COLM: Bull By The Horns

I hate to show any enthusiasm over people losing their jobs, but I really like the 4% workforce cut Columbia announced after the close. By my math, we’re looking at about $100k per employee in net savings, or $0.15 per share (5% EPS accretion). Several factors to consider…

1) Timing: This was in the works when the company announced earnings just 2 weeks ago. Usually when a company announces a workforce cut it accompanies admission that business outright stinks. We all found that out 12 days ago when COLM reported an 11% decline it its backlog. The biz has not changed meaningfully since.

2) One reason the company is doing this now is not only because it should, but because it CAN. The latter has never been the case as COLM habitually stripped capital out of its P&L and balance sheet in an attempt to buoy margins. But over the past two years, SG&A has grown 2x the rate of sales, as COLM has shown greater commitment towards investing in its brands. One might argue that it is going the other way with today’s announcement. That’s fair. But the point I like about brand and infrastructure investment is that if the business slows, a company at least has levers it can pull and capital to redirect to stabilize business. COLM has never had that – until now.

3) Don’t forget that a workforce cut of this magnitude does not come lightly to this family-run business. COLM has resisted this in the past. They dipped their toe in the water w layoffs last year, and now are diving in. I respect the ‘hometown hero’ aspect of the culture – but when return on capital goes from 25% to 10% over 5 years, that’s probably being a bit too blind. Sight restored.

4) COLM is no stranger to down years—but the consensus never forecasted it. Now the Street is calling for a down year in ’09 – but next year I actually think earnings will be up. My estimates were ahead of consensus heading into 3Q, and my ’09 estimate is 13% higher than the Street.

5) Lastly, sentiment on this name smells rank. Over 30% of the float is short, the sell side is calling for a down year, and 91% of the ratings are not Buy.

For what it’s worth, words usually flow off my fingertips when I write comments on our Portal. But I had to stop several times throughout this note and ask myself the question “McGough, are you actually getting bullish???” While I still think there are plenty of Zeros out there, I definitely see value in names like this. So “am I getting more bullish?” Yes.

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