Founded in 1938 in Portland, Oregon, as a small, family-owned, regional hat distributor and incorporated in 1961, Columbia Sportswear Company has grown to become a global leader in the design, sourcing, marketing, and distribution of active outdoor apparel, footwear, accessories and equipment. Columbia Sportswear (referred to hereafter as Columbia) designs, develops, markets and distributes active outdoor apparel, footwear, accessories and equipment under Columbia, Mountain Hardwear, Sorel, OutDry, Pacific Trail and Montrail brand names.
Columbia is one of the largest outdoor apparel and footwear companies in the world and their products have earned an international reputation for innovation, quality and performance. Columbia is well diversified both geographically as well as in terms of the product categories it offers.
The company maintains its operations in the US, Europe, the Middle East and Africa (EMEA), Latin America and Asia Pacific (LAAP), and Canada. In 2011, the company operated 43 outlets retail stores and 8 branded retail stores in the U. S. , 7 outlet retail stores and 3 branded retail stores in Europe, 2 outlet retail stores in Canada, 40 branded retail stores in Japan and 13 outlet retail stores in Korea. Columbia is headquartered in Portland, Oregon and employs about 3,626 people. The company expanded its e-commerce (has been implemented in all of its other geographical subsidiaries) operations across Europe in fall 2011. Its European launch includes the UK, Germany, France, Italy, Netherlands, Belgium, Austria, and Spain.
OPERATIONS
Columbia does not own or operate manufacturing facilities and virtually all of their products are manufactured to the company’s specifications by independent factories located across the world. The strategy enables the company to substantially lower their capital expenditures and avoid the risks and costs associated with operating large production plants and labor forces. It maximizes the company’s flexibility in terms of managing their world-wide supply chain. However, it doesn’t not assure adequate or timely production capacity.
With over 13 manufacturing liaison offices in a total of seven Asian countries and several in North America, personnel in these offices are considered direct employees of Columbia, and are responsible for overseeing production at the various independent factories across the world. Besides overseeing independent production, a significant amount of man power is committed to expanding the global reach of the firm. Over the last year, Columbia has made strategic operational investments to support its growth.
The company expanded its retail store base and increased its annual marketing investment transitioned to predominantly in-house sales teams in North America and Europe.
INTERNATIONAL TRADE
The company’s products are manufactured by independent factories located outside the United States, principally in Southeast Asia. The liaison offices serve as regional offices supervising the factories and their respective international market operations.
Through this process, the company has found accessible ways to enter new markets with little to no risk and gain a large chunk of these respective markets. Their supply chain is managed from a global and regional perspective, and necessary adjustments are changing in accordance with global demand and production. In addition to the prevalent risks associated with international operations (regulations, political unrest, disease, economic, etc. ), Columbia deals with ever-changing consumer preferences and unpredictable seasonal climate changes.
The flexibility gained from its operations front allows the company to focus on more sale-sensitive factors such as consumer patterns and weather conditions around the globe (A majority of Columbia’s sale volume is highly dependable on cold climate). Columbia recently announced an international e-commerce expansion effort, with retail sites planned for Canada and eight European countries by year’s end (Reuter).
The company will launch sites for both its Columbia-branded products and its Sorel brand for shoes and boots. Consumers will be able to shop all sites in local languages and make purchases in local currencies. We see e-commerce as an important tool that helps us fulfill our responsibility to build a strong brand for the benefit of customers and all of our business partners,” says Christian Finell, Columbia’s general manager for Europe, the Middle East and Africa.
RISK MANAGEMENT POLICY
Much of Columbia’s market risk is associated with global financial and capital markets, primarily currency exchange rate risk, and to a lesser extent, interest rate risk and equity market risk. Their primary currency exchange risk management objective is to mitigate the uncertainty of nticipated cash flows attributable to changes in exchange rates. Because the functional currency of many of Columbia’s subsidiaries is not the U. S. dollar, they are exposed to potential material gains or losses from the remeasurement of the monetary transactions. The transaction exposure is primarily managed by using currency forward and option contracts. In addition, they use foreign currency forward and option contracts to hedge the firm’s translation and economic exposure primarily related to intercompany transactions and borrowing arrangements.
The company has a domestic credit agreement for an unsecured, committed $125,000,000 revolving line of credit. The maturity date is July 1, 2016. Interest, payable monthly, is based on the company’s debt ratio, ranging from LIBOR plus 100 to 175 basis points. As of December 31, 2011, no balance was outstanding under this line of credit. In addition, the following line items are credit agreements between the parent company Columbia and its foreign subsidiaries. All agreements are unsecured and uncommitted guaranteed lines of credit. The Canadian subsidiary has available line of credit providing for up to a maximum of CAN$30,000,000.
The European subsidiary has available 2 lines of credit providing for up to a maximum of €30,000,000 and €5,000,000. These credit lines accrue interest based on the European Central Bank refinancing rate plus 50 basis points and Euro Overnight Index Average plus 75 basis points, respectively. The Japanese subsidiary has a line of credit providing for up to a maximum of $5,000,000. The line accrues interest at LIBOR plus 110 basis points. The Korean subsidiary has a line of credit providing for up to $30,000,000.
The line accrues interest at the Korean three-month CD rate plus 220 basis points. As of September 31, 2012, $10,206,000 was outstanding under this line. In addition, the company has arrangements in place to facilitate the import and purchase of inventory through import letters of credit. The Company has available unsecured and uncommitted import letters of credit in the aggregate amount of $15,000,000 subject to annual renewal.
At December 31, 2011, the Company had outstanding letters of credit of $2,029,000 for purchase orders for inventory under this arrangement. In a challenging economic climate, these agreements provide Columbia’s foreign subsidiaries an additional source of credit that is guaranteed and competitively priced.
DERIVATIVES
The company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated U. S. dollar denominated inventory purchases by subsidiaries that use foreign currency such as the European euros, Canadian dollars, Japanese yen or Korean won as their functional currency.
It manages the risk by using currency forward and European-style option contracts designated to effectively hedge the cash flows. All of the company’s derivative contracts have a maturity of two years of less and the maximum net exposure to any single counterparty was less than $3,000,000 in 2011. The counterparties have strong credit ratings and as a result the company does not require collateral to facilitate transactions. In addition, the company has not pledged assets or posted collateral as requirement for entering into or maintaining derivative positions.
Currency forward and option contracts are the primary hedging tools used to manage the risk associated with currency exchange rates. The company is not involved in the commodity trade since it doesn’t deal with the actual production process or purchasing of material. The focus is thus exclusively dedicated to forward and option currency exchange contracts. The following table presents the gross notional amount of outstanding derivative instruments in thousands: Amount of outstanding derivatives (in thousands.
Overall in 2011, all of Columbia’s cash flow hedging was managed through currency forward contracts. Columbia has substantially favored currency orward contracts in recent year, holding approximately $98 million contracts at the end of last September. According to the balance sheet classification, cash flow hedges performed at a gain of $3. 49 million in 2011. While derivative instruments not designated as cash flow hedges closed at a gain of $4. 82 million (net tax). At the end of 2011, approximately $6,074,000 of net gains on both outstanding and matured derivatives accumulated in other comprehensive income was reclassified to net income as a result of underlying hedged transactions.
Columbia’s short-term investments measured at fair value were approximately $69 million. These securities include municipal bonds and U. S. Government-backed municipal bonds. Other short-term asset valuations such as money market deposits and time deposits measured out at $177 million in 2011. A summary of comprehensive income (net tax) (in thousands).
A summary of Columbia’s comprehensive income (net tax) shows a positive other comprehensive income largely due to a successful hedging strategy that allowed the company to by and large make up for the foreign currency translation adjustments. In 2011 a -$8. 7 million currency translation was offset by a positive gain in derivative instruments. The company’s gains (losses) encompassed in other comprehensive income has seen a sharp steady decrease in the past 3 years, partly due to fluctuating currency exchange rates that disfavored the company’s assets.
STRATEGY
Columbia’s international operations have witnessed a great deal of change in the past decade due to ever-changing world markets, economies, and financial instruments. In terms of market share, Columbia is significantly smaller than its competitors in the apparel and footwear industries.
Its growth during the past few years, after the global recession, is a reflection of not only a growing global economy but a more effective marketing and financing strategies. The firms’ booming e-commerce operations and its use of independent manufacturing plants allow for sustained growth without a great deal of capital investments. Columbia business model, coupled with its aggressive expansion worldwide has benefited the company, yet more is awaiting. The company’s ability to enter into new markets without having to invest in new factories or other operations truly limits their risk. The quality of their supply chain and risk managements controls gives the company an edge and a core competency that is difficult to obtain.
In the past few years, they have been able to completely pay off their debt and they have successfully supported their growth through cash on hand and operating income. The company can surely leverage their operations and expand even more, but their management for the most part, has been hesitant to the idea of shifting the equity-to-debt ratio. Their financial strategy aimed at hedging their currency exposure through the use of currency forwards and options has significantly and effectively protected the company from transaction and translation exposures. The degree of risk related to the cash flows from its international subsidiaries is significantly managed and reduced to an optimal level.
Columbia’s main financial focus is related to the management of this translation exposure and the allocation of its lines of credits. The 10-k fails to mention any information about Columbia’s use of currency or interest rate swaps. The use of these instruments could prove to be beneficial from a financial standpoint and boost savings for the company.
Columbia could reduce its financing risks if it chooses to enter into a swap with a counterparty. Currency swap would be the most beneficial arrangement for the company, since a significant focus of Columbia’s risk management is related to currency exchange rate exposure. Going forward, Columbia will need to effectively cope with anticipated currency changes by ngaging in forward contracts, as they already do, but also by borrowing locally.
Management is reluctant to borrow more and leverage their operations, but there is reason to question their stance due to a need for growth and other value-adding activities. Currency exchange rates are unpredictable to a large extent, and consequently the firm has made measureable steps to protect itself from such exposure, but management’ reluctance to add more debt hinders the company’s growth across the globe.
