The Timberland Company Q1 2010 Earnings Call Transcript

| About: Timberland Co. (TBL)

The Timberland Company (NYSE:TBL)

Q1 2010 Earnings Call

April 29, 2010 8:25 am ET


Jeffrey Swartz – President & CEO

Carrie Teffner – CFO

Kaitlyn Bruder - IR


Tom Shaw – Stifel Nicolaus

Mitch Kummetz – Robert W. Baird

Kate McShane – Citigroup

Sam Poser – Sterne Agee

Jonathon Grassi – Longbow Research

Chris Svezia – Susquehanna Financial


You are listening to The Timberland Company’s first quarter 2010 analyst conference call. (Operator Instructions) Now for opening remarks, I’ll turn the call over to Kaitlyn Bruder, Timberland’s Investor Relations Department.

Kaitlyn Bruder

Good morning and welcome to Timberland’s first quarter 2010 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. Jeffrey will then discuss our performances within the context of our longer-term strategic direction.

This presentation includes and our responses to your questions may include statements about the company’s future expectations, plans, and proposals which constitute forward-looking statements for purposes 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 measure. As required by SEC rules, we have provided a reconciliation of this measure in today’s press release and on the Presentation tab found on the Investor Relations section of our website,

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

Carrie Teffner

Thank you Kaitlyn, this morning we reported a solid start to the fiscal year with top line growth in all regions, substantial margin improvement, a significant increase in earnings per share, and a solid balance sheet.

During the call last quarter I told you that our performance in the second half of 2009 was an indication that our fundamentals were improving. Its clear that our disciplined approach to managing our cash and inventory has positioned us well for 2010.

While some of our gross margin improvement was driven by favorable product costs and foreign exchange benefits, we also experienced significant gains from minimizing markdowns and a mix of higher margin product.

Before I go into more detail I would like to comment on our decision to shift away from discussing our business in terms of boots, casual, and performance. You may have noticed this in the earnings release this morning.

Our business has evolved in recent years and those once narrowly defined categories of boots, casual and performance have become less rigid. We want to be very clear about what is driving the business and we believe the most effective way to report to you is to mirror the way we manage the business, which is by geography, product grouping which includes footwear, apparel, and accessories and channel.

We intend to provide this level of detail on a consistent basis. In each quarter we will also include supplemental product lines, gender, and brand highlights where appropriate to help articulate the drivers for the quarter.

As we have done in previous quarters, we will also continue to update you on progress against what we call our big ideas, important product, and marketing initiatives such as Earthkeepers and Timberland Mountain Athletics. In a moment Jeffrey will discuss the strategic progress we are making in each region, but first I’ll walk you through the results of the first quarter.

Revenue for the quarter increased 7% to $317 million and increased 3% on a constant dollar basis reflecting growth across North America, Europe, and Asia and favorable foreign exchange rate impacts.

For the quarter exchange rate changes increased global revenue by approximately $11 million due to the weakening of the US dollar relative the euro and the British pound. Global footwear revenue increased 7% to $226 million from the first quarter of 2009 and apparel and accessories revenue increased 9% to $86 million.

By channel global wholesale revenue was up 6% to $232 million due to double-digit growth in Asia and positive growth in Europe. Worldwide consumer direct revenue increased approximately 9% to $85 million driven by comparable store sales growth of nearly 5%.

In North America revenue increased 2% to $122 million driven by Timberland and SmartWool apparel and accessories. Footwear revenue was relatively flat versus the prior year. PRO posted strong results with 7% revenue growth in the first quarter of 2010 and SmartWool revenue grew by 4% reflecting positive momentum in their respective markets and an increase in at once orders during the quarter.

North America wholesale revenue was relatively flat for the quarter. Retail revenue was up 5% with a 3% increase in comparable store sales and our North America ecommerce business was up 14% over last year.

In Europe revenue for the quarter increased 9% to $152 million and increased 3% on a constant dollar basis. Growth in every market where we operate and in particular the UK was partially offset by declines in certain distributor markets including Greece, Turkey, and the Middle East.

SmartWool continued its European expansion growing the revenue by over 30% in the first quarter. Both wholesale and retail channels showed strong growth in men’s and kid’s footwear. Overall total Europe retail revenue increased 19% driven by the benefit of foreign exchange rates and comparable store sales growth of 6% with double-digit comp improvement in both Spain and Germany.

In Asia revenue for the quarter was $44 million, an increase of 17% compared to the prior year. On a constant dollar basis Asia revenue increased 13% as Chine revenues nearly doubled and Taiwan saw double-digit growth. Wholesale revenue in Asia was up 33% versus the prior period driven by apparel, and men’s footwear.

Retail sales were up slightly reflecting comparable store sales growth of 5% and the net opening of five stores since Q1 of last year. Gross margin for the quarter was 49.8%, up nearly 400 basis points from the prior year period. The year over year improvement in gross margin was driven primarily by favorable product and business mix, less promotional activity at retail, and some product cost decreases.

As I mentioned last quarter some product input costs such as leather returned to more normalized levels in the fall of 2009 and we are also seeing additional pressures for product costs associated with the labor shortage and wage increases in China. We expect to see the impact of these factors on our costs in the back half of 2010.

Operating expenses were essentially flat for the quarter, increases in foreign exchange rate impacts and employee incentive based compensation were partially offset by a gain of $1.5 million associated with the termination of a licensing agreement and continued control over our discretionary spending.

Additionally 2009 included a charge for the impairment of an intangible asset. Operating income for the first quarter of 2010 was $39 million compared to operating income of $18 million in the prior year period.

In the quarter foreign exchange rate changes increased operating income by approximately $1 million. For the quarter earnings per share improved to $0.47, up 72% from the prior year period and our effective tax rate was 34.3%.

We ended the quarter with $239 million in cash and no debt. Inventory was down 16% versus 2009 first quarter levels, and accounts receivable decreased 9% on higher revenue reflecting our continued focus on maintaining a healthy balance sheet. Capital spending totaled $2.8 million in the first quarter of 2010 and 2009.

In connection with our stock buyback program we repurchased approximately one million shares in the first quarter of 2010 at a cost of approximately $20 million. In summary we are optimistic about our start to 2010.

Our first quarter results are the consequence of a lot of hard work, a consistent strategy, and solid execution. We are faced with some of the challenges ahead from increased product input costs such as labor, materials, and transportation, as well as other macroeconomic factors from a still recovering economy.

However our improved fundamentals and targeted investments in the business are positioning us well to take advantage of the upside. We are off to a solid start and we will continue to build a foundation of financial and operational efficiency to support our strategic initiatives going forward.

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

Jeffrey Swartz

Thanks Carrie, we’re pleased to report Timberland’s this morning with a solid return to brand right top line growth and healthy margin rates in all regions and continued profit improvement. Our team is energized by the measureable progress we’ve achieved.

Re-centering the Timberland business however does not happen over night and its by no means complete. Put simply we’re not interested in short-term conversations, we spent the last two years refocusing the brand on our core outdoor equities reconnecting with consumers and driving efficiency throughout the business model.

As proof operating expenses as a percentage of revenue declined versus last and we intend to continue reducing the cost of our business processes. Our balance sheet remains strong, inventory was down 16%, and we ended the quarter with almost $240 million in cash and no debt.

At the same time we’re investing behind important product and consumer facing marketing initiatives. This approach attack operating efficiencies, maintain a healthy balance sheet and invest in the brand. This is how we intend to pursue sharply improved performance for our shareholders.

We think Q1 results demonstrate we’re building a solid foundation for the future. This morning I’d like to take you through some of the regional highlights from the past quarter and share key areas of our continued strategic focus in the year ahead.

Building on last quarter Europe continued on a growth trajectory led by strong performance in the UK, Spain, and Italy. Together these three countries represent roughly half of our European business. International success was broader then that though, Timberland grew in every European country where we operate, despite uneven macroeconomic conditions and continued consumer uncertainty.

I have spoken at length about our core growth strategy we call big ideas, the best of Timberland product backed by brand relevant, emotionally charged, and fully integrated consumer facing marketing.

Two of those big ideas, Earthkeepers and Classics, continued to gain traction in Q1 demonstrating both the power of these big ideas and the timeless relevance of our brand. From our outdoor collections hikers performed especially well as did Classic boot product, both helped by the unusually cold weather across much of Europe during the first quarter.

In our European retail stores the turnaround of our men’s apparel business emerged as a key area of strength. We operate at Timberland apparel design center in London and in 2008 we partnered with Li & Fung to source this apparel for us. Combining powerful designs, capable merchants, and world-class back end efficiency has led to sharply improved performance of men’s apparel at Timberland retail stores in Europe.

Driven in part by an improved apparel result Asia returned to growth in Q1 led by Taiwan, and China where we also saw rapid growth in our Earthkeepers and outdoor footwear collections. We achieved solid quarterly comps in this retail dominant region helped by our clean inventory position and the early availability of our spring product.

Building on the success of our recent collaboration with Stussy in Japan we launched a boat shoe [check out] hybrid cobranded with a hot Japanese brand, White Mountaineering. The innovative silhouette was featured in their 2010 runway shoes and has gotten great buzz on [inaudible] trend sites I know you spend time on like [hypies], freshness, and trend hunter, okay admit it you do.

We also expanded our retail footprint in Asia including our first Timberland owned and operated store in China. We plan to open more Timberland owned retail there to compliment our existing distributor operated store footprint as we continue to build a strong and sustainable brand in China.

We’re proud that we now have nearly 100 Timberland brand locations in China. Consumers there are responding favorably to Timberland’s beautiful, durable outdoor capable product made thoughtfully using materials and methods which reduce our impact on the planet. Last week on Earth Day I was in China and I helped our China Timberland team plant the one-millionth tree in the Curchin desert.

We’re engaging consumers by asking them how we can do well and do good where they live, where they work, and where they play in China. In North America the brand’s turnaround is underway and concrete signs of improvement are emerging.

The North American team is making headway in broadening the portfolio of ideas through which our consumers experience the brand, far beyond Timberland’s iconic yellow boot. We followed up with a very successful fall 2009 launch with Sax Fifth Avenue with some bold new colors on classic two eye boat shoes.

We also saw substantial growth in our durable, outdoor tough hikers. Not only are these products doing well in key accounts like Dick’s, Academy Sports, and Gander Mountain, our outdoor specialty account base grew 10% in the last year. We’ve also made product improvements in our Timberland Mountain Athletics collection and continue to invest in consumer facing and point of sale marketing.

I look forward to sharing more color on TMA’s performance on future calls. Driven by apparel and men’s outdoor footwear Timberland’s North America retail turned in positive comp growth in every direct to consumer channel; specialty, outlet, and ecommerce.

Retail’s results plus improved wholesale sell through give us confidence that the North America turnaround is gaining traction. For fall 2010 we’ve gotten very positive feedback from key retailers and we are driving against the concrete door-by-door plan to accelerate growth in our home market.

Over time we believe that we will engage new consumers and at the same time win back the consumers who once wore and loved Timberland. Many of our most loyal consumers in North America wear Timberland PRO boots and shoes while they work. In Q1 the PRO business returned to growth despite a recession, that disproportionately effected the industrial and service sectors.

PRO boot grew by mid single-digits and continue to gain in a highly competitive market which includes both strong branded and private label players. PRO results outpaced the category partially due to better than expected same store sales at key retailers leading to the need to catch up on inventory and were more than happy to help, winning valuable shelf space throughout [once] orders which led to a strong result for the quarter.

With a franchise build on innovation like our anti fatigue platform and best in class customer service we see even more opportunity ahead for PRO as market conditions improve. We’re encouraged by our Q1 results and the feedback we’re getting on the fall 2010 line. We see concrete signs of real brand right growth globally and we’re working very hard to ensure that we are positioned to capture this potential, to build the brand, and improve results for shareholders.

We’re mindful of the intense effort its taken to bring our business and brand to this place, a place of progress and so know that throughout this organization we are hyper focused on continuing to improve execution against our strategic plan.

We’re making progress but we have much more progress still to make. Carrie and I are now available for any questions you might have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Tom Shaw – Stifel Nicolaus

Tom Shaw – Stifel Nicolaus

Nice quarter, first of all clarity, I think you mentioned on the SG&A side there was a $1.5 million gain in there, just a little more clarity on that and then kind of a continuation on the SG&A side, you’ve talked about in the past efforts to sort of streamline the expense line and bring that rate closer in line with some of your competitors out there, but also you’re balancing that with some, these increased expenditures on the marketing side. Just a little more color on how you’re balancing those two directions.

Carrie Teffner

A couple of things to keep in mind on the OpEx, we have a pretty, a higher mix of both direct to consumer and international, its part of our business, this is different than the business was shaped back in 2004, 2005 and that does drive a little bit higher of an OpEx ratio.

That said as I’ve said before too, we do think there’s more opportunity so its part of this is helped as we grow the top line but its really step by step as we go through our individual processes here looking for where those opportunities are to address operational inefficiency and take cost out.

So, that continues to be a work in process.

Tom Shaw – Stifel Nicolaus

And the gain that was in the—

Carrie Teffner

That has to do with a licensing agreement we had for women’s apparel in North America, so we terminated that agreement as you know, we don’t really do much, do a lot in the women’s apparel business in North America.

Tom Shaw – Stifel Nicolaus

And maybe as a follow-up a little more color on the, pretty nice turnaround there in Asia how much of that is, you talked about some of the distribution being gained, the first company owned store in China, etc., versus what you’re seeing from actual demand standpoint that’s been a weaker region for most of your competitors, just any extra color you can provide there would be great.

Jeffrey Swartz

That’s not door building, that’s better management of our business. It’s the one company owned store so that’s not a material [inaudible] from any perspective. The China network of stores which is not quite 100, its not a huge difference in number year on year so its not pipeline loaded. What it is, is we cleaned the daylights out of the inventory that was sitting in those retail stores the prior years, the prior administration in Asia had built a business but hadn’t built a business that runs right.

The current administration has done a terrific job of cleaning out the inventory and therefore creating open to buy in the existing stores. I haven’t seen Timberland apparel look better in our retail store than it did last week in the stores, we’re talking about spring 2010 merchandise. So spring is not our big season right. I’m telling you men’s apparel looks spectacular.

The stores are well merchandised, the flow is better, and as a result they’re earning comp sale increases in the door so its not pipeline loaded its we’re running our business and executing better. That’s the China story. Taiwan is an exciting business on two levels, one is its doing a terrific job. Second thing is if you look at our consumer direct model anywhere in the world, our Taiwanese stores, and this is years of operating them, these are the best-operated stores we have anywhere.

And there’s a lot to learn from them for us so we think that the results in Taiwan are leveragable and that’s what the Asia team is working on so very positive comp results there but its not pipeline loaded its execution.


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

Mitch Kummetz – Robert W. Baird

Congratulations on a great quarter, a couple of questions, first on your fall outlook I think on the last call you said that you’re encouraged that your performance for fall holiday 2009 would help with your fall 2010 sell in, so now that you have those orders in could you comment on that and I would assume that you would expect sales to accelerate from the first half to the back half just based on probably how your order book is looking but if you could just elaborate on that.

Jeffrey Swartz

Let me try the first part because that one’s more in our hands, what I said before which is that the fall 2009 sell through ought to create open to buy for fall 2010, I reiterate that point. It is for sure true and you know this from talking to retailers that people are being circumspect about open to buy period, so the old rules of commerce don’t apply.

People are still ordering closer to the season so people are still being tighter and tougher about open to buy but the truth is if you perform you have a better opportunity to grow your business. That’s not a big insight it’s the truth and we are seeing that.

We are seeing that period. Our European order book isn’t fully assembled yet by the way to be clear but what we’re seeing is encouraging. Same thing is true with SmartWool, I looked at the regional results for SmartWool Europe, Asia, and the United States, and it bears out. If you look at our business in the US we’re in full battle gear on turning around the business.

To me the question that I’m asking our US team is on a comp door basis how many SKUs are you placing because its less about open to buy initially, its more about shelf face and so if we can take our US doors and we can drive facings up so an example, anecdote right, just an anecdote, but at Paragon which is a pretty important indicator door, if you want to the be the number one outdoor brand on earth you can’t do that with three SKUs which is what we had in the first quarter of last year.

Okay we had 15 SKUs this first quarter, in the second half of the year my push against the team is make 15 SKUs be 1500 SKUs, right, if you don’t get the facing you can’t get the business and I’m not trying to go on long, I’m just trying to tell you that to me the indicator is which doors and which SKUs and then we use our supply chain to fill them in. We’re not getting huge orders, this is not the athletic business, its still the [brown] business which means to me the key indicator in the turnaround in North America is doors and facings.

Mitch Kummetz – Robert W. Baird

And then on the gross margin outlook for the balance of the year, obviously you saw nice expansion in the first quarter for a number of reasons and you talked about some of the pressures on costs going forward, does that suggest that you should, your gross margins could be down in the back half or do you still expect mix and just a cleaner inventory to help offset some of those other pressures.

Carrie Teffner

We definitely expect mix to continue to help. We expect the fact that we have cleaner inventories to help like you said with less off price and promotional sales, but without a doubt the higher leather prices that we covered at the fall of last year, the higher transportation costs coming our way, as well as the labor costs we’re seeing out of China are definitely going to have negative implications for us on our gross margin.

So right now what I can tell you is they’re going to offset each other, that’s still for us to be determined but it is a back part of the year impact to us.


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

Kate McShane – Citigroup

I read your interview in Footwear News this week and thought it was extremely helpful in understanding where your business is coming from and where you are today on the product side, and what I wanted to try and better understand is how maybe you plan to segment some of your new and successful ideas like Earthkeepers, in other words, if its selling at Dick’s Sporting Goods, are you segmenting it so that its slightly different at other retailers. Is this something that you’re focusing on, is it important to your growth strategy.

Jeffrey Swartz

That’s a really good question, and the answer is simply absolutely yes. We are segmenting our big ideas and that I think gives me an opportunity to say to you one of the things that is about sustainable success at Timberland, one of the reasons why I believe that the turnaround and the return to brand health is something to be encouraged about even excited about, is because its not just working harder the same old way.

The addition of regional merchant structure is a big deal which I think is going to help pivot us for sustainable successful specifically we have regionally based real experts in footwear and apparel, merchants who’s job it is to be able to navigate between the brand team which is where the big ideas come from and the distribution teams which is where the big ideas go to market.

And so your question points to a weakness in the past that any time we had an idea that worked, we had an idea that we couldn’t find enough places to sell it. And so over distributing any idea is the eventual death of the idea, right, end up at the conversation about price because its ubiquitous, its everywhere and so all you can compete on is price.

We have the four big ideas that we’re focused on. They are regionally tuned, hard. Our objective is to have these ideas be 80% standard across the global face of the brand but 20% tuned and tuned means not just a color it absolutely means segmented. I was in Japan in the early part of last week and we had a conversation about as an example, ABC Mart which is a very important retailer of ours. [Zebio] is also an important retailer, these are very different retailers.

One which is a casual sport athletic leisure, another that’s a real outdoor performance oriented guy. Putting the same Earthkeeper merchandise in both places is just flat out stupid. Because we have four big ideas not 40, four, and because we’re so manically focused on execution and because we have this new confidence called merchants, we are able to go to each of these retailers and talk not the theory of segmentation but the practice.

Here is product that’s tuned and aimed at the consumer shopping in your door, that’s consistent with our brand. And so the merchandise sets are different and even distinct and as a result we get a broader network and a better way to tell our story. And so you’re absolutely right one of the key issues in driving sustainable brand right top line growth is the discipline of merchandising and keep the big ideas segmented within channels in the different regions.


Your next question comes from the line of Sam Poser – Sterne Agee

Sam Poser – Sterne Agee

When we’re looking at the back half of the year, I was at the Outdoor Retailer Show back in the January and your booth was as busy as I’ve seen it in the last four years there and we’re seeing a lot on sort of this return to what I would call the 90’s kind of boot trend, just sort of looking forward, despite the fact that you say that you haven’t sort of your, you said you hadn’t your total fall booking hadn’t been totally assembled yet, where is it standing on a year over year basis right now given what appears to be, every magazine we look in if you walk those shows through WSA, Fannie, Platform, there was boots all over the place and you certainly should be a well received in that category given the strength of Abington, and Timberland boot company, and the development of the other big ideas that you have, so could you give us some idea of where you are on a year over year basis there.

Jeffrey Swartz

I think you’re right to point out that the fashion trends are important for us to consider within the context of the big ideas because as you well know boot competence is a central competence and so if you talk about outdoor performance boots are important to outdoor performance. Now there of course I mean the one I’m wearing today, the Mount Washington hiking boot with GoreTex, where we talk about Earthkeeper you talk about boots again.

And that’s were Abington, or that’s where Newmarket apply and we talk about classics, obviously boots are a big part of that story and women’s boots are an important story because the competence called boot, right, that’s we started out doing making boots, we’re good at that. And we do it across an incredible range of usage occasions.

From a steel toe work boot to a high performance hiking boot. Where we talk about boots as product categories, that’s what we’re talking about and that’s why within each big idea we spend time making sure that there’s not vulnerability in the product line. Want to make sure that we have that usage occasion called boots very well addressed, men’s, women’s, kid’s, right across the big ideas.

When the fashion ones come in the direction of boots we think our big ideas and our distribution networks are well set up to take advantage of that. You were right to point out that Abington and Newmarket which are youth oriented that doesn’t mean young people, that means young attitude are well positioned to create brand heat and brand buzz in kind of cool ways.

We don’t mean to overdue this notion of collaboration but we’re pretty proud of the fact that we got boots at Collette and we’re pretty excited about the fact that White Mountaineering wants to collaborate with us on classics or that Sax Fifth Avenue wants to put Timberland’s classic silhouettes including boots on Fifth Avenue.

To me its not a big commercial point but it’s a huge brand building point and its one we’re going to continue to extend on and so yes, I am mindful of the fashion trends but I’m more focused on is the strategy right, I think it is. Are we executing the strategy, I think are. And does that mean that we ought to be able to earn our way in the second half, well that’s our intention.

Sam Poser – Sterne Agee

I asked basically on an incomplete or un fully assembled order backlog on a year over year basis can you give us some idea of how that looks as a comparison.

Jeffrey Swartz

I think I just did the best I could on that.

Sam Poser – Sterne Agee

Could you say its up 20% or its up 10%.

Jeffrey Swartz

I could say that but it wouldn’t be useful to either of us, because you know that we don’t we haven’t and we don’t intend to sort of play the backlog, we release the backlog once a year because we know we’re required to but we don’t always don’t talk about it because this is the brown business versus the white business and we see across the channels and across the regions very different results from place to place. It would take a long time to lay that out in a way that would be coherent.

I’d rather tell you that what I said about the North American business which I think is very important is we are tracking carefully doors, comp doors, on how many SKUs did you have, how many SKUs will you have and then we’re positioned because we make our supply chain work hard. If we can get a shoe on the shelf and we can put the marketing behind it and turn it we’re in a position to get it out once ordered and deliver against it.

And so to me that’s a better indicator where our business is going and all I can say about that is I’m encouraged.

Sam Poser – Sterne Agee

You said about Paragon you went from three to 15 SKUs on a year over year basis which is a very nice, on shelf space, a very nice increase, when you’re thinking about in the US business on a year over year basis are you looking at doubling your space based on the conversations that you had right now or is it up, people have already given you commitments to shoes and not necessarily on the fill ins, but—

Jeffrey Swartz

That’s right, [inaudible] going from 33 SKUs to 54, Gandor went from seven to 20, Ramsey went from six to 12, that’s four anecdotes and by the way that’s the entire list of anecdotes I have in front of me so I can’t give you another one but I can tell you that I list those out in order to indicate what? First they’re all outdoor doors, secondly its isn’t one geographic concentration. Ramsey, you know where Ramsey is in New Jersey, you know Gandor is based in Minneapolis, with 23 states, you know [All Track ] in online, you know Paragon is in New York.

So its not the I-95 conversation with Timberland, in fact you’ll hear us continue to talk about when we talk about North America about this undiscovered region of America west of the Mississippi. I’m getting my passport updated and I’ve been working on language skills and we’re going to actually visit part of that world and see if we couldn’t get some business in Seattle or in San Francisco, places where they tell me people wear shoes, so outdoor shoes even, and so when I look at those results, yes I don’t think its, yes I know that the North American team is having conversations about drive increase door by door in SKUs. Don’t make the mistake of saying please or saying if we went from three SKUs to 15 in Paragon our business is going to multiply by five, because that’s not our plan.

We don’t think we could execute that and we don’t think that’s realistic. I’m trying to indicate to you the turnaround is in process. I want to indicate to you that its not happening by good luck, its happening by strategy and execution and I’m telling you that I think the key to the turnaround is to get our brand in the right doors with the right SKUs. What will that turn into in revenue growth in the sell of the spread sheet, you know what, we’re not spending time thinking about that, we’re spending time thinking about executing our strategy.

And so these four anecdotes are only anecdotes, they are positive anecdotes and they indicate the strategy is taking hold but that’s all it indicates and so the second half results there’s a lot to figure out yet and we want to get back to work and execute against it.


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

Kate McShane – Citigroup

About inventories, how should we be thinking about inventories for the rest of the year, I think inventories were down around 16% this quarter but it sounds like sales might be up for the year so what can we expect on that front.

Carrie Teffner

The thing to think about with respect to the inventory is the composition of that inventory and while it was down part of the reason its down is lower excess and obsolete inventory but we’re also improving in our supply chain and bringing the inventory in much closer to when we’re delivering it to the customer and that actually played a much bigger part and the predominant part of the overall decrease in our inventory for the first quarter.

Now that said, we’ve got our demand forecast out for the rest of the year and are building our inventory to support that demand forecast so what we’ll see is inventory going up in Q2 because it just shifts to the nature of our business and the timing of back to school and the fall shipment. So, you should expect to start seeing inventory come back up.


Your next question comes from the line of Jonathon Grassi – Longbow Research

Jonathon Grassi – Longbow Research

When you talked about we have a favorable mix and channel distribution and FX and low product cost impacting the gross margin, can you quantify or give us some sense of the degree of impact each of those variables had on the gross margins.

Carrie Teffner

About half of the margin improvement was related to product mix and just basically higher priced higher margin product. And then a lower promotional and off price activity. About a quarter of the margin improvement was related to lower input costs and in that as well keep in mind we had product reserve that hit the books last year that accounted for about 50 basis points of the improvement.

And then the remaining quarter of the improvement was related to favorable regional and channel mix so again as Europe and Asia grow faster than North America that’s going to help our margins as does the shift to more retail business.


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

Chris Svezia – Susquehanna Financial

Nice job on the quarter and nice job on the call too, being pretty succinct in terms of what’s driving the business and what’s you are doing, I guess one question more pointed given everything that you’re doing in the North American footwear business, and I know everyone is trying to figure out what’s going on with the backlog and I know probably retailers are looking at open to buy and how they’re ordering and some of the business is on an at once and trying to gain shelf space, but putting all that together is it fair to say that the US North American business, wholesale business, grows in footwear this year and when does that inflection point start to happen. Does it look like it start to happen in the third quarter given everything that you’ve done and what you’re up against.

Jeffrey Swartz

I think it’s the right question because I think as an indicator of strategy in concrete terms the North American business is its not the canary in the coal mine, it’s the opposite way around. It’s the herald of spring. When we can demonstrate to you consistent brand right growth of the wholesale footwear business on a first quality basis in North America I think a lot of the questions about can this leadership team make the Timberland brand come to scale will be addressed differently.

I’m pleased with the first quarter results that were reported to you. When you strip away things like off price sales year on year and you look at the fundamental health of the business, you put your fingers on the pulse of how did we do on first quality footwear sales in North America I’d say that the fact that the margin improved is impressive to me because that’s largely, Carrie made mention to it, it’s the SR&A, the sales return and allowance management point.

It didn’t mean we didn’t pay markdowns, it meant that we retailed. The best way not to pay a markdown is to sell the sucker at the first price. But you can’t sell the sucker in a marketplace as competitive as ours at the first price if consumers don’t want it. And so a quick test on how good are you big ideas is almost an 800 basis point improvement in North American gross margin year on year.

To me that’s an indication of not health achieved but that’s an indication of health being earned and I think that’s the theme that we talk about in turning to focus on hard, it would be lovely to have a runaway product that fell out of the sky that we could just ship in carton loads but that’s not how we’re going to turn around our business in North America, its going to be one door at a time. Its going to be one incremental SKU at a time executed crisply.

And I think the first quarter results, let’s say solid progress against that point. When can you show a 50% increase week on week in sales, we’re working hard at that. Do we think that there’s growth ahead of the North American business, distinctly. Do we think that we’re going to be able to deliver growth against North American business within the calendar year, we’re certainly focused on trying to. And I’ll tell you the anecdotes I rattled off to Sam about SKU spreads at key outdoor doors not just in the northeast again, it’s the set up for success.

But you’d be right to say okay you’re set up for success, but until you execute you didn’t execute and I’d say that’s fair. The second half order book, the second half order patterns, the second half SKU placement data says its in our hands to execute better result in the second half North America footwear than we did in the second half last year and we are maniacally focused on doing that because we know nothing will convince our shareholders of progress better than demonstrating wholesale first quality brand right nationally distributed growth in the wholesale footwear business and so team Timberland is pretty focused on that.

Chris Svezia – Susquehanna Financial

It seems like at retail ever since sort of tail end of last year you really started to see improved sell through rate across a pretty broad spectrum of your products and it seemed to continue into the first quarter and I think retailers are either coming back to your product, at some point its got to show up in your numbers where you start to see that wholesale growth start to pick up again, that the sell through rates start to improve. It seems like you’re seeing that retail, I’m just trying to get a sense as when that starts to happen in your neck of the woods in terms of order placement.

Jeffrey Swartz

We’re watching the same thing. And we’re focused on not just recording it we’re actually focused on trying to drive it because yes the big ideas which means better product for start, better brand focused absolutely but, and yes we got acceleration because we got the fortune of good weather in the first quarter in Europe but I would say with humility but with confidence the big ideas are not just product its product and distribution and marketing working together in fortress cities.

I was in France the week before and I looked at the return to health of our French business and it yes its been a product for sure but its better product in the right doors executed in terms of the service strategy and then followed up with marketing and so its not just we’re sitting here hoping for, we’re trying to tie together price, distribution, marketing, very straightforward but very hard edged and so I continue, my fingers are not crossed, I don’t think that way.

Our eyes are really focused on driving growth in the second half. We are, there’s no [inaudible] about that, that’s our desire, and we’re focused on it and you know what, we’ll know, you’ll know how well we execute it when we report to you those results and I understand your patience against those results and I share it.

Chris Svezia – Susquehanna Financial

Mountain Athletics, I’m just wonder if you can just talk about what your thoughts are there and just how we can think about that business after what you went through last year in terms of positioning the product, thoughts about this year and the response and the last question, on ASP, I know you talked about the margins and what’s going on with leather pricing, etc., what’s the flexibility to take pricing up given where your inventory is and the mix of product to mitigate some of those costs.

Jeffrey Swartz

On Mountain Athletic there is sort of good news and bad news about big ideas, if you have 50 of them you can always discard one of them, if you have four of them you got to make them work and we have four of them and we are making Mountain Athletic work. I said before and I’ll say it again I’m grateful to folks like the GMMs and the buyers at places like Dick’s who continue to see the value of the idea and continue to work with us on refining the product, tightening up the marketing, and executing better.

I reiterate that the launch of Mountain Athletics at fall 2009 was a success and by that I mean specifically the point I made to you earlier which is the product was okay. The advertising was not okay. It was great. The distribution was spectacular and so the result at Dick’s of the television ads that we ran plus the product that we had in the stores, we sold through a lot more at Dick’s than we did the prior season, a lot more.

It wasn’t as much Mountain Athletic in the mix as we wanted to be that’s because we didn’t execute the product as well as we should have. But the net takeaway of did the Mountain Athletic strategy work, the answer is yes. To be really clear the Mountain Athletic strategy is what? Its to position Timberland in the minds of youthful consumers as a brand, the first brand of choice in the outdoor segment.

Lighter, faster, further, sexier, and green, that’s a winning proposition. That’s a proposition that North Face doesn’t have, that’s a proposition that ACT doesn’t have, that’s a proposition that [Merrill] doesn’t have. I have deep respect for those brands but I intend, we intend toe by toe at the point of sale to make Mountain Athletic compete and win against those brands because we believe that the proposition has better. We need to execute on the product line better.

We made specific investments in talent on the product side and specific investments in tuning the regional mix, Asia, Europe, United States, we are not going away on Mountain Athletic. We intend to be the number one outdoor brand on earth and Mountain Athletic is the edge of that wedge.

Carrie Teffner

With respect to ASPs kind of a look at Q1 just to let you know ASPs overall for the quarter were slightly up primarily driven by Asia, Europe and North America were essentially flat. As we think about pricing going forward we take pricing into consideration through our development process and so we’re looking at the cost as we develop the product from that standpoint.

But certainly where we see significant [inaudible] we’re going to evaluate pricing opportunities on a selective basis. Now the other thing to say on that is with positive sell through and strong sell through coming through out of the spring, we’d also be looking at SR&A being down which would help offset and mitigate some of the pricing or cost pressure that we would see in the back half of the year.


Your final question is a follow-up from the line of Mitch Kummetz – Robert W. Baird

Mitch Kummetz – Robert W. Baird

I just had a few housekeeping follow-up questions, one on FX obviously saw nice benefit there on your sales in the quarter what was the overall impact of FX on earnings for the quarter and then how does that work its way through the year given what we’re seeing with the dollar of late.

Carrie Teffner

To think ahead for the remainder of the year, given the euro rates last year compared to where they are today, right now based on current spot rates we’re thinking its going to be a negative, a headwind for us. As we look at operating income overall, it’s a very, FX actually had a very minimal effect, I think we said in my script about a million dollars positive impact on our operating income.

Mitch Kummetz – Robert W. Baird

And when you say a negative impact over the balance of the year are you talking about both on the sales side and on the operating income, or just the sales.

Carrie Teffner

Definitely more so on the sales side because we’ll see the benefit coming back to us in SG&A.

Mitch Kummetz – Robert W. Baird

You saw a tax benefit in the quarter, what’s the tax rate that we should be using for the balance of the year.

Carrie Teffner

We’re still expecting the tax rate for 2010 to be favorable to the overall corporate tax rate.

Mitch Kummetz – Robert W. Baird

On the SG&A you had the gain in the quarter and I think if you adjust for that your SG&A would have been up around $2 million-ish, not that I’m saying that we need to pull that out of the numbers but how should we be thinking about your spending as we go through the year. Do you need to reinvest as we go through the year as maybe you see momentum build in the business or how should we be thinking about your SG&A, are you still really tightly managing those expenses and we shouldn’t see any much of a year over year increase in those lines.

Carrie Teffner

The way I would look at that is with respect to our discretionary spending, kind of the day in day out spending, we’re going to continue to manage that in a very controlled fashion. And continue to look for opportunities to drive improvement there. On the other side of that is marketing and as we see the business opportunity to invest there and drive top line growth, we’ll do that.


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

Jeffrey Swartz

Thank you and have a good day.

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