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Timberland Company (NYSE:TBL)

Q3 2009 Earnings Call

October 29, 2009 8:25 am ET

Executives

Karen Blumquist – Senior Manager, Investor Relations

Jeffrey Swartz – President, Chief Executive Officer

Carrie Teffner – Chief Financial Officer

Analysts

Elizabeth Montgomery – Longbow

Heather Bokson – Sidoti & Company

Mitch Kummetz – Robert W. Baird

Tom Shaw – Stifel Nicolaus

Operator

Welcome to Timberland’s third quarter 2009 earnings conference call. (Operator Instructions) Now for opening remarks, I’ll turn the call over to Karen Blumquist, Timberland’s Senior Manager of Investor Relations.

Karen Blumquist

Good morning and welcome to Timberland’s third quarter 2009 conference call. Speaking today will be Jeffrey Swartz, our President and Chief Executive Officer and Carrie Teffner, our Chief Financial Officer. Carrie will be discussing our financial results for the quarter. Jeff will then discuss our performances in 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 a discussion of our constant dollar revenue change and non-GAAP financial measures. As required by SEC rules, we have provided a reconciliation of this measure and additional information on the presentations tab found on the investor relations section of our website www. Timberland.com.

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

Jeffrey Swartz

I just want to say welcome to our new Chief Financial Officer, Carrie Teffner who’s going to speak in a second. Carrie joins Timberland from Sarah Lee where she was CFO to the $2 billion international Household and Body Care Division. As a conscious effort to invest in talent and culture, that can get our brand and the business to the next level, we are very excited to integrate into our senior leadership team Carrie’s operational and financial experience as well as the energy and enthusiasm she brings to the role.

So please welcome Carrie who will now update you on our financial performance in the quarter and what we’re focusing on for the remainder of 2009.

Carrie Teffner

I’m really excited to be at Timberland right now. This is a company with great brands, a proud heritage and a strong commitment to the environment and an enthusiastic team of people with a passion to improve the business.

I believe the combination of these qualities positions Timberland well as we seek to recover from the global consumer crisis. Timberland has made significant strides over the last couple years after a fashion shift took a meaningful portion of very profitable revenue out of the top line.

The company has worked hard to redefine the brand and to reconnect with its loyal consumer base and management has focused diligently on finding efficiencies. Much has been accomplished but we still have more hard work ahead of us.

Going forward we will focus further on driving operational efficiencies and optimizing gross margins through pricing, reducing complexity and streamlining processes in the business. But at the end of the day, these actions don’t mean as much if we don’t drive top line growth.

Our revenues this quarter were essentially flat which given the overall economy isn’t bad, but it isn’t good either. Jeff is going to talk to you shortly about our plans to drive top line growth. These areas of focus are consistent with our long range plans which I believe is the right one for our business. But before Jeff starts, I will walk you through the details of our financial performance for the quarter.

Third quarter global revenues were essentially flat at $422 million and up 2% on a constant dollar basis as strong gains in the boot business across all regions, strong gains in SmartWool and gains in outdoor performance business offset declines in the casual business and Timberland apparel.

For the quarter, foreign exchange rate changes decreased global revenue by approximately $9 million or 2% due to the strengthening of the dollar relative to the pound and the Euro versus last year at this time.

Global footwear revenues of $319 million were up 2% compared to the prior year period driven by strong gains in boots and gains in outdoor performance which offset declines in casual footwear indicating that our renewed focus on classics and our continued efforts to drive brand through focused advertising are showing signs of success.

Apparel and accessory revenue declined 7% reflecting continued softness in Timberland brand apparel across all regions which offset growth in SmartWool. By channel, global wholesales revenues were relatively flat at $342 million, reflecting strength in boots and outdoor performance.

Global retail revenues decreased 4% to $80 million due primarily to declines in the North America Outlet stores. Comparable store sales were down 7% on a global basis.

In North America, sales grew 2% from the third quarter 2008, reflecting strong growth at SmartWool and kid’s boots as well as growth in outdoor performance. North America retail revenues were down 8% with a 15% decrease in comp store sales due to declines in outlet stores. However, North America specialty retail comps were up 1%.

The new Fortress City store in New York at 474 Broadway and Soho is performing well above our internal plans due to strength in our Earth Keeper and Elite collections particularly, Boot company. E-commerce also performed very well in the quarter.

In Europe, revenues decreased 2% from the third quarter of 2008, but were up 3% on a constant dollar basis. Strength in boots and outdoor performance offset softness in casual footwear, a 3% increase in comparable store sales, the strength in boots and the net addition of nine new stores brought strong growth in retail excluding the impact of foreign exchange.

In Asia, revenue was $38 million, a decrease of 2% compared to the prior year. On a constant dollar basis, Asia revenues declined 9% due to softness in both wholesale and retail. Declines in the distributor markets and Hong Kong offset strong growth in Japan.

Retail sales declined 9% excluding the impact of foreign exchange, reflecting comps of minus 2% and the closure of 17 under performing stores since Q3 of 2008.

Gross margin for the quarter was 46% down 40 basis points from the prior year period driven primarily by the impact of higher product cost, foreign exchange impacts and lower margins on close outs, partially offset by favorable mix and pricing on selected products.

Operating expenses were down $8 million or 5% at $136 million reflecting our continued commitment to reduce operating expenses and a $4 million benefit from foreign currency movement.

Operating income for the third quarter was $58 million compared to operating income of $53 million in the prior year period. In the quarter foreign exchange rate changes reduced operating income by approximately $7 million.

For the quarter, earnings per share were $0.68 up 31% from the prior year period and our effective tax rate was 38%. For the full year we expect the tax rate to be approximately 29% including the benefit of approximately 47 million realized in the first three quarters related to the completion of certain tax audits.

We ended the quarter with $113 million in cash and no debt. Our focus on working capital continues and in the third quarter inventory decreased 8% to $202 million and accounts receivable increased 1% to $270 million. Capital spending for the quarter was $3 million.

During the quarter we also returned nearly $10 million to shareholders in the form of share repurchases and we have approximately 2.2 million shares remaining under our current share repurchase authorization.

In summary, we achieved mixed results in the third quarter but for the first time in many quarters, revenue was essentially flat and global footwear revenue was up. We continue to manage operating expenses down and drive improvement on our balance sheet. We have made improvements this quarter, but we still have improvement opportunities ahead of us.

Looking ahead, we remain concerned with the difficult economic conditions, especially in retail. Historically, on an annual basis, consumer direct makes up approximately one quarter of our revenue. This proportion increases to approximately one-third in the fourth quarter.

Additionally, the fourth quarter is a replenishment quarter for us which means we are highly dependent on sell through and the success of the holiday season. We’re in a better position with cleaner inventory and feel comfortable that we are well positioned to respond to our customers with the right product and we should see gross margins improve versus Q3 and last year as we have less excess and obsolete inventory to eliminate.

Regarding operating expenses, we continue to make strategic investments in our brands and we will take the opportunity in Q4 to better position ourselves for 2010. As I said earlier, we will be sharply focused on driving operational efficiencies, optimizing gross margins and returning to top line growth.

We are taking a long term view of the business and making calculated investments behind our long range plans that will drive future top line growth.

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

Jeffrey Swartz

I will note during a quarter most flat compared to last year’s result is an accomplishment given the world we’re competing in but in the same breath, I see the third quarter’s modest progress as nothing more than the first faint external signal to rebuild our brand and business performance is beginning to take.

No one here is even barely satisfied with our performance. We have the highest focus constantly on the standards of real performance in terms of brand building and shareholder results, and on both fronts we have miles still to travel.

No doubt there are positive stories in this quarter’s performance. We ended the third quarter with $113 in cash with our inventories down 8% and our operating expenses down by 5%. We see growing momentum in Europe and we are regaining traction in the classic business with iconic boot demonstrating that we can drive cash and controlling expenses is necessary, but not sufficient.

Until we can reach consistent and sustainable and healthy top line growth, we have a plan, not a good enough result, and so I’m going to continue to use these quarterly calls to report to shareholders on our growth plans, our progress and our challenges. We will redouble our focus on cash and on expenses, but the payoff for shareholders will clearly come when we grow this spectacular and unique brand.

This morning, I’m going to focus on the three big ideas which make in some, our fundamental growth plan. These ideas are Earthkeepers, Classics and Mountain Athletics. We have real consumer insight at the heart of each of these ideas. We have clear focus within these ideas and a real strategy to convert the insight into profitable growth. Earning insight and execute brilliantly against that insight; this is how big ideas become big business.

Let’s start with Earthkeepers. In a phrase, Earthkeepers is rugged, beautiful, outdoor inspired footwear and apparel for men and women, handsome, durable, clean, powerful, built by the most responsible outdoor brand on earth. Consumers don’t come to the shoe display because we use green rubber, a patented process that turns used automobile tires clogging up landfills into high performance rubber outer soles.

They don’t pick the boot because we’ve designed the product so that when it’s reached the end of its useful life, you can return it to us so that we can dis-assemble it and recycle the parts. What brings them to Earthkeepers first and foremost is a distinct and relevant aesthetic. It’s either beautiful or handsome or they won’t pick it up.

But when they do, they find authentic performance, and then they find compelling environmental innovation. This is the Earth Keeper premise, and it’s translating globally both in terms of commercial and consumer impact.

Since we began with four SKU’s launched in fall of 2007, Earthkeepers has grown substantially. We’re on track to achieve $65 million in revenue this year. In Europe, our largest wholesale business, two Earthkeepers SKU’s remain consistently in the top ten best seller’s year to date.

By fall 2010, we expect that Earthkeepers will make up more than 10% of footwear sales and more than 50% of our apparel sales. Earth Keeper product is compelling and so is the marketing plan that tells the story to consumers globally. Our marketing efforts include a very cool collaboration with Grammy Award singer and producer/activist Wyclef Jean.

We share a passion for environment stewardship and community development, Wyclef and Timberland and so Wyclef and Timberland will deliver a series of Earth Keeper events in the next month including the first one which is next week in Philadelphia, which includes store performances at Zillah, in Philip by Wyclef and the launch of the boot and the boot collection that Wyclef helped us to design; the Earthkeepers [Yelahaiti] collection.

For each pair that we sell, and we intend to sell a lot, we’ll invest $2.00 to Wyclef’s [Yelahaiti] foundation for reforestation and community development in Haiti. Earthkeepers is a big idea, at the heart of our growth plan for the Timberland brand, a unique synthesis of consumer relevant commerce and justice.

Pass to Classics, now more than ever; we think consumers are calling for authentic, reassuring classic products which never disappoint. Authentic for us is 30 years of product icons, built in our factories crafted by hand and built to last. In a world gone crazy, our Classic’s business is experiencing a renaissance in Asia and Europe in particular.

Year to date, Classic’s have grown double digits and continue to generate healthy margins. Across our Europe retail portfolio, Classics are a key driver of the mid single digit comp increases we achieved year to date. To be clear, we don’t view Classics as an item or even a collection.

Classics are a point of view, very relevant to the Timberland growth hypothesis; one that we carefully manage and selectively contemporize, not allowing any one look or partnership to be over done.

In Europe, we executed a really cool riff on our iconic yellow boot with Collette, for retail of all things cutting edge and chic. The super limited edition sold out in 10 days and generated really amazing coverage.

In Japan, we’re inviting consumers to reimaging Timberland through our popular and pretty cool design your own hand sewn application which allows a consumer to detail and design a pair of hand sewn shoes which we make one pair at a time in our factory in the Dominican Republic. And we’re also using collaborative design and distribution partnership with brands to create exclusive and cool product.

And in North America, boot company continue to build brand height and brand heat. Both collections have been selling through with distinction at places that we haven’t talked to you about in the past like Nordstrom and Saks Fifth Avenue.

We launched Timberland non athletic this fall aimed at a younger, faster consumer, not the traditional hiking target audience we’ve talked about for so long. Timberland is already gets top brand, gets top brand in the more traditional hiking category. Among athletic, they’re designed to make our outdoor vibe younger and faster.

The premise is clear. Product is lighter, goes faster, carries you further, is sexy in terms of its aesthetic and green in terms of how it’s built. As product continues to develop, my sense to date is that our launch rates a C. This is the right account. We executed really powerful marketing, and we didn’t push far enough in terms of our product aesthetic.

We made capable product, but not sexy capable product. So our sell through in wholesale to date is only okay. In our old stores, among athletics that sold through very well, but to a consumer a shade older than we had in mind when we set to work with this premise.

But we’re not backing away from the insight or the premise not one iota. We have sharply turned our design for spring 2010 and we’re enjoying positive response from our accounts globally as we preview these shoes. Dick remains committed to the strategy and we are grateful to them for their partnership. We’re not going to disappoint them.

Early previews of fall 2010 product have been enjoying positive globally as well. Fall 2010 will also be sustained by the “If you’re not fast, you’re food” advertising campaign which included television, print and new media advertising.

So, a third quarter performance that sees a strategy that’s starting to get traction, and an attempt to narrow the concrete plan to grow the brand and the business based on three valuable big ideas that are seeing consumer response globally.

Even in the midst of economic uncertainty, our brand bodes growth, and we are focused on earning growth even as we remain hyper committed to a pristine balance sheet and maniacally focused on managing our operating expenses. We believe the best lies in front of us.

Carrie and I are now glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Elizabeth Montgomery – Longbow.

Elizabeth Montgomery – Longbow

Could you give me an idea does the Classic category include boots and can you also talk about how big Classic and Mountain Athletics might be currently as a percentage of revenue?

Jeffrey Swartz

Does Classic include boots? The answer is yes. There are 17 silhouettes in the portfolio we classify as Classic. I’m not positive it’s 17 but there’s boots and shoes. Basically there’s field boots, there’s hand sewn shoes.

The next question is how big is the category in relative terms, Classic remains a very big category to us in terms of percentage of total business so I’d be more comfortable to say to you Classic’s is still the anchor of volume. Earthkeeper is the most important growing story. Mountain Athletics is a small notion commercially in the moment but its right for you to think about the three big ideas eventually becoming better balanced, one to the next. But clearly it’s clearly Classics first, outdoor second which includes for the moment and Earthkeeper rugged third.

Elizabeth Montgomery – Longbow

In terms of the consumer direct business becoming, moving up from about 20% to 25%, about a third in Q4, can you discuss what the comps store sales were doing Q3 and have you seen any acceleration in store traffic and sell through in stores? What would be your take on the performance of the consumer business in stores?

Jeffrey Swartz

I told you, historical notion which is that obviously the percentage of our business that’s in consumer direct goes up in the fourth quarter for obvious reasons. She told you about the third quarter results, and she can comment again if she wants to in a second. You ask us what do we see at retail. I’m not talking about area because as you know we don’t comment intra-quarter about that.

I can tell you that we are seeing some very positive signals and I’ll give you a specific example. Our SmartWool business and our Pro businesses which are very dependent on fill in, are seeing I would say positive velocity as we come into season. As you look across the Timberland brand, it’s a mixed result as you’d imagine; some good, some bad by geography and by product line.

So I think that’s probably as specific as I’d want to be.

Carrie Teffner

What I’ll add is specific to your question on comp store sales, globally comp store sales for the quarter were almost 7% down, but in the U.S. it’s weighted more heavily toward the U.S., so U.S. was about 15% down. So Europe is doing better. U.S. is doing a little worse.

Jeffrey Swartz

And if you look inside that for one more second, the U.S. retail result, remember that’s principally in outlet stores in the United States and the softness year to date in our retail outlet stores in the United States has been driven by four stores in particular which are tourist, European center stores. We are just seeing an incredible reduction in traffic.

If you look the stores that are serving American consumers as principal by geography, their result is better than the stores that are affected by the tourism fall off.

Operator

Your next question comes from Heather Bokson – Sidoti & Company.

Heather Bokson – Sidoti & Company

Could you give any color you’re getting back from some of your retailer partners, what you inventory levels look like there and maybe any additional color you can give. I know you said in your scripted remarks that the fourth quarter replenishment is important, how that’s trending maybe to date in the quarter.

Jeffrey Swartz

I can say to you that in terms of retail positioning, I don’t want to sound happy about anything given the world we’re in, but our inventory is clean and our inventory in retail is clean. First off, we have systems that connect us differently than we did before, so we have better visibility on inventory on a world wide basis.

And we spent hard work this year cleaning up some retail inventory, so you can talk about our inventory with our Chinese retail stores, you can talk about the inventory in the United States. I think universally, it’s pretty darn clean.

Carrie Teffner

The only thing I would add is I think we all know retailers are keeping their open to buy dollars tight, and so the question is really going to be about sell through.

Heather Bokson – Sidoti & Company

And how is the sell through trending so far?

Jeffrey Swartz

Day by day, we want you to know we’re on top of it in the sense that we look at it at least once a day on a world wide basis and we are spending every second we can to make sure every pair of socks, every pair of shoes we’re getting out the door can fill the demand that we see.

Heather Bokson – Sidoti & Company

The $2.6 million in other income in the quarter, what is that?

Carrie Teffner

The other income is really driven by a change in deferred comp and FX.

Operator

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

Mitch Kummetz – Robert W. Baird

As far as your Q3 sales, nice sequential improvement coming off of the first half. I’m guess that was largely due to the fall order book versus maybe out once orders in the quarter. I don’t know if you could offer a little color on that. Did you see any deliveries pushed up? It sounds like September retail was a pretty strong period and I’m wondering if there was any product scheduled for delivery in October that maybe got moved up into September because of that, that helped the third quarter that maybe takes a little out of Q4?

Jeffrey Swartz

One in three at Timberland have more in third quarter than two and four do, so you’re right about that, but it also true, and we’ve been saying this consistently that this isn’t a business like the athletic business. So we don’t have a huge, we don’t the same profile of big forward orders that determine how the quarters are going to be.

Even in a third quarter which has a higher percentage of forward orders than fourth quarter, it’s still very dependant on replenishment and execution against replenishment, less so than the fourth, but it’s not feast or famine; meaning we still have to earn a third quarter result over a relatively high percentage of replenishment business. That’s in the Timberland brand.

At Pro, it’s all flowing business except for new products. At SmartWool, the same story, so I don’t want to create the picture of an athletic cycle where one and three are in the book and then two and four we see what happens. So in three we had to earn it as well.

You said that broadly September was reported as a better quarter for retail and we saw indications of some positive activity in September, and you asked did that pull forward orders that were planned in the fourth quarter into the third quarter. We’re here to support retailers who desperate to make every sale they can make so we watch their demand signal as close as can be, but I don’t think there’s anything of any material consequence, day by day, account by account, but not big shifts that are worth talking about.

Mitch Kummetz – Robert W. Baird

On the SG&A side we’ve seen that selling expense continue to come down year over year through the first three quarters this year, even in a quarter where your sales were essentially flat. What are the buckets that you’ve seen the biggest cuts in and how more room is there to cut? And then Carrie you made the comment I think in reference to SG&A that you’re looking to better position the company for 2010 which suggests to me that maybe we wouldn’t expect to see as much of a take down of SG&A in Q4 than what the trends has been in the first nine months.

Carrie Teffner

With respect to your last comment on the fourth quarter and I think the message that I’m trying to convey there is to the extent that we see good opportunities to invest in marketing in the fourth quarter, we are going to take advantage of those opportunities.

Looking at the third quarter in terms of SG&A we did benefit from foreign exchange as I mentioned, and that did help us. But to be honest, there are cuts and reductions that are going overall as we continue to drive operational efficiency and eliminate and reduce discretionary spending. So how much more do we have to go? To be honest, I can’t answer that question.

Do we have more to go? I can say yes to that.

Mitch Kummetz – Robert W. Baird

On FX you mentioned I think all in net impact of negative $7 million on the operating income for the quarter and you’re benefiting on the SG&A but you’re getting hurt on the sales and gross margin side. I’m guessing that turns into a positive in Q4. You would expect it to, and I know that input costs were also a drag on gross margin in Q3 that maybe turn into a positive in Q4. How should we be thinking about that on a go forward basis?

Carrie Teffner

The first thing I want to point out is we do hedge, so we start layering hedges as much as a year out. So the consequence of that is when the dollar weakens we don’t get the full benefit of that in our numbers. Same thing on the flip side. So do we see some benefit in the fourth quarter, the only thing I can say is given the numbers in October, we should see some.

I can’t predict obviously what’s going to happen in November and December, so your points are absolutely valid from an in put cost standpoint. We’ve seen highs and lows in terms of leather prices this year. We should start seeing the benefit of some of those lower leather prices coming through in terms of cost of goods sold in the fourth quarter, so you’re right on a number of fronts.

Mitch Kummetz – Robert W. Baird

If you can talk a little bit about spring orders, how are they coming in? What looks good, what doesn’t, if there’s any big differences in terms of geographies, in terms of how regions are ordering and where you might be seeing more improvement?

Jeffrey Swartz

The spring is the season that hasn’t happened yet and by that I mean, Carrie said it right. I was talking to the SmartWool guys about it, and what they’re telling me makes sense to me, which is everyone watched the world come to an end this year, and so everybody says, what’s going to happen in fourth quarter.

So if you’re the sock guys, and we’re clearly sock guys. We do a spectacular job with SmartWool, and we’re selling and we’re doing our business, but we’re not getting orders for the fourth quarter because we’ve got retailers saying, let’s take REI for example. They’ve got other things in the store besides sock; in fact a lot more stuff in the stores other than socks.

So if the overall store doesn’t do better, they’re not going to give you sock orders even if your business is good. And so the whole conversation has been and remains in the moment, deliver in the fourth quarter and execute it. So it doesn’t mean our sales forces isn’t out there pounding away for accessories, men’s, women’s, children, earth and sky.

Everybody’s killing themselves and we are seeing a spring order book build, but we’re seeing a reluctance for retailers to even have a conversation with you about it. Everybody’s eyes are on what’s going to happen in the next 60 days. So I characterize the process point, and I don’t think it’s trivial, we have an order book.

We see areas of strength and we see areas of weakness. We see things that have clearly not worked as well as we hoped and we others that are doing okay. So for example, I told you I was concerned about Mountain Athletic, our initial launch in fall ’09. I don’t think we executed our end of it very well, especially when it comes to the level of how good is the product.,

So we want all eyes on making the spring ’10 product better. So we killed ourselves. Our spring ’10 product is better. We have orders that reflect that. That’s good. So on a material point, but it’s good.

If you see that the retailers are obsessed about getting through year end and seeing what that’s going to mean and they’re gaining everything, spring and the rest of it falls after on the basis of that result. So I think we’re going to be booking spring until the day it turns to summer, and I don’t know if that’s a permanent shift in mentality, but certainly an operating one right this moment.

Operator

Your next question comes from Tom Shaw – Stifel Nicolaus.

Tom Shaw – Stifel Nicolaus

A continuation on the Mountain Athletics with Jeff, you talked about the product not being quite where it is and rating it a C, is part of the equation there maybe how it’s been positioned with your accounts? It just seems to some degree it’s maybe positioned more in line with the Classics business instead of maybe more on the core hiking type business.

Jeffrey Swartz

I can’t talk about our partners in the U.S. I can talk about international if you want to, but I know you all Dick, so it’s easier to talk about it. They gave us the right place on the floor in no way connected to Classics. Fall ’09, we’re talking about fundamentally true running shoes, so items that were designed to be a real technical performance platform that’s the answer to lighter, further, faster, sexier and lean.

We tilled it on the green side. We did a good job in terms of authentic performance and we did a mediocre job in my opinion, and more importantly in consumer’s opinion when it comes to the aesthetic. So what we call sexy, it’s an interesting thing for us to reflect on.

With all due respect to the place where we live and work, sexy New Hampshire doesn’t necessarily mean smoking in Pittsburg or Minneapolis or Denver where the shoes went on sale. So we just have to update what sexy means. Sexy doesn’t mean [inaudible] so we had to work on the aesthetic side, pure and simple. We didn’t hear consumer say back you have the shoes on their feet they said, yeah, wow.

Great. If you look at the technical reviews about the product from the U.K. for example, we’ve got performance oriented reviews of the product that did a really good job, but they’re not really looking at the shoes. They’re just testing the shoes. It’s like a runner’s world kind of thing.

So to me the fundamental was we didn’t come up with a good enough execution against the distinctive, relative aesthetic. So on the list of things to get wrong, first of all you should get nothing wrong, especially in this type of circumstance, and I’m disappointed that we didn’t get this right.

But I think one of the things about our planning process is its better now than it was in the past, we don’t launch and just close our eyes. We launch and we go to retail and see what’s happening. We stand there and listen to the consumer, and think, oh, oh, we didn’t get this right. Take that feedback and we run back here and we say, “Okay, fix this.” And not fix this in the next 20 years, fix this in the next 10 minutes.

So as I was saying to Mitch, the read on spring ’10 product is we’ve got much closer to the original conception. We’ve also got early pre line work on fall ’10 that’s being done at retail right now, and again people are coming back and saying, better.

So things like as we expand from trailing to other end uses like water shoes or like hiking shoes, because this has nothing to do with Classics. It has to do with positioning us as the most famous outdoor brand on earth. The competition here is not a basketball sneaker. The competition here is a trail running shoe or products of that ilk, and we have real confidence in our ability to build authentic performers with distinct green features and an aesthetic that will kill you.

We’ve got to finish the move. We have good indication of progress in spring ’10 and good indications of progress in fall ’10 and I said, and I wasn’t being gratuitous, I appreciate the fact that Dick remains committed to the idea and remains in our camp to give us a chance to keep making the product be better, and that’s exactly what we’re focused on.

Tom Shaw – Stifel Nicolaus

When you look at this is the first quarter in awhile that we’ve seen the royalty and other income decline. Is that mainly a function of lacking that transition on the wholesale licensing side?

Jeffrey Swartz

It shouldn’t be. I don’t know the answer to that question. Third quarter last year we were in full swing with PDH and apparel. Year on year our business with PDH if you measure in terms of what’s selling through and not selling through, our business is up at Macy’s. Their business with our brand is up at Macy’s.

I just reviewed our performance for last month. Apparel sales and men’s apparel sales at Macy’s year on year is up. So that shouldn’t have been the reason.

Carrie Teffner

In general if we think about the accessories and apparel business being down overall in the quarter, certainly given the license relationship, we will see some decline in the licensing royalties.

Operator

That does conclude today’s Q&A portion. I will turn the call back over to management for closing remarks.

Jeffrey Swartz

Thank you and have a good day.

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