Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including statements regarding the time-frame for the return of consumer demand, capital outflows, operating expense, our ability to manage credit risk, lease concession negotiations, sales order cancellations, inventory purchases, net sales, profitability, cash and our ability to meet our cash needs. Forward-looking statements often use words such as "will", "anticipate", "estimate", "expect", "should", "may", and other words and terms of similar meaning or reference future dates. Our expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis; however, each forward-looking statement involves a number of risks and uncertainties, including those described in Part II, Item 1A, Risk Factors in this quarterly report. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations. New factors emerge from time to time and it is not possible for us to predict or assess the effects of all such factors or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
Our Business
As one of the largest outdoor and active lifestyle apparel and footwear companies in the world, we design, develop, market, and distribute outdoor and active lifestyle apparel, footwear, accessories, and equipment primarily under the Columbia, SOREL, Mountain Hardwear, and prAna brands. Our products are sold through a mix of wholesale distribution channels, our own DTC businesses and independent international distributors. In addition, we license some of our trademarks across a range of apparel, footwear, accessories, equipment, and home products.
The popularity of outdoor activities and active lifestyles, changing design trends, consumer adoption of innovative performance technologies, variations in seasonal weather, and the availability and desirability of competitor alternatives affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by developing new products with innovative performance features and designs, creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention, and adjusting the mix, price points and selling channels of available product offerings.
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2019, approximately 60% of our net sales and approximately 75% of our operating income were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs.
We generally solicit orders from wholesale customers and independent international distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand. We typically ship the majority of our advance spring season orders to customers beginning in January and continuing through June. Similarly, we typically ship the majority of our advance fall season orders to customers beginning in July and continuing through December. Generally, orders are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the results to be expected for any future period.
Impacts of COVID-19
COVID-19 was first identified in China in December 2019 and a global pandemic of respiratory disease caused by COVID-19 was declared by the World Health Organization in March 2020. In response to this pandemic, many regional and local governments worldwide implemented travel restrictions, business shutdowns or slowdowns, and shelter-in-place or stay-at-home orders.
In first quarter 2020, lower consumer demand related to the COVID-19 pandemic began to impact our financial performance in China in late January, Korea and Japan in early February and North America and Europe in March, due to store closures, reduced operating hours and decreased retail traffic. Entering the second quarter, the vast majority of our owned stores across the U.S., Europe, Japan, and Canada were closed due to the pandemic. In addition, many of our wholesale customers' and international distributors' closed stores or reduced operating hours, resulting in lower than expected sales, cancellation of orders and a slowing of receipt of shipments of our products. Store reopening timelines varied by region, with the vast majority of our stores in China and Korea reopened by late April and our stores in the U.S., Europe, Japan, and Canada reopening predominantly within the May and June timeframe. Exiting the quarter, nearly all of our owned stores were open globally. Overall, our store retail traffic remains well below prior year levels. At the time of this filing, a small number of locations globally that had reopened were closed again due to local regulations or our safety concerns resulting from new outbreaks. New outbreaks have also had a detrimental impact on our store performance in affected markets. Stores in destination locations and tourist dependent markets remain some of the most severely impacted stores within our fleet as consumers choose to shop closer to home and online.
Throughout the first and second quarters of 2020, our global DTC e-commerce business remained open, supported by the employees in our distribution centers and call centers. During the second quarter, our global DTC e-commerce business grew 72% year-over-year and
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represented 28% of our global net sales during the quarter. We anticipate our global e-commerce sales growth to remain high for the remainder of the year compared to 2019.
While work has been done during the pandemic to mitigate its effect on our inventory supply, the combined effect of retail stores closures and the resulting decrease in consumer demand, as well as actions taken by our wholesale customers to preserve their capital and liquidity, caused higher than normal inventory levels at June 30, 2020, as inventories grew 7% compared to the prior year. We remain focused on maintaining a disciplined approach to inventory management. We have received, and expect to continue to receive, significant order cancellations. In response, we have significantly curtailed planned inventory purchases. We anticipate selling the remaining inventory in current and future seasons by leveraging our wholesale customers, e-commerce platforms and fleet of outlet stores. Given the actions taken by retailers to reduce inventory levels from a supply perspective, we expect the current elevated promotional environment to moderate in the second half of the year, however, consumer demand may cause an elevated promotional environment to continue, potentially impacting our future net sales and gross margin.
In the second quarter, inventory growth was partially offset by the timing of Fall 2020 receipts, which are more heavily weighted to the third quarter this year, compared to Fall 2019 receipts in the prior year. This timing shift primarily reflects supply chain disruptions related to the pandemic that occurred earlier in the year.
COVID-19 also impacted our distribution centers, our call centers, our retail stores, our third-party manufacturing partners and other vendors, due to the effects of facility closures, reductions in operating hours, labor shortages and real time changes in operating procedures to accommodate social distancing and additional sanitization measures. Our work-from-home policies continue in many regions, including the United States.
In response to the uncertainty of the pandemic described above, we enhanced our liquidity position during the year by taking various actions with respect to our domestic credit agreement. As of the time of this filing, we have:
• increased our total available committed and uncommitted credit lines and facilities to provide approximately $631 million of borrowing capacity, of which $525 million is committed and available domestically;
• suspended the quarterly dividend and share repurchases; and
• reduced planned capital expenditures.
We have initiated numerous cost containment measures across the organization, including lowering personnel related expenses, reducing demand creation spend, and minimizing discretionary expenditures. These measures reflect our effort to lower 2020 operating expenses by more than $100 million compared to last year, before incremental extraordinary expenses related to the COVID-19 pandemic including, but not limited to, exceptional provision for bad debts, severance and restructuring charges and other related expenses. We continue to evaluate our cost structure for 2021 and beyond. To enable long-term growth and execute our strategic priorities, we anticipate taking additional actions to adjust our current expense structure, including evaluating the reallocation of resources.
See the Liquidity and Capital Resources section below for additional information.
Given the ongoing business disruption and uncertainty surrounding the pandemic, we are unable to estimate full year results with reasonable accuracy. While significant uncertainty remains, we expect sales volume to stay below prior year levels for the balance of the year. Absent further deterioration in trends due to the pandemic, we anticipate the second quarter to be the steepest year-over-year percent change in net sales of the year, with declines moderating in the second half of the year. Overall, we do expect future material financial impacts associated with the COVID-19 pandemic, including, but not limited to, lower global net sales, the delay of inventory production and fulfillment, and incremental costs associated with the COVID-19 pandemic, such as, exceptional provisions for bad debt, severance and restructuring charges and other related expenses.
Strategic Priorities
Our immediate focus is on maintaining a strong balance sheet, financial flexibility and sufficient liquidity. Our long-term commitment to driving sustainable and profitable growth has not changed and our strategic priorities remain to:
• drive brand awareness and sales growth through increased, focused demand creation investments;
• enhance consumer experience and digital capabilities in all of our channels and geographies;
• expand and improving global DTC operations with supporting processes and systems; and
• invest in our people and optimizing our organization across our portfolio of brands.
Capital Allocation
Given the realized and anticipated declines in net sales, profitability and cash related to the COVID-19 pandemic, our capital allocation priorities have shifted. We remain committed to maintaining our strong balance sheet to enable maximum strategic flexibility and access to additional liquidity if warranted. Within that context, our priorities include preserving liquidity for business operations and mitigating the financial impact of external risks given the pressure currently impacting the retail industry. We plan to revisit our capital allocation priorities when the business stabilizes and cash flows are more reliable and predictable.
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Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the condensed consolidated financial statements and accompanying Notes that appear in Part I, Item 1, Financial Statements in this quarterly report. All references to quarters relate to the quarter ended June 30 of the particular year.
To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in the exchange rates used to translate net sales generated in foreign currencies into United States dollars. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measures useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP.
The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
Highlights of the Second Quarter of 2020
Lower net sales and profitability in second quarter 2020 compared to second quarter 2019 primarily reflect the impact of temporary store closures and lower consumer demand resulting from the ongoing COVID-19 pandemic.
• Net sales decreased $209.6 million, or 40%, to $316.6 million from $526.2 million in the second quarter of 2019.
• Income from operations decreased $86.7 million , or 530%, to a loss of $70.3 million from income of $16.4 million in the second quarter of 2019.
• Net income decreased $73.7 million, or 320%, to a loss of $50.7 million, or $(0.77) per share, from income of $23.0 million, or $0.34 per diluted share, in the second quarter of 2019.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 53.8 51.8 52.8 50.0
Gross profit 46.2 48.2 47.2 50.0
Selling, general and administrative expenses 68.7 45.8 55.9 41.7
Net licensing income 0.3 0.7 0.5 0.5
Income (loss) from operations (22.2) 3.1 (8.2) 8.8
Interest income (expense), net (0.2) 0.5 0.1 0.5
Other non-operating income, net 0.3 0.2 0.3 0.2
Income (loss) before income tax (22.1) 3.8 (7.8) 9.5
Income tax benefit (expense) 6.1 0.6 2.1 (1.3)
Net income (loss) (16.0) % 4.4 % (5.7) % 8.2 %
Results of Operations — Consolidated
Quarter Ended June 30, 2020 Compared to Quarter Ended June 30, 2019
Net Sales: Consolidated net sales decreased $209.6 million, or 40%, to $316.6 million for the second quarter of 2020 from $526.2 million for the comparable period in 2019. Net sales declines moderated as the quarter progressed with April net sales down 58%, May net sales down 47% and June net sales down 20% compared to the same periods in 2019. The overall decrease primarily reflects the negative impact of temporary store closures, including our wholesale customers' stores, and lower consumer demand resulting from the ongoing COVID-19 pandemic. Our e-commerce businesses have largely remained operational during the COVID-19 pandemic, with the exception of temporary distribution center closures to perform deep cleaning. Our global e-commerce net sales increased 72% for the second quarter of 2020 compared to the second quarter of 2019, and represented 28% of total net sales.
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Net sales by brand, product category and channel are summarized in the following table:
Three Months Ended June 30,
Reported
Net Sales Adjust for
Foreign Currency
Translation Constant-currency
Net Sales Reported
Net Sales Reported
Net Sales Constant-currency
Net Sales
(In millions, except for percentage changes) 2020 2020 (1)
2019 % Change % Change
Brand Net Sales:
Columbia $ 265.8 $ 2.5 $ 268.3 $ 454.9 (42)% (41)%
SOREL 13.3 0.1 13.4 15.1 (12)% (11)%
prAna 27.7 — 27.7 38.7 (28)% (28)%
Mountain Hardwear 9.8 0.2 10.0 17.5 (44)% (43)%
Total $ 316.6 $ 2.8 $ 319.4 $ 526.2 (40)% (39)%
Product Category Net Sales:
Apparel, Accessories and Equipment $ 243.8 $ 2.0 $ 245.8 $ 432.2 (44)% (43)%
Footwear 72.8 0.8 73.6 94.0 (23)% (22)%
Total $ 316.6 $ 2.8 $ 319.4 $ 526.2 (40)% (39)%
Channel Net Sales:
Wholesale $ 159.9 $ 1.3 $ 161.2 $ 296.2 (46)% (46)%
DTC 156.7 1.5 158.2 230.0 (32)% (31)%
Total $ 316.6 $ 2.8 $ 319.4 $ 526.2 (40)% (39)%
(1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year.
Gross Profit: Gross profit as a percentage of net sales contracted to 46.2% in the second quarter of 2020 from 48.2% for the comparable period in 2019. The gross profit contraction primarily reflected margin pressure related to the COVID-19 pandemic, including:
• an increase in inventory reserves; and
• lower DTC product margins, reflecting elevated promotional activity; partially offset by
• favorable DTC sales mix resulting from a higher proportion of e-commerce sales, which generally carry higher gross margins; and
• lower volume of wholesale close-out sales.
Our gross profit may not be comparable to other companies in our industry because some of these companies may include all of the costs related to their distribution network in cost of sales while we, like many others, include these expenses as a component of SG&A expense.
Selling, General and Administrative Expense : SG&A expense includes all costs associated with our design, merchandising, marketing, distribution and corporate functions, including related depreciation and amortization.
SG&A expense decreased $23.1 million, or 10%, to $217.7 million, or 68.7% of net sales, for the second quarter of 2020, from $240.8 million, or 45.8% of net sales, for the comparable period in 2019, primarily due to:
• lower retail expenses, primarily resulting from lower personnel expenses due to store closures;
• decreased demand creation spending;
• decreased discretionary spending; and
• COVID-19 related government subsidies and incentives; partially offset by
• COVID-19 related expenses, including catastrophic leave and furlough pay as well as severance and other pandemic related costs; and
• retail store related impairments.
In March 2020, we initiated numerous cost containment measures across the organization to mitigate the impacts of COVID-19 on our business. See additional discussion of these measures in the Impacts of COVID-19 discussion above.
Income (Loss) from Operations: Loss from operations was $70.3 million, or (22.2)% of net sales, in the second quarter of 2020 compared to income from operations of $16.4 million, or 3.1% of net sales, in the comparable period in 2019.
Income Tax Benefit (Expense): Income tax benefit was $19.5 million for the second quarter of 2020, compared to a benefit of $3.1 million for the comparable period in 2019. Our effective income tax rate was 27.7% for the second quarter of 2020, compared to negative 15.3% for
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the same period in 2019. Our effective tax rate increased compared to prior year primarily due the change in mix of book income or loss among jurisdictions, as well as the favorable impact of the passage of a Swiss tax reform package on our effective income tax rate for the second quarter of 2019.
Net Income (Loss): Net loss was $50.7 million, or $(0.77) per share, for the second quarter of 2020 compared to net income of $23.0 million, or $0.34 per diluted share, for the comparable period in 2019.
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
Net Sales: Consolidated net sales decreased $296.0 million, or 25%, to $884.8 million for the six months ended June 30, 2020 from $1,180.8 million for the comparable period in 2019. The decrease primarily reflects the impact of temporary store closures, including our wholesale customers' stores, and lower consumer demand resulting from the ongoing COVID-19 pandemic. Net sales decreased across all regions, brands and product categories, primarily in the U.S. DTC and wholesale businesses.
Net sales by brand, product category and channel are summarized in the following table:
Six Months Ended June 30,
Reported
Net Sales Adjust for
Foreign Currency
Translation Constant-currency
Net Sales Reported
Net Sales Reported
Net Sales Constant-currency
Net Sales
(In millions, except for percentage changes) 2020 2020 (1)
2019 % Change % Change
Brand Net Sales:
Columbia $ 737.5 $ 4.8 $ 742.3 $ 1,007.1 (27)% (26)%
SOREL 52.0 0.1 52.1 54.6 (5)% (5)%
prAna 64.2 — 64.2 79.9 (20)% (20)%
Mountain Hardwear 31.1 0.2 31.3 39.2 (21)% (20)%
Total $ 884.8 $ 5.1 $ 889.9 $ 1,180.8 (25)% (25)%
Product Category Net Sales:
Apparel, Accessories and Equipment $ 696.0 $ 3.6 $ 699.6 $ 958.2 (27)% (27)%
Footwear 188.8 1.5 190.3 222.6 (15)% (15)%
Total $ 884.8 $ 5.1 $ 889.9 $ 1,180.8 (25)% (25)%
Channel Net Sales:
Wholesale $ 485.8 $ 2.6 $ 488.4 $ 659.4 (26)% (26)%
DTC 399.0 2.5 401.5 521.4 (23)% (23)%
Total $ 884.8 $ 5.1 $ 889.9 $ 1,180.8 (25)% (25)%
(1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year.
Gross Profit: Gross profit as a percentage of net sales, decreased to 47.2% in the six months ended June 30, 2020, from 50.0% for the comparable period in 2019. The gross profit contraction primarily reflected margin pressure related to the COVID-19 pandemic, including:
• an increase in inventory obsolescence provisions associated with unsold inventory; and
• a decrease in DTC product margin, reflecting higher promotional activity.
Selling, General and Administrative Expense : SG&A expense increased $2.0 million, or 0.4%, to $494.5 million, or 55.9% of net sales, for the six months ended June 30, 2020, from $492.5 million, or 41.7% of net sales, for the comparable period in 2019.
The SG&A expense increase was primarily due to:
• increased bad debt expense, reflecting heightened accounts receivable risk resulting from the ongoing COVID-19 pandemic;
• incremental extraordinary expenses related to the COVID-19 pandemic; and
• increased information technology expenses; partially offset by
• lower retail expenses, primarily resulting from lower personnel expenses due to store closures;
• decreased demand creation spending; and
• decreased discretionary spending.
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In March 2020, we initiated numerous cost containment measures across the organization to mitigate the impacts of COVID-19 on our business. See additional discussion of these measures in the Impacts of COVID-19 discussion above.
Income (Loss) from Operations: Loss from operations was $72.3 million, or 8.2% of net sales, for the six months ended June 30, 2020 compared to income from operations of $104.3 million, or 8.8% of net sales for the comparable period in 2019.
Income Tax Benefit (Expense): Income tax benefit was $18.1 million for the six months ended June 30, 2020 compared to an income tax expense of $14.6 million for the comparable period in 2019. Our effective income tax rate was 26.4% for the six months ended June 30, 2020 compared to 13.0% for the same prior year in 2019. Our effective income tax rate for the six months ended June 30, 2020 compared to prior year primarily due the change in mix of book income or loss among jurisdictions, as well as the favorable impact of the passage of a Swiss tax reform package on our effective income tax rate for the comparable period in 2019.
Net Income (Loss): Net loss was $50.5 million, or $(0.76) per share, for the six months ended June 30, 2020 compared to net income of $97.2 million, or $1.41 per diluted share, for the comparable period in 2019.
Results of Operations — Segment
Quarter Ended June 30, 2020 Compared to Quarter Ended June 30, 2019
Net Sales by Geographic Region: Net sales by geographic region are summarized in the following table:
Three Months Ended June 30,
Adjust for Constant- Constant-
Reported Foreign currency Reported Reported currency
Net Sales Currency Net Sales Net Sales Net Sales Net Sales
(In millions, except for percentage changes) 2020 Translation 2020 (1)
2019 % Change % Change (1)
U.S. $ 183.2 $ — $ 183.2 $ 315.5 (42)% (42)%
LAAP 67.4 1.9 69.3 101.6 (34)% (32)%
EMEA 58.3 0.5 58.8 91.6 (36)% (36)%
Canada 7.7 0.4 8.1 17.5 (56)% (54)%
$ 316.6 $ 2.8 $ 319.4 $ 526.2 (40)% (39)%
(1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year.
Unless otherwise noted below, net sales decreases within all regions primarily reflect the impact of temporary store closures, including our wholesale customers' stores, and lower consumer demand resulting from the ongoing COVID-19 pandemic compared to the same period in 2019.
• U.S. net sales decreased $132.3 million, or 42%, to $183.2 million for the second quarter of 2020 from $315.5 million for the comparable period in 2019. U.S. net sales decreased in the U.S. wholesale and DTC businesses. The net sales decrease in the U.S. DTC business was driven by decreased net sales from retail stores, partially offset by increased net sales from our e-commerce business.
• LAAP region net sales decreased $34.2 million, or 34% (32% constant-currency), to $67.4 million for the second quarter of 2020 from $101.6 million for the comparable period in 2019. The net sales decrease in the LAAP region was primarily driven by decreased net sales in our Japan and LAAP distributor businesses.
• EMEA region net sales decreased $33.3 million, or 36%, to $58.3 million for the second quarter of 2020 from $91.6 million for the comparable period in 2019. The net sales decrease in the EMEA region was led by decreased net sales in our EMEA distributor business, followed by our Europe-direct business.
• Canada net sales decreased $9.8 million, or 56% (54% constant-currency), to $7.7 million for the second quarter of 2020 from $17.5 million for the comparable period in 2019. The net sales decrease in Canada was primarily driven by decreased net sales in our wholesale business.
Segment Income (Loss) from Operations: Segment income (loss) from operations includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Typically, income from operations as a percentage of net sales in the U.S. is higher than the other segments due to scale efficiencies associated with the larger base of net sales in the U.S. and incremental licensing income compared to other segments.
Generally, we anticipate this trend will continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business. The EMEA segment, in particular, typically has realized lower operating margins compared to other segments due to a relatively higher fixed cost structure associated with our supply chain and administrative functions, compared to net sales. To the extent net sales increase in the EMEA segment, we would anticipate an improvement in the operating income margin of that segment.
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The following table presents segment income (loss) from operations for each reportable segment:
Three Months Ended June 30,
(In millions, except for percentage changes) 2020 2019 Change ($)
U.S. $ (18.2) $ 46.5 $ (64.7)
LAAP (2.1) 10.0 (12.1)
EMEA 0.1 9.5 (9.4)
Canada (8.8) (2.6) (6.2)
Total segment income (loss) from operations (29.0) 63.4 (92.4)
Unallocated corporate expenses (41.3) (47.0) (5.7)
Income (loss) from operations $ (70.3) $ 16.4 $ (86.7)
Unless otherwise noted below, segment income from operations within all regions decreased due to the impact of temporary store closures, including our wholesale customers' stores, and lower consumer demand primarily resulting from the ongoing COVID-19 pandemic compared to same period in 2019.
• U.S. loss from operations of $18.2 million, or (9.9)% of net sales, for the second quarter of 2020 decreased $64.7 million from income from operations of $46.5 million, or 14.7% of net sales, for the comparable period in 2019. The decrease resulted from decreases in net sales combined with decreased gross margin. U.S. SG&A expense increased as a percentage of net sales to 57.7% for the second quarter of 2020 compared to 34.9% for the same period in 2019. U.S. SG&A expense for the second quarter of 2020 included incremental COVID-19 related expenses, including catastrophic paid leave and furlough pay as well as severance and other pandemic related costs.
• LAAP loss from operations of $2.1 million, or (3.2)% of net sales, for the second quarter of 2020 decreased $12.1 million from income from operations of $10.0 million, or 9.8% of net sales, for the comparable period in 2019. The decrease resulted from decreases in net sales combined with decreased gross margin. LAAP SG&A expense increased as a percentage of net sales to 57.9% for the second quarter of 2020 compared to 46.1% for the same period in 2019.
• EMEA income from operations of $0.1 million, or 0.2% of net sales, for the second quarter of 2020 decreased $9.4 million from $9.5 million, or 10.4% of net sales, for the comparable period in 2019. The decrease was driven by decreased net sales, combined with decreased gross margin. EMEA SG&A expense increased as a percentage of net sales to 34.7% for the second quarter of 2020 compared to 25.6% for the same period of 2019.
• Canada loss from operations of $8.8 million, or (113.0)% of net sales, for the second quarter of 2020 increased $6.2 million from $2.6 million, or (14.9)% of net sales, for the comparable period in 2019. The increased loss was driven by decreased net sales, partially offset by decreased gross margin. Canada SG&A expense increased as a percentage of net sales to 147.7% for the second quarter of 2020 compared to 56.3% for the same period of 2019. SG&A expense for the second quarter of 2020 included incremental COVID-19 related expenses, including catastrophic paid leave and furlough pay as well as severance and other pandemic related costs.
Unallocated corporate expenses decreased by $5.7 million to $41.3 million for the second quarter of 2020 from $47.0 million for the comparable period in 2019.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net Sales by Geographic Region: Net sales by geographic region are summarized in the following table:
Six Months Ended June 30,
Adjust for Constant- Constant-
Reported Foreign currency Reported Reported currency
Net Sales Currency Net Sales Net Sales Net Sales Net Sales
(In millions, except for percentage changes) 2020 Translation 2020 (1)
2019 % Change % Change (1)
U.S. $ 559.1 $ — $ 559.1 $ 727.7 (23)% (23)%
LAAP 170.0 3.3 173.3 234.5 (28)% (26)%
EMEA 114.1 1.9 116.0 162.9 (30)% (29)%
Canada 41.6 (0.1) 41.5 55.7 (25)% (25)%
$ 884.8 $ 5.1 $ 889.9 $ 1,180.8 (25)% (25)%
(1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year.
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Unless otherwise noted below, net sales decreases within all regions primarily reflect the impact of temporary store closures, including our wholesale customers' stores, and lower consumer demand resulting from the ongoing COVID-19 pandemic compared to the same period in 2019.
• U.S. net sales decreased $168.6 million, or 23%, to $559.1 million for the six months ended June 30, 2020 from $727.7 million for the comparable period in 2019. U.S. net sales decreased in our U.S. DTC and wholesale businesses. The net sales decrease in the U.S. DTC business was driven by decreased net sales from retail stores, partially offset by increased net sales from our e-commerce business.
• LAAP region net sales decreased $64.5 million, or 28% (26% constant-currency), to $170.0 million for the six months ended June 30, 2020 from $234.5 million for the comparable period in 2019. The net sales decrease in the LAAP region was primarily driven by decreased net sales in our China and Japan businesses, and to a lesser extent, decreased net sales in the LAAP distributors and Korea businesses.
• EMEA region net sales decreased $48.8 million , or 30% (29% constant-currency), to $114.1 million for the six months ended June 30, 2020 from $162.9 million for the comparable period in 2019. The net sales decrease in the EMEA region was led by decreased net sales in our EMEA distributor business, followed by our Europe-direct business.
• Canada net sales decreased $14.1 million, or 25%, to $41.6 million for the six months ended June 30, 2020 from $55.7 million for the comparable period in 2019. The net sales decrease in Canada was primarily driven by decreased net sales in our wholesale business.
Segment Income (Loss) from Operations: The following table presents segment income (loss) from operations for each reportable segment:
Six Months Ended June 30,
(In millions, except for percentage changes) 2020 2019 Change ($)
U.S. $ 21.9 $ 142.2 $ (120.3)
LAAP 3.9 36.7 (32.8)
EMEA 0.1 18.8 (18.7)
Canada (4.6) 3.4 (8.0)
Total segment income from operations 21.3 201.1 (179.8)
Unallocated corporate expenses (93.6) (96.8) (3.2)
Income (loss) from operations $ (72.3) $ 104.3 $ (176.6)
Unless otherwise noted below, segment income from operations within all regions decreased due to the impact of temporary store closures, including our wholesale customers' stores, lower consumer demand, higher inventory reserves and increased bad debt expenses primarily resulting from the ongoing COVID-19 pandemic, compared to strong sales performance for the comparable period in 2019.
• U.S. income from operations decreased $120.3 million to $21.9 million, or 3.9% of net sales, for the six months ended June 30, 2020 from $142.2 million, or 19.5% of net sales, for the comparable period in 2019. The decrease was driven primarily by decreased net sales combined with decreased gross margin, increased provisions for uncollectible accounts receivable, and incremental COVID-19 related expenses, including catastrophic paid leave and furlough pay as well as severance and other pandemic related costs. U.S. SG&A expense increased as a percentage of net sales to 44.3% for the six months ended June 30, 2020 compared to 30.8% for the same period in 2019.
• LAAP income from operations decreased $32.8 million to $3.9 million, or 2.3% of net sales, for the six months ended June 30, 2020 from $36.7 million, or 15.7% of net sales, for the comparable period in 2019. The decrease primarily resulted from decreased net sales combined with decreased gross margin. LAAP SG&A expense increased as a percentage of net sales to 49.6% for the six months ended June 30, 2020 compared to 40.9% for the same period in 2019.
• EMEA income from operations of $0.1 million, or 0.1% of net sales, for the six months ended June 30, 2020 decreased $18.7 million from $18.8 million, or 11.5% of net sales, for the comparable period in 2019. The decrease was driven by decreased net sales combined with decreased gross margin. EMEA SG&A expense increased as a percentage of net sales to 39.9% for the six months ended June 30, 2020 compared to 29.9% for the same period of 2019.
• Canada loss from operations of $4.6 million, or (11.1)% of net sales, for the six months ended June 30, 2020 decreased $8.0 million from income from operations of $3.4 million, or 6.1% of net sales, for the comparable period in 2019. The decrease primarily resulted from decreased net sales combined with decreased gross margin. Canada SG&A expense increased as a percentage of net sales to 56.3% for the six months ended June 30, 2020 compared to 37.6% for the same period of 2019.
Unallocated corporate expenses decreased by $3.2 million to $93.6 million for the six months ended June 30, 2020 from $96.7 million for the comparable period in 2019.
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Liquidity and Capital Resources
At June 30, 2020, we had total cash and cash equivalents of $474.8 million, compared to $686.0 million at December 31, 2019 and $386.2 million at June 30, 2019. In addition, we had short-term investments of $1.0 million at June 30, 2020, compared to $1.7 million at December 31, 2019 and $138.2 million at June 30, 2019. At June 30, 2020, we had approximately $530.0 million in committed borrowing availability. We have suspended quarterly cash dividend payments and further share repurchases. Our Board of Directors will continue to evaluate the potential for future dividend distributions and management may resume share repurchases in the future at any time, depending upon market conditions, our capital needs and other factors. Our primary ongoing funding requirements are for working capital and capital expenditures.
We expect to meet our cash needs for the next twelve months with cash and cash equivalents, short-term investments, borrowings under our committed and uncommitted lines of credit and facilities, additional borrowing capacity, access to capital markets, and cash flows from operations. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. We continue to monitor the credit markets, as well as our business trends, to evaluate our potential needs. We have already taken key actions to mitigate the impact of the current economic crisis on our financial position with a focus on financial liquidity enhancements, capital preservation, cost containment measures, and inventory management. See "Impacts of COVID-19" above for additional discussion.
Our business is affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash, cash equivalents and short-term investments balances generally are at their lowest level at the end of the third quarter and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales.
Short-term borrowings and credit lines
Refer to Note 4 and Note 15 in Item 1 of this quarterly report for additional information regarding our lines of credit and overdraft facilities in place. At June 30, 2020, we had $525.0 million available domestically under our restated credit agreement and, internationally, our subsidiaries had approximately $106.4 million in committed and uncommitted lines of credit and overdraft facilities in place, which could be terminated at any time by either the applicable subsidiary or the banks, some of which were guaranteed by Columbia Sportswear Company. At June 30, 2020, approximately $2.8 million was outstanding on our Japanese subsidiary's overdraft facility. At the time of this filing, we are in compliance with all financial covenants necessary as a condition for borrowing under the restated credit agreement, as amended.
Cash Flow Activities
Net cash used in operating activities was $37.3 million for the six months ended June 30, 2020, compared to net cash provided by operating activities of $2.6 million for the same period in 2019. The change in operating cash flow was primarily driven by a $99.5 million decrease in operating cash flow provided by net income (loss) and non-cash adjustments, partially offset by a $59.6 million decrease in cash used by changes in assets and liabilities. The most significant comparative changes included Accounts receivable , Accounts payable , and Inventories . The increase in cash provided by Accounts receivable was primarily driven by lower wholesale second quarter net sales . The decrease in cash provided by Accounts payable was primarily driven primarily by lower second quarter inventory receipts as a result of less inbound products and order cancellations due to the COVID-19 pandemic. The decrease in cash used by Inventories reflects lower inventory receipts and the effect of an increase in the provision for excess, close-out or slow moving inventory.
Net cash used in investing activities was $19.4 million for the six months ended June 30, 2020, compared to net cash provided by investing activities of $76.4 million for the comparable period in 2019. For the 2020 period, net cash used in investing activities consisted primarily of $21.0 million for capital expenditures, partially offset by $1.6 million of net sales of short-term investments. For the same period in 2019, net cash provided by investing activities primarily consisted of $127.2 million of net sales of short-term investments, partially offset by $50.8 million for capital expenditures. The decrease in capital expenditures for the 2020 period compared to the same period in 2019 was due to lower planned 2020 capital expenditures as well as capital preservation measures taken in light of the ongoing COVID-19 pandemic.
Net cash used in financing activities was $151.7 million for the six months ended June 30, 2020, compared to net cash used in financing activities of $145.2 million for the comparable period in 2019. For the 2020 period, net cash used in financing activities primarily consisted of repurchases of common stock of $132.9 million, and dividend payments to our shareholders of $17.2 million. For the same period in 2019, net cash used in financing activities primarily consisted of repurchases of common stock of $100.3 million, dividend payments to our shareholders of $32.7 million, and $17.9 million related to the purchase of the non-controlling interest in our China joint venture.
Contractual obligations
Our inventory purchase obligations decreased to $232.9 million at June 30, 2020 compared to $337.2 million at December 31, 2019. There have been no other material changes to the estimated contractual commitments contained in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
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Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019 have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Some of these critical accounting policies affect working capital account balances, including the policy for revenue recognition, allowance for uncollectible accounts receivable, excess, close-out and slow moving inventory, product warranty, impairment of long-lived assets, intangible assets and goodwill, income taxes, and stock-based compensation.
Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this quarterly report. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.
Except as described below and disclosed in Note 1 in Item 1 of this quarterly report, pertaining to our adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Impairment of Long-Lived Assets, Intangible Assets and Goodwill
Long-lived assets, which include property, plant and equipment and intangible assets with finite lives, are amortized over their estimated useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. In the second quarter of 2020, we tested certain retail locations and their respective lease right-of-use assets for impairment. See Note 1 in Item 1 of this quarterly report for impairment charges recognized in the second quarter of 2020. Further declines in projected future performance or significant declines in market rents for retail spaces may adversely affect the recovery of retail locations assets.
Our 2019 impairment tests of goodwill and intangible assets with indefinite lives indicated that the fair value of all reporting units and intangible assets with indefinite lives exceeded their respective carry values by more than 20%, except for the prAna brand's trademark. In the prAna brand impairment analysis, the estimated fair value of its trademark exceeded its carrying value by approximately 20%. Additionally, the estimated fair value of the prAna reporting unit exceeded its carrying value by more than 30%. As a result of the COVID-19 pandemic and a significant decline in projected net sales, the prAna brand's trademark and goodwill were tested for impairment as of March 31, 2020. While no impairment was indicated during the first quarter 2020 tests, the degree by which the fair value of the prAna reporting unit and trademark exceeded their respective carrying values declined from our 2019 impairment test. After performing both qualitative and quantitative analysis, including review of future long-term revenue and cash flow assumptions, we concluded a triggering event requiring the measurement of prAna brand's trademark and goodwill for impairment as of June 30, 2020 did not occur. If, due to the current level of uncertainty relating to the COVID-19 pandemic, the prAna brand's actual or projected future performance deteriorates from the projections considered in our first quarter 2020 tests, it is possible that an impairment charge would be required.
Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected sales, income, cash flows, discount rates, market-based multiples, remaining useful lives, and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements Not Yet Adopted" in Note 1 in Item 1 of this quarterly report.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been any material change in the market risk disclosure contained in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.