COLM - Columbia Sportswear: Great Brand At A Fair Price

2023-04-05 00:37:23 ET

Summary

• Columbia Sportswear has quietly outperformed the S&P 500 Index in the past decade.
• The expanding outdoor activewear market and increasing penetration of DTC channels should continue to drive growth.
• Recent earnings showed solid resilience as net sales edged up despite facing a weakening economy.
• The current valuation remains discounted.
• I rate the company as a buy.

Investment Thesis

Columbia Sportswear ( COLM ) is a low-profile stock that has been quietly outperforming the broader indexes, with shares up over 200% in the past decade. I believe the company will continue to perform well thanks to the expanding outdoor activewear market and the opportunities in the DTC (direct-to-consumer) channel. Despite facing tough macro headwinds, net sales continued to show solid resilience in the latest quarter. The bottom line was weak but this is mainly due to one-time impairment charges. The current valuation is below other activewear peers and also discounted on a historical basis. I like both its fundamentals and valuation; therefore, I rate COLM stock as a buy.

Expanding Activewear Market

Columbia Sportswear is a heritage outdoor activewear company founded back in 1938. It currently comprises the iconic brand Columbia, and other emerging brands such as Sorel, prAna, and Mountain Hardware. The Columbia brand alone accounts for roughly 85% of the company's total revenue and continues to be its crown jewel.

Colombia is one of the few leaders in the outdoor activewear market alongside The North Face and Patagonia. The growth opportunity in the market remains huge, as the popularity of outdoor activities like hiking and camping continues to increase. According to Precedence Research , its market size is forecasted to grow to $17.2 billion in 2025 with a 4.5% CAGR (compounded annual growth rate). The company themselves are even more optimistic and estimates its TAM (total addressable market) to be $40 billion. I believe the market expansion should continue to provide solid tailwinds moving forward.

Growth In DTC

I believe the ongoing expansion of the DTC channels will also be a meaningful growth driver. Retail brands have historically relied heavily on wholesale retailers as their primary distribution channel, as they can leverage their large footprint and reach without having to build out their own store network, which is costly. However, an increasing number of brands are now focusing more on DTC as the rise of e-commerce enables brands to reach customers easily at a low cost. They are favoring DTC as they can gain full control of their brand image, customer experience, and provide better personalization.

It is also extremely accretive to financials as sales from DTC channels have much higher margins. For instance, Columbia’s gross margin has been growing consistently in the past decade as its DTC penetration continues to increase. I believe there is still ample room for expansion as DTC sales currently only represent less than 60% of total sales. The expansion should continue to be a strong growth catalyst for the bottom line.

Financials

Despite the deteriorating macro backdrop, Columbia Sportswear's latest earnings remain resilient. The company reported revenue of $1.17 billion, up 4% YoY (year over year) compared to $1.13 billion. On a constant currency basis, revenue growth was 8%. The growth is mostly contributed by the Columbia brand, which continued to see decent demand thanks to its strong branding and loyal following. The segment grew 8% YoY from $894.2 million to $961.3 million. This was offset by the weakness in emerging brands, which declined 11.5% YoY from $235.5 million to $208.3 million. On a channel segment, DTC revenue grew 5% to $655.1 million, now accounting for 56% of total revenue. While wholesale revenue grew 2% to $514.5 million.

The bottom line was relatively soft due to inflationary pressure and one-off charges. Due to elevated pricing, costs of sales grew 7.4% YoY from $539.5 million to $579.5 million. This resulted in gross profit staying flat YoY at $590 million, while the gross margin dipped 180 basis points to 50.4%. I expect inflation headwinds to ease as the CPI continues to trend down. SG&A (selling, general, and administrative) expenses were up 5.5% from $384 million to $405.1 million. Net income was $125.7 million compared to $157 million, but this is non-comparable due to impairment charges for prAna. Excluding this impact, diluted EPS was $2.45 compared to $2.39, up 2.5%.

The balance sheet remains extremely healthy with $431 million in cash and only $379 million in debt. The company also initiated guidance for FY23, which is pretty mixed in my opinion. It expects revenue growth to be between 3% to 6% and diluted EPS growth to be flat at the midpoint. The top line suggests little slowdown yet the bottom line continues to be pressured.

Valuation

Despite the 30%+ rally since September, Columbia Sportswear’s valuation still looks very reasonable. The company is currently trading at an EV/EBITDA ratio of just 9.6x, which is cheap on a historical basis. It represents a meaningful discount of 35% compared to its 5-year historical average of 14.8x. The valuation is also below other performance apparel peers like Canada Goose ( GOOS ) and Lululemon ( LULU ), as shown in the chart below. They are trading at an EV/EBITDA of 12.4x and 22.6x, which represents a premium of 29% and 135% respectively. It is worth noting that Lululemon has been reporting superb growth rates hence the substantial premium may be justified.

Investor's Takeaway

I believe Columbia Sportswear is a solid investment option. The company should continue to benefit from the expansion of the outdoor activewear market, and the growth of DTC should also boost the bottom line. The company’s current growth rate is a bit soft but should start to reaccelerate next year. According to Seeking Alpha’s analyst estimate , EPS growth is expected to return to double digits in FY24. I believe the re-acceleration in growth alongside the discounted valuation should present solid upside potential. Therefore, I rate the company as a buy.

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