It's that time of year again - time to buy new winter coats, boots and other accessories. But should you buy the stock of one of the biggest outdoor apparel companies?
Columbia Sportswear Company (COLM, Financial) has come to my attention because I need a new coat—and because the name came up when I used the GuruFocus All-In-One-Screener to look for mid-cap companies with financial strength and profitability ratings of at least 7 out of 10. With a $6 billion market cap, Columbia currently enjoys ratings of 8 out of 10 on both measures, though the valuation story paints a murkier picture.
Business overview
Columbia has four main lines of business:
- The namesake Columbia® brand focuses on clothing for outdoor activities. The company described it in its 10-K for 2019 as follows: "Our Columbia brand is known for authentic, high-value outdoor apparel, footwear, accessories and equipment products designed with innovation, function, and quality suited for all seasons, activities and locations."
- SOREL® refers to its footwear, which mainly targets "fashion-forward savvy women," as well as men and youth.
- Mountain Hard Wear ® - mainly for climbers, this segment includes premium apparel, accessories and equipment designed to meet the high-performance needs of climbing enthusiasts and to satisfy climbers' everyday lifestyles.
- The prAna® brand focuses on "clothing for positive change" and "adventurous spirits in stylish, sustainable and versatile gear."
Columbia distinguishes itself from its competitors at two levels. First, it frequently adds new features to its products, making them increasingly valuable to consumers. Second, it has trademarked names and logos, which it "vigorously" defends.
Competitors include the much larger VF Corporation (VFC), the maker of North Face apparel (VF designs and manufactures numerous other types of clothing as well). It also faces what it called "competition from our wholesale customers who, under their own private brand names, produce and distribute similar products to our target consumers through their own retail stores and e-commerce businesses".
While economic headwinds have affected Columbia's fortunes this year, they have been mitigated to some extent by its innovation and adaptation. For example, it reported in its Q2 2020 earnings release that it had been able to increase e-commerce net sales by 72% year-over-year.
Financial strength
One of the reasons Columbia gets such a robust financial strength rating is that it has little debt in comparison to its assets and its operating income.
A cash-to-debt rating of 1.00 or higher shows a company has enough cash resources to completely pay off its debt if it so chooses. Columbia has that. Similarly, its interest coverage is very high, demonstrating it earns enough operating income to pay its interest expenses 276 times over.
It carries short-term loans valued at $174.4 million. It did not need to take on any extra short-term debt in the first or second quarters of this year, despite setbacks from the coronavirus, and it carries no long-term debt.
Both the Piotroski F-Score and the Altman Z-Score are strong, and the company earns a higher return on invested capital than its weighted average cost of capital. This makes it a value creator, which in turn should drive up the share price over time.
Profitability
Again, the company gets a high rating in profitability, outperforming most of its competitors and peers in the manufacturing – apparel and accessories industry. At the same time, it is currently underperforming its own previous metrics, suggesting that this used to be a company that beat the competition even more forcefully. Can it get back to that position again?
A revenue growth rate averaging nearly 10% per year over the past three years indicates Columbia is finding new ways to make money even though it is in a mature industry. Both profitability measures, Ebitda and earnings per share, are roughly double the revenue growth rate, suggesting the company is finding ways to become more efficient.
There's some question in my mind about the existence of a moat. I'm going to presume the company has one based on its brand names and ability to find new ways to make its apparel more valuable to consumers. As Robert Stephens pointed out in the GuruFocus article, "Why Columbia Sportswear Has Growth Potential," it is capitalizing on both product innovations and operating innovations.
On the other hand, it competes with not only big companies but also with its own wholesale customers who develop their own branded products. There is also the issue of ever-changing consumer preferences; miss a step and an apparel company could take a serious fall.
Overall, I believe Columbia has a narrow moat, based on qualitative factors. That appears to be consistent with the quantitative factors, using the moat characteristics of the Macpherson model. Over the past 10 years, its median return on equity has been 10.29% and its median return on tangible equity has been 11.16%. Both are below the 10-year 15% threshold set by the Macpherson model, but are still in the double-digits.
Valuation
Based on its current stock price, Columbia is considered fairly valued by the GuruFocus Value chart. However, we get a range of different valuations from other methods.
Its price-earnings ratio of 34.34 is high when compared with its 10-year median of 22.99. Its PEG ratio is also high at 2.28 (fair value is considered 1.00). Overvaluation is also the verdict of the discounted cash flow (DCF) calculator:
The DCF assessment is based on a predictability rating of 3.5 out of 5 stars, which makes it reasonably reliable.
With those differences, let's look at a 10-year price chart of the stock:
The recent pullback brought the price below the trendline, which I would say introduces a third possibility—that Columbia is modestly undervalued. Perhaps our best option is to split the difference and concur with the GF Value calculation that the stock is fairly valued.
Dividends and share buybacks
With the onset of Covid-19, Columbia suspended both its dividend and its share buybacks. It seems safe to say no one was counting on either of these returns to shareholders to make or break a buy/don't-buy decision. They were both quite low to begin with; this company focuses more on growth and capital gains.
Gurus
Earlier this year, gurus were net buyers of Columbia stock, but since then have cooled on the prospects:
Three gurus currently have positions in Columbia. Pioneer Investments (Trades, Portfolio) has the largest stake with 133,604 shares, good for 0.20% of shares outstanding. It added 7.27% to the investment in the second quarter. Ray Dalio (Trades, Portfolio) of Bridgewater Associates added 75.49% to his holding in the most recent quarter for a total of 6,051 shares. Jeremy Grantham (Trades, Portfolio) of GMO LLC cut his holding by almost 9% to finish the quarter with 5,159 shares.
Conclusion
Management at Columbia Sportswear has done a good job over the past decade, giving us confidence it can generate more of the same over the next five to 10 years (and after we get past the coronavirus and economic uncertainty). The company has taken a short-term hit but was strong enough going into the troubles that it has been able to ride them out so far.
The company is financially strong and profitable. Valuation, though, is more of an issue. Is it fairly valued as the GF Value indicator suggests, or overvalued as some of the other metrics indicate? Investors will have to determine that for themselves.
What we can sure of is that income investors will find nothing of value in Columbia; even after its dividend is reinstated it will likely be low. Value investors might like the absence of debt but may want to wait for a more significant pullback before they can identify a margin of safety. I think growth investors, on the other hand, may see this as a potential entry point.
Disclosure: I do not own shares in any of the companies named in this article.
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