The Timberland Company Q1 2009 Earnings Call Transcript

| About: Timberland Co. (TBL)

The Timberland Company (NYSE:TBL)

Q1 2009 Earnings Call

April 30, 2009 8:25 am ET


Karen Blomquist – Sr. Manager IR

Jeffrey Swartz – President & CEO

John Crimmins - CFO


Heather Boksen – Sidoti & Company

Elizabeth Montgomery – Longbow Research

Chris Svezia – Susquehanna Financial Group

Mitch Kummetz – Robert W. Baird

Kate McShane – Citigroup



You are listening to the Timberland Company’s first quarter 2009 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 first quarter 2009 conference call. Speaking today will be Jeffrey 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, a non-GAAP financial measures. As required by SEC rules we have provided a reconciliation of this measure and additional information on the Presentation tab found in the Investor Relations section of our website at

Thank you and now, I’ll turn the call over to John.

John Crimmins

Thanks Karen, and good morning everyone. I reported to you back in February that as we embarked on a new fiscal year, our priorities and initiatives would continue to focus on maintaining a strong balance sheet, building brand health, and working to improve operating margins.

We believe a continued commitment to these fundamental guiding principals will continue to serve us well in this volatile economy. The strength of our balance sheet has us well positioned to continue our investment in brand building initiatives into target product and category based opportunities, key to our long-term growth.

We also remain committed to controlling our operating expenses and have reported to you a number of cost saving initiatives over the past 24 months that a favorably impacted our bottom line. And while our results for the first quarter were unplanned, we continue to face extremely difficult challenges with continued weakness in the economy, inventory pressures weighing heavily on our wholesale customers, and weak consumer spending.

Despite these factors, we maintain the belief that our sharp and consistent strategic focus in this challenging revenue environment will allow us to provide unique value to our customers as both the economy and demand improve.

Today, I will provide you detail on our first quarter results and where we stand in respect to these priorities, then Jeffrey will update you on the progress we are making against our strategic objectives.

First quarter global revenues decreased 13% to $297 million as strong gains in the men’s boots business in both Europe and Asia as well as gains in SmartWool products were offset by declines in Timberland brand apparel and men’s casual footwear.

For the quarter foreign exchange rate changes decreased global revenues by approximately $22 million or 6% due to the overall strengthening of the dollar. Global footwear revenues were down 11% compared to the prior year period driven by declines in the casual business and the men’s North American boot business.

Outside the US we continued to see encouraging signs that our boot business is strengthening, as a result of renewed focus on core product and return of consumers to authentic brands and classic style.

The declines in casual footwear were driven by softness in the wholesale markets. Apparel continues to remain a challenge globally with worldwide apparel and accessory revenue declining 20% primarily as a result of softness in the European and Asian markets during the first quarter and the transition to a licensing model for our North American wholesale apparel business.

These results were partially offset by the continued strength of SmartWool where once again we saw double-digit growth for the quarter. Recently we took actions to strengthen our European and Asian apparel businesses through a new sourcing arrangement with Li & Fung which we believe will improve not only the efficiency of the production and development processes, but also the overall quality of our apparel offering we sell in those markets.

By channel global wholesale revenues declined 14% to $219 million reflecting continued softness in the wholesale market and the impact of foreign currency. Global retail revenues decreased 8% to $78 million primarily driven by an unfavorable foreign exchange impact. Comparable stores sales were down 2% on a global basis driven by declines in North American outlet stores which offset positive comps in Europe and in Asia.

North American sales fell 13% as declines in boots in our casual business offset strong growth in performance footwear and SmartWool. North America retail revenues were down 9% reflecting a 10% decline in comparable store sales.

Europe revenue decreased 15% from the first quarter of 2008 and 2% on a constant dollar basis. Continued softness in the wholesale business was partially offset by strong sales of men’s and women’s boots and a 4% increase in comparable store sales.

In Europe the unfavorable foreign exchange impacts masked strong growth in certain markets, primarily Germany, Austria, and our distributor businesses particularly in The Middle East. In Asia revenue was $37 million, a decrease of 3% compared to the prior year.

On a constant dollar basis Asia revenue declined 6% due to softness in our retail business and declines spread throughout most of the region. Retail sales in Asia declined 6% as the benefit of changes in foreign exchange rate changes and a 5% increase in comparable store sales did not offset the impact of our decision to close certain underperforming retail locations.

Operating income for the first quarter was $18 million, down 70 basis points compared to the prior year period. Foreign exchange rates reduced operating income in the first quarter by approximately $1 million as the dollar strengthened against the Euro and the pound.

Gross margin for the quarter was 46%, down 20 basis points from the prior year period driven primarily by the impact of higher material and manufacturing costs partially offset by favorable changes in channel and product mix.

Operating expenses fell 12% to $119 million reflecting a $14 million decrease in selling expense on lower volume. Included in operating expenses in the first quarter is a $1 million noncash intangible asset impairment charge.

For the quarter earnings per share were $0.27. Our effective tax rate was 11% compared to 39% in the first quarter of 2008 reflecting the release of $6 million in reserves related to the completion of certain tax audits. For the same period of 2008 earnings per share were $0.30.

We ended the quarter with $159 million in cash and no debt. Inventory in the first quarter decreased 10% to $163 million. We remain focused on adjusting quickly to changing demand signals and driving down excess and obsolete inventory levels.

Accounts receivable in the quarter decreased 15% to $172 million. Capital spending for the quarter was about $3 million. In the first quarter we repurchase nearly one million shares under our share repurchase program and have 3.7 million shares remaining under our current share repurchase authorization.

As I indicated earlier, although our first quarter results were consistent with our internal planning assumptions, we remain cautious and believe the remainder of the year will be challenging. As the year develops we will manage for changing conditions, update our plans accordingly, and maintain our priorities in the face of external challenges.

We still believe that there is much uncertainty surrounding performance for the balance of the year and are not providing additional details on our outlook. We remain committed to our strategic priorities and will continue to invest behind them at a pace tempered by the economic uncertainty we face.

And we will continue to focus on managing the things that we can control, managing our working capital conservatively, and diligently controlling our spending.

Thank you, now I’ll pass the call over to Jeffrey.

Jeffrey Swartz

Good morning, in the face of harsh external realities, we are pleased with the progress we can report it the first quarter. Our results demonstrate the strength of our brand, financial discipline, and commitment to strategy even in the midst of economic crisis.

We see consumers being much more selective, turning to trust in authentic brands like Timberland, brands that are known for quality, durability, and values. Timberland’s brand heritage coupled with long held financial conservatism enables us to operate from a position of strength to remain committed to strategy even now and I’m pleased to say that our long-term strategic initiatives to rebuild brand heat and height, one fortress city at a time supported by a nimble and sustainable value chain are continuing to show positive results.

Here are selected highlights from the first quarter and a preview of some initiatives we have planned for the balance of the year 2009.

Over the past 18 months we have been executing an integrated marketing strategy to rebuild Timberland’s brand heat and height with consumers globally. We believe that investing in our brand now will position us to capture share as consumer spending picks up.

We are leveraging all forms of media from television, film, and print, to PR, online, and events and we’re seeing results in our top markets. Through independent outside research we have seen meaningful improvements in key brand measures and an increase in traffic and comps at our ecommerce sites both in the US and in the UK.

Right now we’re running our first ever spring timed television ads in the UK and Italy. Spring TV helps consumers understand that Timberland isn’t just boots and cold weather. The ad we call Delirium, features Earthkeeper boat shoes in a creative and aggressive presentation.

At least in part as a response to the TV seven out of the top 10 sellers last week in the UK, were boat shoes but the marketing is working more broadly then just on boat shoes. On a constant dollar basis we saw strong growth in Europe in wholesale boots for men and women, and retail growth broadly in footwear.

While television advertising gives us broad exposure, we’re also driving grassroots events that reinforce our brand positioning and create more intimate relationships with consumers. Last week we were a headline sponsor of the Green Apple Music Festival, America’s largest Earth Day celebration with community service events and free concerts in 10 US cities.

The events allowed us to reach our target audience and to engage with Earthkeepers, all around service and music. Green Apple showcased the Earthkeeper boat shoe, and was supported by point of sale at Macy’s and several key independents and Timberland specialty retail stores and on

Earthkeeper remains our single biggest big idea, the best of our thinking across products, marketing, commerce, and culture. Earthkeepers has high presence across a broad network of online sites from Facebook to Changent and YouTube, and that presence is building real connections with consumers.

To date our viral tree planting application on Facebook has grown a virtual forest of nearly one million trees. Over the next few years we’ll plant real trees in the physical world to help fight climate change and to pay off our consumers’ passion for reforestation where they live.

Earthkeepers is commerce and justice at work. When we launched the line in fall 2007, we achieved about $3 million in sales in the first season. By 2009 the Earthkeepers franchise is on track to achieve around $65 million in sales globally, across men’s, women’s, and kid’s.

Earthkeepers brings together everything we stand for as a brand, in this case environmental values and action and commercial impact for shareholders. Reaching consumers through a blend of traditional and emerging media helps us build brand heat, but must be executed carefully with relevant, beautiful, and brand right product.

I have several success stories to share. Kid’s footwear has been a area of emerging strength for Timberland. Last year we placed a renewed and reenergized focus on this business. We’ve seen with admiration what our kid’s apparel licensees have achieved. Children’s World Fashion in Europe has Timberland kid’s apparel positioned as a top three brand in revenue across Europe and Kid’s Headquarters has established a big and successful apparel franchise for Timberland within the US.

With great product in footwear and apparel we can create an enduring consumer relationship, with a child and with a parent. So in footwear the kid’s team executed a total remake of the business from shoe to shelf. The kid’s design team developed inside lead and collections at the right price points specifically for active kids demanding lifestyles, footwear that can deliver for the mountain to the playground, to the classroom.

Retailers are responding perhaps best demonstrated by a fall order book that is up double-digits in the US and in Europe. We have high expectations for Timberland kid’s and I look forward to reporting progress in the near future.

Like kid’s, women’s represents significant growth potential for our brand. After dramatically increasing our investment and reorganizing our women’s effort, women’s has started to demonstrate real progress. In 2008 we refined our understanding of the consumer and we worked hard to upgrade product and our in store shopping experience.

In the first quarter on a constant dollar basis, women’s at retail and wholesale worldwide turned in a strong performance, led by Europe and by boots. We intend to build on that momentum with premium women’s apparel and accessories and powerful women-specific advertising in the Italy test market in fall 2009, where selling thus far has been strong.

I look forward to sharing more progress in the coming months.

Events like the Green Apple Festival are key connection points and they happened in season influence where we get scale and impact for our marketing dollars. We call them fortress cities and in the first quarter we made great strides in our agenda to elevate the brands through fortress cities using elite collections.

We opened a Timberland specialty retail store in SoHo in New York City, at 474 Broadway in mid February and its off to a great start even in the world of meltdown at retail and even despite a slowdown in international tourist traffic in the area where the store is located.

The store features Timberland elite collections like Boot Company and Abbington, as well as our classic product in key apparel. To date, the store is up 20% to our plan. Boot Company, this elite part of our footwear, Boot Co. at wholesale has continued to contribute to our strategic objective of building brand height.

During Fashion Week in New York, Miami, and Los Angeles, Boot Co. was featured by hot, emerging designers in their fashion shows and in their look books. Nordstrom’s is expanding the door count for men’s Boot Co. from five doors to 52 doors for fall 2009.

While relatively small in dollar terms, elite collections are helping Timberland to credibly shine the light on the high end. In the larger wholesale segment of our business, in the context of the currency economic challenge, we’re pleased with how our fall 2009 order book is shaping up.

Much has been made in the world of potential signs of life in the macroeconomic patient, while we believe that Timberland’s well positioned we have no insight into the macro economy and so we remain cautious about forecasting consumer spending and its impact on our business.

We are monitoring our business very carefully and we’ll obviously share results with you as 2009 develops. From our portfolio brands, SmartWool continues to capture share in socks and in [base layer] in core outdoor channels despite retail sales trending down overall in that channel. It was a relatively tough ski season.

SmartWool is also working hard to expand its presence in Europe and in Asia. Timberland PRO’s results were slightly down versus last year reflecting the impact of consumer spending of the economic downturn in the United States specifically and obviously in the work category.

Given PRO’s leadership position relative to our competition, we continue to see healthy signs on the day to day. Our core product continues to sell through well albeit at a slower rate then last year. The new Endurance family continues to outperform pushing it 5% to 6% a week and the accounts sending us weekly selling reports.

And finally the fall 2009 sell in shows us the good news that new products are getting placed at a very healthy rate. As you know, we’ve made considerable progress in streamlining our global infrastructure and we continue to look for efficiencies through our business so that we can invest more behind our strategic initiatives.

Fall 2009 would be the first season in market leveraging our sourcing partnership with Li & Fung on men’s apparel for Europe and Asia. As high quality apparel is critical to Timberland’s overall brand presentation we believe that our partnership with Li & Fung is already yielding a stronger collection that has more consistent fit and quality and responds to regional trends and color stories in a more powerful way.

While its still early in the fall 2009 sell in process for apparel, we look forward to reporting back to you on this important initiative.

No doubt the past year has been very challenging for consumers and businesses alike, but we believe we have a lot to be proud of and with our commitments to financial discipline and strategic execution, a lot to look forward to.

Last week we hosted Earth Day events which united more then 8,000 volunteers at more then 150 events around the world generating nearly 50,000 hours of citizens’ service. People are increasingly concerned about climate change and its impact on our world, and those people are our consumers.

By educating consumers on how to be part of the solution, inspiring them through the stories of others, engaging them in events to put their own environmental passion into action, we reinforce the inexplicable link between commerce and justice, one that consumers have long connected with Timberland.

Despite the continuing uncertainties in the broad consumer marketplace, we’re steadfast about executing our brand building strategy. We believe firmly that Timberland’s unique competitive advantages, a strong brand rich in heritage and differentiated by core values, a clear strategic roadmap, and a focused leadership team, will accelerate the reinvigoration of the brand and position Timberland for long-term profitable growth.

John and I are now available if you have any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Heather Boksen – Sidoti & Company

Heather Boksen – Sidoti & Company

I was curious, the gross margin in the quarter seems to be at least a little stronger then I was expecting, can you talk about, maybe go into a little greater detail about the components and what was supporting that as far as I think you said the product and channel mix, and is that something that we should see continuing in the remainder of the year.

John Crimmins

Well the key components you just recapped them, we did see some kind of upward product cost pressure that was offset by changes in product and channel mix. The product mix for us is a little bit, we’ve talked about our footwear result and within that result some strength in boots particularly in Europe and Asia.

It’s a little bit more of a mix in overall towards some higher margin product. Also if you compare to the first quarter of last year we were in the midst of closing a number of retail stores last year so we had retail sales at lower margins then normal because we were going through closure sales.

So that had some of the impact. And I think we see, looking forward on gross margin there will be a number of factors. FX continues to be a significant component, a lot of variability and volatility in the different product cost components, and then how revenue, how our revenue mix works across the next several quarters, its just not clear enough for us to make the call.

Heather Boksen – Sidoti & Company

Also can you, I don’t know if you can talk to this, but I know the inventory level at least on your books looks good, what’s it look like in channels.

Jeffrey Swartz

We watch it very carefully in channel, on a global basis, and I would say qualitatively if we had a concern to rack and stack, I would say I’m concerned about two things. I see in our China business, I see more inventory in store broadly, right, it’s a new business, relatively new start-up business, a lot of new stores, they’re not turning their inventory as fast as I’d like to see them turn it.

Working very hard on [inaudible] that. We have first quality stores up not TFO’s up and so we have growing pains there, its not an issue of substance, I’m just telling you at the level of detail at which we watch channel inventory. So I’m talking about inventory in third party stores in China.

I’d also tell you about men’s apparel in specific places in Europe, we saw early in the quarter that men’s apparel wasn’t retailing as fast as we wanted it to so for example at ECI, in Spain, we were aggressive about hitting that on the head with them. And I just got an update this morning, and part of the reason I’m telling you this story is just to indicate to you, I’m trying to demonstrate to you, we’re monitoring trade inventory not quite as [inaudible] as we pay attention to our own, because the information systems are not as perfect, but we’re very concerned and very focused on making sure trade inventories are balanced.

The two areas that were on my plate were Chinese overall inventory and its not fixed but its under control, and men’s apparel inventory in Europe and its not only, I think its fixed, I won’t call it the problem solved, but these are relatively [diminimous] issues. In the US our profile, we monitor our profile formally once a month. We sit down and review it together. That’s not Timberland’s inventory that Timberland’s trade inventory.

And I think we are pretty darn healthy.

Heather Boksen – Sidoti & Company

Just a housekeeping question, how should we view modeling the tax rate for the remainder of the year.

John Crimmins

I think if you back into the, from the information that we gave you on our tax rate for the quarter we take a look at what we expect our overall rate to be and then we, as I mentioned in the quarter, we had a one-time release of reserves of about $6 million that effected the effective rate that runs through the quarter.

I think you can kind of back that out to get into what our overall assumption would be for the full year.


Your next question comes from the line of Elizabeth Montgomery – Longbow Research

Elizabeth Montgomery – Longbow Research

Congratulations on a good quarter, can you give any more color about the boot trend and how strong boots are, how big it is as a percentage of revenue, any more color on that and then secondly when you look at the retail stores including like you said the SoHo store being 20% above planned, do you have like a pro forma model that you’re attempting to plan to when you think about adding stores in the fortress cities and are they profitable or are you thinking of it more as a marketing advertising type of component.

Jeffrey Swartz

Let’s go backwards, we do have a model for stores. We won’t open a store unless we believe its going to be profitable so there’s no conversation about, you get no credit as the sponsoring regional business leader for, it’s a window on the world, we’ve heard that speech. We’ve opened those stores, we’ve closed those stores.

And so the store-by-store conversation is operational and financial and the [strictured] Timberland people work under now, the single credible point you have is, you have to put in front of us a pro forma plan that you commit to and believe in that starts with, pretty is pretty but its got to be profitable period. And so we’re using really tight financial models to insist on how we allocate capital.

We’ve told you and we’ll continue to tell you our focus on the balance sheet is sort of a, its an anchor to win which we’re not going to diminish and so we’re not opening stores without that kind of discipline period.

SoHo is 20% ahead of the plan that they submitted to us. The plan that we approved, it’s a high street location, it’s a special place, etc., etc., but it was held to the same standard that it will be a profitable store or you don’t get the capital and the 20% doesn’t mean anything. Its new days, it doesn’t mean anything in financial terms, it means something to me in brand terms because we planned for this store to be profitable and we’re outperforming its expectation and that’s surprising to me.

And I’m really interested to see what’s happening in the store. This gets to the first question you asked which is about the boot business, if you looked at the top 10 sellers around the world last week as we did yesterday, you’d see classic Timberland product at the top of that list. And so I’m going to be really careful so not to confuse you, I see only boots on the list but to be clear what I mean by that, three of what I would call boots are shoes, hand sewn boat shoes.

That’s Timberland internal talk, when we talk about classics, the original styles, 10061 the yellow six-inch boot, or 25077 which is the original chrome tan boat shoe and the way I think of our merchandising, those classics, that’s the trend that we’re seeing come back in a powerful way. That to me is really good news.

There’s a couple of things to say about it, one is from a fashion perspective the sharpest signal we’re seeing about that is from Italy right this minute where we’ve been in slightly in scramble mode in terms of replenishing inventories against classics. Literally the yellow boot, but also hand sewn boat shoes, hand sewn rugged shoes.

To me it’s a really positive signal. Second thing, and I think that’s a pretty straightforward fashion point so its harder to explain, but there’s another thing that we’re seeing and I’ll use the UK as an example which is different, I think its pretty exciting. We keep saying Earthkeeper is the biggest idea we have, this idea of thoughtful beautiful product environmentally sustainable, that’s under the framework of eco desirability.

Green is sexy, green is the new black, blah, blah, blah. We’re seeing something else in the context of the economic downturn which is that enduring, bullet proof, durable, great value, is desirable too in the same frame. Not eco desirability, [now] eco frugality. So we’re running some ads, we [ginned] them up quickly and we spun them out fast in the last 30 days, [Legas Delaney] created some print ads and we did some sort of ambush out of door and in newspaper stuff and they’re aggressive ads.

It shows the classic product you’re talking about, boots and hand sewn, original classic Timberland stuff, stuff that’s built to last forever. Ads used to say, years from now you may have to replace the laces. The ad headline now just shows a pair of Timberland, beautiful pair of Timberland hand sewn shoes, it’s a kind of cheeky line, it says something to the effect of, we build things to last, maybe we should go into the banking business.

And it shows this pair of shoes and the response has been sharp. Consumers are saying I want trusted durable, believable, I like reassuring stuff. And so on those two dimensions, one is a fashion dimension and the other one is a, I think its an earned progress in a temporal circumstance, we are making progress with classic products, hand sewn shoes as well as boots.

Elizabeth Montgomery – Longbow Research

If I can ask a follow-up on that, the boat business, can you give us any color on how large that is as a percentage of revenue and is there a margin difference, a gross margin difference between the boat shoes and the boots.

Jeffrey Swartz

We said in the day that the classic boot, 1061 is one of our highest margin items manufactured mostly in our own factories in the Dominican Republic. We have been doing it for 30 years, we should be good at it by now. The same is true, relatively speaking of boat shoes meaning we make many of those boat shoes hand sewn [on the] last, genuine [parlmot] nylon stitching guaranteed to last forever, with mid sole construction if you’re interested in the same factory for the same 25 years and so in relative terms our boat shoe has a high margin compared from our own factories compared to others would be able to do it.

So I would rather sell a boat shoe then some of the other things in our mix. If you ask would I rather sell a yellow boot or would I rather sell a boat shoe, I would rather sell both, but if you asked me just financially, the boot has a higher average selling price obviously and so that’s higher margin dollars and it probably has, don’t quote me on it, a higher gross margin although I bet you could quote me on it.

So in relative terms boot has a higher average selling price and it’s a higher gross margin percentage so we like boots. But boat shoes especially the classic ones at our own factory, that’s nice business too and that’s part of the reason we’re running the Delirium television ads in the spring because we’ve had this disconnect between second half and front half, between cold weather and snow, and warm weather and sun.

We have always had a very big boat shoe business and boat shoes had a fashion trend in the last couple of seasons, I know you know, and so we don’t apologize for the fact we make the best damn boat shoe on earth and we need to sell some more.


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

Chris Svezia – Susquehanna Financial Group

So I just want to make sure I’m clear on something, you had mentioned that booking trends and talked specifically about the kid’s business and you said that was up I think double-digits globally, you made some reference about the women’s business, anything or any color do you dare to comment at all about the overall business, men’s I guess more importantly, how that’s trending as you look to those fall bookings given the reference about the kid’s business.

Jeffrey Swartz

We picked on kid’s and women’s because we thought we had something topical to say, one is because the women’s test market in fall 2009, we’ve made noise about it, we want to keep you in the loop. We haven’t said anything about the kid’s business and we felt like it was important to give you some visibility to it.

Clearly the men’s business is still the biggest part of our business and the remark between us we said something about the fact overall we’re pleased with the way the fall order book shapes up and so you put those together, that’s kind of my view of the men’s business.

Chris Svezia – Susquehanna Financial Group

As it pertains to the boot business in the US, and given the US wholesale decline in revenue given the retail comp performance in the US, its seems like so far Timberland, Timberland PRO on the boot end overall, it seems like share stability at retail is somewhat challenging at this point. Can you maybe just talk about where you see an opportunity maybe start to change and start to turn that tide a little bit. It seems like holding your market share position out there right now as you go through the spring has been a little bit more challenging. So I’m just kind of curious as you talk to about seeing and pleased with the trends you’re seeing about fall order book, can you just maybe talk to how you might see an actual improvement. What gives you that level of encouragement so you can start to see improvement in the second half.

Jeffrey Swartz

So just on the share point, we’re not losing share in PRO, we’re gaining share in PRO and we had good math on that so I don’t want to [conflate] PRO with any kind of the fashion parts of the line. We said that PRO’s results were down year on year slightly. If you compare PRO’s performance through at retail in the segment and channel they compete in, while we’re not pleased that its not up year on year, the channel is sharply down.

And so if we’re slightly down to me the math of that one is we’re continuing to take share and I can tell you that is absolutely the PRO plan and we have real confidence in our ability to go nose to nose with Wolverine, or Red Wing, I don’t mind saying the names out loud I have respect for both companies, but we believe we have a better proposition and most importantly so does the retailer and the consumer.

So we’re going to continue to, not be [bellicose] but to be confident and focused on that. As it relates to the men’s boot business, if you’re asking are we stabilized in terms of our position on the shelf and are we stabilized in consumers’ minds, I say qualitatively, somebody asked the question earlier about so what is your inventory profile look like, I would say I am relatively pleased. I’m not satisfied, but I’m relatively pleased relative to those two points.

Meaning I think we have stabilized and I believe that we are well balanced at retail, with specialty independence in that channel, as well as with broader national players. We’ve done smart things like turned on quick response with Foot Locker as a means and method of making sure that inventory stays balanced and so I guess my view of the business is its relatively speaking stable.

Now you’re question about how does that give us confidence about the second half, I hope you haven’t heard us say we feel confident about anything. I hope you’ve heard us say that we have a strategy and we’re sticking to it. We have a clean balance sheet which gives us the base to stick to that strategy. We have real indications that our strategy is getting traction and we have real uncertainty about what that means because of external circumstances that we just can’t, let’s not spend a lot of time on it, we just don’t know what to do about that.

By that I mean we don’t know how to factor that into a view. We know what to do about it, we’re running those ads like I told you about the UK very nimble stuff. We are watching inventory like a hawk and we’re trying hard to fight for every pair that we can sell through. I said to you also that we’ve looked at the forward order book for fall and we’ve asked ourselves, look we made bets in terms of strategy.

Example Earthkeeper, example women’s in Italy, example launch of Mountain Athletic and we said to ourselves, we said here’s our expectation. We compare our expectation to the order book. We look at that and we say stay on strategy. We’re doing what we said we were going to do. So I don’t want to project a confidence. I do want to project, well maybe, confidence in the strategy. That’s what I want to project, how’s that.

Chris Svezia – Susquehanna Financial Group

What’s that strategy. I’m just kidding.

Jeffrey Swartz

No that hurt. That hurt. You’re probably a Yankees fan too.

Chris Svezia – Susquehanna Financial Group

One last thing, just on the product cost side, what are you seeing there, just kind of how we should look at that, does that start to abate as we go into the second half of the year.

John Crimmins

Yes, we believe so. The economy has driven a number of changes from obviously from last year and we expect to see some favorability in product cost inputs from material costs and petroleum based costs, transportation costs, very difficult to predict exactly what will be there, but we’re still kind of working through inventory that was built off of a, during a different economic time.

Chris Svezia – Susquehanna Financial Group

And just on the strategy piece, I wasn’t talking about the Timberland strategy, I was just talking about maybe enlightening us on terms of what you think about your numbers and your order books and things of that nature, not necessarily the strategy in terms of you guys don’t have a strategy.


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

Mitch Kummetz – Robert W. Baird

You made a lot of comments about fall and being pleased with the order book there, I’m guessing the order book is better for fall then spring, I think that’s a pretty safe assessment, right.

John Crimmins

Well our order book is always better for fall then it is for spring.

Mitch Kummetz – Robert W. Baird

In terms of the percentage up or down, I think in the K that you had given that backlog as of the end of Q4 was down 13%. I’m guessing, I would think that’s a pretty good proxy for the spring order book.

John Crimmins

The problem is we’re just not comfortable with backlog or order pool build as a good predictor of future revenue. So many things have changed, the effect, the timing of orders, cancellation rates, that a trend that we may see in the order pool doesn’t necessarily translate to how we would want to make a revenue call.

Mitch Kummetz – Robert W. Baird

And then, this question is maybe a little tougher to answer, Q2 you have less visibility on Q2 because its largely a fill in quarter, but you made a comment that you feel like inventory levels at retail at least in the US are pretty healthy, my recollection last year is that in a kind of a deteriorating environment retailers were a bit over inventoried, how do you feel about just the overall kind of fill in outlook. You’re a month into the quarter, do you feel like the environment out there has stabilized and with retailers in a pretty good inventory position that you could potentially see stronger fill in rates in the second quarter then you did a year ago.

Jeffrey Swartz

There’s a real tension between our profile and their profile, our profile in their store and their overall profile and so we’ve dealt with this, everybody has right, many forever which is if you’re turning faster then the other guy typically that get’s you the incremental the at once order. And we are watching literally that at once and cancel every single day as if we were a retailer which is good.

And so we see that struggle, we see that tension, called how’s our retail performance, well its uneven. There are parts in the channel where we’re performing I think very well, even in the second quarter, and there’s part in other channels even in the same geography where we’re not performing as well.

So that’s Timberland’s performance per se. Then there’s the variability of the retailers’ overall performance because we have some retailers that are actually performing pretty well and we’re performing pretty well with them and in that case we’re booking at once ahead of expectations.

We have other places where we’re performing well and they’re not and we’re fighting to maintain our plan and there’s other places where either they’re doing well or not but we’re not and we’re behind. And so its hard to be insightful about retail trend broadly spoken. It appears to the nearsighted one speaking to you, very uneven and so it’s hard to call.

I read the same press reports you do and I talk to a lot of retailers as I’m sure you do too, and the scatter diagram of a how is it and how’s it going to get better, it looks like a Rorschach test so there’s not a trend where the department store guys say its getting better and the independent guys say its getting worse. Its just, it’s a little bit of a fog in terms of overall performance.

Some of the better managed guys that we do business with, so on the approach [Tractor] is a good example of a very well managed retailer, Dick’s is a very well managed retailer, you know all this stuff. ECI manages their business very carefully in Spain. These are examples of retailers where we have close contact, how’s our brand doing, how’s your department doing, and there’s a very, very, very faint light that you can just, you wonder if you’re imagining the dawn.

But there is a little bit of positive energy in places like that. But for every bit a little bit of positive energy like that, there’s bankruptcies that hit our balance sheet because we didn’t see that one coming, even though we’re very, very cautious and careful about credit management, and there is all of a sudden big retailers saying, you’re doing fine but we’ve turned off all inventory replenishment not just because its quarter end, but because our business isn’t good.

And I don’t mean to sound like I don’t know more then that, but that’s kind of where we are.

Mitch Kummetz – Robert W. Baird

On FX, dragged down sales by 6% in the quarter but only, and I say only, took operating income down a million, I would have guessed it would have been worse then that. Are there some hedge gains working to your advantage there.

John Crimmins

Yes, there’s two things that happened there, one is we did have some hedging in place that cushioned the FX impact during the quarter and then we had some natural hedging in that we have operating expenses that are denominated in those currencies as well.

So the netting effect is a combination of those two favorable points offsetting the negative revenue point.


Your next question comes from the line of Kate McShane – Citigroup

Kate McShane – Citigroup

Can you go through some of, you’ve already given a good amount of detail about some of your larger markets in Europe and what you’re seeing, but can you remind us what you’re exposure is like in Eastern Europe and how that might contrast with what you’re seeing in Western Europe.

Jeffrey Swartz

Eastern Europe, Timberland presents the brand probably in Eastern Europe through a series of local partnerships. So for example in Russia, I was on the phone with the guy who owns that business, we just opened, when I say we, their capital our brand, we just opened another store last week in Moscow. I think that puts us in the range of 10 that are opened between say Moscow and two other places.

That is behind the plan that we had originally conceived of. The guy who is the money and the brains behind their operation is a very powerful fellow and real estate developer among other things, and you’re absolutely right that the kind of cliff like performance of that retail environment has caused them to come back to the table. Its true in the Baltic’s, states where we operate with a different partner.

Its true in the Ukraine, we have another partner. Its true in Russia even with this guy as well capitalized as he is, they’ve slowed down dramatically the rate of store openings. They are still opening stores, Timberland’s brand presence is still increasing and their retail performance is okay. I told you that I was worried about inventory profile in our Chinese stores specifically the ones in the south, the north is pretty good.

As you know in China we have different partners in different regions, so the guy up north is a better operator then the guy down south. In Eastern Europe they are in general relatively good operators but they’re facing real sharp stop from consumer and so we’ve worked hard with them to balance up orders, that’s our flow to them, and we’re doing what we can to help them sell through better.

And we’ve done some small scale but aggressive things like some repricing of key outerwear pieces. We’ve sort of put that at the head of the queue for scarce product on things like classic boots, the business there is broadly terrible. Our business with them is okay. The consequence of that is they have slowed the rate of store openings.

We’re in close connection to them to understand financial exposure on their end and if we have exposure on our end but they’re all third party distributors. There’s no Timberland subsidiary presence there. We don’t have any inventory liability there. We have really a consumer liability in the sense that we are trying to build our brand and its an important, we were making much more progress before the crisis then we are today.

Kate McShane – Citigroup

If I could ask one other question, how should we think about your share repurchase strategy for the rest of the year. A lot of companies have pulled back in an effort to conserve cash, and I know Timberland is very cash rich and has no debt, but what are your thoughts on that, that drives you through the rest of 2009.

Jeffrey Swartz

I’m dying to hear what he has to say about this.

John Crimmins

Well I think maybe our history is a good indicator of how we feel about share repurchases. We think it’s an efficient way to return value to shareholders, but we don’t talk about our future commitments because there are a lot of different variables that go into our decisions as to whether we will continue the share repurchase program or not.

Jeffrey Swartz

Including my paranoia about cash in the mattress, right?

John Crimmins



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

Have a good day everybody.

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