Columbia Sportswear Company Reports First Quarter 2018 Financial Results; Raises Full Year 2018 Financial Outlook

Columbia Sportswear Company (NASDAQ: COLM) today announced record net sales of $607.3 million for the quarter ended March 31, 2018, an increase of 12 percent (8 percent constant-currency), compared with net sales of $543.8 million for the first quarter of 2017. Non-GAAP net sales of $599.0 million increased 10 percent (7 percent constant-currency).

First quarter 2018 net income increased 25 percent to a record $45.1 million, or $0.64 per diluted share, compared with first quarter 2017 net income of $36.0 million, or $0.51 per diluted share. Non-GAAP first quarter 2018 net income increased 48 percent to $54.5 million, or $0.77 per diluted share, compared with non-GAAP first quarter 2017 net income of $36.9 million, or $0.52 per diluted share.

President and Chief Executive Officer Tim Boyle commented, "We are pleased to report better than expected first quarter net sales and profitability led by strength in our direct-to-consumer ("DTC") businesses, growth in our wholesale businesses, including a return to growth in U.S. wholesale, and the favorable effect of strengthening foreign currencies relative to the U.S. dollar. Gross margin exceeded expectations, and we maintained SG&A discipline while continuing to invest in our strategic priorities."

"We are also pleased to increase our full year 2018 financial outlook as a result of better than expected first quarter net sales and profitability, higher than initially planned Fall 2018 advance wholesale orders, including continued improvement in U.S. wholesale net sales across all of our brands, and the favorable effect of strengthening foreign currencies relative to the U.S. dollar. When considering our plans for the balance of the year, we have made the decision to accelerate investment in our strategic priorities."

"First quarter 2018 net sales and earnings results, as well as healthy advance orders for Fall 2018 across our regions demonstrate the power of our global brands and our initiatives to become a more brand-led and consumer-focused organization. Our powerful balance sheet, with $808.2 million in cash and short-term investments, and no long-term debt, provides the flexibility to invest in the business as our major markets evolve. It is from this position of strength and confidence that we are accelerating investment in our strategic priorities to:

• drive brand awareness and sales growth through increased, focused demand creation investments;
• enhance consumer experience and digital capabilities in all our channels and geographies;
• expand and improve global direct-to-consumer operations with supporting processes and systems; and
• invest in our people and optimize our organization across our portfolio of brands."

First Quarter 2018 Financial Results

(All comparisons are between first quarter 2018 and first quarter 2017, unless otherwise noted).

Net Sales

First quarter 2018 consolidated net sales increased 12 percent (8 percent constant-currency) to a record $607.3 million. Non-GAAP net sales increased 10 percent (7 percent constant-currency) to $599.0 million.

Geographies (See "Geographical Net Sales" table below)

• U.S. net sales increased 9 percent, attributable to high-teens percent growth in DTC and low-single-digit percent growth in wholesale. The company operated 130 U.S. retail stores at March 31, 2018 compared with 120 at the same time last year.
• Latin America Asia Pacific ("LAAP") net sales increased 11 percent (5 percent constant-currency) primarily due to the effect of the new revenue accounting standard. LAAP non-GAAP net sales increased 4 percent (2 percent decrease constant-currency) driven by growth in Japan, China, and Korea, partially offset by declines in LAAP distributor net sales.
• Europe Middle East and Africa ("EMEA") net sales increased 30 percent (15 percent constant-currency) primarily driven by low-30 percent growth (mid-teens percent constant-currency) in Europe-direct and modest growth with EMEA distributors.
• Canada net sales increased 11 percent (6 percent constant-currency), largely driven by DTC.

Brands (See "Brand Net Sales" table below)

• Columbia brand net sales increased 13 percent (10 percent constant-currency) to $508.8 million.
• SOREL brand net sales increased 13 percent (10 percent constant-currency) to $30.8 million.
• prAna brand net sales increased 9 percent to $42.3 million.
• Mountain Hardwear brand net sales decreased 12 percent (14 percent decrease constant-currency) to $24.4 million.

Product Categories (See "Product Category Net Sales" table below)

• Apparel, Accessories and Equipment net sales increased 11 percent (9 percent constant-currency) to $490.0 million.
• Footwear net sales increased 13 percent (8 percent constant-currency) to $117.3 million.

Channels (See "Channel Net Sales" table below)

• Wholesale net sales increased 5 percent (1 percent constant-currency) to $343.9 million.
• DTC net sales increased 23 percent (20 percent constant-currency) to $263.4 million.

Profitability

Record first quarter 2018 operating income of $59.3 million, or 9.8 percent of net sales, increased 24 percent compared to operating income of $48.0 million, or 8.8 percent of net sales, in the first quarter of 2017. Non-GAAP first quarter 2018 operating income increased 43 percent to $70.3 million, or 11.7 percent of net sales, compared to non-GAAP operating income of $49.3 million, or 9.1 percent of net sales, in the first quarter of 2017.

Record first quarter 2018 net income increased 25 percent to $45.1 million, or $0.64 per diluted share, compared with net income of $36.0 million, or $0.51 per diluted share, in the first quarter of 2017. Non-GAAP first quarter 2018 net income increased 48 percent to $54.5 million, or $0.77 per diluted share, compared with non-GAAP net income of $36.9 million, or $0.52 per diluted share, in the first quarter of 2017.

Taxes

First quarter 2018 income tax expense was $12.6 million, resulting in an effective income tax rate of 20.6 percent, compared to $9.8 million, or 20.1 percent, in the first quarter of 2017.

Excluding a $2.6 million income tax benefit associated with Project CONNECT and $1.0 million in provisional income tax expense associated with the TCJA, non-GAAP first quarter 2018 income tax expense was $14.2 million, resulting in an effective income tax rate of 19.6 percent.

Excluding a $0.4 million income tax benefit associated with Project CONNECT, first quarter 2017 non-GAAP income tax expense was $10.2 million, resulting in an effective income tax rate of 20.4 percent.

Balance Sheet

At March 31, 2018, cash and short-term investments totaled $808.2 million, compared to $590.5 million at March 31, 2017.

The enactment of the TCJA and the resulting change to a territorial taxation system provides us with significantly more flexibility to repatriate foreign cash, and as a result we were able to repatriate $219.6 million of foreign cash to the United States in early April 2018.

Consolidated inventories increased 2 percent to $406.0 million at March 31, 2018 compared to $398.8 million at March 31, 2017, including an $18.2 million decrease driven by a balance sheet reclassification of the estimated cost of inventory associated with sales returns into prepaid and other current assets under the new revenue accounting standard. Excluding the impact of this classification change, consolidated inventories increased 6 percent compared to March 31, 2017.

Cash Flow, Share Repurchases and Dividends

Operating cash flow for the three months ended March 31, 2018 was $77.4 million, compared to $88.2 million in the three months ended March 31, 2017.

Capital expenditures totaled $12.3 million in the quarter ended March 31, 2018, compared to $11.3 million in the quarter ended March 31, 2017.

During the first quarter of 2018, the company repurchased 235,497 shares of common stock for $18.1 million, or an average of $76.84 per share, and paid $15.5 million in dividends.

At March 31, 2018, approximately $119.8 million remained available under the current stock repurchase authorization, which does not obligate the company to acquire any specific number of shares or to acquire shares over any specified period of time.

The board of directors authorized a regular quarterly cash dividend of $0.22 per share, payable on May 31, 2018 to shareholders of record on May 17, 2018.

Updated Full Year 2018 Financial Outlook

All projections related to anticipated future results are forward-looking in nature and are subject to risks and uncertainties which may cause actual results to differ, perhaps materially. Projections are predicated on normal seasonal weather globally. In addition, our updated full year 2018 financial outlook assumes that current macroeconomic and market conditions in key markets do not worsen.

The company's annual net sales are weighted more heavily toward the Fall/Winter season, while operating expenses are more equally distributed throughout the year, resulting in a highly seasonal profitability pattern weighted toward the second half of the year.

The company currently expects 2018 net sales growth of approximately 8.0 to 10.0 percent (prior 5.5 to 7.5 percent), compared with 2017 net sales of $2.47 billion. The company expects non-GAAP net sales growth of approximately 6.5 to 8.5 percent (prior 4.0 to 6.0 percent) which excludes approximately $40 million in net sales associated with the new revenue accounting standard.

The company expects full year 2018 gross margin to improve by up to 140 basis points and non-GAAP gross margin to improve by up to 60 basis points, excluding an approximately $40 million benefit to gross profit associated with the new revenue accounting standard.

The company expects SG&A expenses to increase at a rate faster than net sales, resulting in approximately 150 to 170 basis points of SG&A expense deleverage (prior 170 to 190 basis points), and non-GAAP SG&A expense deleverage of approximately 30 to 50 basis points (prior 40 to 50 basis points), excluding approximately $40 million in SG&A expenses associated with the new revenue accounting standard, and approximately $23 million (prior $27 million) in Project CONNECT program expenses and discrete costs.

Based on the above assumptions, the company expects 2018 operating income between approximately $275 million and $285 million (prior between $263 million and $273 million), and non-GAAP operating income between approximately $299 million and $308 million (prior between $290 million and $300 million), resulting in operating margin between approximately 10.3 and 10.5 percent (prior between 10.1 and 10.3 percent), and non-GAAP operating margin between approximately 11.4 and 11.5 percent (prior between 11.3 and 11.5 percent).

The changes in revenue and expense classification associated with the new revenue accounting standard are expected to have a 15 to 20 basis point negative effect on reported operating margin rate for 2018, but no effect on reported operating income.

The company expects an estimated full-year effective income tax rate of approximately 22 percent, which reflects a lower U.S. federal statutory income tax rate as a result of the TCJA and may be materially affected by further refinement of the company's 2017 TCJA provisional estimates as well as changes in the company's geographic mix of pre-tax income and other discrete events that may occur during the year.

The company expects 2018 net income between approximately $213 million and $220 million (prior between $203 million and $211 million), and non-GAAP net income between approximately $231 million and $238 million (prior between $224 million and $231 million), or diluted earnings per share between approximately $3.01 and $3.11 (prior between $2.88 and $2.98), and non-GAAP diluted earnings per share between $3.27 and $3.37 (prior between $3.17 and $3.27).

With respect to our 2018 financial outlook, non-GAAP financial measures exclude net sales of approximately $40 million, with an offsetting increase in SG&A expenses of approximately $40 million associated with the new revenue accounting standard, as well as Project CONNECT program expenses and discrete costs of approximately $23 million, $18 million net of tax, or $0.25 per diluted share (prior $27 million, $21 million net of tax, or $0.29 per diluted share). In the first quarter of 2018, we incurred $1.0 million, or $0.01 per diluted share, in incremental provisional income tax expense related to the TCJA.