Columbia Sportswear Stock: Long Term Winner (NASDAQ:COLM)

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Investment thesis

Columbia Sportswear Company (NASDAQ:COLM) is one of the most stable players in the apparel industry. While gross margin contracted 170 basis points in the last quarter, Columbia’s gross margin remains remains on par with competitors like VF Corp. (VFC) and well above other apparel sellers like American Eagle (AEO). In addition, net sales for the quarter rebounded well and there is a dividend yield of 1.6%. SOREL (Columbia’s footwear brand) also continues to grow, and there has been widespread strength across the international business.

Columbia’s business is one of the best, the hardest part is figuring out what price to invest. The current price of $75 is quite good, however, a better price would be $70. Columbia has previously said it expects the second quarter to be weak, and it has consistently been its weakest quarter. However, based on current economic conditions, Columbia may be better positioned to weather a recession, if one occurs, based on its performance during the 2008 financial crisis. Overall, Columbia is a winner. long term with some short term headwinds.

Numbers

Columbia’s overall net sales are up 2.7% for fiscal 2021 compared to 2019. This compares to an 8% increase from 2018 to 2019. Disregarding 2020 growth rates due to the nature of this year, Columbia has rebounded quite well. Compared to competitor VFC, Columbia is experiencing a similar recovery with similar revenue growth rates. They are both valued at ~13 P/E, with one of the only differences being the dividend yield. Columbia’s dividend yield is 1.6% and VF’s dividend yield is 4.2%. Besides Patagonia, which is a private company, Columbia’s biggest competitor remains VFC’s The North Face brand. Columbia’s international sales are up across the board, with net sales in LAAP up 14% and EMEA up 42%. These figures reflect increasingly strong activity, and e-commerce activity also grew by double digits at 21%. Wholesale and DTC both rose 22%.

The biggest surprise of the quarter was Colombian footwear brand SOREL, posting the most impressive growth rate at 37%. Although it is a smaller brand with more growth opportunities, it is important to Columbia’s broader diversification and enables more revenue streams beyond the Columbia brand.

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Margins

One of the main reasons Columbia shares have fallen to these levels is shrinking gross margins. Gross margin currently sits at 51% after falling 170 basis points. This was attributed to transportation costs. This can be seen as a temporary headwind as supply chains are sorted. However, Columbia’s margin was also offset by positive factors like a weaker promotional environment.

In Columbia’s latest 10-K they explained that –

In 2021, we operated in an extremely low promotional environment…We expect these trends to remain favorable into early 2022 and expect a gradual return to a more normalized promotional environment…For 2022, we do not expect these indicators to return to known levels in 2019 and previous years. (SEC filing).

Therefore, for the remainder of fiscal 2022, they should benefit from a favorable promotional environment. Columbia also expects another 130 basis point decline in gross margin to 50.3%. Even at 50.3%, Columbia’s gross margin is still significantly higher than most of the apparel industry, which sits at around 40%.

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Forecasts and economics

One of the best articles I read this week was in The Economist titled “America’s Next Recession”. The gist of the article is that a recession is more than possible, but won’t be as bad as 2020 or 2008-2009. “Since 1955, rates have risen as rapidly as they will this year through seven business cycles. In six of them, recession followed within a year and a half” (The Economist). The author then predicts that a recession is imminent by the end of 2024. This is important in determining the best price to buy Columbia. Columbia’s stock price has already fallen significantly and is rising again. However, management has already issued guidance that the next quarter will be far from pretty due to Russia and China and historically the second quarter is their worst performing quarter. Columbia will release its second quarter results on August 9, 2022.

For now, I think Columbia’s stock price will move within 5% of the current price of $75. It’s not a bad time to buy stocks. However, I think an even better time might be to buy after Q2 earnings or even when the stock hits $70 again. Based on the 6-month price chart, the stock has touched $80 twice and has yet to break above that resistance level. Due to changes in fall shipments, revenue growth is expected to be stronger in the third quarter. While this article from The Economist predicts a mild recession by the end of 2024, it’s important to remember that there is money to be made by then.

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Additionally, should a recession hit lightly or not, Columbia has proven itself capable of withstanding a recession. From 2008 to 2009, Columbia suffered a 6% decline in net sales and a fractional reduction in gross margin (SEC Filing). In terms of retail players, Columbia is one of those with the most flexibility to weather a recession, in part due to higher commodity prices.

Technical analysis

Columbia bottomed around $70 and currently sits at $75, a jump of 7% from the 52-week low. The RSI remains at moderately bought levels at around 40, and the 200-day SMA is well above the 50-day SMA. While the 200-day SMA is above the 50-day SMA, which is a traditionally bearish sign, there is little indication that Columbia’s price is moving below $70. Especially since a lot of bad news has already been priced into stock prices, and the last time Columbia shares fell below $70 was in 2017, when earnings were much lower.

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Data by YCharts

Conclusion

Columbia remains a long-term winner and is attractive at these prices. However, given the consensus that has been building in the next quarter, it might be better to buy some stocks after the second quarter or at the $70 buy target. Although Columbia has suffered some margin contraction, they still have a fairly high margin of 50%, and with a P/E of 13, the valuation is solid. Current economic forecasts point to headaches ahead, but Colombia is uniquely positioned to weather the storm and I think it’s a future winner.

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