Over the last six months, Columbia Sportswear shares have sunk to $67.45, producing a disappointing 15.1% loss - worse than the S&P 500’s 7.7% drop. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Columbia Sportswear, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even with the cheaper entry price, we don't have much confidence in Columbia Sportswear. Here are three reasons why you should be careful with COLM and a stock we'd rather own.

Why Do We Think Columbia Sportswear Will Underperform?

Originally founded as a hat store in 1938, Columbia Sportswear (NASDAQ: COLM) is a manufacturer of outerwear, sportswear, and footwear designed for outdoor enthusiasts.

1. Weak Constant Currency Growth Points to Soft Demand

We can better understand Apparel and Accessories companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Columbia Sportswear’s control and are not indicative of underlying demand.

Over the last two years, Columbia Sportswear’s constant currency revenue averaged 2.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Columbia Sportswear’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 12.8% for the last 12 months will decrease to 6.3%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Columbia Sportswear’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Columbia Sportswear doesn’t pass our quality test. After the recent drawdown, the stock trades at 15.8× forward price-to-earnings (or $67.45 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Columbia Sportswear

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