Columbia Sportswear Upgraded ahead of Q2 Results

Rating upgrade for Columbia Sportswear

On July 23, Columbia Sportswear (COLM) stock was up 2.7% after Bank of America Merill Lynch upgraded its rating to “buy” from “neutral.” Bank of America Merill Lynch believes that Columbia Sportswear’s valuation is in line with its peers, including Nike and Adidas. Plus, the investment firm is optimistic about the strength in Columbia Sportswear’s US wholesale apparel business and growth prospects in the footwear market. Bank of America is also positive about the healthy and consistent margin outlook due in part to Columbia Sportswear’s Project Connect program. Bank of America increased its price target for Columbia Sportswear stock to $130 from $112. The new price target indicates upside potential of about 24%.

Columbia Sportswear Upgraded ahead of Q2 Results

Expectations from upcoming results

Columbia Sportswear plans to announce its second-quarter results after the financial markets close on July 25. Notably, the company has exceeded analysts’ earnings expectations in seven out of the past nine quarters.

Analysts expect the footwear and apparel company’s adjusted EPS to decline to $0.01 in the second quarter of 2019 from $0.16 in the second quarter of 2018. The company’s investments in growth initiatives could weigh on its Q2 earnings. Analysts expect the company’s sales to rise 5.2% to $506.9 million in the second quarter.

Columbia Sportswear expects mid-single-digit sales growth in the second quarter. The company expects a small loss to breakeven EPS in the second quarter. It should be noted that Columbia Sportswear generally experiences its lowest sales volume in the second quarter.

Footwear maker Skechers (SKX) declared its second-quarter results on July 18. Second-quarter sales surged 10.9% to $1.26 billion. Skechers’ international and direct-to-consumer businesses drove top-line growth. The second-quarter adjusted EPS grew 36.1% to $0.49. Robust top-line growth and a lower share count due to share repurchases had a favorable impact on Skechers’ earnings.

Recap of previous results

Columbia Sportswear significantly exceeded analysts’ earnings forecast in the first quarter of 2019. First-quarter adjusted EPS grew by an impressive 39% to $1.07. Analysts expected EPS of $0.83. Higher sales, a rise in net interest income and the buyout of the company’s Chinese joint venture boosted the bottom-line growth.

First-quarter sales also grew 7.8% to $654.61 million and exceeded analysts’ forecast of $646.66 million. The company’s Sorel and Columbia brands drove its first-quarter sales. Columbia Sportswear experienced strength in the US wholesale as well as direct-to-consumer channels.

The company’s gross margin expanded to 51.4% in 2019’s first quarter compared to 49.3% in 2018’s first quarter. Operating margin grew 360 basis points to 13.4% on a reported basis.

Analysts’ recommendations

Following the upgrade by Bank of America, Columbia Sportswear stock was rated a “buy” by ten out of 14 analysts. Plus, four analysts had a “hold” recommendation. Columbia Sportswear stock has risen 24.8% on a YTD basis as of July 23. In comparison, stocks of peers Nike and Skechers have risen 16.9% and 73.4%, respectively, so far in 2019.

The 12-month average price target of $119.08 for Columbia Sportswear stock reflects an upside potential of about 13% compared to the closing stock price on July 23.

As of July 23, Columbia Sportswear was trading at a 12-month forward PE multiple of 21.8x. Analysts expect Columbia Sportswear’s sales to grow 9.2% to $3.0 billion in 2019. Analysts also expect adjusted EPS to rise 13.7% to $4.56 in 2019.

Columbia Sportswear expects its 2019 sales growth in the range of 6.5% to 8.5%. It expects EPS in the range of $4.40 to $4.55 and gross margin to improve by 80 basis points.

The company’s operating margin is expected to expand 20 to 40 basis points. This expansion is expected despite an estimated 40 to 60 basis point deleverage in Columbia’s selling, general, and administrative expense rate.

The company recently stated its opinion about the impact of additional tariffs on Chinese imports on its business. It is taking several measures to drive its sales, capture cost of sales efficiencies and expense savings through its Project Connect program. The company is also making investments to support the growth of its direct-to-consumer business.

Correction: An earlier version of this article suggested that the operating margin expansion would drive deleveraging of the selling, general, and administrative expense rate. This was a copy editing error.