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Robert Stephens, CFA
Robert Stephens, CFA
Articles (230) 

Why Columbia Sportswear Has Growth Potential

The company’s investment prospects are encouraging despite retail sector uncertainty

September 11, 2019 | About:

Columbia Sportswear (NASDAQ:COLM) is adopting an increasingly innovative strategy that could boost its earnings growth outlook.

The retailer is investing in new technology that should enhance its competitive advantage and provide it with greater differentiation versus its sector peers.

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Increasing efficiency

According to its second quarter update, the company expects its Project CONNECT strategy to improve its efficiency through a reorganization of its operating model. It expects this to produce an increasingly consumer-focused business that is better able to respond to changes in the tastes of its customers.

Columbia Sportswear has started to see the benefits of its CONNECT strategy, according to its second-quarter update. For example, the business recorded a rise in its gross margin of 150 basis points, with it rising to 50% in the second quarter. It expects its gross margin to improve by a further 80 basis points in the current year, with a plan to expand its capacity and invest in improving its productivity.

Technological change

Columbia Sportswear is currently in the pilot phase of the implementation of its Consumer-First retail platform. The company expects its new retail platform to improve the shopping experience across its store network. It also anticipates that the ongoing investment it is making in its IT systems infrastructure will boost its online growth opportunities, according to its most recent annual report.

In addition, the company implemented its Experience-First mobile platform across its Europe-direct business in the second quarter. The platform includes a reimplementation of its e-commerce platform in order to improve its checkout, search and browsing experiences for customers.

Innovation

The company’s increasingly innovative products should resonate with a wider range of consumers that increases the size of its total addressable market. As part of this, it launched a new footwear platform called Shift in August 2019 that targets younger adults who seek a mix of functionality and innovative design.

The retailer’s limited-edition Star Wars jackets proved to be popular after going on-sale in its second quarter. They sold out in a matter of minutes, and provided cross-selling opportunities as a result of them driving increased footfall to its stores and to its website.

Columbia Sportswear is also developing unique technologies such as its Sun Deflector design that uses titanium dioxide dots to regulate the temperature of its products. This should differentiate its products versus its sector peers, and may enable it to gain market share.

Possible risks

The ongoing trade war between the US and China could lead to a challenging operating environment for the business. Its products sourced from China currently represent a low double-digit percentage of its total imports. Further US tariffs on imports from China could therefore impact on the company’s sales and profitability in fiscal 2020 onwards.

Alongside this, consumer sentiment has weakened since the start of the year according to the University of Michigan’s index. Consumer sentiment now stands at a level of XX, which is its lowest point since 2016. This could lead to lower demand for the company’s products as consumers trade down to cheaper options, or postpone their discretionary purchases where possible.

The company’s investment in its marketing strategy could mitigate the impact of weak consumer sentiment. It is focusing on intensification efforts within specific regions that are designed to increase its presence across a wider consumer demographic. They were undertaken in Houston and Chicago during the company’s 2019 fiscal year, and led to sales lifts in both cities.

In addition, Columbia Sportswear is increasing its investment in China. It bought out its joint venture partner in China in fiscal 2019 and refreshed its management team in the region. The business is seeking to optimize its distribution model in China, while it is investing in improving the range of its products that are available in the country. This could diversify its operations away from the US, as well as provide it with increasing exposure to China’s growing consumer goods market.

Outlook

In its next fiscal year, the stock is forecast to post a rise in its earnings per share of 9%, according to analyst consensus forecasts. Since it trades on a forward price-earnings ratio of 20, it could continue to beat the S&P 500 following its 3% outperformance of the index in the last year.

Disclosure: the author has no position in any stocks mentioned.

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