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The Timberland Company (NYSE:TBL)

Q4 2008 Earnings Call

February 5, 2009 8:25 am ET

Executives

Jeffrey Swartz – President & CEO

John Crimmins – CFO

Karen Blomquist – Sr. Manager IR

Analysts

Kate McShane – Citigroup

Chris Svezia – Susquehanna Financial Group

Mitch Kummetz – Robert W. Baird

Operator

You are listening to the Timberland Company’s fourth quarter and full year 2008 analyst conference call. (Operator Instructions) Now, for opening remarks I will turn the call to Karen Blomquist, Timberland’s Senior Manager of Investor Relations.

Karen Blomquist

Good morning and welcome to Timberland’s fourth quarter 2008 conference call. Speaking today will be Jeffery Swartz, our President and Chief Executive Officer and John Crimmins, our Chief Financial Officer. John will be discussing our financial results for the quarter. Jeffrey will then discuss our performance within the context of our longer-term strategic direction.

This presentation includes and our responses to your questions may include forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any such statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are discussed in today’s press release and in the company’s filings with the SEC. Copies of our SEC reports are available upon request from Timberland.

This presentation also includes discussion of constant dollar revenue change, and diluted EPS excluding restructuring costs and related costs which are non-GAAP financial measures. As required by SEC rules we have provided a reconciliation of these measures and additional information on the Presentation tab found in the Investor Relations section of our website at www.timberland.com.

Now, I’ll turn the call over to John.

John Crimmins

Thanks Karen and good morning. We ended the year in a very challenging retail environment reflecting a downturn in consumer spending and global economic uncertainty. Despite these macroeconomic challenges our goals remain unchanged. We will protect our business in the near-term and stay the course for the long-term.

Overall our business fundamentals are sound and our balance sheet remains solid. We ended the year with $217 million in cash, $418 million of working capital, and no debt. The difficult decisions we’ve made over the past two years to adjust our cost structure and streamline our operations have us positioned to achieve our long-term goals and manage risks in the months to come.

Looking forward we expect more challenges as a result of continued unfavorable global economic conditions and will continue to carefully manage our costs and inventories. We believe that tough times present opportunity and while the current economic environment has placed short-term pressure on margins and profitability we have taken proactive steps to maximize our ability to respond effectively to unforeseen challenges as well as opportunities that may lie ahead.

Jeffrey will give you more detail on those opportunities, but first I’ll walk you through our financial performance for the fourth quarter.

Fourth quarter global revenues decreased 12% to $391 million as gains in the men’s worldwide boots business, SmartWool and PRO products were offset by the closure of certain retail locations, declines in Timberland branded apparel, men’s casual footwear and women’s boots. For the quarter foreign exchange rate changes decreased global revenues by approximately $14 million due to the overall strengthening of the dollar.

Global footwear revenues were down 8% compared to the prior year period led by strong growth in the men’s boots business in PRO which was offset by declines in the casual business and women’s boots. We continue to see encouraging signs that our boot business is strengthening as a result of cleaner inventory levels and renewed focus on core product.

Our PRO business continues to perform well developing compelling products and increasing its share of the industrial footwear market. The declines in casual footwear were driven by a softness in both wholesale and retail markets.

Global apparel and accessory revenue declined 22% primarily as a result of our transition to a licensing model for our North American apparel business partially offset by the continued strength of SmartWool where we saw a double-digit growth for the quarter.

We also saw some softness in the European and Asian apparel markets during the fourth quarter. We have not yet seen the anticipated benefits of our new sourcing arrangement with Li & Fung which we believe will improve the efficiency of the production and development process and the overall quality of the apparel that we sell in these markets.

By channel the global wholesale revenues declined 11% to $257 million reflecting continued softness in the wholesale market and the impact of foreign currency. Global retail revenues decrease 13% to $133 million driven by unfavorable foreign exchange impacts, the difficult worldwide retail environment, and revenue declines associated with our decision to close certain underperforming retail stores.

Comparable store sales were down 8% on a global basis as declines in North America and Asia were partially offset by modest growth in Europe. By the end of the quarter we had completed the closure of 41 of the approximately 50 specialty and outlet stores identified as part of our global retail restructuring program.

We now anticipate that three additional stores will be closed under the program in the first half of 2009 and the remaining six stores will be kept open.

North America sales fell 13% as anticipated declines in Timberland branded apparel and declines in women’s boots and our casual business offset strong growth in SmartWool and PRO. North America retail revenues were down 17% reflecting eight fewer doors and a 16% decline in comp store sales.

Europe revenues decreased 14% from the fourth quarter of 2007 but were essentially flat on a constant dollar basis. Continued softness in the wholesale business was partially offset by strong sales of men’s boots, a 0.8% increase in comp store sales.

In Europe unfavorable foreign exchange impacts masked strong growth in certain markets, primarily Italy and Spain. In Asia revenue was $50 million, an increase of 2% compared to the prior year. On a constant dollar basis Asia revenue declined 7% due to softness in our retail business and declines throughout much of the region.

Retail sales in Asia declined 5% as the benefit of changes in foreign exchange rates did not offset a 1% decline in comp store sales and the impact of our decision to close certain underperforming retail locations.

Operating income for the fourth quarter was $23 million with an operating margin for the same period of 5.9%, a decrease of 140 basis points over the prior year. For the quarter earnings per share were $0.23 and remain $0.23 excluding restructuring costs. In the fourth quarter foreign exchange rates reduced operating income by approximately $5 million as the dollar strengthened the Euro and the pound.

For the same period of 2007 earnings per share were $0.40 or $0.52 excluding restructuring and related costs. Gross margin for the quarter was 44.5% down 80 basis points from the prior year period driven primarily by the impact of higher material and product manufacturing costs partially offset by favorable changes in our sales channel and product mix as well as the impact of lower close out and off price channel activity reflecting the benefit of actions taken earlier in the year to drive down excess and obsolete inventory levels.

Gross margin was also negatively impacted by the strengthening of the US dollar. Operating expenses fell 10% to $151 million reflecting an $11 million decrease in selling expense and a $10 million decrease in restructuring charges partially offset by a $4 million increase in general and administrative expense due primarily to higher incentive compensation costs reflecting the achievement of certain internal targets.

Included in operating expenses in the fourth quarter is a one-time benefit of approximately $2.6 million related to a legal settlement, a $2 million noncash intangible asset impairment charge, and severance costs of approximately $2 million related to ongoing efforts to streamline the organization.

During the fourth quarter we maintained our increased level of marketing spend that began in the fourth quarter of 2007 demonstrating our continued commitment to strengthen our premium brand position. Fourth quarter 2007 results included the release of approximately $8 million in accruals primarily related to incentive compensation as our annual performance fell below last year’s minimum requirements.

In the fourth quarter of 2008 our effective tax rate was 48.9%. This rate is higher then expected due to a non-deductible loss from a significant decline in the market value of certain company owned life insurance assets and the impact of the noncash intangible asset impairment charge. These unanticipated items increased the company’s fourth quarter tax expense by approximately $1.8 million.

During the fourth quarter of 2007 our effective tax rate was 24.3% reflecting the release of $8 million of specific tax reserves related to the closure of certain audits during the quarter.

As I said earlier we ended the quarter with $217 million in cash and no debt. Inventory in the fourth quarter decreased 11% to $180 million. Throughout 2008 we’ve done a much better job at matching our supply and demand signals and driving down excess and obsolete levels leaving us with a much cleaner inventory position then a year ago.

Accounts receivable in the quarter decreased 10% to $169 million. Capital spending for the quarter was $7 million. In the fourth quarter we took a conservative approach to our cash management and did not repurchase any shares under our share repurchase program. For the full year we have deployed approximately $45 million towards our share repurchase program and have 4.6 million shares remaining under our current share repurchase authorization.

We anticipate that 2009 will continue to be challenging due the uncertainty around consumer spending patterns and the financial health of the retail industry in general, conditions that make forecasting difficult. Consequently we are not providing a business outlook at this time.

In response to the uncertainty of the times with a rate and scale of change in consumer behavior and retail circumstances as relatively unprecedented we have for internal planning purposes developed a series of contingent operating scenarios. As we learn more about the impact of macro circumstances on our business we will adjust our business plans accordingly.

The choices we make will be governed by three fundamental principals. In times such as these cash is king. We will continue to maintain our pristine balance sheet. Brand health is key to enterprise performance, we will continue to invest in our brand enhancing strategies. Operating margin improvement, we will work to deliver and improve operating margins by sharply controlling operating expenses and minimizing markdowns.

While we cannot control what is happening externally we remain focused on the things that we can control. For the last 18 months we reduced our operating expense base by over $70 million as we focused on tightly managing discretionary expenses and took actions to run as lean and as efficient an organization as possible.

We have reinvested approximately $30 million of these savings behind strategic priorities including consumer facing marketing, our high growth businesses of PRO and SmartWool, and our expansion into China and select fortress cities, and we ended the year with a very strong balance sheet affording us financial flexibility in a competitive marketplace with $217 million of cash, $418 million of working capital, and no debt.

In 2009 we don’t anticipate any near-term relief from the external environment but as the year develops we will manage for changing conditions, update our plans accordingly, and maintain our priorities in the face of external uncertainties. We remain committed to our strategic priorities and will continue to invest behind them, although the pace of some investments particularly retail expansion will be slowed until macro factors improve.

And we will continue to focus on managing the things we can control, managing our working capital conservatively, and controlling our spending diligently. Thank you, now I’ll pass the call over to Jeffrey.

Jeffrey Swartz

Good morning, there’s been an extraordinary external circumstances. Timberland made concrete progress against our strategic commitment to improve brand strength and enterprise performance during 2008. The hard choices and the hard work necessary to restore the Timberland brand to health began well before the current downturn and so we believe we are well prepared to operate our brand successfully despite the volatility seen in 2008 and anticipated in 2009.

We spent a great deal of time to focus our brand building and to lock in on a strategic plan for brand and enterprise health. Those efforts are behind us meaning now we’re able to say confidently all eyes on execution across our business. In challenging times we are equipped with a great brand and a simple and clear plan well understood throughout the business and our team is energized and focused with a clear sense that despite the externals we can make real strategic progress even in 2009.

We are not naïve about what’s going on around us. We are very concerned about our customers’ ability to survive, very concerned about our supply chain partner’s ability to survive, acutely aware that consumers are hurting everywhere but we believe in the plan we’ve built, we have faith in our brand and confidence with all eyes on execution we can move forward.

Let me share highlights of our progress and some context for where we are heading.

In a market as paralyzed and fearful this one is, only emotionally relevant and distinctive brands get any attention. Consumers are buying but only propositions that are authentic, compelling, and enduring. Trusted brands that have gravitas, brands that deliver emotional value, brands that innovate and product and in communications, we think those are brands that survive and even capture share.

That after 30 plus years of brand building globally Timberland is trusted and see as authentic by retailers and consumers is a powerful foundation upon which to invest in emotional relevance and while others pull back, we see now as the perfect time to continue to invest in building brand heat and brand height.

In fall and through holiday we executed integrated global brand building campaign designed to create emotional connection with consumers. We deployed high emotion films during major sporting events such as the Olympics, on television, in cinemas, and online. And we executed more then TV. We launched interactive viral communications on Face Book and other web vehicles and we measured our marketing impact and even in terribly chaotic times we began to break through with consumers.

Where we invested globally we saw improvements in specific brand metrics and higher traffic at our stores and on our ecommerce sites. While nearly everyone went nuclear on promotions as early as late Q3, we held back. We believed in the marketing and on our ability to respond quickly based on a powerful and nimble supply chain.

We think our strategy and our discipline paid off. While sales at Timberland bricks and mortar were soft overall, margin remained healthy, meanwhile both our US and UK ecommerce saw sales and margin increases well ahead of our 2008 plan. Given most of the news back from the retail front we’re pretty happy with those outcomes. We were very pleased with our first foray in web-based marketing.

From a soft launch in June of 2008 our Earthkeeper plant a tree application on Face Book engaged tens of thousands of consumers worldwide and resulted in them growing online more then 600,000 virtual trees and this is only one part of our web 2.0 consumer engagement strategy online. It is absolutely clear to us that Timberland consumers want to engage with the richness of our brand and online is an incredibly powerful way to build connections between consumers and our brand.

We also enjoyed a great response as the footwear and outerwear sponsor of the Sundance Film Festival in [Parkshead], Utah where handsome rugged outdoor products with authentic environmental credentials connected our brand to important consumer influencers. This kind of marketing is more powerful then a co-op ad in the newspaper somewhere and we’re really pleased at the progress we made in pushing our marketing model into the 21st century, even in the midst of a chaotic Q4.

Reaching for relevant innovation and marketing and in product is what Earthkeepers is all about. From a product perspective despite the economic disaster at retail Earthkeepers faired well. We believe that beautiful product executed brilliantly, built responsibly, marketed compellingly, it will sell through almost as if the economy was okay.

In virtually every market we’re in, Earthkeepers boot products sold through with distinction. Earthkeepers represented 15% of our retail sales in Europe on 10% of store inventory. In Asia Earthkeepers represented two out of the five top selling retail SKUs and in the US Earthkeepers were among our very best sell through SKUs.

We’re doing exactly what we said we would do which is making outdoor oriented, handsome, capable footwear and apparel for consumers globally with strong environmental commitment and we’re getting emotional response from consumers. For me, Earthkeepers represents both a product and a brand evolution creating the next generation of iconic Timberland product and supporting it with powerful integrated story telling, a strategy we are committed to building on.

We’re also seeing positive trends in classic boot product across the line. Sales of our core 10061 product have been strengthening over the last two quarters globally. Of course a little cold weather doesn’t hurt and drove sales in Europe particularly in Italy and Germany. Overall in our boots business, prices are strong, inventories are relatively clean, and retailer margins remain relatively healthy. Elite collections, Abbington and Timberland Boot Co. as well as seasonal stories such as Shackleton, also turned in worthy performances.

Likewise the launch of Timberland Mountain Athletics is gathering speed. Timberland Mountain Athletics is an insight, its not simply a trail running product launch because the world doesn’t need another trail runner. Our idea is lighter, further, faster, sexier, greener products, aimed at young attitude users. The Mountain Athletic launch is backed by innovations like our exclusive arrangement with green rubber.

In the entire outdoor space only Mountain Athletic outsoles will be made using recycled automobile tires from green rubber, high performance rubber with an extraordinary story. Buy a pair of shoes and take a tire out of the landfill. This is relevant innovation. This is environmental values in action in a cool and consumer sexy way and customers are responding. In every one of our regions globally we have met or exceeded our sell in expectations.

In the US Dick’s has signed on for a 250 plus door test and Finish Line will feature brand building assortments in a minimum of 50 doors for Mountain Athletic and fall 2009. We’re also getting positive feedback from key accounts in Europe and in Asia and I look forward to consumer response to the Mountain Athletics television commercial that will air when the products are launched.

Finally our work with apparel licensee Phillips-Van Heusen is also progressing. PVH has delivered three men’s apparel collections in the US and partnered with us on brand building activities such as the concert series Dig It that we executed last year. We’re looking forward to PVH’s continued investment in building up the Timberland apparel offer, a high quality distribution, strengths of which PVH’s track record is well established.

Our focus in terms of building brand heat and brand height is, one fortress [inaudible]. By concentrating our investments in brand building and in building consumer access networks at wholesale, at retail, and online in key cities we get scale and we get impact. One key city at a time we can make our brand famous and powerful.

During the second half of 2008 we opened another retail store in fortress London, this one at the new Westfield shopping center and while retail was falling apart globally our new location at Westfield was among our top three in sales during December. We’re working for a similar outcome at the intersection of Brand of Commerce in fortress city New York. You’re welcome to visit our new SoHo store at 474 Broadway, South of Broom, which opens next week.

Selected prudent investments like these stores are part of building premium networks of wholesale and retail in fortress cities worldwide. I look forward to sharing more progress about fortress cities on future calls.

Our entire premise for building brand heat and height in fortress cities globally despite the economic sandstorm hinges on our ability to execute with precision and distinction all along our value chain from design through to execution. We made hard [eyed] and calculated choices over the last 18 months to improve our ability to operate as an enterprise.

Over the last 18 months we’ve taken out over $70 million of expense out of our global expense base and we’ve reinvested purposely against brand health. We’ve sharply restructured how we do our work and while we’re not finished seeking more effective and more efficient means of competing we came into the economic nightmare healthier for those hard choices with a much better balance of operating expense investments.

At the same time we remain one of the best balance sheet management teams in this industry. Its not by accident that we ended 2008 with zero debt and with $217 million in cash. It comes from reining in complexity in our product design process, it comes from a very high quality supply chain in footwear, and it comes from operating systems that incented for and focused on generating cash.

As a result we have a very healthy financial keel underneath our brand building strategy. I believe we’re making the right choices, hard and clear choices, that set up a healthier brand and a better performing business. No one can be optimistic about economic circumstances in this moment, but we don’t control the economy. We’re accountable for making every dollar of investment work hard and with urgency to rebuild our brand’s position globally.

We’re accountable for making sure that our balance sheet stays clean and for executing with distinction against the opportunities that continue to exist with consumers despite the external realities. At the end of the day we know what we know. We believe in our brand and we believe in our strategy. We’re focused on our long-term strategic objectives of rebuilding the Timberland brand and creating real sustainable value for Timberland’s consumers, customers, and shareholders and we’re committed to making progress in spite of the external realities that beset us.

We’re glad to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kate McShane – Citigroup

Kate McShane – Citigroup

You mentioned that one of your strategies for 2009 is that you’re going to continue to invest in brand enhancing strategies and I know you’re not giving guidance for 2009 today but how should we think about marketing expense for next year. Can we expect the same level of investment as in 2008.

Jeffrey Swartz

I wouldn’t think about it in terms of dollars, I’d think about it in a same level of intensity. We have three things to sort. One is there are some big ideas that are being introduced for the first time in 2009, example is Mountain Athletic, example is the relaunch of women’s in Italy. There are other ideas like Earthkeepers which are already introduced that need to be reinforced and so one is there is a different pipeline of big ideas mostly in the fall of 2009.

Two is a marketing dollar in media is going farther obviously in 2009 then it did in 2008 and so we should be able to create similar levels of intensity with lower media spends. Literally you can buy television or media space cheaper as you know. The third thing is we said to you that we have contingent operating plans and what we mean by that is, all eyes right now are focused right now on two things.

One is executing the daylights out of a really challenging spring season, its as everybody reports it to be so its one pair at a time. The second thing that everybody is focused on is building the fall order book. We are travelling relentlessly into the face of our customers and having conversations about building a fall order book and we are certainly rating our market investments on the basis of what that order book will tell us.

We have a range of scenarios of what the order book will tell us and as a result what kind of marketing investments we’ll make. The point we were trying to make is we’re not going to back away from the strategy of rich ideas, deepen consumer insight that are aimed at important markets that are backed up with integrated marketing plans but we’re not [pureic] here, we’re very practical and so we’re going to build the most robust order book we can and then we’ll make judgments about the level of actual dollars that we spend in marketing on the basis of that order book.

Operator

Your next question comes from the line of Chris Svezia – Susquehanna Financial Group

Chris Svezia – Susquehanna Financial Group

When you talked about contingency plans, you talked about cash is king and about brand health and the investments, operating margin improvement, in the context of 2009 how do you rank those. You talked about the investments you need to make and brand building initiatives, depending on obviously the reaction to spring and the fall, I’m just trying to get a sense of, when you talk about operating margin improvement is that a realistic assumption for 2009 in those internal plans given the environment, given what you’re up against.

Jeffrey Swartz

We gave you the lens through which we view the business in priority order, meaning first cash is king and balance sheet being as bullet proof as one can build a balance sheet, that’s our number one priority. Our number two priority is to build the brand and our number three priority is given that you have made the choices, so choices like if the order book says you have 10 you buy eight.

That’s a view of cash is king and balance sheet comes first and we expect that people are ordering, we expect we see that people are ordering later and that are ordering in the form of reservation. That’s not a Timberland thing, I think that’s a broad observation of the marketplace so we just have to be careful that we under reach in terms of inventory. So we are tightening our merchandising and we’ve been tightening up our buys.

To be clear we began that process in the middle of last year so this isn’t an okay, all hands on deck thing. Look at the inventory result we delivered in the fourth quarter. We didn’t miss sale. We did lower the amount of excess and obsolete that we had to sell. I think from a balance sheet perspective and inventory perspective I want to give you the impression that this is an every day top of mind, hard-nosed operating practice that is not new news, its real news at Timberland and consistent news.

So that remains our number one priority, keep the balance sheet spotless because that gives us the flexibility to deal with things that we can’t control. Second thing is brand building and that was what I said, I want us to continue to be moving forward even though the marketplace is as difficult as it is and then the question is how does that turn, how do you predict what that will mean from an operating margin perspective and there I have to say its simply a matter of we have to look at what the order book is going to tell us. With top line, without assembling an order book that reflects better performance door by door, its hard for me to say how operating margin improves within the year. We are not going to get into estimates and guidance but I’m trying to answer your question to say out loud we have scenarios that say we can deliver this kind of an order book and it could be leverage.

We have also estimates that say with the rate of bankruptcies and the pressures out there we may not be able to assemble that level of an order book in which case its harder for us to be confident about literally improving the margin.

John Crimmins

The three different priorities, they don’t necessarily work in tandem, in fact they sometimes contradict each other and so the key point there is that we’re going to make choices trying to balance the importance of the three priorities and as we learn more about the impact of the macroeconomic environment and consumer spending trends, we’ll adjust our plans accordingly with those three objectives in mind.

Chris Svezia – Susquehanna Financial Group

When you look at, you’ve done a great job of reining in the cost structure at Timberland in 2008, given the environment and I guess over the scenarios that you’re playing out here, how much more of an opportunity exists as you try to balance the brand building initiatives to continue to look at the operating structure to make those cuts without sacrificing too much of the brand development globally.

Jeffrey Swartz

I’m very encouraged by the Board governance model that we’re living here at Timberland. Our Board has done an extraordinary job of stepping up in these times so we’re meeting much more frequently then we’ve done in the past because the times demand it and the Board is differently engaged in understanding how our business is operating and so they’ve driven us to say show us different scenarios that have a nice edge that balances.

Because there’s a place where you can create in your mind a nuclear winter and that is, if you get to that place where literally the world comes to an end and I can say for whatever its worth the early indications of our fall book don’t suggest anything like that. They suggest a crappy environment but nothing like I’m describing. We’ve created flexibility in our spending plans so that if we needed to be really Draconian in terms of balance sheet is the only thing that matters and even let brand be a distant second we have real flexibility.

That’s what I call the nuclear winter notion, honest to goodness don’t think it’s a one in a thousand but I also want to say to shareholders we’re prepared in case there is a one in a thousand. In the 999 out of a 1000, what kind of leverage have you got there.

John Crimmins

There’s two parts to the spend, the one is the element of spend that we view as investment behind our strategic initiatives and so we have the ability to control that and we will modify the level that we investment behind our strategies based on what we learn about the revenue signal and how our business is performing as we work through the year.

And then there is also, I’d cut the next piece into two parts too, there’s still an element of discretionary spend that if things got dramatically worse we could cut back further, not quite the nuclear winter scenario, but we do have some triggers that we can pull to get tighter should things be worse then expected.

Chris Svezia – Susquehanna Financial Group

Spring versus fall, you mentioned spring obviously challenging and judging from the inventory positions obviously you’re preparing for that to some degree I guess you can infer that it would be certainly challenging relatively speaking to that magnitude, what point in time as you look to fall do you start to get comfort around how the fall order book should shape out one way or the other. What gives you confidence you might actually start to see some light at the end of the tunnel.

Jeffrey Swartz

About spring, we are, you know, all our profits largely come from being a wholesaler of footwear we do other things, but our profits come from wholesale yet our mentality has to change and it is actively changing. We are operating much more like a retailer in terms of how we’re managing and monitoring the business. Its springtime right now, meaning we are chasing on every other day basis, as if Nordstrom were our own stores, it’s a much more aggressive approach because spring is as difficult as all can be.

You know that we have [four] to order looks mostly at quarters one and quarters three, quarters two and four are typical fill in quarters. So we’re out now, we have been since mid January assembling a fall order book in apparel on a global basis. We have a weekly expectation of orders by region even by door and we look at that. We think that we’ll have some sense of the third quarter in the range of end of March early April. That’s based on not a normal sell in cycle. A normal sell in cycle we should have view of that earlier but not only are retailers writing orders for closer to the season they’re all writing orders later period.

So for example with Dick’s, on the Mountain Athletic launch we’ve been meeting with Dick’s since the early part of the fourth quarter of last year because it’s a new idea and we want to give their team a change to vet the idea and talk about it, we haven’t got an order in hand yet. We are about to get orders in hand so just to give you a sense of timing how long its taking to get ideas sold in and then converted into orders, the net is we think end of March, early of April we’ll have a pretty strong sense of the third quarter as indicated by an order book.

Operator

Your next question comes from the line of Mitch Kummetz – Robert W. Baird

Mitch Kummetz – Robert W. Baird

I just wanted to follow-up on that last question because you did mention that for spring you’ve got a Q1 forward order look and Q1 is not an inconsequential quarter for you so based on that spring order book what can you say about your outlook for the first quarter without giving specific earnings guidance.

Jeffrey Swartz

All I will tell you is that I’d characterize it as every day is a changing reality and I don’t want to imply that we’re not in control or on top of what’s happening because I say humbly but clearly I think we are. That was my point about operating more like a retailer then a wholesaler. I have a clear sense of what happened in Germany yesterday at retail then we would have had a year ago. So we’re paying different kind of attention to it day by day and we are, I don’t think we’re leaving a lot on the table. Our execution is good. Our supply chain team is capable and so if there’s an at once order, we know about it and we’re doing everything we can to fill it and to nail it and I think we’re doing a very good job in a very tough quarter.

More then that, I think its really hard to get out in front of ourselves. I can tell you what happened yesterday and I can tell you what we anticipate doing today, and I’m not sure yet about tomorrow.

Mitch Kummetz – Robert W. Baird

On the gross margins, down 80 bps in the fourth quarter and you talked about a number of factors contributing to that, mix, fewer close outs a positive but that was more then offset by higher product costs and the impact of FX, so when we think about 2009 and your inventory is in good shape and I imagine mix will continue to work to your advantage in terms of gross margin but what about product costs and what about FX, does FX become a bigger drag in 2009 then what we’ve seen in Q4 and then product costs, my understanding is that those were a drag in the first half and maybe some of that has alleviated by the back half. How should we be thinking about the factors that weigh on the margins.

John Crimmins

I think what you just described about product costs is fairly accurate. We’ve seen some increased product costs in the second half of 2008. We expect that trend to continue when you compare first half of 2009 to first half of 2008 and we’ve talked on previous calls about our assumptions for expecting some product cost increase. And then I think its also fair to characterize that as we work through the first half of the year in particular we do go into the year with a cleaner inventory position, I think we’ll get some gross margin performance back by not having to the same degree of off price and excess clearance activity that we had in the first half of last year.

So I think those fundamental assumptions are directionally accurate. On the foreign exchange piece I’m trying to stay away from forecasting what’s going to happen with foreign exchange. We tell you on each quarter what the impact has been on that quarter and so you can work backwards and make your own assumptions for what you want to use for rates. But certainly the directional impact of FX has swung at us in the fourth quarter of this year so if rates were to continue in the same place, they’d be working more against us then for us.

Mitch Kummetz – Robert W. Baird

When you look at Q4 sales came in down double-digits but obviously there’s some moving parts there can you give us a number either percentage increase or an absolute dollar number as to where the sales were if you strip out the licensed apparel and then the stores that were closed just to get a sense of as to what the run rate is there.

John Crimmins

There are several moving pieces and I’m not sure, I don’t think I have all the pieces to tell the full story for you, I think we’ve gone through at a high level, you understand what the bigger factors are. I’m not sure I want to go any deeper then that.

Operator

Your next question is a follow-up from the line of Kate McShane – Citigroup

Kate McShane – Citigroup

Your Timberland product has been called out by several retailers recently as having sold through very well specifically in the athletic specialty footwear channel, have you changed the product for this channel specifically in terms of offering and price and was this one of your better performing channels during the fourth quarter.

Jeffrey Swartz

We have not changed the fundamental merchandise mix that’s offered to the athletic channel. What we have told you consistently is that we have narrowed down the merchandising and so if you look at our brand’s performance in a retailer like Foot Locker you would see the heart and soul of the iconic boot lines, so it’s a narrower merchandising, that’s good on a couple of levels.

We have absorbed a lot of pain as the fashion contraction occurred around us but we’re down to an assortment that is I don’t want to say impervious to fashion but it’s the least fashion sensitive aspect of that line. I was at retail yesterday in New York looking at our presentation in that channel and you see a tight, hard, defendable point of view and that’s principally the kind of good news that I think you are hearing.

That’s the genesis of that good news. In terms of price, I guess I’m most pleased to see that while our wholesale prices actually have gone up a little bit within that product category our retail, the retail price being charged by our retailers which is of course is their discretion to set, I observed that they are higher, the average retail price for core Timberland boots in the marketplace, the lowest I saw yesterday which I did have a conversation with one of our sales associates, was I say $130 retail for a pair of yellow boots right next door to a better display which was $145 for yellow boots.

In either case the $130 which did involve a bit of a conversation on the side there with a Timberland colleague of mine is still sharply better then it was in the fourth quarter of 2007, by sharply better I mean $25 or $30 better at retail. Now you know we don’t control the retail prices, we’re only responsible for wholesale prices and we have respect for and obviously our retails make any choice that they want to make about how to price things.

But I’m very pleased to see that the average retail price for our iconic product in much higher year-on-year and I hope because we continue to constrain the supply and continue to focus the merchandising and continue to try and build brand heat that that price will go up not down. Our prices at wholesale have gone up slightly and we hope that our retails will stay firm.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Jeffrey Swartz

Thank you and have a good day.

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Source: The Timberland Company Q4 2008 Earnings Call Transcript
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