Keith and I just had a healthy debate on COLM. I think it’s shaping up as a fundamentally positive risk/reward. His near-term inclination is to wait for the print. It comes down to duration.
Why I’m Liking COLM.
This is a perennially underperforming business – for good reason. It managed the transition from a small family-run specialized model into a larger mass-market portfolio of brands while tightening its wallet and starving its content of dollars needed to grow. As such, a host of brands including The North Face (VFC), Spyder, Marmot, and dozens of others have been nibbling away at its share. COLM has maintained a decent-enough top line growth rate overall, but margins came down to 10% from 20% 5 years ago as it lost relevance and ability to hold price.
But at the beginning of last year, COLM started to plow more capital into its brands – both R&D and marketing – and is finally putting capital to work in growing its footwear business. For the record, COLM has only a $200mm footwear business – which is a joke when considering that it owns brands like Columbia, Sorel, and Mountain Hardware. Just because it had 20% margins once it does not mean it is owed them again. In fact, COLM grossly over-earned then. But I think that the resources are finally being put in place that will prove this to be a margin level from which COLM can climb. All we need is flat margins and this name works. I can find a point or two of upside.
As for the business, it goes without saying that it is not good today. But with 1) the Street expecting a 50% earnings decline in the quarter, 2) a 5% earnings slip for 2009 (the first time ever that COLM went into a year w down Street expectations), 3) only 1 buy rating on the stock, 4) 35% of the float short the stock, and 5) trading at 4.5x EBITDA – I think that the results and outlook need to be really really bad for this stock to tank from here.
Fundamentally… Yes, I am concerned that the top line compares for the next 2 quarters are tough as COLM anniversaries a 4-5% FX boost, as well as the launch of Techlite and Omni-Shade – which is represented in the -11% spring backlog already reported. This should be offset in part by sales from the additional 15 outlets in COLM’s plan. Margins, however, go up against extremely easy comparisons (-4-6pts last year) in 1H at the same time it will be benefitting from the $7-$8mm from recently-announced headcount cuts. Some of this will go to additional lease expenses, but the reality is that there’s never been a better time to negotiate with landlords. I’m usually not a fan of new stores for brands like this, but the timing lowers the sales hurdle needed to leverage occupancy costs over the long-term. Finally, I loop this into what should be a decline in capex for ’09, and inventory relative to sales (see SIGMA chart below), and this all adds up to be a pretty nice story in this tape.
Oh, and by the way – inventory of cold weather gear is not exactly fat out there. After a string of mild winters, it’s been very cold in key regions of the US relative to past years. I hate bringing up the weather card, but it has always been a factor here, and that fact remains.
This company has a lot of wood to chop, but for every negative fundamental factor, I can come up with two positives. It is not a 'big idea' for me here, but the risk/reward can't be ignored.