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Robert Stephens
Robert Stephens, CFA
Articles (137) 

Why Columbia Sportswear Could Beat the S&P 500

The stock’s strategy appears to be improving

February 11, 2019 | About:

Increased investment in new technology could boost Columbia Sportswear Co.'s (NASDAQ:COLM) prospects. The company is investing in increased product innovation as it seeks to broaden its appeal among consumers. In addition, investments in new technologies are expected to improve the customer experience as well as strengthen its competitive advantage.

An improved marketing strategy has been successful in recent quarters. It is now expected to be rolled out into new locations as the company’s growth plan evolves. As part of this initiative, it is ramping up investments in its supply chain in order to improve its operational efficiency.

While a slowdown in China could threaten sales growth, the company is adapting to changing consumer tastes while investing in its customer experience.

Having risen 43% in the last year versus a 2% gain for the S&P 500, Columbia Sportswear could offer further growth potential.

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Investment

Investment in product innovation could catalyze the company’s financial performance. The release of its new winter technology, Omni-Heat 3D, won GearJunkie’s Gear of the Year award. Sales of the new technology have been strong, with the company now planning to incorporate it into a wider range of products.

Under a new management team, its footwear division is expected to release a range of new products, including its first platform innovation called Shift. Footwear is expected to become the company’s largest category as it seeks to rapidly gain market share in the $30 billion global industry. Columbia also intends to increase investments within its Sorel brand, where it is seeking to extend beyond the core winter boot category with new products. 

Investments in new technology include its Consumer First initiative. This is expected to deliver a more personalized and seamless experience for consumers across its global retail operations, including order management and point-of-sale systems. Its Experience First program is aimed at boosting the mobile customer experience, which encompasses the reimplementation of its e-commerce platform to improve checkout speed and search results.

Evolving business

A focused marketing strategy has contributed to sales growth in recent quarters. The company is investing in demand creation through the use of brand stories. It has also executed a number of "Key City Attack" strategies, which involve a mix of digital, in-store and out-of-home advertisements. Broad-based sales in Chicago grew as a result of the strategy. It is expected to be rolled out to other major cities in the near future.

Recent collaborations with Kith and Opening Ceremony have appealed to young urban consumers. Limited-edition products have helped to drive significant levels of traffic to Columbia's retail locations in recent quarters, with further releases planned.

Changes to Columbia Sportswear’s supply chain are expected to improve productivity and enhance service levels. It is forecasted to increase capital expenditures to between $130 million and $135 million in 2019, which is up from the $66 million recorded in 2018. The additional spending will be focused on investments in its direct-to-consumer business, facilities expansion and technology platforms as it seeks to improve its operational efficiency.

Risks

The slowdown in the Chinese economy is a risk to the future performance of the business. Retail sales in the country increased just 10 basis points to 8.2% in December versus the same period of the previous year. Retail sales in China are on a downward trend, which is expected to continue over the next couple of years. Columbia Sportswear has reported a changing retail environment and increased brand competition in China, which are expected to reduce its growth rate in the current fiscal year.

In response, the company is seeking to improve its appeal through an investment in its in-store experience, which includes fixture upgrades and full store renovations. It will also seek to differentiate itself from sector peers through the launch of a new casual outdoor lifestyle format that is aligned with current consumer trends. Its joint venture buyout provides the company with greater control over the direction of its Chinese business, which it continues to regard as a key growth area over the long term.

Verdict

An increasing level of investment in key areas of its business could transform Columbia Sportswear’s financial prospects. Investing in new technology could improve its efficiency as well as the customer experience. Product innovation may help to broaden its appeal, with further investments in new products expected in the near term.

An evolving strategy, which includes changes to its marketing strategy, are contributing to improved sales. The company is also making changes to its supply chain as it seeks to increase its operational efficiency.

While a slowdown in China is a potential threat to its future performance, it is reshaping its business in the country following its joint venture buyout. It is also making investments in China to enhance the customer experience.

Having outperformed the S&P 500 in the last year, the stock has investment potential.

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