Columbia Sportswear is facing tough outdoor and wholesale challenges ahead.
A lackluster fourth-quarter report resulted in layoffs, as well as an expectation for “erosion in profitability” in 2024. And the company’s challenges include cautious retail partners and greater competition from other brands.
“Looking ahead, we expect 2024 to be a challenging year. Retailers are placing orders cautiously, and economic and geopolitical uncertainty remains high,” Timothy P. Boyle, chairman, president and CEO, told investors in an earnings conference call on Thursday, adding that spring and fall order books “reflect these challenges.”
Boyle said the impact from headwinds is most pronounced in the U.S., and that the firm is projecting growth in several markets outside of North America. As for the ocean freight disruptions on the Red Sea, Boyle said: “We have experienced some impacts to the flow of spring 2024 production, but our in-window delivery rates to wholesale customers are still well above 90 percent and cancellation exposure related to the delay is low as of right now.”
Chief financial officer and executive vice president Jim A. Swanson said that because the company has long-term contracts in place with certain ocean carriers, it has not been incurring any increases in spot rates or surcharges, adding that thus far, “we don’t anticipate that having a meaningful impact on our business.”
However, the company’s forecast for net sales in 2024 “is a decline of 2 percent to 4 percent,” which Boyle said will result in a contraction of Columbia’s operation margin.
“To mitigate further erosion in profitability and to improve the efficiency of our operations, we are implementing a multiyear profit improvement program,” he said, noting that a reduction in expenses and realignment coupled with savings from normalized inventory levels are expected to reach $125 million to $150 million in annualized savings by 2026. The company last year had elevated inventory levels, particularly in footwear.
The realignment translates to a 3 to 5 percent reduction in headcount, primarily impacting its U.S. corporate headquarters. Columbia reportedly has just over 3,100 staff at its Portland, Ore., headquarters, translating to an estimated 95 to 155 jobs. Boyle said layoffs are expected to be completed by the end of March.
In addition to eliminating expenses connected to carrying excess inventory, the company is also focused on driving cost savings from from strategic sourcing and vendor rationalization outside of its supply chain. Boyle emphasized that the company is “not cutting back on demand-creation investments.” He also said that cost savings initiatives will ramp up over the course of 2024 and 2025, with the full benefit realized in 2026. The goal of the initiatives is to “restores operating margins to a low-teens percent rate. We’ve achieved this level of operating margin performance before and we’re confident it’s achievable again,” Boyle said.
For the fourth quarter, net income dropped 26 percent to $93.3 million, or $1.55 a diluted share, on a net sales decline of 9 percent to $1.06 billion. Net sales were at the low end of guidance, and were driven primarily by the company’s wholesale accounts, which were down 17 percent in the quarter. “On-time fall 2023 shipments shifted a greater portion of sales into Q3 this year relative to last year,” Boyle explained. He also said that direct-to-consumer (DTC) sales fell 4 percent. DTC sales performed well during peak sales windows, such as Black Friday, but fell off during non-peak periods. In addition, brick-and-mortar sales were “relatively flat,” Boyle said.
In North America, net sales in the U.S. fell by 12 percent, while in Canada net sales were down 29 percent, but that was mostly because of on-time third-quarter shipments in 2023 relative to the year-ago quarter. Sales rose 7 percent in its Latin America/Asia-Pacific region, and Boyle said that the company expects “China to again be one of the fastest-growing parts of our business in 2024.”
For the full year, net income fell 19 percent to $251.4 million, or $4.09 a diluted share, on a net sales gain of 1 percent to $3.49 billion.
The company projected first-quarter net sales to be down 8 to 11 percent to a range of $730 million to $753 million, compared with $820.6 million in the same 2023 quarter. Diluted earnings per share (EPS) were guided to a range of 30 cents to 45 cents, versus 74 cents in the year-ago period.
The company also provided first-half projections, with net sales down 6 to 9 percent to $1.31 billion to $1.35 billion, versus $1.44 billion a year ago. The diluted EPS range is between 1 cent and 26 cents, versus 88 cents a year ago.
And for the year, the company expects net sales at between $3.35 billion to $3.42 billion, after factoring a decline of 2 to 4 percent, versus $3.49 billion a year ago. Net income was guided to between $207 million to $231 million, or diluted EPS at $3.45 to $3.85.
Columbia’s four major brands are Columbia, Sorel, Mountain HardWear and prAna.
Wall Street wasn’t thrilled with what they heard on the call.
Maurico Serna at UBS said the disappointing report “reinforces sell rating conviction.” While the company has a portfolio of solid outdoor brands, he said there is still downside risk to the company’s full-year 2024 outlook if demand fails to pick up in the second half, which could result in weaker sales and more aggressive discounting.
And while the outdoor and sports-inspired apparel and footwear market should rise 3 percent to 4 percent at a five-year compound annual growth rate, Serna said outdoor demand should moderate beyond fiscal year 2024 given the outsized growth during the pandemic. And he expects the company to face challenges from increasing competition in the category.
He also noted that Sorel is expected to underperform in Fiscal Year 2024, with a sales guidance of low-20 percent decline, which is below a flat outlook for the Columbia brand. “This weakness in Sorel implies footwear sales growth should lag apparel,” Serner concluded.
At TD Cowen, softlines analyst John Kernan has the equivalent of a “hold” on shares of the company’s stock. “Risks include rising competition across outerwear, footwear, and Columbia’s broader apparel categories. We view Columbia’s outlook as cautious for VF Corp., Under Armour and others,” he said. Kernan back in October expressed concern on weakening data for a number of outdoor apparel and footwear firms, including Columbia Sportswear.
