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Shares of Columbia Sporstwear (NASDAQ: COLM) rose more than four percent on Monday after analysts at Bank of America upgraded shares to Buy from Underperform with a price target raised to $92 from a previous $82.

Rafe Jadrosich of Bank of America believes that the Columbia brand is now idealyl positioned for sustainable mid-to-high single-digit percentage growth, which will create “significant” operating margin improvements.

Innovating and expanding beyond the plain winter jacket

The Columbia brand name has always been synonymous with winter and cold-weather gear. Not anymore, Jadrosich argues. He sees several secular drivers that should support a more sustainable long-term growth outlook, Jadrosich wrote in his upgrade note.

The analyst believes that sporting good retailers are currently reducing their private-label offerings in favor of branded offerings. Instead, retailers are showcasing the Columbia brand that has several accessible price points.

Jadrosich also notes that Columbia has made “meaningful strides” over the past few years to reduce its exposure to mid-tier and off-price channels.

“Columbia's technologies (Omni-Heat and Turbodown) should allow the company to better segment channels going forward, which will allow it to grow in both sporting goods and mid-tier without cannibalizing each other,” Jadrosich wrote.

In terms of specific products in Columbia's pipeline, Jadrosich sees potential in items with down insulation, which can be worn as a “versatile” jacket in the fall and used as a mid-layer in winter.

In fact, the analyst sees a growing trend of Columbia's innovative products replacing some fleece purchases.

Columbia's Performance Fishing Gear is a $100 million business in the premium fishing space that is increasingly being worn as a lifestyle apparel, especially in the southeast U.S. The analyst believes that this segment has broad appeal and that Columbia is “one of the few major brands with authenticity in the category.”

When Columbia acquired prAna for $190 million in June, the company gained exposure to the rapidly growing athleticwear space with roots in yoga, rock-climbing and fitness. In fact, between 2010 and 2013, prAna grew sales at an annual compounded growth rate of more than 30 percent.

Finally, Columbia is beginning to see success in its footwear offerings with hiking and trail running products. The analyst sees opportunity for Columbia to grow off a low base in the category.

Significant operating margin opportunity ahead

Jadrosich believes that Columbia has several catalysts available to improve its gross margins to a low-double-digit percentage from its current forecast of 8.6 percent in fiscal 2014.

Firstly, Columbia could leverage its fixed expense and reduce headwinds given an improving revenue outlook. The analyst adds that Columbia's gross margin improvements are possible given the fact that inventory rose 7.7 percent in the second quarter compared to a sales growth forecast of 20 percent in the second half of 2014.

As Columbia continues to expand its international presence, gross margins will improve. The analyst points to recent developments in Columbia's global network over the past few years, including an expansion of its European distribution center and increased store network.

Jadrosich sees Columbia's Sorel brand expanding to fashion and year-round offerings, especially in Europe, where Columbia reset its distribution.

Posted-In: Athleticwear Columbia Sportswear Rafe JadrosichNews Retail Sales


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