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The Timberland Company (NYSE:TBL)

Q3 2007 Earnings Call

November 1, 2007 8:25 am ET


Jeffrey Swartz - President, CEO

John Crimmins - Acting CFO

Karen Blomquist - IR


Jeffrey Edelman - UBS

Kate McShane - Citigroup

John Shanley - Susquehanna International

Virginia Genereux - Merrill Lynch

David Meyer - Brean Murray


You are listening to The Timberland Company's third quarter 2007 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 Karen Blomquist, Timberland's Senior Manager of Investor Relations. Please proceed, ma'am.

Karen Blomquist

Good morning and welcome to Timberland's third quarter 2007 conference call. Speaking today will be Jeffrey Swartz, our President and Chief Executive Officer, and John Crimmins, our Chief Financial Officer. John will be discussing our financial results for the quarter. Jeff will then discuss our performance within the context of our longer-term strategic direction.

This presentation and our responses to your questions may include forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are discussed in today's press release and 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, diluted EPS, operating income, and operating expense excluding restructuring costs, which are non-GAAP financial measures. As required by SEC rules, we have provided a reconciliation of these measures and additional information on the presentations tab found in the investor relations section of our website,

Thank you and now I will turn the call over to John.

John Crimmins

Thanks, Karen. 2007 has been a year of challenge and change; but despite the challenges we are facing, we remain focused on our long-term goals of improving our operating margin performance while strengthening our brand. So far this year, we have taken steps that will result in progress against these objectives.

Early in the year, we announced the licensing of our North American apparel business. We then implemented aggressive cost controls, including a strict headcount freeze, and recently announced an adjustment to our retail store portfolio that will result in the closure of approximately 50 underperforming retail stores globally. Today, we have announced that we are streamlining our US salesforce and global product organizations. These actions are examples of the difficult steps that we are taking to improve operating margins and to improve our cost structure.

Today, I will take you through the specifics of the quarter, and then Jeff will give you more color on the organizational changes we are making in order to drive efficiencies, as well as other strategic initiatives focused on driving top line growth.

Third quarter global revenues declined 14% to $433 million, as declines in the US and Europe offset gains in Asia and distributor markets. Foreign exchange rate changes added 2% to overall revenues for the quarter.

Global footwear revenues decreased 16% to $310 million, on anticipated double-digit declines in boots and kids, as well as modest declines in casual footwear; and approximately $3 million related to our voluntary recall of certain PRO Direct Attach Steel Toe footwear offset benefits from the addition of IPATH. Global apparel and accessory revenues fell 10% to $116 million as declines of Timberland-branded casual apparel offset strong growth in SmartWool and the addition of Howies.

By channel, global wholesale revenues decreased 17% to $344 million. Global retail revenues increased 3% to $89 million as benefits from our global door expansion offset a 6% decline in comparable store sales.

International revenues decreased 4% to $241 million in the third quarter or 9% in constant dollars. Europe revenues fell 8%, or 13% on a constant dollar basis, driven by lower boots and kids and apparel sales. Europe results were impacted by declines in most of the European regions, where continued pressure on boots and kids offset strong growth with our distributor partners.

Asia sales increased 8%, or 7% on a constant dollar basis, benefiting from gains in Malaysia and Singapore as well the key distributor markets. Asia results reflected growth in footwear supported by continued expansion of our integrated brand presence across the region. In the third quarter we opened a store in Hong Kong, an outlet in Taiwan, and two shops in Malaysia. Overall, we continue to be pleased with our progress in expanding Timberland's global brand franchise in Asia and are on a track to add approximately 50 wholesale doors in China in 2007. We will continue to focus on emerging markets as a key opportunity for expansion.

Timberland's US sales fell 23% to $192 million in the third quarter, driven by anticipated decreases in boots and kids sales as well as declines in Timberland-branded apparel as we transition this business to our licensing partner. US wholesale revenues declined 28% to $148 million as lower boots and kids sales, impacted in part by our strategy to maintain the premium positioning of the Timberland brand. Weakness in apparel offset double-digit growth in SmartWool and gains from the addition of IPATH.

Timberland's US retail revenues declined approximately 4% in the third quarter, as declines in boots and apparel revenues and general retail softness drove a 5% decline in domestic comparable store sales. As we announced on September 26, we recently completed a comprehensive review of our global retail portfolio which has resulted in our decision to close the majority of our US specialty stores by early 2008.

Stores targeted for closure are primarily larger locations that are not consistent with our strategy to operate smaller footwear-focused stores in the United States and select international markets. We are continuing to test this smaller Footwear First format and recently opened two stores in the Boston area. By mid-November, we will have converted our Garden State Plaza store in northern New Jersey to this new format.

Timberland's operating income for the third quarter was $45 million, including $8 million in restructuring charges related to the closure of approximately 50 retail stores globally. We expect there will be additional charges due to the closures of approximately $7 million in the fourth quarter and $1 million in the first quarter of 2008. Excluding these charges, operating income fell $32 million to $52 million, and operating margin fell 480 basis points to 12%. Third quarter EPS was $0.42. Diluted EPS was $0.49 excluding restructuring charges, compared with $0.88 for the third quarter of 2006.

Gross margin for the quarter was 46.9%, 80 basis points below the prior-year period, reflecting unfavorable impacts from lower boots sales in the US and Europe; increased levels of off-price sales and markdowns; and higher comparable product costs, due in part to the final phase-in of EU duties. We also incurred approximately $3 million in costs related to returned inventory as a result of our voluntary recall of certain Timberland PRO products in September.

Operating expenses, excluding restructuring charges for the quarter, fell 3% to $151 million, as reductions in incentive-based compensation and marketing expenses offset costs associated with the addition of new businesses. We continue to believe that we need to drive efficiencies across our organization to deliver stronger financial returns for our business. Jeff in his comments today will provide more details on our efforts to rationalize our operating expense structure. He will also discuss plans to use a portion of these savings to fund additional investment in consumer-facing marketing, a strategy that we believe is crucial to supporting future revenue gains.

Foreign exchange rate changes added approximately 120 basis points to gross margins and $7 million to operating profits for the quarter. While the weaker dollar benefited operating income, it reduced other income by $5 million, primarily resulting from the marking to market of 2007 foreign exchange forward contracts. This higher level of foreign exchange rate volatility, both above and below the operating income line, is due to our loss of hedging treatment for foreign exchange contracts entered into prior to our decision to restate our financial results due to the clarifying guidance on FAS 133 in April of this year. We recently implemented a new monthly hedging program that under FAS 133 is eligible for hedging treatment and will begin to reduce the volatility on our results from foreign exchange differences beginning in the first quarter of 2008.

Timberland's tax rate for the third quarter was 40%, 420 basis points higher than the prior-year period, driven by lower profits in international markets. We continue to target a full-year tax rate of 35% to 35.5%, as a higher Q4 tax rate driven by lower profits in international markets will be offset by the release of specific tax reserves related to the expected closure of certain audits during the fourth quarter.

We ended the quarter with $44 million in cash and $47 million in short-term debt used to support seasonal working capital needs. Inventory in Q3 increased 3% to $259 million, in part due to the addition of new brands and increased product costs.

Accounts receivable at the end of Q3 decreased 13% to $287 million, as the impact of lower wholesale revenues was partially offset by a modest deterioration in European collections. Wholesale DSOs for the quarter increased three days to 66 days. Capital spending for the quarter was $20 million.

During the third quarter, we repurchased 778,000 shares under our current repurchase program. We continue to believe that share repurchases are a good way to return excess cash to shareholders. Timberland has 2.4 million shares remaining under current share repurchase authorizations.

For the fourth quarter, we anticipate revenue declines in the mid single-digit range and operating margin declines in the range of 200 basis points compared to the prior year, excluding restructuring costs. This estimate is slightly below prior estimates, due to continued softening in the US and European markets and its impact on our latest retail and at-once trends.

We expect the significant declines in boots and kids sales we have seen to-date to continue in Q4, resulting in full-year declines in the range of $100 million globally, which will offset strong gains in other parts of our portfolio.

Full-year revenue will likely decline by mid single-digits compared to the prior year. Lower boots and kids sales, higher levels of promotional activity, and increased product costs will place continued pressure on operating margins, with expectations for full year declines in the range of 400 to 450 basis points compared to prior year levels, excluding restructuring costs. We anticipate that the full-year tax rate will be in the 35% to 35.5% range.

For 2008, we're targeting mid single-digit first half revenue declines and improved operating contributions compared with first half 2007 comparable results. We anticipate that soft market trends will be offset by our efforts to drive operational efficiencies across the organization and by our decision to close approximately 50 retail stores by the end of the first quarter of 2008. Comparable 2007 estimates exclude restructuring costs and include impacts from our store closures.

Now I will pass the call over to Jeff.

Jeffrey Swartz

Thanks, John. On our last two conference calls, I have spoken frankly about my dissatisfaction with Timberland's current financial performance; and I have outlined plans for reinvigorating top line growth by redirecting investment to higher turn businesses and driving operational efficiencies across our organization. Today I will provide an update on progress.

First, the systematic review of our business portfolio and our diligent effort to make thoughtful choices guided by strategy and values to ensure that we are focused on the highest return, highest potential activities at Timberland. Previously I have discussed our decision to license men's and women's apparel in North America to Phillips-Van Heusen. Having spent substantial time with the team at PVH looking at their Fall '08 efforts -- product and marketing, etcetera—I am reinforced in my belief that by simplifying our operating agenda we have in fact improved our brand. Entering into this agreement was a good decision.

In September, we announced the decision to close approximately 40 specialty and roughly ten factory outlets in the US, Europe, and Asia. These stores will operate through the holiday season and then will close during the first quarter of 2008. On an annual basis, closing these stores will reduce revenues by approximately $40 million, but will increase operating profit by approximately $6 million.

As part of our distribution strategy globally, we believe that we can operate brand right, shareholder right, retail formats from full service integrated stores in capital cities to focused Footwear First stores, to outlet stores. Given our decision to address underperforming stores, we will enter 2008 with a healthier retail portfolio which is brand right and business right.

This is the second concrete example of reviewing our business portfolio and making sharp choices to better focus our investments on management and capital to optimize returns for shareholders, while staying true to brand strategy and enterprise values.

This quarter, I can report progress against how we will operate our core business, which remains the Timberland footwear franchise. For some time I have asserted that to drive profitable growth globally in our footwear franchise, our product creation process needs relevant, differentiated consumer insight at its inception.

To mine insight, we created four specific consumer-focused teams: Authentic Youth, Casual Gear, Outdoor Performance, and Industrial. We appointed a president for each team, and outfitted each president with the tools to pursue his specific consumer. This specialized focused by consumer is beginning to yield benefits, specifically in sharper, better-focused product assortments for spring 2008 and for fall 2008. Yet it is clear that there is both distinction and overlap between the various segments within the Timberland Tree brand.

While the central insight that motivated the creation of the separate vertical teams remains vibrant -- namely that an Authentic Youth consumer is distinct from an OP is distinct from a Casual Gear consumer -- still we concluded that there is also considerable overlap between these differentiated consumers in terms of what they want from the Timberland brand.

Going forward, we need to continue to glean and to leverage real consumer insight at the product creation level, but we can operate much more efficiently if we connect the distinctive consumer segments under a unified brand leadership organization. Instead of three distinct and separate product sales and marketing organizations, -- an Authentic Youth, a Casual Gear, and OP separate set of teams -- we can operate much more efficiently as a unified Timberland brand with specialty product and sales teams working together.

Accordingly I have asked Gene McCarthy and Mike Harrison to serve as co-presidents for the Timberland brand. Working together with me, Gene and Mike will share responsibility for the overall performance of the Timberland brand and every aspect globally.

Mike is a five-year veteran at Timberland with extensive international experience. Gene is an industry veteran and brings extensive brand, sales, and product experience to the table. I am a third-generation Timberland brand builder. Together I believe we make a formidable team. With Gary Smith responsible for the enterprise portfolio group, which includes Timberland PRO, SmartWool, and other new brands, our brand leadership team is complete.

Licensing apparel, rationalizing our global retail portfolio, and restructuring our US sales and global product teams are concrete examples of redirecting investment choices, rationalizing our operating expense structure to deliver improved financial returns. We will continue with our review of our entire business portfolio, and we expect to identify additional actions that will improve our efficiency and our financial performance.

Part of the reason we're working so urgently to refocus our investment choices is because we recognize the need to strengthen our brand's voice. Investing incrementally in consumer-facing marketing is an imperative we are pursuing even as we are attacking every other element of operating expense.

We will run a TV advertising campaign in select markets in 29 countries, including a test in the Boston market. The Boston test, which runs through December 16, kicked off on October 15 during the Red Sox-Indians American League Championship series, which means that the TV test kicked off in Boston shortly after the Yankees went home for winter vacation. The TV campaign features our Earthkeepers Collection of fully-waterproof boots for men and women and our Benton 3-in-1 waterproof jacket.

As challenging a business environment as we are operating in, we remain committed to living our values. On October 22, we were among 17 companies that were recognized by the Environmental Protection Agency here in the US for helping to address climate change by utilizing renewable energy in our supply chain. One of our biggest customers, Macy's, was also recognized for the same kind of environmental leadership. We congratulate them for their inclusion on this list and for their forward thinking in the retail world.

Looking forward, I believe we're making the right strategic decisions to restore the health of our enterprise. We will continue to review the full scope of our business portfolio and our value chain. We will continue to make choices that aim at reducing complexity, eliminating low value-add activities, and rationalizing our expense structure; not simply to prop up short-term financial results, but instead to set us up for long-term and sustainable success.

Even in the face of continued near-term pressures, we believe that by acting like the best bootmaker on earth, by focusing on our unique brand DNA, which is a combination of outdoor proven, industrial strength, environmental values in action, we can overcome the softness in the market and improve sharply the results we're delivering our shareholders. We are acting with urgency and diligence within the bounds of strategy and values. And we look forward to reporting progress to you.

John and I will now take your questions.

Question-and-Answer Session


Your first question comes from Jeffrey Edelman - UBS.

Jeffrey Edelman - UBS

You have been talking about product segmentation, new designs, for a long time now and you are still not getting it right. Have you had any positive anecdotal evidence from retailers on what you have done for spring and for fall '08? Or is it just still well, we have got some new stuff, let's see how it goes?

Jeffrey Swartz

I actually think the product segmentation efforts that are made by the AY team and the CG team and the OP teams actually have even more than anecdotal evidence of real progress. I think, as disappointed as I am by the performance of the casual aspect of the brand in the third quarter, that is the first disappointing signal I have seen from that business in a while.

I don't ascribe it to any one particular point, certainly not simply to a product point. I think we are actually making real progress, Jeff, within the portfolio. You can take your approach any way you'd like; but let's look at the casual business for a moment.

In Europe, the casual women's business, we have reported to you consistently, at least through this year; I just don't remember how much further back, that we're making real progress at translating brand DNA into women's appropriate product. That is in retailing. It is certainly true that within the Outdoor Performance segment of the business in the United States and globally we have opened doors that we hadn't access to before; which is to say, sports specialty distribution we have opened doors and retailed the product. That is with Timberland OP.

With Timberland Authentic Youth, which is the business that Gene has led so admirably in the last year, as he has focused on the acute need to turn the product line, I would say that our spring sell-in has been better balanced, has been better received, sharply better received than it was in spring last. Spring last, I think your criticism is fair. Spring last we were talking about trying hard. Spring coming in Authentic Youth, specifically in women's in the United States but also in men's, I have seen the product line be seasonally appropriate, consumer relevant. It is not yellow boots. It is seasonally relevant, consumer relevant for men and for women and we have gotten very positive response.

When I say very positive response, I don't mean we see the business up double-digits. You heard us say that we are facing the constraints of open to buy. They are based on lack of great sell-through performance. So I am not talking in terms of revenues; I am talking in terms of strategy, having traction. I would say that in AY, the number one sell-in product line for spring '08 on a global basis came out of the AY team.

I believe that the reality at Timberland is we have a very large cloud that is obscuring otherwise more progress than I think is clear either to your eye or to your heart, Jeff. Because I think the results don't bear out the assertion that segmentation is not working. I think if you look sell by sell, we have the volume. The net of the volume is as disappointing as it is, but the granular result business by business is better than I think you characterized.


Your next question comes from Kate McShane - Citigroup.

Kate McShane - Citigroup

Your guidance for sales in the fourth quarter declined from flat sales to down mid single-digits. Are you seeing a cancellation in orders from retailers in the fourth quarter?

Jeffrey Swartz

Fourth quarter is typically, as you know, Kate, a fill-in business at a retail business. So, we have a normal volume of cancellations which is to say we always have gives and gets, but the first and the third quarter are more future-oriented quarters, and the second and the fourth are more fulfillment-oriented quarters. So, we are looking at retail trend. We are looking at performance in our own stores. We are looking at the lift from the marketing campaign in Europe and the test market in the United States.

We are being cautious. By cautious, I don't mean we are being conservative in our forecast. We feel cautious about performance. So we are addressing that in terms of making sure we reel in inventories and purchases, to the extent we can do that, and we are working hard on sellthrough activities in order to stimulate sellthrough on a global basis. We don't see anything particularly encouraging in the marketplace right now.

John Crimmins

Kate, just to reinforce what Jeff said, it is really the fine-tuning of our outlook for the balance of the year is based on our most recent comp store performance, at-once trending. It is not related to cancellations. It is just the trending of the replenishment in our retail business.

Kate McShane - Citigroup

You had mentioned in the press release that you could see $10 million in annualized savings. Jeff, correct me if I am wrong, but I think you said you may use some of that to support the brand. But is there an estimate of how much you expect that to go to the bottom line?

John Crimmins

Kate, what we talked about was $10 million in savings related to the specific actions that we announced today, annualized savings.

Jeffrey Swartz

$6 million incremental profit from the retail.

John Crimmins

That's right. Then we talked about reinvesting some of that savings to have a louder, more articulate, clearer brand voice.

We have also said that we continue to with our review of our portfolio, to review all of our investment choices and spending decisions. So, we don't yet have all of the components to give you what I think you are looking for.

Jeffrey Swartz

I can say this much, qualitatively, Kate, which is if your question is, if you have got a dollar of savings, do you intend to spend a dollar, $1.50, or $0.80 on marketing investment? It is absolutely clear at every level here at Timberland that we have to do two things. We have to rationalize the investments we're making in this business, and we have to drive better results for our shareholders both in the short term and in the long term.

The way we will drive results in the short term is that we will reinvest thoughtfully. So we are going to spend more money on marketing, but not at the willful expense of improving financial results starting right away. So our expectations in 2008, I heard John say something about improved financial results in the first half of the year. That is wholly consistent with the notion of we will redirect investment away from lower value-added places to higher-value-added places like marketing and we will deliver improved financial returns.

We told you that a 15% operating margin is what we see. We understand from where we stand that is a steep hill to climb, and we need to demonstrate progress against that not ten years from now, but as quickly as we can. So you should expect us to be urgent about the choices that we are making and not self-indulgent.


Your next question comes from John Shanley - Susquehanna International.

John Shanley - Susquehanna

Jeff, Nike has stated as recently as earlier this week that they have gained market share at Timberland's expense in each of the last two years, and they expect to do it again in 2008. What are they doing right to basically be able to make that claim? Which by the way, is supported by both of our consumer panels. What are they doing that basically is allowing them to gain share, while you are evidently having trouble, particularly in the boot product category?

Jeffrey Swartz

I can't comment on what they think they are doing right. I look forward to different anecdotal evidence from the marketplace, John. We are the best bootmaker on earth and the biggest sneakermaker on earth can claim whatever leadership is rightfully theirs. This won't be a war of words; this will be a marketplace conversation, and we haven't finished that conversation yet.

John Shanley - Susquehanna

Do you think you will be able to turn it around by fall '08 in terms of both the boot and the kids' product lines?

Jeffrey Swartz

We think we have already made dramatic progress in Authentic Youth product offering. We think the reaction of retailers from large to small in spring '08 reflects that. We respect the market circumstance. We respect the pressure that our retailers are under. We respect the competitive pressures that exist. I am a third-generation guy, John. This story is not finished yet.

John Shanley - Susquehanna

That is great to hear. I just have one quick question on Europe. Can you give us an update on where you stand in terms of finding alternative sourcing countries to offset the anti-dumping duties of Vietnamese- and Chinese-produced footwear products?

Jeffrey Swartz

As we told you, we have continued to pursue a global sourcing agenda. Not in response to, but in respect of some of the challenges that exist, including anti-dumping. We continue to have a real asset in the Dominican Republic. We believe that a more diversified approach to sourcing in other parts of Southeast Asia, even to include potential Eastern Europe, are ways that we can think about how to serve our customers with distinction, with short supply chains and high-quality product.

John Shanley - Susquehanna

Are you now sourcing from these other countries for Europe? Is the Dominican Republic producing from components made in countries other than China?

Jeffrey Swartz

The Dominican Republic has been producing for 20-odd years for us. In the Dominican Republic we're making a variety of constructions, including the original hand-sewn shoes, which is something we still relatively uniquely do. That is principally, if not exclusively a North American kind of componentry. The yellow boot that we manufacture in the Dominican Republic and mostly Europe, North American componentry. Some of the newer constructions, Timberland PRO boots, I am not sure where all the components come from. But if you look at the balance of what is in the Dominican, by no means the majority of that comes from anywhere but North America. Some of it, I'm sure, comes from the global economy, but it is not principally China.


Your next question comes from Virginia Genereux - Merrill Lynch.

Virginia Genereux - Merrill Lynch

Can you tell us exactly what the revenues in Europe and Asia were in the quarter?

Jeff, can you talk about the weakness in Europe? That is around 35% or so of your business. What countries and what are the drivers of that?

Jeffrey Swartz

I will go first, and John will figure out how to answer your first question. I will answer the second question first about performance in Europe. I'm disappointed with our performance in men's apparel in Europe. That was a relatively speaking not a geography thing; that is a product line thing. I'm disappointed with the way we have executed fit and quality. I'm also disappointed with the creative content of the product line. That is a consumer letdown.

I think there is plenty of brand permission and there is plenty of retailer desire for us to succeed. I just don't think we executed well from a product perspective. That is translating. The consumer expects premium execution from us; I don't think they saw that in our product line.

On a geography basis, we have a marketplace in France where in particular that is an example of a marketplace that is really underperforming relative to some of the other markets. I have seen our Italian team by contrast doing, I think, a spectacular job of fighting for every pair of shoes at the point of sale and making better progress.

We had pressure in the UK. The pressure in the UK is not a marketplace pressure. It is a consumer pressure within a market. That is the boot conversation. If you were looking at the numbers I am looking at, you would see a performance in the UK that is more like the French performance, but it isn't the same story. The story in the UK is boots; although a big part of the French problem is not exclusively boots.

If you look at the business in Italy, which was always less about boots anyways, you see better performance. So there is, I am sorry to say, in essence, a portfolio of results to reveal to you. It is not one simple single thing.

That is good news and bad news, Virginia. It is good news because we have some things that are working. That was my answer to Jeff earlier; that we are going to obviously be continuing to focus on trying to leverage what is working, and yet the unfortunate part is we have more than one thing that isn't working. So I mentioned apparel, I mentioned boots, and I mentioned the specific geography problem in the French market. That is a portfolio of goods and bads, the net of which is a disappointing result in the quarter.

I continue to be a big believer in the power of our brand. I was in the marketplace in Europe very recently, even in developing markets like Russia, and I saw Timberland's stores in Moscow and in St. Petersburg. I was at the store opening in Milan where we opened a flagship store in Milan. We closed one and opened one, so it is a net of zero. But I see the strength and the currency of the brand. I understand that it is still very much ours to lose, or ours to win. I intend obviously to turn it into a win. I am disappointed with the temporary result.

John Crimmins

Virginia, just to answer the first part of your question. Europe's revenues for the third quarter were about $187 million. That represented an 8% decline, 13% decline on a constant dollar basis. Asia revenues were about $40 million, which was up about 8%; or 7% in constant dollars.

Virginia Genereux - Merrill Lynch

Thanks, John. Jeff, based on what you're saying, I would say that weakness is going to extend. I mean if that is going to continue, that is going to be a 2008 phenomenon and probably all of 2008. If sales are weak now, folks are going to order less even in the back half of '08.

Jeffrey Swartz

I am not saying you're wrong; I am going to say I am going to work hard to prove that you're wrong. So I don't want to be disrespectful, because I respect your judgment. But I don't believe that will be the result.

Virginia Genereux - Merrill Lynch

Because why?

Jeffrey Swartz

Well, I said to you earlier this year that the boot business sharply declined in Europe this year. I don't say there is zero in the boot business. So I acknowledge that through 2008 there is a boot business in Europe, and it may decline. I cannot foresee its rate of decline being anything like what it is has been this year. That is point one.

Point two is, the shareholders pay us not to sit back and observe these results but to fix them. In spring '08 and in fall '08, we have an order book that is forming up for spring '08. We haven't even begun to solicit an order book for fall '08. We are in the process, we're in the midst right this minute of a 29-country TV flight, which is principally in Europe, and the effect of which has not yet translated into retail results. It is a week or 10 days; or two weeks since it started.

We're also doing things right now in the fourth quarter, Virginia, that are aimed at not necessarily improving our financial performance but absolutely improving our retailers' performance. Because you are correct, that if open to buy is simply a function of how did you do last season, it is imperative that we not accept the result that is in front of us. So, part of what you see in our prognosis for the fourth quarter is investment against ensuring better sellthrough results; in Europe in particular, market by market. So I don't think that the die is cast, by any stretch.

Virginia Genereux - Merrill Lynch

My second question, Jeff, can you give us a sense or magnitude, at least a quantification, how big are sort of the boots/kids businesses now? A pro forma, on an '07 basis, ex this $100 million, how much do they represent of the business?

Jeffrey Swartz

Well, it is ex this $200 million, right, Virginia? $100 million of this year and the $100 million of the prior year. So, what I think we are comfortable saying to you is relative share of our overall product line, which is to say the casual business still remains our biggest business. Is it fair to the so-called boot business is the second-largest business?

John Crimmins

I think the way we have talked about it recently, which is a business with our Authentic Youth consumer, would be our second-largest category because there is some product that appeals to that same consumer that we wouldn't consider to be boot product.

Virginia, I don't believe we have spoken specifically to the size of our boot business in the past. I think what we have said to this point and our directional comments are about all we want to say about the boot business.


Your next question comes from David Meyer - Brean Murray.

David Meyer - Brean Murray

I noticed your comment, Jeff, where you were saying the boots' and kids' businesses declined $100 million last year, are expected to decline $100 million this year. I was just curious if you were expecting those businesses to stabilize next year? Or should we be expecting another decrease, like another $100 million? What do you think it might do next year?

Jeffrey Swartz

I said at the last earnings release that I believe that the Authentic Youth business is a geography business: US first; Europe second; Asia third. It is a gender business; men's first; kids' second; women's third. I told you that in the cell called US, men's, women's and kids' which is the biggest of all of those all together, that business is stabilizing. I said that the last time we talked and I repeat the point now.

Which is not to say that it is growing, it is not to say that it is flat, it is to say it is stabilizing. So, have we hit bottom in the boot business yet? I don't know the answer. I don't want to assert that an absolute terms. But it sure feels like the business is stabilizing.

In Europe I told you, and I continue to say, that the business, which is mostly men's and kids', not so much women's, that business has been in steep decline. That is a big source of the decline in revenues this year. It was never as big a business as the US business. So, it has gotten to the point where, here is a delicate phrase. We are not down to the dry heaves yet, which is to say there may be some more reduction in the boot business to see yet. But what is left in the stomach, so to speak, is a much smaller value than there was at the beginning of this year. That is to give you a sense of the rate of decline that could potentially exist.

Our Asia business has a relatively stable and even a relatively successful boot business. We make no predictions about whether that is going to go up or down. But it has always been the smallest of the three anyways. So to be clear again, the US I would say is stabilizing in a very active if not stabilized sense. Europe continues to decline, but it's declining on a relatively small base. Asia is relatively steady as she goes.

David Meyer - Brean Murray

For this mid single-digit revenue decline in the first half of '08 that you are expecting, just out of curiosity, do you think that will be equal across the operating segments? The four, Authentic Youth, Casual Gear, that sort of thing? Or will some segments be positive and some be more negative than that?

John Crimmins

I am going to answer your question geographically. I think we see a continued weak retail environment in the US and in Europe. So that has really been the driver of the guidance that we have given for the first half of next year. In Asia, we continue to see positive performance.

David Meyer - Brean Murray

Out of the four areas, again, which do you think of best positioned right now? Which do you think might have the most work to go to get to where you would like it to be?

Jeffrey Swartz

Of the four that you reference, we will go backwards. Industrial is well positioned. The brand is retailing. It is a strong, small business. Outdoor Performance is [inaudible] position on a global basis. That is a distribution conversation that relates to the sports specialty channel. It is a relatively small business. The product line is strong. The team is focused, and the retailing is mixed.

The Authentic Youth business is, I think, has been sharply repositioned and I applaud the team for having done it. You'll see soonest improved performance in the US. We will count on better performance again out of Asia; hopefully, at least stable and potentially better. It will take the longest time to see improvement relatively speaking in Europe for the AY business. So I think it is well positioned in the US to turn the corner, and I expect that to be sooner rather than later.

Regarding the casual business, the casual business is principally the center of attention for me here is our European business, because that is essentially a casual business. That is why I'm disappointed that the result in the boot business in some regards obscures the progress that we are making in the casual business, although I acknowledge and take responsibility for the failure to perform in men's apparel in Europe, which is a casual failure. I would say the casual brand is very well positioned in Europe, and it needs to be invigorated by a combination it's less about product accepted apparel; it is more about marketing voice, frankly.

We are in the right doors, we have support from the right customers, and we have open to listen from the consumer. We need to drive the brand harder in a competitive environment. So I would say it is very well positioned in Europe and in Asia. It is least well positioned in the United States. The need for us to improve the position of the casual brand in the US is most imperative.

That is why I am very pleased with the implementation of the Plant One on You national promotion with Nordstrom in all doors in the men's shoe department. It is up and operating. We haven't had a national promotion with men's Casual Gear footwear with Nordstrom for a long time. My view is, with deep respect to all others, Nordstrom is an extraordinary point-of-sale, and that we have earned the right to have a tabletop presentation with a promotion that is consumer oriented. That says come in, look at the Earthkeepers Collection which is environmental values in action, outdoor-proven, industrial-strength footwear. You buy a pair of shoes, we will plant a tree.

That was a program that we developed in the UK. It was very successful. Nordstrom has endorsed the program and it is in all doors. To me that is an example of the work that we have to do if we want to improve our position as a Casual Gear brand in the US, and we absolutely do intend.

By the way, last point that I am saying, I reiterate the fact that the work that is being done by the team at Phillips-Van Heusen to relaunch Timberland men's and women's apparel in the United States in Fall '08 will have a real impact on the consumer and trade perception of the Casual Gear brand. Candidly we are not in that position right this moment. But in fall '08 we shall be. The apparel that they have done is good. The marketing they are doing is thoughtful. It is a very capable team.

So if you take our work in footwear, their work in apparel; our investment in marketing, their investment in marketing, that is why I said to Virginia, by no means have we struck our [colors] as it regards Fall '08.


There are no additional questions at this time. I would now like to turn the call back over to management for closing remarks.

Jeffrey Swartz

Thank you and have a good day.

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Source: The Timberland Company Q3 2007 Earnings Call Transcript
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