The Timberland Company Q3 2007 Earnings Call Transcript

| About: Timberland Co. (TBL)

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 toThe Timberland Company's third quarter 2007 analyst conference call. This callis being recorded and is copyrighted material. Therefore, please note that itcannot be recorded, transcribed, or rebroadcast without permission of theTimberland 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 thatduring the Q&A session you limit your questions to one question and onefollow-up.

Now, for opening remarks, I will turn the call over to KarenBlomquist, Timberland's Senior Manager of Investor Relations. Please proceed,ma'am.

Karen Blomquist

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

This presentation and our responses to your questions mayinclude forward-looking statements within the meaning of the Safe Harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Any such statements are subject torisks and uncertainties that could cause actual results to differ materially.These risks and uncertainties are discussed in today's press release and the company'sfilings with the SEC. Copies of our SEC reports are available upon request fromTimberland.

This presentation also includes discussion of constantdollar revenue change, diluted EPS, operating income, and operating expenseexcluding restructuring costs, which are non-GAAP financial measures. Asrequired by SEC rules, we have provided a reconciliation of these measures andadditional information on the presentations tab found in the investor relationssection of our website,

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

John Crimmins

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

Early in the year, we announced the licensing of our NorthAmerican apparel business. We then implemented aggressive cost controls,including a strict headcount freeze, and recently announced an adjustment toour retail store portfolio that will result in the closure of approximately 50underperforming retail stores globally. Today, we have announced that we arestreamlining our USsalesforce and global product organizations. These actions are examples of thedifficult steps that we are taking to improve operating margins and to improveour 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 aremaking in order to drive efficiencies, as well as other strategic initiativesfocused on driving top line growth.

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

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

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

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

Asia sales increased 8%, or 7% on aconstant dollar basis, benefiting from gains in Malaysiaand Singaporeas well the key distributor markets. Asia resultsreflected growth in footwear supported by continued expansion of our integratedbrand 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'sglobal brand franchise in Asia and are on a track to addapproximately 50 wholesale doors in Chinain 2007. We will continue to focus on emerging markets as a key opportunity forexpansion.

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

Timberland's USretail revenues declined approximately 4% in the third quarter, as declines inboots and apparel revenues and general retail softness drove a 5% decline indomestic comparable store sales. As we announced on September 26, we recentlycompleted a comprehensive review of our global retail portfolio which hasresulted in our decision to close the majority of our USspecialty stores by early 2008.

Stores targeted for closure are primarily larger locationsthat are not consistent with our strategy to operate smaller footwear-focusedstores in the United Statesand select international markets. We are continuing to test this smallerFootwear First format and recently opened two stores in the Bostonarea. By mid-November, we will have converted our Garden State Plazastore in northern New Jersey tothis new format.

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

Gross margin for the quarter was 46.9%, 80 basis pointsbelow the prior-year period, reflecting unfavorable impacts from lower bootssales 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 EUduties. We also incurred approximately $3 million in costs related to returnedinventory as a result of our voluntary recall of certain Timberland PROproducts in September.

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

Foreign exchange rate changes added approximately 120 basispoints 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 foreignexchange forward contracts. This higher level of foreign exchange rate volatility,both above and below the operating income line, is due to our loss of hedgingtreatment for foreign exchange contracts entered into prior to our decision torestate our financial results due to the clarifying guidance on FAS 133 in April of this year. We recentlyimplemented a new monthly hedging program that under FAS 133 is eligible forhedging treatment and will begin to reduce the volatility on our results fromforeign exchange differences beginning in the first quarter of 2008.

Timberland's tax rate for the third quarter was 40%, 420basis points higher than the prior-year period, driven by lower profits ininternational markets. We continue to target a full-year tax rate of 35% to35.5%, as a higher Q4 tax rate driven by lower profits in international marketswill be offset by the release of specific tax reserves related to the expectedclosure of certain audits during the fourth quarter.

We ended the quarter with $44 million in cash and $47million 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 ofnew brands and increased product costs.

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

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

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

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

Full-year revenue will likely decline by mid single-digitscompared to the prior year. Lower boots and kids sales, higher levels ofpromotional activity, and increased product costs will place continued pressureon operating margins, with expectations for full year declines in the range of400 to 450 basis points compared to prior year levels, excluding restructuringcosts. 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 halfrevenue declines and improved operating contributions compared with first half2007 comparable results. We anticipate that soft market trends will be offsetby our efforts to drive operational efficiencies across the organization and byour decision to close approximately 50 retail stores by the end of the firstquarter of 2008. Comparable 2007 estimates exclude restructuring costs andinclude impacts from our store closures.

Now I will pass the call over to Jeff.

Jeffrey Swartz

Thanks, John. On ourlast two conference calls, I have spoken frankly about my dissatisfaction withTimberland's current financial performance; and I have outlined plans forreinvigorating top line growth by redirecting investment to higher turnbusinesses and driving operational efficiencies across our organization. Today Iwill provide an update on progress.

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

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

As part of our distribution strategy globally, we believethat we can operate brand right, shareholder right, retail formats from full serviceintegrated stores in capital cities to focused Footwear First stores, to outletstores. Given our decision to address underperforming stores, we will enter2008 with a healthier retail portfolio which is brand right and business right.

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

This quarter, I can report progress against how we willoperate our core business, which remains the Timberland footwear franchise. Forsome time I have asserted that to drive profitable growth globally in ourfootwear franchise, our product creation process needs relevant, differentiatedconsumer insight at its inception.

To mine insight, we created four specific consumer-focusedteams: Authentic Youth, Casual Gear, Outdoor Performance, and Industrial. Weappointed a president for each team, and outfitted each president with thetools to pursue his specific consumer. This specialized focused by consumer isbeginning to yield benefits, specifically in sharper, better-focused productassortments for spring 2008 and for fall 2008. Yet it is clear that there isboth distinction and overlap between the various segments within the TimberlandTree brand.

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

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

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

Mike is a five-year veteran at Timberland with extensiveinternational experience. Gene is an industry veteran and brings extensivebrand, sales, and product experience to the table. I am a third-generationTimberland brand builder. Together I believe we make a formidable team. WithGary Smith responsible for the enterprise portfolio group, which includesTimberland PRO, SmartWool, and other new brands, our brand leadership team iscomplete.

Licensing apparel, rationalizing our global retailportfolio, and restructuring our USsales and global product teams are concrete examples of redirecting investmentchoices, rationalizing our operating expense structure to deliver improvedfinancial returns. We will continue with our review of our entire businessportfolio, and we expect to identify additional actions that will improve ourefficiency and our financial performance.

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

We will run a TV advertising campaign in select markets in29 countries, including a test in the Bostonmarket. The Boston test, which runsthrough December 16, kicked off on October 15 during the Red Sox-IndiansAmerican League Championship series, which means that the TV test kicked off inBoston shortly after the Yankeeswent home for winter vacation. The TV campaign features our EarthkeepersCollection of fully-waterproof boots for men and women and our Benton3-in-1 waterproof jacket.

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

Looking forward, I believe we're making the right strategicdecisions to restore the health of our enterprise. We will continue to review thefull scope of our business portfolio and our value chain. We will continue tomake choices that aim at reducing complexity, eliminating low value-addactivities, and rationalizing our expense structure; not simply to prop upshort-term financial results, but instead to set us up for long-term andsustainable success.

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

John and I will now take your questions.



Your first question comes from Jeffrey Edelman - UBS.

Jeffrey Edelman - UBS

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

Jeffrey Swartz

I actually think theproduct segmentation efforts that are made by the AY team and the CG team andthe 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 thebrand in the third quarter, that is the first disappointing signal I have seenfrom that business in a while.

I don't ascribe it to any one particular point, certainlynot 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; butlet's look at the casual business for a moment.

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

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

When I say very positive response, I don't mean we see thebusiness up double-digits. You heard us say that we are facing the constraintsof open to buy. They are based on lack of great sell-through performance. So Iam not talking in terms of revenues; I am talking in terms of strategy, havingtraction. 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 verylarge cloud that is obscuring otherwise more progress than I think is cleareither to your eye or to your heart, Jeff. Because I think the results don'tbear out the assertion that segmentation is not working. I think if you looksell by sell, we have the volume. The net of the volume is as disappointing asit is, but the granular result business by business is better than I think youcharacterized.


Your next question comes from Kate McShane - Citigroup.

Kate McShane - Citigroup

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

Jeffrey Swartz

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

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

John Crimmins

Kate, just toreinforce what Jeff said, it is really the fine-tuning of our outlook for thebalance of the year is based on our most recent comp store performance, at-oncetrending. It is not related to cancellations. It is just the trending of thereplenishment 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 thinkyou said you may use some of that to support the brand. But is there anestimate of how much you expect that to go to the bottom line?

John Crimmins

Kate, what we talked about was $10 million in savingsrelated 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 thatsavings to have a louder, more articulate, clearer brand voice.

We have also said that we continue to with our review of ourportfolio, 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 arelooking for.

Jeffrey Swartz

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

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

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


Your next question comes from John Shanley - SusquehannaInternational.

John Shanley - Susquehanna

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

Jeffrey Swartz

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

John Shanley - Susquehanna

Do you think you willbe able to turn it around by fall '08 interms of both the boot and the kids' product lines?

Jeffrey Swartz

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

John Shanley - Susquehanna

That is great tohear. I just have one quick question on Europe. Can yougive us an update on where you stand in terms of finding alternative sourcingcountries to offset the anti-dumping duties of Vietnamese- and Chinese-producedfootwear products?

Jeffrey Swartz

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

John Shanley - Susquehanna

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

Jeffrey Swartz

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


Your next question comes from Virginia Genereux - MerrillLynch.

VirginiaGenereux - Merrill Lynch

Can you tell us exactly what the revenues in Europeand 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 thedrivers of that?

Jeffrey Swartz

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

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

On a geography basis, we have a marketplace in Francewhere in particular that is an example of a marketplace that is reallyunderperforming relative to some of the other markets. I have seen our Italianteam by contrast doing, I think, a spectacular job of fighting for every pairof shoes at the point of sale and making better progress.

We had pressure in the UK.The pressure in the UKis not a marketplace pressure. It is a consumer pressure within a market. Thatis the boot conversation. If you were looking at the numbers I am looking at,you would see a performance in the UKthat is more like the French performance, but it isn't the same story. Thestory in the UKis 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 thereis, I am sorry to say, in essence, a portfolio of results to reveal to you. Itis 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 myanswer to Jeff earlier; that we are going to obviously be continuing to focuson trying to leverage what is working, and yet the unfortunate part is we havemore than one thing that isn't working. So I mentioned apparel, I mentionedboots, 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 disappointingresult in the quarter.

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

John Crimmins

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

VirginiaGenereux - Merrill Lynch

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

Jeffrey Swartz

I am not saying you're wrong; I am going to say I am goingto 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.

VirginiaGenereux - Merrill Lynch

Because why?

Jeffrey Swartz

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

Point two is, the shareholders pay us not to sit back andobserve these results but to fix them. In spring '08 and in fall '08, we havean order book that is forming up for spring '08. We haven't even begun tosolicit an order book for fall '08. We are in the process, we're in the midstright 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 aweek 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 butabsolutely improving our retailers' performance. Because you are correct, thatif open to buy is simply a function of how did you do last season, it isimperative that we not accept the result that is in front of us. So, part ofwhat you see in our prognosis for the fourth quarter is investment againstensuring better sellthrough results; in Europe inparticular, market by market. So I don't think that the die is cast, by anystretch.

VirginiaGenereux - 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? Apro forma, on an '07 basis, ex this $100 million, how much do they represent ofthe business?

Jeffrey Swartz

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

John Crimmins

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

Virginia, Idon't believe we have spoken specifically to the size of our boot business inthe past. I think what we have said to this point and our directional commentsare 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 theboots' and kids' businesses declined $100 million last year, are expected todecline $100 million this year. I was just curious if you were expecting thosebusinesses 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 theAuthentic Youth business is a geography business: US first; Europesecond; Asia third. It is a gender business; men'sfirst; 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, thatbusiness is stabilizing. I said that the last time we talked and I repeat thepoint now.

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

In Europe I told you, and I continueto say, that the business, which is mostly men's and kids', not so muchwomen's, that business has been in steep decline. That is a big source of thedecline in revenues this year. It was never as big a business as the USbusiness. So, it has gotten to the point where, here is a delicate phrase. Weare not down to the dry heaves yet, which is to say there may be some morereduction in the boot business to see yet. But what is left in the stomach, soto 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 potentiallyexist.

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

David Meyer - Brean Murray

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

John Crimmins

I am going to answeryour question geographically. I think we see a continued weak retailenvironment in the USand in Europe. So that has really been the driver of theguidance 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 bestpositioned right now? Which do you think might have the most work to go to getto where you would like it to be?

Jeffrey Swartz

Of the four that youreference, we will go backwards. Industrial is well positioned. The brand isretailing. It is a strong, small business. Outdoor Performance is [inaudible] positionon a global basis. That is a distribution conversation that relates to the sportsspecialty channel. It is a relatively small business. The product line isstrong. The team is focused, and the retailing is mixed.

The Authentic Youth business is, I think, has been sharplyrepositioned and I applaud the team for having done it. You'll see soonestimproved 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 seeimprovement relatively speaking in Europe for the AYbusiness. So I think it is well positioned in the USto turn the corner, and I expect that to be sooner rather than later.

Regarding the casual business, the casual business isprincipally the center of attention for me here is our European business,because that is essentially a casual business. That is why I'm disappointedthat the result in the boot business in some regards obscures the progress thatwe are making in the casual business, although I acknowledge and takeresponsibility 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 positionedin Europe, and it needs to be invigorated by acombination it's less about product accepted apparel; it is more aboutmarketing voice, frankly.

We are in the right doors, we have support from the rightcustomers, and we have open to listen from the consumer. We need to drive thebrand harder in a competitive environment. So I would say it is very wellpositioned 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 USis most imperative.

That is why I am very pleased with the implementation of thePlant One on You national promotion with Nordstrom in all doors in the men'sshoe department. It is up and operating. We haven't had a national promotionwith 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 apromotion that is consumer oriented. That says come in, look at theEarthkeepers Collection which is environmental values in action,outdoor-proven, industrial-strength footwear. You buy a pair of shoes, we willplant 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 alldoors. To me that is an example of the work that we have to do if we want toimprove our position as a Casual Gear brand in the US, and we absolutely dointend.

By the way, last point that I am saying, I reiterate thefact that the work that is being done by the team at Phillips-Van Heusen torelaunch Timberland men's and women's apparel in the United States in Fall '08will have a real impact on the consumer and trade perception of the Casual Gearbrand. Candidly we are not in that position right this moment. But in fall '08we shall be. The apparel that they have done is good. The marketing they aredoing 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 saidto Virginia, by no means have we struck our [colors] as it regards Fall '08.


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

Jeffrey Swartz

Thank you and have agood day.

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