a significant number of shares of the company.

If you’re looking for growth this isn’t the stock for you but if you’re wishing to preserve capital, earn a dividend and sleep easy at night then Columbia is a company to add at these reasonable values.

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