Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Kaitlyn Bruder – IR

Jeffrey Swartz – President and CEO

Carrie Teffner – VP and CFO

Analysts

Chris Svezia – Susquehanna Financial

Kate McShane – Citi Investment Research

Adam Comora – EnTrust Capital

Jonathon Grassi – Longbow Research

The Timberland Company (TBL) Q3 2010 Earnings Call November 4, 2010 8:25 AM ET

Operator

You are listening to The Timberland Company’s third 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 implies consent to these terms. If you do not agree to these terms, simply drop off the line.

We ask that during the Q&A session, you limit your questions to one question and one follow-up.

Now, for opening remarks, I will turn the call over to Kaitlyn Bruder of Timberland’s Investor Relations Department.

Kaitlyn Bruder

Good morning, and welcome to Timberland’s third 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 may be 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 in the company’s filings with the SEC.

This presentation also includes discussion of constant dollar revenue change, and 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. We’re pleased to report Timberland’s third straight quarter a sustainable and brand right, top line growth driven by impressive results in our international and SmartWool businesses.

Improved gross margins driven by a healthier product mix and fossil spending during the quarter yielded a significant increase in earnings per share. We maintained a strong balance sheet and into the quarter with $109 million of cash on hand, and again, remain debt free.

We believe 2010’s financial results are the direct outcome of the teams improving execution of Timberland’s long-term growth strategy. This morning, I’d like to provide some additional color behind two key strategic initiatives, which together tells the story about the past and the future of the Timberland brand and business.

The first is a global story about growth driven by a powerful big idea we call Earthkeepers. It’s a uniquely Timberland story which hits squarely at the brands sweet spot; the intersection of outdoor, New England heritage and environment values and actions, and which highlights our growth potential.

The second is a regional story, which describes where the brain is coming from, and the kind of roll-up-your sleeves, gloves-off, puckered-down work we’re doing to turn around the business in North America.

I’d like to take you behind the headlines to anchor the reality of what it means and what it takes to turnaround a great brand in the minds of consumers, and I’d like to share some of the positive achievements to date and the milestones we’re headed towards.

First Earthkeepers. As we talked about in previous quarters, nothing validates this big idea better than its rapid and broad-based growth. Earthkeepers integrates product and messaging that’s relevant in all our regions, to all our genders, and across all product categories. And the sales are there to prove it; up more than 300% in all regions when compared to the third quarter last year.

At retail, a channel that we strongly believe is the best representation of our brand globally, Earthkeepers product is flying off the shelf. In fact, retail sales of Earthkeepers products is going at nearly twice the rate of our wholesale business and Earthkeepers help to drive positive comp sales in all regions.

To support and accelerate growth, we are investing a significant share of marketing dollars behind the Earthkeepers idea. In Q3, we launched our biggest and most environmentally-focused marketing campaign yet called Nature Needs Heroes. This campaign can be seen globally; online, in stores, and on television.

The ads use outdoor imagery and beautiful Earthkeepers products combined with humor to help communicate the serious message in environmental accountability. The impact is undeniable and sales of our Earthkeepers product have more than tripled since last year, and we believe there’s more to come.

Earthkeepers demonstrates clearly that we can create value for shareholders while asserting our values as a branded company. And if you’ll come with me inside the decline we report today in our North American revenues in Q3, I think you’ll see the same story that we’re on the path of delivering sustainably excellent financial returns to shareholders as we turn the North America business around.

To make my point, I want to deconstruct the Timberland North America revenue stream into three elements. Call them close-out, brand building big ideas, and classics.

In quarter three, we report our close out revenues down year-on-year, and you can see this effect in the improved gross margin that North America earned.

Also in Q3, Timberland consumer direct, [inaudible] with stores sales, admittedly from a limited number of TSR, Timberland’s special retail stores that we deploy, and from our outlet stores, were positive, comp sales positive. Consumers told us at the cash register, your brand strategy is clearer, your product is better, and we’ll buy it.

In terms of big ideas, we saw big results in North America. I’ll review two specifically; Earthkeepers and Outdoor Adventure.

Here are the facts, in Q3 2010, compared to Q3 2009, Earthkeepers footwear revenues in North America were up more than 400% and now represent more than 10% of the Timberland business in North America.

In our top five accounts, Earthkeepers SKUs per door, more than doubled and door count more than tripled. Yes, we sold in Earthkeepers nationally, to the right doors with a sharply broader assortment. Skeptical retailers bought into our brand right, well executed big idea, and we delivered concrete and powerful sales growth; same exact story in Outdoor Adventure.

In this business the solid Mountain Athletic and Outdoor product branded Timberland, our business in Q3 2010 versus Q3 2009 is up 20%. We have opened 42 new independent outdoor accounts in North America for the fall season, and we’ve gotten extensive placement in noteworthy outdoors doors, such as Cabala’s and Bass Provident, and key outdoor focus online partners such as Backcountry.com. Unless you think that this is all about classic hiking boots, know that Mountain Athletic was up in the third quarter North America by more than 40%.

In the face of these three elements of real and clear progress, our Classic’s business was down in Q3. I’m disappointed by the result but I’m not dismayed. It’s absolutely clear that our efforts to turn this important element of our brand in the right direction, are not working as well or as swiftly as we want, and yet even despite this shortfall, there is evidence that our strategy to return Classic’s to growth is beginning to take route.

We’re actively resetting the brand in our youth distribution network, do classic updates such as New Market and Abington product, and outdoor focus products like Furious Fusion, all of which are gaining traction. We also seen a significant uptick in doors including such influence of locations as Alife and Undefeated.

Keep in mind that Classic’s is still a large part of our footwear business and that tremendous progress in our smaller categories of Earthkeepers, Outdoor, and Elite Collections were not enough to offset the declines in our Classic business. So consolidated North America revenues were down for the quarter but I believe furiously that when you look inside the business, what is on display is a well-paced, strategically-focused plan to return the brand and the business to sustainable and profitable growth.

We strongly believe that through strategic initiatives such as Earthkeepers and the turnaround in North America, we’re positioning Timberland for sustainable and long-term growth. This process is a journey and they have been and will continue to be challenges along the way.

As we look forward, we remain concerned about lingering macroeconomic and consumer uncertainty in our key markets, but our strong global portfolio and balance sheet position, outside of – one more time, sorry, it’s in English; it’s a second language. However, our strong global portfolio and balance sheet position Timberland well for the season ahead. We have no doubt that we have a brand and a business that would deliver solid results for our stakeholders, and I look forward to updating you on other key growth drivers on future calls.

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

Carrie Teffner

Thank you, Jeff. This morning, we released our third quarter financial results and we are pleased to again report top line growth. This, along with margin gains in all regions, and a 47% increase in earnings per share are concrete indicators that we continue to make progress against our brand strategy and our commitment to create values for our shareholders.

I will take – now walk you through the details for the quarter.

Revenue for the quarter increased by 2 ½% to $432 million and increased 5% on a constant dollar basis, reflecting growth across Asia and Europe, partially offset by a decline in North America.

Global footwear revenue was essentially flat at $320 million compared to the third quarter of 2009. Apparel and accessory revenue increased 11% to $106 million and royalty and other revenue decreased 10% to $6 million. By channel, global wholesale revenue was up 2% to $349 million compared to the prior year period, due to strong growth in Europe and Asia, partially offset by declines in North America.

Worldwide, consumer direct revenue increased 5% to $84 million driven by improved comparable store sales in all regions, and the net addition of eight new retail stores since the third quarter of 2009.

In Europe, revenue for the quarter increased 5% to $204 million despite unfavorable foreign exchange rate impact. Revenue increased 12% on a constant dollar basis, driven by increases in kids and women’s footwear. Double-digit revenue growth in Scandinavia, and the distributor markets was offset partially by double-digit declines in the [inaudible] region.

By channel, wholesale revenue in Europe for the quarter increased 5%, and retail increased 3%. Comparable store sales increased 10% for the quarter.

North America revenue decreased nearly 4% to $182 million compared to the prior year period. Double-digit revenue growth in SmartWool brand was offset by declining kid and women’s footwear. In women’s footwear, we saw declines in our wholesale channel, but in retail where we had strong new product placements, we saw double-digit increases, all be it on a small but growing base.

Men’s footwear was up 2% versus the third quarter of 2009, driven primarily by our Pro business. Wholesale revenue in total for the quarter was down 4% as our level of off price product sales was nearly half of what it was in the prior year period and our first quality revenue was essentially flat.

In the consumer direct channels, comps were up 3% though revenue was down 1% due to the net closure of four outlet stores and the decline in our e-commerce business due to less frequent promotion and fewer discounts in the quarter.

In Asia, revenue for the quarter was $47 million an increase of nearly 20% compared to the prior year and 13% on a constant dollar basis. Wholesale revenue in Asia increased 18% and retail was up an impressive 22% with comparable same-store sales of 9% and the net opening of 10 stores since Q3 of last year. The increase in both wholesale and retail was driven by substantial increase in apparel sales.

This quarter marked the fourth straight quarter of margin improvement over the prior year, with gross margin for the quarter up 170 basis points from the prior year period to 47.8%. The improvement in gross margin was achieved in all regions and was primarily driven by fewer and more profitable closeout sales in favorable product and regional mix, partially offset by unfavorable foreign exchange rate impact.

While the benefits from mix may continue, we expect that increase product cost as a result of higher leather, transportation, and labor cost, will adversely impact gross margins in the fourth quarter of 2010 and through 2011.

Operating expenses for the third quarter increased 3% or $4 million to $140 million when compared to the third quarter of 2009. The increase was driven by cost related to a multi-year ERP system implementation, which I’ll comment on further in a moment, and higher incentive compensation expenses.

Marketing spend increased slightly, versus the prior year and remained relatively flat as a percentage of revenue. Operating income for the third quarter of 2010 was $72 million compared to operating income of $61 million in the prior year period.

Our effective tax rate for the quarter was 28% compared to 38% in the prior year period reflecting the release of certain tax reserves in Q3 of 2010. Fully diluted weighted average shares outstanding in the quarter were 52.2 million reflecting the purchase of 1.7 million shares by the company in the third quarter of 2010 for $30 million.

Finally, as I mentioned previously, earnings per share increased 47% from $0.68 to $1. We ended the quarter with $109 million in cash and no debt. Accounts receivable was flat at $269 million compared to the prior year period. Total inventories were up 19% to $240 million at the end of the third quarter. Our focus on working capital has left us with very clean inventory balance and the drivers of the change include an improved outlook for our business in the coming quarters, higher product input cost, and an increase in backlog due to late supply.

Capital spending totaled $4 million in the third quarter of 2010, compared to $3 million in 2009.

We continue to deliver profitable top line growth and maintain a strong balance sheet. However, as I have mentioned earlier, our supply chain is challenged by a number of factors including higher labor, product and transportation cost, which began to impact a result in Q3.

The impact will be more meaningful in Q4, especially when you recall that in Q4 last year we had the benefit of both record low leather cost as well as significantly lower transportation cost.

Although we expect this impact on the margin to be partially offset by continued favorability mix, we do anticipate seeing a year-over-year overall declining gross margin in the fourth quarter because of the increase cost.

Even with the increased input pressures, we are pleased about the positive momentum in all channels across our global portfolio and our ability to deliver strong year-to-date results, including brand right, top line growth.

A year ago, I told you that we would focus further on driving operational efficiencies by reducing complexity, and streamlining prophecies in the business. I’m pleased to share with you that we have made the decision to implement an ERP system to better support our business model and further streamline our operation. This will be a multi-year project with an initial focus on order and inventory management, as well as supply and demand planning.

This is a significant investment in our future capabilities and we are confident that it will create the platform we need to approve our operating efficiency and position ourselves for future growth. We’re still in the early days of this multi-year multi-phase initiative and our intention is to update you along the way, thank you. Jeff and I are now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Chris Svezia with Susquehanna Financial.

Chris Svezia – Susquehanna Financial

Good morning, everyone. I guess my first question is just on the – I want to ask on inventory being up 19%, just maybe talk about the drivers to that inventory increase, whether it’s supply-chain focused or whether or not your thoughts about backlog and the trajectory in the business support that level of growth.

Carrie Teffner

Sure. As I mentioned, it is – we’ve got a clean inventory balance, or excess in obsolete is down year over year versus where we were. We do feel the pressure of backlog related to late supply coming in in Q3 and not being able to turn it as quickly as we would have liked to. So we see that revenue come forward – come through in Q4.

So at the 19% increase, we actually feel it’s a good inventory balance for us right now given our projected growth in the upcoming quarters.

Chris Svezia – Susquehanna Financial

Okay. And then just on – when you guys talked about the margins, during the quarter, could you maybe just break up some of the gross margin, the puts and takes, how much was just mix, how much was related to just in how much closeouts year over year, etcetera. Just kind of puts and takes on that margin?

Carrie Teffner

Sure. So it’s a 170 basis-point improvement, about a little over 40% of that improvement was related to mix, about 1/3 was related to lower closeouts and less sales returns and allowance, and the difference is really just FX and lower input costs. So we still have a little bit of favorability in some of our costs coming through.

Chris Svezia – Susquehanna Financial

Okay. And then your comments just on – directionally on the margin, you know, obviously we expect you to be down here obviously in the fourth quarter, but as you go into next year, any thoughts about – and I know you’ve talked about this in the past, but things like mix, things like pricing, do those incrementally offset what’s happening on the product cost inflation side? And maybe can you quantify how much that’s going up because clearly you’re talking about gross margins, at least as you first look at it, potentially being negatively impacted next year. Does that just assume they’re down next year? I’m trying to get some more color around that.

Carrie Teffner

No, that’s good. Yeah, obviously the input costs are real, the increases that we’re expecting. We do expect to see improved mix continue. We’ve been seeing that, but what will change is in Q4 of last year is where we started to see a real drop in the closeout business, so we won’t expect to continue to see that favorability affecting the margins. So our leverage that we have to pull then are really around value change. So where we can see opportunity to drive cost out from there, which will continue to work, and then of course, pricing. But we’re also being very thoughtful about pricing and we’re not just taking it right up with the spring business.

So prices will come later in the year and it won’t fully offset the higher input costs. So we do expect margins to be down year on year.

Chris Svezia – Susquehanna Financial

Okay. And last question I just want to ask, just on the business itself, you know, I just want to talk about North America one second and thanks, Jeff, for just going through the detail. But just on the closeout, how much was that down, I guess? Could you maybe quantify that? And when you talk about just sort of what’s going on with the Earthkeepers and the Outdoor Adventure Business, I mean, can you quantify how big Earthkeepers is roughly in your business? Are these growth rates sustainable given product and what you’re doing with regards to gaining some of these new channels of distribution like Cabala’s, Bass Pro, I don’t know if REI and places like that fall into it, but maybe talk about size and opportunity to those to continue to grow like that.

Jeffrey Swartz

The big ideas for marketing purposes, we call them big ideas because we believe they are big ideas. We think that – I indicated to you that Earthkeepers is up to 10% of the business and I think that’s – the grow rate, we’re not going to make a prediction about growth rates, but we’re going to tell you that it’s a big idea. And if we tell you we’re investing in television advertising against a big idea at the size of the businesses now, to me that’s an indication, if I were listening to it, I would secure that as an indication of how serious we are about growing our business. When we talk about expanding doors and expanding SKUs of in-doors, I think that’s good new twice, right. That is, we told you that North America was up. We’re going to put this business in a different place than it’s been and that means with a balance in natural distribution. We’re going to be the number one outdoor man on earth, that means, yeah, we are in the business with REI and not just REI on the East Coast, but REI on the West Coast, and EMS, and BackCountry. Com in Canada.

So the fact of the reporting with Eatherkeepers and with Outdoor Adventures, two examples, including Mountain Athletic, we’re getting doors and we’re getting the SKUs for door, and we’re getting sell-through rates, and we’re supporting with marketing. My view of that is, that’s our strategy working. And our expectation, and we’ve made it clear, is we expect to grow the topline profitably and I’m committed to making that happen. That’s our focus.

So we have a relatively small base in Earthkeeper, but it’s up to 10% of our volume. How high can that go? Let’s see.

Carrie Teffner

And regarding your specific question with regard to how much are closeouts down in North America, they’re down about 50% in North America in Q3 versus last year’s Q3.

Chris Svezia – Susquehanna Financial

Okay. Thank you. I’ll get back in the queue.

Operator

(Operator Instructions) Your next question comes from the line of Kate McShane with Citi Investment Research.

Kate McShane – Citi Investment Research

Good morning. I just had a follow-up question on the inventory with it being up 19%. I wondered if you could tell us what the biggest driver is of those that you’ve listed? And do you expect revenue over the next six months to be up in the double digits?

Jeffrey Swartz

The biggest driver in terms of the increase in inventory is higher input costs and that’s about 1/3 of the increase. And then I mentioned, we have the backlog as well. And then with respect to forward-looking revenue guidance, we’re not giving that, but certainly we do expect improved business going forward.

We hear from your question you’re concerned about the inventory. All we can tell you back is, we’re not.

Kate McShane – Citi Investment Research

I just wanted to better understand this. That’s all. And then my other question, Jeff, you had talked about the classics business and how it’s not exactly where you want it to be yet, and that there are a lot of different drivers that are there that could improve that business. In your opinion, what needs to happen for the classic business to see positive growth? Is it one thing, is it many things? What do you think is the tipping point, or the turning point that will drive classics to be positive growth year over year?

Jeffrey Swartz

Yeah, I don’t want to be understated about when we’ll reach the tipping point, but I want to be affirmative about our strategy for reaching tipping points.

So let me say this. We worked really hard in the last 18 months to be [inaudible] clear with each other about what the brand stands for. So our real energy against what they call brand truth at Timberland, at least now, we’re not talking to ourselves about it, we’re talking to consumers about it and getting to a point where I think the creative teams at Timberland all over the world have a really clear view of who we seek to serve and how we seek to serve, and that’s our brand truth.

We’ve also spent an enormous amount of energy to build a long-range plan, region by region and team by team, and if you look at for example the North America plan you see growth accelerators. One of the growth accelerators relates to the youth consumer and it’s absolutely our view that we have an incredible asset called a loyal consumer who’s connected to the brand in a powerful way. Our failures of execution, which we’ve relaxed on ad nauseam, to our distribution base, to our product focus, to repetitious spinning of SKU as opposed to innovative approach to the consumer. If you take a clear view of brand truth, a discipline view long-range plan and you add real consumer insight.

I think if you looked at the New Market Collection in footwear, we look at the Abington Collection, we look for the product to sell, the market goes with it, we look at where it’s being distributed, I think that’s not only a hint, that’s an explicit view of how we intend to serve the consumer. It’s a premium product, it’s an innovative product, it’s brand product delivered in a balance tilted towards premium and distribution.

I spend time now with our North American team and with most of the key customers that we do business with in these channels, they’ll ask about this formula about how we will take the strategy to work with the consumer who is younger. And we have – I said in the prepared stuff, sort of a fierce view that our brand has currency with this consumer and our brand promise, number one outdoor brand on earth, is relative to this kid. So the product [inaudible] is huge and a product like New Market and Abington are indicators that we’re not – that we’re absolutely serious about serving this consumer and we believe that there’s real growth to be had there; on a national basis, on a sustainable basis. And I look at the results we’re earning now, it’s so in to be clear on New Market and Abington, they haven’t sold through yet, but to sell in on Abington and New Market is huge and our indicators are take the strategy, execute it well with a clear consumer insight, we should be able to grow this business. And I can tell you, we’re determined to.

Kate McShane – Citi Investment Research

Thank you.

Operator

Your next question comes from the line of Adam Comora with EnTrust Capital.

Adam Comora – EnTrust Capital

Yeah, hi, guys. Just a couple of quick questions. The first is, can you just help us quantify a little bit some of this revenue that may have slipped from the third quarter into the fourth quarter based on what everybody’s been talking about, the shipping and transportation issues?

Carrie Teffner

Yeah, we always have some backlog coming out of the quarter. It was definitely a little bit higher in Q3, but we’re already shipping it in Q4. So I won’t quantify it precisely, but it is up a little bit higher than normal.

Adam Comora – EnTrust Capital

Okay. And then just in terms of overall operating margins, you guys have always done a terrific job holding the line on the SG&A, do you see that continuing into the fourth quarter and 2011 such that we could still get operating margin expansion if topline comes through as you guys seem to be indicating?

Carrie Teffner

Yeah, there’s two elements there that will affect us in Q4. I mentioned our cost associated with our ERP implementation, so we will take a hit in terms of our OpEx related to that. The other element that will happen in Q4 is additional marketing spend to support the Nature’s Made campaign that Jeff mentioned earlier. But I still believe we’ll see some margin expansion.

Adam Comora – EnTrust Capital

Okay. Terrific, thanks a lot. And I assume as we think also about the buyback, which I commend you on, that still seems to be an efficient use of cash at this point?

Carrie Teffner

Yes, it does.

Adam Comora – EnTrust Capital

Okay. Thank you.

Operator

Your next question is a follow up from the line of Chris Svezia with Susquehanna Financial.

Chris Svezia – Susquehanna Financial

I guess my first kind of follow-up question is just on the international side. Just on a constant currency basis, you continue to show directional improvement there. Just maybe talk about what’s going on there and to a degree you can talk about any suitability measures to that.

And my last question is just going off of what Adam had asked, but looking a little bit further out, I know you don’t give guidance specifically, but you obviously feel probably the best about your business that you’ve felt all year and some time. It seems like growth is accelerating, but even with the input cost pressure and based on just kind of how disciplined you are in the business, is it fair to say you guys can still drive operating margin improvement as we look out over the next 12 to 18 months, even with the cost pressure? Those are my two questions.

Jeffrey Swartz

So I’m going to answer a part of your second quarter and then your first question and then Carrie is going to answer your second question.

Just to be clear, I know you know what I'm going to say. Our operating margin is not acceptable from our perspective. So the answer to your question, can we, absolutely every single senior leader here believes we have to expand our operating margin and we’re committed to doing it. We told you strategically how we think that will be done. It will be done by brand right, big ideas that generate positive revenue growth. Input costs are a temporal circumstance that we’re going to struggle with, we are struggling with it. We’re not making excuses for it. We’re taking it straight on and we’ll manage through it.

So we believe that big ideas we get paid for. We see that in gross margins and we continue think from an SG&A perspective, the reasons we made such a bold of investment to invest enterprise wise, a business transformation because we believe we can operator more efficiently, more effectively so we’re not satisfied with the level of spending. We need to spend more money to brand build, but we can’t spend more money on brand building with the operating margin we have. So we understand that – we think we understand the math and so we’re pushing very hard at this notion of operating expense, operating margin expansion. You say, you look at European business and you see direction and right direction. If you look inside the headlines, I see even better than that.

For example, like our French business, which has been, as they say in French, [inaudible]. I haven’t been satisfied at all in our French for over five years. It was as close to a booth market as we had in Europe, meaning sort of two single minded from a pie perspective; over distributed and not well managed. The business has sharply improved under the leadership of the team there and it’s return to healthy growth, very impressive. The fantasy business, which can absolutely crush as the economic reality of the same, our franchise stores are small-based, but our franchise store, in this span are up 17% in the period.

Now, talk about yucky results, that’s Spanish for not a good result the prior year, but very positive trend. And so, actually the heart of the indicator in the global business in Europe and Asia is the consumer direct business. We see positive results from a retail perspective. We saw positive growth in Japan. We haven’t seen that in a long time.

So what’s working? Our brain strategy is working, right. It’s men and women are actually selling through. We sold more – I don’t want to sound optimistic in the least, and please don’t let me, but we sold more women’s footwear in our Scandinavian franchise stores in the period that we sold men’s shoes and our men’s business has double-digits on a healthy base. So in that sense, we killed it. We killed it with the Swedish women. To me, those are indicators that we’re – that our brand strategy is working. It’s not a single item, it’s big ideas, executed well; store windows that tie to marketing campaigns, it sounds like sort of retail 101. Good, we’re doing a better job of it.

So I look across the European business in general from a mature market like Italy to a trend-down market like France, to a tick-tock market like Scandinavia, growth markets like China, turn-around markets like Japan, I see positive indicators sort of everywhere I look.

Again, the question you asked, which is, is this improvement sustainable, I believe that it absolutely is.

Carrie Teffner

And I would just add, on the operating expense side of things, this hype that we will invest more to support or ERP implementation, we’re doing that with the point of view that we also have to continue driving operating expenses down as a percent of revenue. So that’s the commitment that we’re working towards. And despite the FX cost pressures on the business, we still feel like we can do that.

Chris Svezia – Susquehanna Financial

Okay. All right, very helpful. And just one last thing, Jeff, you didn’t mention the UK, just any color on the UK in your thoughts?

Jeffrey Swartz

I'm very pleased with the efforts the UK is making their way up. We’ve got a very positive reaction to show up and play. We got women’s footwear relaunched and probably delivered shoes with poor quality. So we have plenty of opportunity. We have a business that is performing pretty well, and some of the executional failures that we self-inflict possibly makes me crazy. The net is, from a consumer perspective you look at our retail performance, you feel pretty good about the brand. Our focus, like Carrie said, we can reduce SG&A as a percentage of sales. We can also execute better in the way we take the big ideas all the way through. In fact, a couple of executional things in the UK really ticked us off. So from a consumer perspective, better than from an execution perspective; opportunity to improve, but the consumer’s waiting for us.

Chris Svezia – Susquehanna Financial

Okay. All right, thanks, Jeff. I appreciate it.

Operator

Your next question is a follow up from the line of Adam Comora with EnTrust Capital.

Adam Comora – EnTrust Capital

Just one quick follow up. On the impact from the closeout, the lower closeouts on your topline, can you help us quantify that a little bit, and are we know through that in the fourth quarter such that we’ll get a better or truer picture of how the brand and the business is growing?

Carrie Teffner

Yeah. Let me take the second part of the question first. We are starting to lap significant improvement in the closeout business from Q4 of last year. So that’s when we started. We saw 30% reduction in closeout business in Q4 last year over Q4 2008, so we are starting to lap that. We shouldn’t continue to see that much of an impact overall from a revenue standpoint.

Given the size of the decline in closeouts in Q4 definitely had an impact on our revenue base, but in the grand scheme of things, you know, revenue – closeout revenue in general is well below 10% of our revenue anyway, so it’s not that big of an impact.

Chris Svezia – Susquehanna Financial

Okay. So if it’s 8% and it had been running down 30, 40, 50%, it’s been a low-single digit drag on revenues?

Carrie Teffner

You got it.

Chris Svezia – Susquehanna Financial

All right. Thank you.

Carrie Teffner

Thank you.

Operator

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

Jonathon Grassi – Longbow Research

Good morning, guys. Just on the marketing expense, you said it was up slightly on an absolute basis and then I think sort of split on a percent of the revenue basis. Given the incremental spend that you’re putting into Earthkeepers, are you taking away any marketing dollars from any other product lines?

Carrie Teffner

No, not really taking away from any other product lines. You know, we had – it’s really more of our – we launched in Q3, but the bigger marketing spend comes in Q4 for us to support the Nature’s. So we’re not taking away from anything, it’s just a timing.

Jonathon Grassi – Longbow Research

Okay. And then, could you tell us which provider you went for the ERP system and should we expect any lumpiness in SG&A because of the implementation?

Carrie Teffner

We went with FAP, the The Apparel Footwear Solution and with respect to lumpiness, I don’t think we’ll see lumpiness, I think it will be a pretty steady levels of expense and capital that we’ll be spending behind it. We’re still working through early days and we’ll get a little bit more clarity on how that really will flow. But we’re not looking at big spikes one quarter to the next. So it should be pretty smooth.

Jonathon Grassi – Longbow Research

Okay. And then just finally in Timberland Pro, how did that trend through the quarter in the retail stores, in your company-owned stores.

Jeffrey Swartz

We don’t do any – we do product to all those stores, but not exposing our retail service, only through wholesale. It’s up to us, it’s up to the retailers.

Jonathon Grassi – Longbow Research

Okay. Thank you.

Operator

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

Jeffrey Swartz

Thank you. Have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Timberland Company CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts