Like Nike, Columbia Sportswear is a sportswear brand - focused on the outdoor and mountain niche. The company was born in Oregon, developed by a visionary entrepreneur and is still closely controlled by the founding family.
The Boyle family holds 53% of the capital. Fun fact: while Timothy Boyle (69) ensures the management of the company since 1978, its his mother Gertrude Boyle (95) who continues to chair the board.
Gertrude is the spouse of the late Neil Boyle, the founder of the company who died in 1970. The latter had fled Nazi Germany in 1937, emigrated to Oregon and, in the wake of that, bought Columbia which at the time was a hat factory.
At the start of the century, the company generates a turnover of $1 billion and is among the most profitable textile brands in the world. Its distribution is then mainly provided by large retailers such as Sears, Wal-Mart, and Target, and limited to North America despite a remarkable breakthrough abroad.
Its only several years later that Timothy Boyle, who is a witness of the success of rivals such as North Face or Patagonia, takes the initiative to completely reposition its offer: with the assistance of a freshly recruited scientific team, Columbia filed more than 200 patens and positioned itself as a pioneer in textile technology in extreme environments from then on.
These innovations allowed the brand to upgrade to a higher range, to boost its margins and to seduce a more demanding clientele. However, in parallel with a fierce competition, the Boyle family had to deal with another major strategic challenge: the decline of large general retailers - like Sears, which went bankrupt a couple of months ago.
This is why, on top of polishing the brands image and issuing good products, the company had to develop direct sales channels - both physically and online - as well as new distribution networks. Simple in theory, but the operational implementation is much more difficult in reality: there are plenty of failures that, as we all know, provide a prime hunting ground for private equity firms - for which buying and restructuring obsolete brands has long been one of the most profitable niches.
Not only has Columbia been able to escape this kind of doom scenario, but it has done so with panache: the sales have doubled between 2010 and 2018 (from $1.4 to $2.8 billion) while the profit exploded (from $77 to $268 million). The gross margin profile - a true sign of a brands seduction power - is close to 50%: this is more than mainstream fashion brands such as Nike, Gap or L Brands (Victorias Secret), but of course one or two notches below luxury brands such as Moncler or Hugo Boss.
The strong operating performance of the company must be put into perspective with its extraordinary financial position: the balance sheet is a true fortress - like the majority of the investments in the MarketScreener portfolios - since the current assets alone ($1.7 billion, two-thirds of which consist of cash and equivalents) largely cover all of the companys liabilities ($678 million).
This strength is the result of an exceptionally non-capital intensive business model that delegates the distribution of the brand to partners rather than to stores it owns - the company only has 261 stores, half of which are in North America: this is also a classic character trait of family-run companies, they are naturally less aggressive than companies in which the management takes risks with money that isnt theirs.
The other side of an excessive capitalization is that the management sacrifices an optimal return on equity - this remains, however, appropriate, since it hovers around 15% - on the altar of a comfortable long-term financial security. The return on capital - working capital and fixed assets - remains however prodigious, as the intrinsic quality of the business demonstrates.
Certain investors will regret what they without a doubt perceive as a wait-and-see attitude. Others - among which the author - will welcome the heritage logic of the founding family and remember that a capitalization with a higher leverage (almost) always ends up by turning against the company - as the recent difficulties of brands like Hugo Boss show us; always on point fashion-wise but penalized by too much debt.
The business model is also characterized by - we mentioned it earlier - a maximum operating leverage: with a fixed cost structure - that mainly consists of administrative and advertising costs - thats more or less stable, all the extra dollars earned with the gross margin (top line) find themselves in the net margin (bottom line); an increase in sales generates thus an exponential impact on the profits which is also well-reflected in the evolution of the share price over the past years.
Of course, the opposite is true too if the sales started to drop!
The companys accounting is conservative and the free cash flow is easily reconcilable with the net result when it isnt frankly superior to the latter. An appreciable advantage: besides the little capital thats mobilized, maintaining a modest distribution network of its own allows the company to keep a very limited need for working capital and to maximize its cash generation.
On a valuation level, the share price currently is $100, or, once the company value is adjusted by the excess cash, a multiple of around 23 times the profit of the previous financial year, and barely two times the expected sales for 2019. Please note: we retain the earnings per share here rather than the free cash-flow because the former usually is lower than the latter - this choice, therefore, seems conservative; for a more in-depth discussion on this topic, you can read our article Accounting profit vs. free cash-flow
More or less in line with the market - despite a potentially above-average growth profile - this valuation seems however very reasonable if the strong sales trend continues. By the way, on the private market, and in the interest rate environment that we have known for nearly twenty years, a growing brand typically trades at higher multiples.
Columbias future will depend on its success in Asia, and on the returns it will get from its online investments. The analysts who follow the company - whose consensus is updated in real-time by MarketScreener - believe in these perspectives at least as much as the companys management: the latter is known for its prudence and its common sense and launched a share buy-back plan of up to $200 million in 2018 - which is essentially the profit of the year - at an average price of $85 per share.
This probably means that the management considers its share undervalued at this price - which of course doesnt mean that this is the case.
Lets note that Columbias sales are, unsurprisingly, subject to a rather district seasonal impact: this is why investors who follow timing methods if they are interested in the company, will perhaps prefer a mid-year entry point.
Columbia Sportswear Company is an opportunity on the crossroads of growth and momentum and enters as such the MarketScreener USA Portfolio