Why Columbia Sportswear’s Operating Margin Contracted in Q3



Gross margin expansion

Columbia Sportswear’s (COLM) gross margin expanded to 48.2% in the third quarter compared to 46.7% in the third quarter of 2017. Excluding the impact of a new accounting standard, the company’s adjusted gross margin expanded 110 basis points on a year-over-year basis to 47.8%. The impressive expansion was the result of strong DTC (direct-to-consumer) sales, the impact of a favorable full-price sales mix, and foreign currency hedges.

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Nike’s (NKE) gross margin expanded 50 basis points to 44.2% in the first quarter of fiscal 2019 as a result of better pricing, a positive full-price sales mix, and higher Nike Direct margins. Skechers’ (SKX) gross margin expanded 40 basis points to 47.9% in the third quarter driven by several factors, including increased retail prices and a favorable segment mix in its domestic business.

Third-quarter operating margin contracted

Columbia Sportswear’s operating margin contracted 20 basis points to 16.2% in the third quarter due to accelerated spending. On an adjusted basis, its operating margin contracted 90 basis points to 16.0% owing to investments in support of the company’s growing DTC business, expenses associated with demand creation, and higher incentives.

Margin outlook

Following its strong operating performance, Columbia Sportswear raised its gross margin forecast for 2018. The company expects its 2018 gross margin to expand up to 165 basis points compared to 2017. Its previous outlook had indicated a gross margin expansion of up to 140 basis points. On an adjusted basis, the company expects a gross margin expansion of up to 90 basis points.

Columbia’s operating margin for 2018 is expected to be in the 11.2%–11.3% range on a reported basis compared to the previous outlook of 10.6%–10.8%. Its adjusted operating margin is expected to be in the 11.8%–11.9% range. Despite the deleveraging of its selling, general, and administrative expenses, the company expects its adjusted operating margin to expand in 2018 due to profitable growth and cost control.

We’ll look at Columbia Sportswear’s valuation in the next article.


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