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The Timberland Company (NYSE:TBL)

Q2 2010 Earnings Call Transcript

July 28, 2010 8:25 am ET

Executives

Kaitlyn Bruder – IR

Jeffrey Swartz – President and CEO

Carrie Teffner – VP and CFO

Analysts

Chris Svezia – Susquehanna

Kate McShane – Citi Investments

Adam Comora – EnTrust Capital

Mitch Kummetz – Robert W. Baird

Jonathon Grassi – Longbow Research

Operator

You are listening to The Timberland Company’s second quarter 2010 analyst conference call. This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcast without permission of the Timberland Company. Your participation in this event complies – implies consent to these terms. If you do not agree to these terms, simply drop off the line.

Now, for opening remarks, I will turn the call over to Kaitlyn Bruder of Timberland’s Investor Relations Department. Please go ahead, ma'am.

Kaitlyn Bruder

Good morning and welcome to Timberland’s second quarter 2010 conference call. Speaking today will be Jeffrey Swartz, our President and Chief Executive Officer; and Carrie Teffner, our Chief Financial Officer.

Before I turn the call over to Jeff, I would like to remind you that this presentation includes and our responses to your questions may include statements about the company’s future expectations, plans, and proposals which maybe considered forward-looking statements by securities laws.

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 the company’s filings with the SEC. 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 in the Investor Relations section of our website, www.timberland.com.

Thank you. And now, I will turn the call over to Jeff.

Jeffrey Swartz

Good morning. Overall, we are pleased to report our second quarter results. With solid revenue growth in all regions and notable improvements in our gross margin, we believe our long-term strategy is creating sustainable results for our shareholders.

Thus far, results in the first half of 2010 have represented a sharp turnaround from where we were just a couple of years ago when fashion trends were moving away from Timberland's reliable Classic Boot business. We believe that the progress we made this quarter across all of our product lines is both meaningful and sustainable.

I would like to take a few minutes to highlight several wins from the past quarter and describe strategic growth opportunities for Timberland going forward. The second quarter historically has been our smallest quarter. However, with brand-right top line growth and significant gross margin improvement like we saw in this past Q2, we are proving that Timberland can perform well and serve consumers 12 months of the year.

Disciplined inventory management helped us minimize markdowns and enclose [ph] our revenue decline 31% compared to the second quarter of last year. Our balance sheet is as solid as ever with reductions in inventory and accounts receivable and we finished the quarter with $238 million in cash and no debt.

Results for the quarter were solid in all regions. In North America, SmartWool, historically a cold-weather brand, had a stellar quarter with an increase in revenue of 42%. At the same time, the team made great progress against a growth strategy of evolving from a sock brand into an outdoor lifestyle brand. While Timberland's footwear business in North America saw a slight decline in revenue for the quarter, this was largely driven by a decline in close-out revenue compared to last year. Combined with improving gross margins, these are exactly the kind of results we are looking for as North America gets on a healthier trajectory.

In Europe, the positive results were well balanced across our men's, women's, and kids' footwear lines. We also saw improvements in Earthkeepers, outdoor, and our Classic product. In Asia, revenue in quarter two was up 5% on a constant dollar basis, driven by impressive results in our retail stores.

Though we had several wins during the quarter, quarterly results were adversely affected by a non-cash impairment charge, primarily related to our Howies and IPATH brands. These are small, yet compelling brands, which represent a very small part of our overall portfolio. We had significant expectations for their future growth and operating results and they have now met these expectations. I don't want this charge to mask the fact that the fundamentals of our business are solid and improving.

That said, macro conditions continue to be difficult in some of our top markets. In North America, after seeing signs of an improved retail environment, spending dipped in June. In Europe, consumer confidence remains low and the impact from the weaker euro is very real. In addition, product input cost pressures are beginning to impact our supply chain and will inevitably challenge our margins.

Despite these challenges, we are committed to our strategy of becoming the number one outdoor brand on earth, and our path to number one is all about executing our strategies faster and better. Our commitment is to provide best-in-class product across a range of categories with a particular focus on what we call "big ideas." These are great product stories that represent the best of Timberland's brand equities.

Undoubtedly one of the most important is our Earthkeepers line, outdoor capable product using innovative responsible materials and construction methods. Earthkeepers is an idea that's uniquely Timberland's and it's ours to own. We are excited that consumers across all regions, across our channels and seasons are responding favorably and we are achieving very tangible results. Building on an already impressive growth trajectory, Earthkeepers revenue more than doubled in Q2 over last year in all regions and across men's, women's, and kids'.

Earthkeepers also represents a fantastic opportunity for big ideas in combination and brand-right collaborations. This spring, we cross-pollinated Earthkeepers' construction principles with our Classic product in a profound way. The result, Earthkeepers 2.0 boat shoes, which are designed for disassembly, meaning when you are finished with the shoe, you can take it apart and we will recycle it and we are the focus of prints ads in Europe and Timberland retail store windows globally.

The public relations' response to this product has been awesome and helped to drive full-price sales of both our Classic and Earthkeepers boat shoes around the world. This powerful product and the storytelling combination of Timberland's heritage and Timberland's future at the same time is just another step on our path of offering consumers authentic outdoor performance, cutting-edge innovation, value, and values.

We are adding a fresh spin to our classic shoes in other ways as well. Hot collaborations like our new boat shoe with Colette in France and a hand-sewn collaboration with Rag & Bone in the U.S. highlight Timberland's authenticity and heritage and yet provide access to new and very influential consumers.

Building on the buzz from these collaborations in the fall, we plan to increase our consumer-facing marketing to support two important ideas. One of those is Earthkeepers, which we will support with some great fall television ads reinforced by an integrated campaign of digital media, in-store marketing, and advertising. The other big idea is women's. From a brand marketing perspective, these two ideas overlap in important ways.

Several spring styles helped Women's Earthkeepers revenue grow to more than 10 times our 2009 levels; 10 times a small level in 2009, but 10 times nonetheless, building on momentum from our integrated launch in Italy in fall 2009. When we re-launched the women's brand in Italy in fall 2009, we deployed a women's specific marketing campaign across Europe this spring. The result was great product, backed by focused consumer-facing marketing, which contributed to an impressive 28% revenue growth in Europe women's footwear in Q2. We are more confident than ever that Timberland has what it takes to be a credible women's brand in Europe and in the rest of the world.

After two quarters of stabilization, followed by two quarters of growth, I am pleased that our consistent and focused strategy is translating to real results and the Timberland brand is in a healthier place than it has been in years. Yet, we recognize that there is still opportunity to strengthen the brand in all regions. We are stewards of both the Timberland brand and business and we remain committed to our strategy to create sustainable and responsible growth for the long term.

Carrie will now take you through the financial results in greater detail.

Carrie Teffner

Thank you, Jeff. This morning, we reported our second quarter financial results with top line growth and substantial margin improvement in all regions. Similar to last quarter, a portion of our gross margin improvement was driven by favorable product costs, but we also saw significant gains from selling a mix of higher-margin product, lower close-outs, and fewer markdowns and returns.

As Jeff mentioned, this gross margin improvement was partially offset by a non-cash charge of $13 million to write down goodwill and intangible assets, primarily related to two of our small acquisitions. Including this pretax charge, loss per share increased from $0.34 to $0.44 in the second quarter of 2010. I'll now walk you through the details.

Revenue for the quarter increased 5% to $189 million, an increase of 6% on a constant dollar basis, again reflecting growth across North America, Asia, and Europe. For the quarter, unfavorable foreign exchange rates in Europe and the U.K. due to the strengthening of the U.S. dollar relative to the euro and the British pound were mostly offset by favorable foreign exchange rates in Asia. Global footwear revenue increased 4% to $132 million from the second quarter of 2009, apparel and accessories revenue increased 10% to $52 million, and royalty and other revenue decreased 4% to $5 million.

By channel, global wholesale revenue was up 8% to $117 million compared to the prior-year period, due to double-digit growth in North America and Europe, partially offset by declines in Asia. Worldwide consumer direct revenue was flat at $72 million, as improved comparable store sales in Asia and the net addition of eight new Asia retail stores since the second quarter of 2009 were offset by declines in Europe and North America.

North America revenue increased almost 7% to $92 million compared to the prior-year period, driven by stronger sales in apparel and accessories. Footwear revenue was also up 3% versus the prior year. Wholesale revenue for the quarter was up 11% as our Timberland PRO business posted strong results with 15% revenue growth in the second quarter of 2010 and SmartWool revenue grew by an impressive 42%. This was partially offset by a 15% decline in close-out revenue.

In the consumer direct channel, our North America e-commerce business grew by 18% compared to this quarter last year. Overall, consumer direct revenue was down 3%, driven by soft comps in our outlet channel and the net closure of four outlet stores.

In Europe, the revenue for the quarter increased 1% to $67 million, an increase of 6% on a constant dollar basis. Double-digit revenue growth in Italy, Germany, and Scandinavia was partially offset by double-digit declines in the U.K. and France. Footwear revenue in Europe for the quarter increased 6% with improvement in men's, women's, and kids'. This increase was partially offset by declines in apparel sales in both wholesale and retail due to fewer off-price sales. Overall, total Europe retail revenue decreased 10%, driven by unfavorable foreign exchange rates and declines in comparable store sales.

In Asia, revenue for the quarter was $30 million, an increase of 10% compared to the prior-year period. On a constant dollar basis, Asia revenue increased 5%. We continue to see significant growth in Taiwan and China, which was partially offset by declines in the Asia distributor business. Asia retail was up an impressive 23% with comparable store sales of 11% and the net opening of eight stores since Q2 of last year. Asia wholesale revenue declined 9% for the quarter due to both the timing of orders, as well as a 78% reduction in close-out sales.

Gross margin for the quarter was 49.5%, up 750 basis points from the prior-year period. Year-over-year improvement in gross margin was achieved in all regions and was driven primarily by favorable regional, channel, and pricing mix, which accounted for over a quarter of the favorability. Another quarter of the favorability was from lower product costs. A decline in global close-out revenue, as well as less sales returns and markdown allowances also contributed to the margin rate favorability.

While the benefits from mix and lower product costs continued in the second quarter, we expect that the increased product costs as a result of higher leather, transportation, and labor costs will adversely impact gross margins in the second half of 2010.

Operating expenses for the second quarter increased 13% or $15 million to $127 million when compared to the second quarter of 2009. The increase was driven by the $13 million non-cash charge for impairment of goodwill and intangible assets that Jeff spoke about earlier in the call. These were partially offset by favorable foreign exchange rate impact and a $1.5 million gain in Q2 related to the termination of a licensing agreement.

Operating loss for the second quarter of 2010, which included the $13 million impairment charge, was $33 million compared to an operating loss of $36 million in the prior-year period.

We ended the quarter with $238 million in cash and no debt. We continue to tightly manage working capital as total inventory was down 2% at the end of second quarter to $177 million and accounts receivable was down 13% for the quarter. Capital spending totaled $4.5 million in the second quarter of 2010 compared to $5 million in 2009. In connection with our stock buyback program, we repurchased approximately 1.3 million shares in the second quarter of 2010 at a cost of approximately $25 million.

Our foundation of financial and operational efficiency continues to strengthen and I am encouraged by the progress in each region. For the remainder of the year, we will continue to invest responsibly behind key strategic priorities to grow the top line, manage our expenses, and maintain a keen focus on our balance sheet.

We are committed to growing the top line, but as I mentioned last quarter, our industry is faced with a number of supply chain challenges impacting freight and product costs. We are partnering with our suppliers and customers to work through these challenges and where necessary, we will implement price increases to help offset higher input costs. We will also work to mitigate the cost increases by managing our inventories to minimize markdowns and returns. And as you can see by our 750 basis points of gross margin improvement in the second quarter, we are already starting to move in this direction.

Overall, our fundamentals are solid and our disciplined approach to managing our cash and inventory has left us well positioned to build on the momentum we have worked hard to gain over the past few quarters.

Thank you. And now, Jeff and I are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chris Svezia with Susquehanna.

Chris Svezia – Susquehanna

Good morning, everyone.

Jeffrey Swartz

Hi, Chris.

Chris Svezia – Susquehanna

I guess the first – Jeff, for you, when we think about the North American boot business in general, I know it's not kind of a huge quarter for this, but you did talk a lot about what's going on in Earthkeepers. But I was wondering if you can just talk a little bit more about – any color about Mountain Athletics, the Classic business in the quarter and just kind of what your thoughts are as you progress through the balance of this year as you look to the second half. Any color there as well?

Jeffrey Swartz

So we continue to characterize the way we want our brand built as big ideas first, right? We have a very clear view of the brand positioning. We say simply and clearly we want to be the number one outdoor brand on earth. That means every product in our product range has to earn the mark against that strategy, right, that aspiration.

And so Mountain Athletics is a tremendously important part of our portfolio. It's not a tremendously important commercial element. It's in a, relatively speaking, elite collection of high performance oriented product. It is much more about positioning than about usage, meaning trail running shoes, Furious Fusion hiking – light hiking boots, winter extreme in this – in the winter season and water products in the summer season.

Mountain Athletic is designed lighter, further, faster, sexier, and green. It's to make it clear to the consumer that outdoor credible is an important part of Timberland's business. That's why the Outdoor Retailer Show next week in Salt Lake is such an important show to us. The fact is this time last year we had roughly 45 appointments booked for outdoor. This time this year, we have 90 appointments. This – that doesn't mean that business is doubling, Chris. It means, though, that our focus in North America on establishing a credible position as the leader in outdoor on a national basis is our strategy. We are executing the strategy and making solid progress against it.

Mountain Athletics is a product element, the marketing that you will continue to see from us is going to emphasize the position – the number one outdoor brand on earth in clear terms, distinct from the people we compete with. There is people who pose in the outdoors, there is people that oppose the outdoors, and there is the people who thrive in the outdoors, and Timberland is the brand for people who thrive in the outdoors. This is the number one outdoor brand on earth, that's what we are focused on.

And so all our big ideas point to that same notion, all our products, all our marketing, all our efforts. And the fact that Earthkeepers is succeeding the way it is, the fact that our sell-throughs in outdoor performance product and outdoor performance environments like Dick's or Academy, continue to be as strong as they are, are proof texts, to me at least, that our strategy is working in North America.

Chris Svezia – Susquehanna

So each one of these – I mean, it's fair to say, to be more pointed that Mountain Athletics – I mean, obviously Earthkeepers and the – but the Classic business, to a degree, that grows in the second half of the year based on how you are looking at your order book?

Jeffrey Swartz

We continue to tell you that we are going to build the brands by focusing on big ideas that are consumer relevant. Earthkeepers is one, Classics is another, Outdoor Adventure led by TMA is another.

We are going to continue to create fewer, better-focused, innovative products with clear and more powerful marketing. We are going to work hard to fight for every single pair you can get on a forward-order basis. And then with the strength of our balance sheet and the strength of our value chain – our supply chain, we will replenish demand.

And so we believe you get a forward order, you put the order on the shelf, you beat the heck out of it in terms of execution and then you sell it back in. And that's the story of fall 2010 and fall 2011. Retailers continue to be, rightfully, cautious about building their inventories. Good brands are going to have to be more than just good ideas and marketing, they have to execute. And I continue to think our balance sheet is a reflection of the fact that we can really execute from a supply chain perspective.

And so even though there is supply chain pressure, and everybody and their mother-in-law needs more shoes right now, you – if you go out to the market, and I know you do Chris, and you ask who is delivering outdoor product at retail right now – outdoor footwear at retail right now, and who is late on their shipments, who is not getting that extra pair of shoes – look at the PRO business, that's an outdoor, but the same business model. That's not a forward-order business, that's a count-and-fill-and-execute business. And in the second quarter, we delivered again, the 15% increase. And that's not a forward-order conversation, that's the strategy that our team is executing. So that's our plan.

Chris Svezia – Susquehanna

Carrie, just a quick question for you. When you think about the gross margin, obviously a stellar performance here in Q2, but you talked about a lot of these elements as you go into the back half and they are pretty well-pronounced, everyone is talking about them. I guess can you put it in the context of buckets, I mean, between the regional mix of product, the type of product that's selling? Just kind of give us some thought process – can you still grow your mix?

And it seems like you still grow and expand your gross margins in the back half of the year, maybe Q4 gets a little tougher for you. But I'm just trying to put it in the context of how much pressure you will be getting from higher product costs, freight, things of that nature.

Carrie Teffner

Yes, I think the way I would talk about this is in the context of the margin results for this quarter. So if we go back and I break that down for you, two-thirds of the improvement that we saw in our margin improvement was related to mix, pricing, less close-outs, lower returns, and allowances. A quarter of it was related to input costs. So what I would suggest is think about our margins in the context of those elements as you think forward in the back half of the year.

Certainly, we've talked about leather prices increasing, and then that coming to – that impacting us in the back half of the year and ramping up move towards Q4. We've heard clearly about the labor costs increasing as well. So it – that's the portion of our margin that is tackling. We know that it's – about 60% of our costs is related to the input materials. So that should give you some additional color as well.

Chris Svezia – Susquehanna

Okay. When do you anniversary – when are you done with all your close-out sales? In other words, when do you anniversary getting your inventories really clean? Does that start to happen in third-quarter or are you pretty much done with that at this point?

Carrie Teffner

What I would say is we still were running pretty high level of close-outs throughout last year. And we came into the end of the year really with a cleaner level of inventory by the end of the year.

Chris Svezia – Susquehanna

All right. Thank you very much.

Operator

Your next question comes from the line of Kate McShane with Citi Investments.

Kate McShane – Citi Investments

Hi, good morning. I wondered if you could talk a little bit about inventory positioning for the rest of the year. Obviously, your inventory is still down year-over-year, but sequentially, it is up from where it was. So how should we think about that going into the back half of the year and into your stronger selling season?

Carrie Teffner

Sure. With respect to how we are ending Q2 with inventory, we are 2% down versus where we were last year. So we have cleaner inventory at the end of Q2 than we did last year. What we expect to see in the remainder of the year, obviously, is ramping up in Q – into the – by the end of Q3 to help support the holiday season. So expect to see inventories growing and then obviously, where we land in Q4 will be directly related to what our sell-through is, because Q4 is a (inaudible) retail period for us.

Kate McShane – Citi Investments

Okay, great. And then my second question is on your cash balance. You have always had a very nice cash balance, no debt, great balance sheet. You are repurchasing shares, but I imagine there is a limit to how much you can do. Is there any other priorities for cash that you are thinking about right now?

Carrie Teffner

Sure. When we look at our cash balance, share repurchase, we do see that as a great vehicle to return value to the shareholders. But we also look in terms of capital investment as a business both that will drive top line growth would be it – albeit, retail expansion, as well as investments into the business, into the infrastructure of the business to drive efficiency that will lower operating expenses. So as we look forward and look at our cash balance position, we are looking at basically those three tools in terms of how we are going to invest in the business.

Kate McShane – Citi Investments

Okay. Thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of Adam Comora with EnTrust Capital.

Adam Comora – EnTrust Capital

Yes, hi. Just a couple of quick questions. The first is what's your strategy on those input costs? Do you guys think or are you thinking about taking price increases to help offset that and sort of order of magnitude?

Jeffrey Swartz

We are very mindful of input costs on two dimensions. One is there are temporal issues, like leather. People get all worked up 25 years of looking at this; it goes up one season, down in next. This – so there are temporal issues and the way we respond to temporal issues is more, as you would expect, Adam, in a temporal fashion, which is to say we engineer product for value, we substitute materials where it's appropriate, we do sort of thoughtful temporal things.

There are strategic issues in terms of input costs and you got to say that the circumstance in Southeast China is a clean example of a strategic issue, right? The plentiful labor that can move down from the north and live in dorm rooms, and that will go on forever. First of all, everybody knows it won't go on forever, but then even the shoe industry has figured out that it's actually going away as a reality even as we speak.

And so that – it's a – we would call it even a seismic shift in terms of the sourcing base, where shoes are going to be made. The shoe industry is still a relatively backward industry when it comes to supply chain. And so we continue to migrate to low-wage environments. And so you hear our competitors and you hear us talking about that kind of a response to input costs means you have to move from one geography to another geography and so you hear names like Bangladesh, and you hear things like Vietnam, and you hear things like other countries. So that's definitely part of the mix.

One of the things I would remind you of – I know you know, we manufacture footwear still. We have facilities in the Dominican Republic. We have been there for nearly 25 years, we've said in public terms it's roughly 10% of the manufacturing volume. We have a very capable asset there and it's very interesting for me to watch the total cost view of footwear made on the Dominican Republic in our facility compared to some of the other alternatives that are available to us around the world.

So sourcing strategy choices have to be considered differently than – this year than say a year or two ago, because I think the labor circumstance in China is fundamentally changing, the material cost thing is a temporal point you expect us to work really hard.

On the issue of price, you heard Carrie say that we are going to be thoughtful. We are not going to be knee-jerk about it, which means you have the obvious circumstances; input costs go up, but despite what the politicians are saying, the reality is people don't have jobs. And so willy-nilly to say let's just pass that through is a – is obviously an irresponsible brand building. So we are going to be very thoughtful about price. We are taking price increases, that's a fact. In terms of input costs, it's as I described it, both temporal and strategic in terms of our response.

Adam Comora – EnTrust Capital

All right, terrific. And then just to – maybe if you could just add a little bit of color on where you feel inventory is in your – in the channel. It feels like there were definitely good sell-throughs over the last three to six months, the weather helped out last winter. Do you feel that bodes well for your wholesale business in the – for the next six to nine months?

Jeffrey Swartz

Yes.

Adam Comora – EnTrust Capital

Okay. And last question is share repurchase. It sounds like you are going to continue to be aggressive. Certainly it feels like there is – continues to be excess cash and certainly at these levels, it still feels like a good strategic return to capital.

Jeffrey Swartz

Yes again.

Adam Comora – EnTrust Capital

All right. Thanks a lot.

Jeffrey Swartz

Thank you.

Operator

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

Mitch Kummetz – Robert W. Baird

Yes, thank you. A few questions. First one for you, Jeff. On the SmartWool business, you mentioned it was up 42% in the quarter. Can you give us some sense as to how big that business is now or how much of that increase drove your overall increase on the quarter? And then you also talked about that business having transitioned from a sock company to a – an outdoor lifestyle brand. Could you just maybe give us some product examples as to what you mean by that?

Jeffrey Swartz

Sure. SmartWool is a shining star in the constellation of our business. It is principally a North American business, which is why we include it within the segment reporting called North America and we don't break it out separately in terms of size.

We know from – this is a really, really well-run business. We have an incredibly capable management team and they are really on top of their business. They have a very dominant position in performance socks in exactly the right kind of environments, like Grassroots Alliance retailers. They continue to compete for – they are finalists year after year with REI, for example, vendor of the year. This is stuff to us that we take – this is a crown jewel that we take really, really seriously and we are very passionate about building the brand in a responsible way.

So if you take the sock business, which is – it starts with ski, which is the first place that they came from, had a practical solution to a specific reality. They live in Steamboat Springs, and they are passionate about that marketplace. If you look at what they have done from mountain sock skiing to hiking to running; now they even have cycling. Merino wool is an extraordinary fiber that creates incredible benefits to the consumer and they've worked really hard, it's no overnight wonder, to convince consumers that wool against the skin isn't scratchy and itchy, and all those other things.

It's a wicking fiber, it keeps you warm when it's cool and cool when it's warm, it's extraordinary. And Mitch, if you don't have a pair, please go buy a pair, because it would make the rhetoric really clear and it would help our third-quarter results. So I would appreciate both of those things.

The transition, though, from a sock company with an incredibly dominant share of the performance marketplace in U.S. to what they call active mountain lifestyle – you asked can you give me some examples, the most powerful example I can give you is what we call is this getting so cool for a boot guy – it's called Next-to-Skin. We don't talk about that in the shoe business, but we do in the apparel business. Next to Skin means base layer. It means – I would have called them long-johns, but I know that ain't the technical term. It's Merino wool that goes from the ankle up to the neck now.

And so it is – and the growth we've had in sell-through of getting this placed in the right performance environments and then driving sell-through against synthetics. You know all of the synthetic players are out there and the fortunes that have been made in selling synthetic fiber undergarments, right, in active environments. And so we know about football brands and all those other brands, huge, huge business. And you know about great outdoor brands like Patagonia, an example of a great outdoor brand with this product that they call Capilene.

So if you look across this world from commodity stuffs like, let's say – I don't know, no-name stuff to athletic stuff to outdoor stuff, we make at SmartWool a superior product to every one of those, better value, better performance, and it's a much larger market than the sock market and we have begun to make serious inroads in selling in and selling through.

The third part of the active mountain lifestyle story, so once you go from sock to Next-to-Skin, is a conversation about what about Merino wool sweaters and what about Merino wool bike shorts, and can you expand the usage occasion to more of what an active mountain lifestyle calls for. And we absolutely believe the answer is yes. So we continue to believe that this business, which is a relatively small part of our total business, it's a – it's a magnificent brand with – I don't want to say an unlimited upside, but it's very hard to imagine how high it is up with SmartWool right now.

Mitch Kummetz – Robert W. Baird

And what about the opportunity outside North America? You said the brand is principally North America for now.

Jeffrey Swartz

Yes, a great question. We just promoted a senior exec from Steamboat. He is going to work out of our European – Timberland European headquarters in the U.K. near London. We have a top three position in Europe, but not a number one position in Europe.

And in Asia, we are just beginning as a brand, we are – through mostly distributors and agents. But I believe and our long-range plan calls for substantive growth of this SmartWool franchise in Europe and Asia. We are – we're – in this sense, we are mountain lifestyle people, which is to say we would like to say less and do more. There is a lot of hornblowers in the outdoor space, and that's not who the SmartWool guys are. But you are right to say it's a big opportunity outside the U.S.

Mitch Kummetz – Robert W. Baird

Okay. And then maybe – if I may, just a few quick questions for Carrie. FX impact on the quarter, I know it was a bit – about a 1% drag on the sales. What was the impact on earnings? And then how do you think about FX going forward into the back half? I would imagine it becomes more of a drag on sales. I don't know if it – what the impact on earnings might be.

Carrie Teffner

Yes. You are right on revenues. It had a negative impact on revenue of about $1.1 million; and then on operating income, it had a favorable impact of about $800,000. And then with respect to the back half of the year, I got to tell you, we watch the rates daily as you can imagine and if I look at over the course of this year, the euro has ranged from a high of 1.46 to a low of 1.19 or 1.18 and change. And even in the past 60 days, it's had a more than a $0.10 span in that area. So in the pound, we've seen a lot of volatility as well.

So do I – it all depends on where the euro lands and how that affects us in the back half of the year. I mean – but certainly, if you look at it versus last year and it's down, it's going to have a negative impact.

Mitch Kummetz – Robert W. Baird

Got it. And then you called out in your press release this $1.5 million impact – or gain from termination of licensing agreements. Could you just remind me what that is? And I guess you had a bit of a gain in the first quarter as well, but – I guess a similar gain in the first quarter.

Carrie Teffner

Yes.

Mitch Kummetz – Robert W. Baird

Does that continue going forward over the balance of the year?

Carrie Teffner

No, it doesn't. This is – in the first quarter, it was related to the termination of a licensing arrangement for our women's apparel business in North America. And in Q2, it's related to the license – licensing arrangement we had on our accessories business. So these are discrete items that would not be expected to continue.

Mitch Kummetz – Robert W. Baird

Got it. And then lastly, tax rate for the year, what are you looking at right now?

Carrie Teffner

We are still looking at that to come in below the overall corporate tax rate.

Mitch Kummetz – Robert W. Baird

Okay. All right. Thank you.

Operator

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

Jonathon Grassi – Longbow Research

Hi, good morning. I guess, can you guys be a little bit more specific on the degree of input cost pressure and how they are going to trend in the second half of the year and into the spring of 2011, I guess from a labor and a raw material perspective? And I guess how much – I guess, overall, how much do you expect the cost of goods sold to increase from these variables?

Carrie Teffner

Yes. I think, Jonathan, we don't give guidance for the remainder of the year and certainly we are not talking about 2011 at this point. So I can't really give you anymore color than we already have.

Jonathon Grassi – Longbow Research

Okay. And then just on the performance of the company on retail stores, especially – specifically the ones in the U.S. and Europe, how did that trend throughout the quarter? How is it looking so far into July and can you talk about what – regarding each product line, or give us some specific – some idea of the product lines and what was looking strong, what was looking weak?

Carrie Teffner

Well, let me kind of step back and kind of reiterate a little bit about our retail performance for the quarter. In Asia, we had 11% comps in the quarter. We've done a lot of great things in Asia, so we feel very good about those results.

North America, let me break that down a little bit more in detail. Comps were up 1% in the quarter and 2.5% year-to-date in our specialty retail stores. They are down less than 1% year-to-date in our outlet business, but that's where we've had less excess inventory to liquidate and we have – where we have also reduced the amount of promotional activity that we have been doing.

In Europe, well, we did see declines in Q2. We are still up on a year-to-date basis on a kind of comp-store basis. So overall, this – it's a little bit mixed within the regions, but we certainly understand what's happening there. If you look at Europe, up a little bit more (inaudible) some of the declines earlier in the quarter related to the colder, wetter weather, related to the spring product that we have in-store, but that's about all we are going to – we can comment on.

Operator

At this time, there are no further questions. I would like to turn the call back over to management for closing remarks.

Jeffrey Swartz

Thank you and have a nice day.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect.

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