Friday, March 23, 2007

Calls of Note Part 1

Two tier-1 firms offering their views on Columbia Sportswear (NASDAQ:COLM) today.

- Merrill Lynch notes that as part of our Retailing Leaders Conference, they hosted an investor discussion with Columbia Sportswear's CFO Bryan Timm, VP of Sales Mick McCormick, and Director of Investor Relations David Kiser.

Firm notes the company has made significant changes in its footwear organization since the departure of former Vice President Brad Gebhard last October, overhauling the staff (including 100% of the senior merchandising team, the design leadership, as well as sales and distribution staff) and realigning production processes. Newly developed product will have a greater casual/lifestyle focus, with more year-round offerings (currently primarily cold weather products). The first line to incorporate these changes will be the spring '08 offering, which should post some good growth against slight declines in spring '07.

Firm sees moderate fall backlog growth, in the 6-8% range. They continue to see relatively moderate fall backlog growth, due to a warm winter in the US and Europe, and the likelihood that footwear orders will be down y/y. (While retail inventories in the US have now cleared given a much colder and wetter February, they got the sense that European outerwear inventories remain thick.) This represents a deceleration from last fall's 8.7% constant dollar organic backlog, which included low single digits growth in footwear orders (keep in mind that footwear SKUs will be down 33% for fall '07).

Management pointed out some key differentiators between the two brands. North Face is far more of a fashion brand than Columbia (which is more focused on authenticity and value) and has a very small sportswear business (39% of Columbia's sales, and up 18% this past fall). While North Face does provide markdown support to retailers (Columbia does not), management also pointed out that Columbia provides much higher initial mark-ups to retail customers.

Firm thinks investors will have one more big opportunity to buy COLM, after March results, assuming conservative backlog growth and guidance. They reiterate Buy and call COLM their best retail idea.

- Morgan Stanley says they're getting more cautious on COLM's order backlog. Recent sales data and discussions with retailers for COLM's outerwear business cast some doubt as to the quality of current order backlog levels -- a key stock driver. While market share in core Outerwear (50%+ of EBIT) is rising nicely yy, they're seeing 20%+ declines in avg price point suggesting that retailers are heavily discounting product to clear the shelf for spring merchandise. Not a shocker given the rough winter for the cold-weather apparel business, but never a good data point to see for an apparel brand.

Why This is Important: By firm's math, 65% of COLM's sales, and nearly 75% of annual cash flow comes from the fall selling season. Advance orders are being booked today, and reported by COLM next month w/1Q EPS. The North Face (owned by VFC) is not slowing down nor are smaller brands like Spyder and Marmot (owned by K2) that are gaining share. In addition, they're seeing new competitors like Merrill (owned by Wolverine Worldwide) get into the Outdoor space. Furthermore, there's an overinventoried US retail base that firm thinks is only holding margin steady due to vendor markdown support, and yet COLM is one of the few brands that does not offer such margin support. When all is said and done, they think that the outerwear space will be a share-grab for fall '07 (orders being placed now), and firm's concerned about COLM's relative positioning.

Notablecalls: Ouch! COLM shares are going to get hurt today. While Merrill seems to be positive at the first glance - best retail idea after all - they are also not expecting to see strong backlog that seems to be priced into the stock. And backlog is just about everything this stock is about. Actionable!!

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