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Columbia Sportswear Company (NASDAQ:COLM)

F1Q09 Earnings Call

April 23, 2009 at 5:00 pm ET

Executives

Gertrude Boyle - Chairman of the Board

Timothy Boyle -President and CEO

Thomas B. Cusick - Vice President of Finance and Chief Financial Officer

Peter J. Bragdon - Vice President and General Counsel

Ron Parham - Director of Investor Relations

Analysts

Robert Drbul - Barclays Capital

Michelle Tan - Goldman Sachs

Kevin Kim - Robert W. Baird

[Bill Gazelum - Tiet & Capital Management]

Steven Martin - Slater Capital

Kenneth Stumphauzer - Sterne, Agee & Leach

Sarah Hasan - McAdams Wright Ragen

[Sarah Geary] - RBC Capital Market

Operator

Good afternoon. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions)

I would now like to turn the conference call over to Ron Parham, Director of Investor Relations. Sir, you may begin your conference.

Ron Parham

Thanks Ashley. Good afternoon and thanks for joining us on today’s call. Earlier this afternoon we issued an earnings release and financial schedules covering the results of our first quarter of 2009. With me today to discuss the results and answer your questions are Columbia’s Chairman, Gert Boyle, President and CEO, Tim Boyle, Vice President of Finance and Chief Financial Officer Tom Cusick, and Vice President and General Counsel Peter Bragdon.

Before we begin, our Chairman Gert Boyle has an important reminder.

Gertrude Boyle

Good afternoon. I would like to remind everyone that this conference call will contain forward-looking statements regarding Columbia’s business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what is projected.

Many of these risks and uncertainties are described in Columbia’s annual report on Form 10-K for the year ending December 31, 2008 and subsequent filing with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs and we do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or changes in our expectations.

Ron Parham

Thank you, Gert. I will hand the call over to Tim.

Timothy Boyle

Thanks, Ron. For those of you who have listened to our calls in the past, you will recognize Bryan Timm is not with us today. He is traveling in Asia with the members of his team as it is his role as Chief Operating Officer. So, welcome everyone and thanks for joining us this afternoon to discuss the results of our first quarter and how we see 2009 playing out based on fall backlog and our current assessment of a very unpredictable market.

I will start by saying that we were pleased with how we managed our business in the first quarter producing operating income of $10.4 million and earnings per share of $0.27 which is $0.14 per share above the midpoint of the outlook we have provided in January. Tom will go into detail in what drove that performance but I want to focus my comments on the conditions of the external retail environment and on the progress we believe we are making internally to return the growth.

Looking at the external environment, I am not telling you anything you do not already know when I say that business remains challenging and that those challenges have spread well beyond the US over the past several months. While the first quarter got us up to a slightly better start than we anticipated, the fall backlog decline of 15% that we reported with today's Q1 results suggests that we will continue to see deterioration in our top line over the remainder of the year. As a category, apparel continues to be one of the weakest discretionary consumer spending sectors in the economy and we are working closely with our retail partners to plan our business under the assumption that things will remain challenging throughout 2009.

In addition, within the apparel segment, department stores especially those that are mall based have been the weakest channel for more than 12 months. Over the past five to seven years, department stores have grown to represent approximately 30% of our US wholesale revenue base. Consequently, this channel has presented the biggest challenge for us as they have taken steps to significantly reduce inventories and to raise cash to mitigate the effects of tight credit markets.

So far, none of our large national department store partners has been forced into bankruptcy or liquidation but a few of our large and longest running regional retail chain partners have not faired as well over the past couple of months. We are working very closely with a number of retailers around the world to manage their credit limits and plan their payments and shipments very carefully in order to keep our products on their shelves and available to consumers without incurring undue credit risks.

What is happening in the US is also playing out in key markets across Europe, some of which had been among our best growth markets over the past decade. In addition, several economies in our distributor based business are under severe stress suffering stead declines and consumer spending, currency evaluation and even more troubled credit markets that is here in the US. As a result, we have seen significant declines in many of these markets. Canada's credit market seems to be at better shape than the US but consumers there have caught a bit of the US consumers spending contagion as the Canadian dollar has weakened against the US dollar by roughly 20% over the past six months.

Japan and Korea remained relative bright spots for us. Korea has reported Q1 net sales were punished by a greater than 30% decline in the value of the won against the dollar more than offsetting the midteens growth rate they achieved in local currency for the quarter. Conversely, Japan generated mid single digit local currency growth and benefited further from the strengthening of the yen against the US dollar to produce reported growth of more than 20% in the first quarter. It is a quick review of the external environment and only focusing on that could lead to be discouraging.

While those macroeconomic realities have certainly had an impact on how we are managing our business in the near term, our strong balance sheet has provided us with a financial flexibility to continue investing in our strategic initiatives to position our brands for when the global economy recovers. We are continuing to build a multi channel, multi brand business model and their related operational capacities that we believe will provide sustainable, profitable growth platforms. We are using our technology portfolio to continue creating differentiated products with clear benefits adding a great value for a wide variety of that to our consumers.

We will continue to invest in our direct-to-consumer business in the form of additional branded stores and outlet stores. We are also building e-commerce platforms for our Columbia and Sorel brands that are slated to launch in the second half of 2009. All three of these direct-to-consumer channels are important evidence for us to communicate our innovation, demonstrate the benefits of our technologies, build excitement around the brands and to drive consumer demand. We will continue to invest in our forward business and believe there is a substantial opportunity to grow our Columbia, Sorel and Montreal franchises.

The global outdoor footwear business is estimated at somewhere around $7 billion annually. That means we currently have less than 4% market share. We think the investments we have made and continue to make to attract top footwear industry talent may begin to payback as early as 2010 and offer great long-term potential. Finally, we are continuing to invest in integrated marketing programs that will drive consumer demand for each of our brands.

I will turn the call over to Tom to review the financial results.

Thomas Cusick

Thank you, Tim, and good afternoon everyone. I will begin with the brief overview of the income statement and balance sheet.

First quarter net sales decreased 9% to $272 million with changes in foreign currency exchanges rates contributing 5 percentage points of that decrease. Looking at Q1 2009 net sales on a regional basis compared with Q1 2008, US sales increased less than 1% to $156.3 million. US retail sales more than doubled as there were approximately 20 more US based retail stores operating in Q1 2009 compared to same period last year. US wholesale sales showed a high single digit percentage decline primarily attributable to the Columbia brand and concentrated in our sportswear and footwear categories which typically account for the majority of our spring season business.

EMEA sales declined 24% to $49.8 million including an 8% drag from foreign currency exchange rates. Net sales in our EMEA direct business showed a high 20% decline including a 10% negative effect from foreign currency exchange rates reflecting the difficult macroeconomic conditions to soft spring order book and the misaligned product assortments and market positioning in the region that we have mentioned in previous calls. We expect fall 2009 to continue to be challenging for us in this region. Our EMEA distributor business declined mid single digit which is due to our shift in the timing of shipments. Advance orders for spring 2009 actually increased in a low double digit for this channel. However, a higher percentage of the business shipped in December 2008 and what is recorded as revenue in Q4 of 2008 compared to spring 2008 shipments which shipped in January 2008 and were recorded as revenue in Q1 2008.

These timing shifts are common because the vast majority of our distributor shipments for both the EMEA and LAAP regions are factory direct with revenue being recognized on a cargo vessels departure date over which we generally have little control. The majority of our spring season shipments to distributors occurred in the months of December and January where most fall distributor shipments occur in June and July. Given the peak shipping periods overlap quarters, a quarterly sales for this channel are less predictable than our direct businesses.

Net sales in Canada declined 26% including an 18% currency headwind primarily due to planned reductions and some channel of distribution. Net sales in our LAAP regions decreased 6%, foreign currency exchange rates played a strong role in our Japan and Korea businesses in this region. Low 20 percentage growth in our Japan business was aided by midteens percentage growth from the effect of currency. Conversely, the effects of currency on accretive business turned high teen percentage constant dollar growth into a 20% decline for the quarter.

Net sales to our LAAP distributor showed a mid 20 percentage decline which is consistent with our EMEA distributors predominately due to the timing of shipments as a higher proportion of spring 2009 order shipped in December compared to spring 2008. Advance orders for spring 2009 from our LAAP distributors were up below teens.

Looking at first quarter net sales by product category compared with Q1 2008, sportswear's net sales declined $22.9 million or 14% mostly related to Columbia brand net sales declines in both the EMEA direct and US wholesale business. Outerwear net sales increased $7.2 million or 10% in the first quarter. The increase was primarily driven by a higher volume of fall 2008 closeout product sales in the US.

Footwear net sales declined $11.3 million or 22% mostly due to EMEA direct in US wholesale shipments as expected based on our lower spring order backlog. In addition, the US decline was further magnified by shift in the timing of shipments into the second quarter. Accessories and equipment net sales increased $1.6 million or 10%. From a brand perspective, the 9% decline in first quarter net sales can be primarily isolated to the Columbia brand which was down $25.6 million or 10%.

Mountain Hardwear net sales grew 6%. Sorel, Montrail and Pacific Trail net sales were insignificant in the first quarter of each year. Gross margin decreased by 330 basis points in the first quarter primarily due to an increase volume of fall 2008 closeout products sales at lower comparative margins resulting from higher to normal order cancellations and a more promotional retail refinement.

SG&A expense decreased 2% to $102 million representing 37.5% of first quarter net sales compared to 34.9% in last year's first quarter. In absolute dollars, this decrease was driven by cost reductions executed over the past several months to mitigate further erosion in our operating profitability. The cost reduction initiatives which began in mid 2008 including reductions in headcount, incentive compensation, benefits and other discretionary cost as well as our plan marketing spend for 2009. Cost associated with our direct-to-consumer initiatives essentially offset this cost saving measures.

As the percentage of sales, the SG&A expense deleveraged is largely a result of revenue contraction in our whole sales businesses in the US and Europe coupled with an increased fixed cost based resulting from our expanded retailed business. Operating income for the first quarter of 2009 was $10.4 million or 3.8% of net sales compared to 9.2% of net sales for the comparable quarter in 2008.

Income tax expense for the first quarter of 2009 was $4.4 million equating to a 39% tax rate compared to $9.8 million or a 33% tax rate for the first quarter of 2008. The increase in our first quarter 2009 tax rate was due to a higher expected full year mix of US income which is generally taxed at a higher rate in international income. Net income for the first quarter 2009 was $6.9 million or $0.20 per diluted share compared to $19.9 million or $0.56 per diluted share for the first quarter of 2008.

Turning to the balance sheet in comparing March 31, 2009 balances to March 31, 2008, the balance sheet remains very strong with cash and short term investments totaling $299.8 million versus $278.1 million at the same time last year. Consolidated accounts receivable at March 31, 2009 declined 13% to $213.5 million versus $246.2 million a year ago. This decrease is largely related to the decrease in our wholesale sales for the quarter.

Consolidated DSO decreased to 71 days from 75 days at March 31, 2008. During the first quarter of this year, we wrote off approximately $2.5 million in uncollectible accounts receivable related to customers in bankruptcy. We continue to actively manage or credit risk and cash collections and has slightly increased our reserve for doubtful accounts to approximately 4% of accounts receivable. Consolidated inventories decreased 6% to $223.7 million compared to $238.1 million last year. This decrease is largely attributable to lower finished goods inventory on hand in the US and Europe. We expect the consolidated inventory levels will continue to decline on a year-over-year compared basis to the end of the year as we believe we have bought more tightly for fall 2009.

During the first quarter, we generated approximately $58.8 million in cash from operations compared to $60.9 million in Q1 2008. CapEx was $10.3 million for the first quarter of 2009 compared to $14.2 million in the same period last year with the majority of our current year CapEx related to our retail expansion in the US and Europe. Depreciation and amortization expense for the quarter was $8.2 million versus $7.9 million in last year's first quarter. Today, we announce that Columbia's Board of Directors approved a second quarter dividend of $0.16 per share.

Now, let us turn our attention to the outlook for 2009. The worldwide economic environment has created a high degree of uncertainty around consumer demand and other factors that affect our business significantly limiting our visibility. Therefore, we are not providing as much detail about our expectations for the rest of the full year as we have in the past. However, we will discuss how we are managing our business today and how we intend to manage it through this period of uncertainty under the assumption that the global economy does not deteriorate further from current levels.

Actual results could differ perhaps materially from our current outlook. Based on our earlier discussion of the 15% decline in our combined order backlog, we expect our full year wholesale business to decline in the midteens on a percentage basis including the anticipated negative effects of foreign currency exchange rates and to be slightly offset by growth in our direct-to-consumer business.

As a result, we expect full year 2009 net sales to decline in a low double digit on a percentage basis compared with 2008. We expect full year operating margin to decline approximately 300 to 350 basis points from 2008 including last year's impairment charge recorded in Q4. This decline is primarily due to SG&A deleverage and to a lesser degree, some contraction in gross margins. The SG&A deleverage is primarily the result of the revenue contraction in our wholesale business in the US and Europe as well as our international distributor business and an increasing fixed cost base resulting from our direct to consumer initiatives.

We are planning our marketing and advertising spend to just over 5% of sales for 2009, down slightly from 2008 levels. The gross margin contraction is primarily due to a higher volume of closeout products sales and more promotional retail environment and negative effects of foreign currency head rates. We are currently estimating the full year income tax rate to be approximately 30%. However, it could higher or lower than that in each of the remaining quarters of 2009 based on a geographic mix of taxable income and specific events occurring with each quarter.

We are currently planning an approximately $55 million in capital spending during 2009, essentially flat with 2008 with approximately $35 million related to retail expansion and approximately $20 million related to maintenance and infrastructure projects. Looking specifically at Q2 which is our lowest volume and most volatile quarter of the year as we wind down spring shipments and begin fall deliveries, we expect net sales to contract in the low to mid 20% range due to the decrease quarter backlog reported today, timing shifts and a lower volume of international distributor shipments in the quarter. The deleveraging of our fixed cost base coupled with the continued investment and our direct-to-consumer initiative will result in a significantly higher operating loss in Q2 2009 as compared to last year's Q2.

While our strategic initiatives will pressure profitability in the near term, we firmly believe that they are the right thing to do and will be beneficial in the years to come. That concludes my remarks and I now hand the call back to Tim for his closing comments.

Timothy Boyle

Thanks, Tom. I will close quickly by simply acknowledging that it is already quite clear that 2009 is not going to be remembered as a great year for Columbia Sportswear from a financial standpoint. But it is our intention that 2009 will be remembered as a year in which our strong financial position allowed us to continue investing in strategies that will help set us in the path toward renewed growth and profitability. We remained committed to using our worker's balance sheet and strong cash flows to pursue growth opportunities while reducing operating cost wherever possible.

Thank you. Operator, could you please begin the Q&A?

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Robert Drbul - Barclays Capital.

Robert Drbul - Barclays Capital

Tim, just a couple of questions for you; first on the backlog, can you give us any ideas in terms of some of the commentary or feedback from the retailers? How much of it do you think was macro related versus pricing versus the product, any thoughts around that?

Timothy Boyle

Well I guess I would say that our, if you took the overall mood of retailers globally, it is one of extreme caution. So, that is definitely and very impactful on backlog this year. I had many retailers tell me that in fact almost every one of them intend to chase inventory throughout the balance of the year. Secondarily, we lost a few customers due to bankruptcy here in the last quarter and we want to make sure that we have the appropriate caution of accounts receivable credit extensions. But we still have work to do on our product and we recognize that and many of the investments that we are making throughout the year is going to be continue to improve the differentiation and quality of the products.

Robert Drbul - Barclays Capital

Of the doors or the customers that you lost for 2009, can you give us an idea in terms of like how many lost doors you are selling to? How many doors you lost as a percentage of the total?

Timothy Boyle

I think on a door count basis, it is probably not significant. We have so many doors we are selling to but we have a number of strong regional players that we have lost in the first quarter of 2009 and so it is not so significant on a door count, just another contributor to the impact of the reduced backlog.

Robert Drbul - Barclays Capital

Okay and then what is the cash on the balance sheet? Can you just give us an idea in terms of is acquisition, are they still part of your game plan here going forward in terms of growth opportunities? Can you comment some buyback thoughts etc?

Timothy Boyle

Well, Bob in this environment with the bad news that we are talking about today, it is very comforting that we have the kind of balance sheet that we have today which we know will protect us and give us the opportunity to first and foremost focus on our existing business and brands and make sure that we are giving those businesses that proper investment which is going to be required and then frankly will be positive for the Company when other companies cannot invest. Secondarily, we do have a strong balance sheet and it allows us to be opportunistic so we will be handling our plans to relation to future sort of in that order.

Robert Drbul - Barclays Capital

Okay and then Tim, you said a lot of your retailers are hoping to chase product in the back half. How are you approaching your inventory buys with those types of commentaries from your customers?

Timothy Boyle

Well, we have been much more conservative in terms of our approach to inventories as it relates to the back half of 2009 so our hope is that the economy becomes more robust and that customers will take more inventory from us than they currently have on order but we are not planning for that. We are planning that the business remains at about the same level and we really do not have any speculate. We have very little speculative inventory and much leaner than in prior periods.

Operator

Your next question comes from the line of Michelle Tan - Goldman Sachs.

Michelle Tan - Goldman Sachs

Just following up on Bob's question on the regional players that were lost, I am sorry if I missed this on the call but were there still sales to those players in the 1Q numbers or was that something that was already basically gone by the time spring sales?

Timothy Boyle

I think there are probably were some sales in Q1 to those customers. They may not have been significant. I do not have that number with me but we did not have the bankruptcy clarification until later in the quarter.

Michelle Tan - Goldman Sachs

Great and then as you look at the fall backlog relative to the first quarter sales trend, what do you think is the potential deterioration? Is it more on the side of retailers battening down even more than they did for first quarter or where do you see those slides and the fall order book..?

Timothy Boyle

Yes, I am sorry. So, our customers typically in fact require if they want merchandise from us in the back half of the year, they have to buy it early in the year and so our backlog reflects basically our future view in the business. Our customers have been cautious in their purchasing. They typically can come back to us and we encourage them once being sold out in the merchandise that they bought to come back and buy more if we have it. In historical periods, we would have been more aggressive about carrying a larger inventory in the event of those orders but we are taking up much more cautious approach this year than we ever have and so it is our expectation that the outlook we had given you today is really what our view of the business for the balance of the year.

Michelle Tan - Goldman Sachs

Okay, that is helpful and then I guess my last question would be on the first quarter, the sales upside versus your plan, anything additional to call out there in terms of color?

Thomas Cusick

That was really just a function of timing so it does not have any impact really on Q2 or rest of year.

Operator

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

Kevin Kim - Robert W. Baird

It is actually Kevin Kim calling in for Mitch. Just a quick question about the inventory number, I know going into the quarter, you were planning on liquidating the excess fall inventory and it seems like you were successful in doing that but how is that compared to your plans and how that... I guess, yes that is the question.

Thomas Cusick

Really our closeout sales came in for Q1 as we planned the last time we talk from both our sales perspective and a margin perspective.

Kevin Kim - Robert W. Baird

Okay, and then you guys are continuing to expect improvements throughout the year?

Thomas Cusick

Relative to volume of closeouts?

Kevin Kim - Robert W. Baird

Just in terms of the inventory number, are you still planning on having improvements throughout the year?

Timothy Boyle

Yes, we currently expect inventory to come down for the balance of the year.

Kevin Kim - Robert W. Baird

Okay and as far as the end season cancellation rate during the quarter, how is that compared to what you saw during Q4, just as bad or has that gotten better?

Thomas Cusick

Are you speaking specifically to spring?

Kevin Kim - Robert W. Baird

Yes.

Thomas Cusick

I would say our cancel rates had ticked up somewhat from normal levels to the date of the spring.

Kevin Kim - Robert W. Baird

And how is that compared to the levels that you saw in Q4?

Thomas Cusick

Well, Q4 was really a fall phenomena and we are now into spring.

Kevin Kim - Robert W. Baird

Okay and then just one last quick question as far as to FX impact in Q1 on EPS.

Thomas Cusick

I am sorry, can you repeat that question?

Kevin Kim - Robert W. Baird

Yes, just one last question, what was the FX impact on the EPS?

Thomas Cusick

Oh, it was roughly $0.05.

Operator

Your next question comes from the line of [Bill Gazelum - Tiet and Capital Management_29.29]

[Bill Gazelum - Tiet & Capital Management]

A couple of questions, first of all the shoe business was down significantly and given the opportunity that you see there, would you discuss what happened here in this quarter that made the shoe business worse than the other areas and then number two, how would you characterize the retailers inventory at this point in time?

Timothy Boyle

Certainly well footwear, we believe, is one of the biggest opportunities for the Company on a product category and frankly, we have been talking about it for some time and we have had a number of different teams working on footwear over the last several years. We have a team working on and now that we have a high degree of confidence in, the bulk of our reduction in volumes was related to our international business and our distributor business shifting periods against last year. So, while we do not have the kinds of robust growth that we would expect at footwear, a portion of that shortfall was a function of timing against prior periods. I am sorry, I forgot the second part of your question.

[Bill Gazelum - Tiet & Capital Management]

Retailer's inventory?

Timothy Boyle

Yes, I believe that certainly in a look-forward basis as we talk about fall which is really the balance of our year, our retailers have very clean inventories I would suggest. So, the expectation is that we are not looking at a bunch of carryover agreements were it is sitting at retailer's shelves. They are very clean.

[Bill Gazelum - Tiet & Capital Management]

And one final question if I may, in the past you have highlighted the retailer's interest in your technology based products. How in this environment, what is their level of interest then in those products relative to the less sophisticated products?

Timothy Boyle

Our business has continued to grow in those differentiated products from us and when I say differentiated that is primarily differentiated by technology so that continues to be a bigger part of our business and a stronger part, the more commodity products have been under pressure frankly.

Operator

Your next question comes from the line of Steven Martin - Slater Capital.

Steven Martin - Slater Capital

I got on a little late but I just want to clarify the guidance for 2009. When you say that it is a 300 to 350 basis point operating margin decline from 2008, you are talking 2008, the operating profit dollars being 118.7, not the 143 which excluded the impairment charge, correct?

Timothy Boyle

Yes, that comparative includes the prior year impairment charge so if you exclude it, it would be I think that charge is roughly a 187 basis points so that would be added there.

Steven Martin - Slater Capital

Right. I mean, with the charge in there, the operating margin was almost exactly 9%.

Timothy Boyle

Correct.

Steven Martin - Slater Capital

So, you are saying that the operating margin will be between 5.50 and 6.

Timothy Boyle

Correct.

Steven Martin - Slater Capital

Fine. I just want to make sure I had the inclusion/exclusion right.

Operator

Your next question comes from the line of Sam Poser - Sterne, Agee & Leach.

Kenneth Stumphauzer - Sterne, Agee & Leach

This is actually Ken Stumphauzer for Sam Poser. I was wondering if you guys could just maybe give us a little bit of color about opportunity to cut cost and SG&A over the balance of 2009, if we could expect it maybe say comparable reclines as we say in the first quarter and then further whether you have any, if FX gives you any kind of beneficial impact on that stand.

Thomas Cusick

Sure, so with regard to FX and as we look at the back half of the year, we expect FX currently to be less detrimental than it will be to the first half as we inversely the devaluation of Canadian dollar as well as the won and then just really how we, the seasonality of the different regions of our business plays a big factor to that as well.

Kenneth Stumphauzer - Sterne, Agee & Leach

Okay and then as far as cost cutting goes, over the course of the year, could we expect to see similar declines in absolute terms that we saw on the first quarter or do you think that we might actually see a tick up?

Thomas Cusick

As we look at SG&A for the balance of the year, I think the guidance would imply that it is up very slightly year-over-year and our current plans are that the economy is not going to get any worse than it is currently to the extent that it does and we will have to reevaluate our SG&A spent for the year.

Kenneth Stumphauzer - Sterne, Agee & Leach

And so the nominal increase is largely a function of the increase retail store base?

Thomas Cusick

Yes, so when we look at SG&A change year-over-year, we got a decrease happening in our clear book selling cost as a result of the decline in sales and that is essentially offset by the investment in the retail expansion direct-to-consumer initiatives.

Kenneth Stumphauzer - Sterne, Agee & Leach

Okay, and then finally just if you could talk about, you might have mentioned this and if you did, I apologize but the cadence of the direct-to-consumer over the balance of the year to the store openings, excuse me.

Thomas Cusick

Sure. So, as we look at the US, we got for the second quarter, we have got one store planned, five in Q3 and two in Q4.

Operator

(Operator's instruction) Your next question comes from the line of Sarah Hasan - McAdams Wright Ragen.

Sarah Hasan - McAdams Wright Ragen

I am just wondering if you could talk about the impact of the decline in labor and commodity cost and how that is impacting your cost of goods and where it is being offset in the gross margin.

Timothy Boyle

Sure, this is Tim. Well, we have talked a lot about from the historical basis price increases and I think we have been pretty clear that our philosophy is that demand will have much more impact on these price increases than any of the commodity cost. I think what we are seeing today as our operations people are in Asia that we should not expect any price increases. In fact, we are very likely to start seeing some price decreases. Now, strategically for us whether or not we keep those lower costs gross margin for the Company or whether that we pass them to be more competitive, we have not yet determined that but certainly we will have the ability to make that decision here I believe because I think cost are going to be moderating in fact falling.

Operator

And there are no further questions in the queue at this time. I am sorry, we do have one from the line of [Sarah Geary_37.52] - RBC Capital Market.

[Sarah Geary] - RBC Capital Market

I just have a quick question about the product innovation, I know you just launched I think it is OmniSheild, anything else that we can look forward to the remainder of the season and specifically maybe in sportswear, anything new that we can accord to? Thanks.

Thomas Cusick

Certainly. Well OmniShield was really the focus for the Company for this coming season that is being in fall 2009 as it related to our improvements in our sportswear business and it has been well received by our customers. We have two or three more specific technologies in the pipeline which are in the process of being tested but those will be for future seasons primarily for spring 2010 and beyond but it looks like right now there will be a significant amount over the next call of 12 months that we can talk about but right now, we are focusing on the OmniShield and OmniTech components for fall 2009.

Operator

Okay, there are no further questions at this time, sir.

Timothy Boyle

Well, thank you very much for listening in. We look forward to seeing all of you over the next quarter and then talking with you again at the end of the quarter.

Operator

This concludes today’s first quarter 2009 earnings release conference call. You may now disconnect.

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