COLM: Risk/Reward Is Shaping Up Nicely

Here’s some irony for you… Yesterday I was in my office reviewing top line and cash flow trajectories for all the companies I track in retail. One that stood out to me as a potential positive inflection was Columbia Sportswear. No, the irony is not that I’ve been a perpetual bear on this model, but that about an hour later Keith (who has the uncanny ability to call key stock levels on a massive number of tickers) sent me an email saying ‘COLM looks like a lay-up under $30 – long side.’

Mark my words, COLM WILL miss the quarter and management WILL guide down. I’m at $1.75 for 2H08 EPS vs. the Street at $2.01. But with short interest at an all time high of 33% of the float, do you think that just MAYBE the market knows this?

Also, I like the fact that trends in the channel are picking up for COLM at a point when the company is just beginning to anniversary 4 quarters of extremely tough EBIT margin compares. It is gaining share on the margin from VFC’s The North Face, and its US Outdoor division (36% of sales and nearly 50% of cash flow) has picked up since COLM last issued guidance. The kicker for me is the P&L compares are so rough, in part, due to a meaningful increase in SG&A spend to up the ante on product and marketing – something I have long knocked this company for. SG&A ratio will have gone from 28% to 34% over 3 years. That’s the exact level that this company needs to kick start growth.

If I assume that EBITDA is down another 20% in 2009, I get to sub-7% margins and a 5.6x EBITDA multiple. That’s not cheap relative to some other names in the space (esp one with 22% of sales in Europe), but with margins having gone from 16% to 7% over 3 years as COLM repeatedly shot itself in the foot, I think that the risk/reward is starting to point higher as it relates to cash flow. Heck, at this point a simple factor like a cooler than expected winter would get the cash flowing.

Please see our COLM margin walk below for detail on the progression of key P&L components. See our follow up post for key market share trends in key categories.

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