The Timberland Company Q1 2008 Earnings Call Transcript

| About: Timberland Co. (TBL)
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The Timberland Company (NYSE:TBL) Q1 2008 Earnings Call May 1, 2008 8:25 AM ET

Executives

Karen Blomquist – Senior Manager of Investor Relations

John Crimmins – Chief Financial Officer, Vice President Finance & Chief Accounting Officer

Jeffrey B. Swartz – President, Chief Executive Officer & Director

Analysts

John Shanley – Susquehanna Financial Group

Kate McShane – Citigroup

Jeffrey Edelman – UBS Warburg

Mitch Kummetz – Robert W. Baird

Virginia Genereux – Merrill Lynch

Heather Boksen – Sidoti & Company

Jim Duffy – Thomas Weisel Partners

Operator

You are listening to the Timberland Company’s first quarter 2008 analyst conference call. (Operator Instructions) Now, for opening remarks I will turn the call to Karen Blomquist, Timberland’s Senior Manager of Investor Relations.

Karen Blomquist

Good morning and welcome to Timberland’s first quarter 2008 conference call. Speaking today will be Jeffery 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 includes and our responses to your questions may include forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are discussed in today’s press release and in the company’s filings with the SEC. Copies of our SEC reports are available upon request from Timberland.

This presentation also includes discussion of constant dollar revenue change, 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 presentation tab found in the investor relations section of our website at www.Timberland.com.

Now, I’ll turn the call over to John.

John Crimmins

During 2007 we took significant steps to reorganize our business and to begin to set the foundation for future growth and healthier profit margins. Our first quarter results show that the actions we have taken have begun to produce some benefit, as we were able to show improved profitability despite continued top line challenges.

Today, I’ll walk you through our financial performance for the quarter and then Jeff will update you on the progress we are making against our key strategic initiatives. I will also introduce our new reporting segments, North America, Europe and Asia.

First quarter global revenues increased 1% to $340 million as foreign currency changes, strong gains in SmartWool and Timberland Pro products as well as more moderate gains in casual footwear offset declines in boots and Timberland apparel revenue in North America. For the quarter foreign exchange rate changes added 5% to overall revenues.

Global footwear revenues remained flat compared to the prior year as declines in boot sales offset strong growth in PRO footwear, moderate gains in casual footwear and benefits from the addition of IPATH. The decline in boot sales is somewhat misleading however as much of the decline results from the significant decrease in sales through off price channels in the North American wholesale market.

We began 2008 with a much cleaner inventory position with boots for both Timberland and our retailers. Global apparel and accessory revenues grew 3% to $98 million as double digit gains in SmartWool and Howies and modest growth in Timberland apparel in international markets offset planned decreases in US Timberland Apparel. By channel global wholesale revenues decreased 2% to $256 million.

Global retail revenues increased 10% to $85 million reflecting a 6% increase in global comparable store sales. During the quarter we closed 24 of our company owned retail stores as part of our previously announced global retail realignment. As I mentioned earlier, this quarter we changed external reporting segments to better reflect the way we now review and manage our business. Our North America, Europe and Asia business segments now replace our previously reported segments: US wholesale; US consumer direct; and international.

I will begin my segment performance with Europe. European revenues decreased 2% on a constant dollar basis as declines in boots and casual footwear offset growth in outdoor performance footwear and apparel and accessories. Declines in kid’s boots and women’s boots masked an increase in sales of men’s boots.

Constant dollar sales declines in Spain, France and the Benelux region were offset by growth in distributor markets primarily in Eastern Europe and the UK. Asia sales fell 6% on a constant dollar basis due primarily to declines in Japan and Hong Kong which offset growth in key distributor markets including China. We continue to expand Timberland’s global brand franchise in Asia with a particular focus on China where we now have over 60 Timberland branded distributor operated stores open and are on track to add an additional 50 doors this year.

Timberland’s North America sales fell 5% on a constant dollar basis reflecting decline in both the US and Canada. North America wholesale revenues fell 6% as planned declines in Timberland apparel reflecting our transition to a licensing arrangement and reduction in off price footwear sales offset double digit gains in SmartWool and Timberland PRO as well as benefits from the addition of IPATH. Timberland’s North American retail revenues were relatively flat in the first quarter as a 2% increase in comparable store sales offset a decrease in door count related to the closure of underperforming stores over the past two quarters.

Timberland’s operating income for the first quarter was $23 million. Operating income excluding restructuring charges was $24 million, 18% above the prior year period and operating margin improved by 100 basis points to 7%. For the quarter EPS was $0.30 or $0.31 excluding restructuring charges compared with $0.15 or $0.22 excluding restructuring charges for the first quarter of 2007.

Gross margin for the quarter was 46.3%, 170 basis points below the prior year period driven by higher retail close out activity related to store closures and increased product costs offset by the benefits from foreign exchange rate changes and reduced off price activity in our North American wholesale business. Foreign exchange rate changes added 110 basis points to gross margin and $6 million for operating profit for the quarter.

Operating expenses excluding restructuring charges fell 5% to $134 million reflecting savings related to the closure of underperforming retail stores and efforts to drive efficiencies across our organization. These aggressive actions to tightly manage our operating expense base are improving our profitability in the face of challenging market conditions. The operating expense reductions have been carefully managed and have enabled us to make incremental investments to support growth initiatives.

We ended the quarter with $135 million of cash and no debt. Inventory in the first quarter decreased 2% to $180 million due to a disciplined approach to inventory control in the face of a tough retail environment. Accounts receivable in Q1 increased 1% to $202 million in line with revenue growth. Capital spending for the quarter was $4 million.

In the first quarter we repurchased 668,000 shares under our current repurchase program. We continue to believe that share repurchases are a good way to return excess cash to our shareholders. Timberland has 6.6 million shares remaining under current share repurchase authorizations. In the first quarter our tax rate was 39% compared to 34.5% in the first quarter of 2007 due to changes in the geographical mix of our profits.

We are maintaining our full year outlook as favorable foreign exchange benefits are anticipated to offset continued challenges in retail markets globally. We are targeting mid single digit revenue declines due in part to the decision to close underperforming retail stores. We anticipated operating expenses in the range of $550 million, flat to modest operating margin improvement excluding restructuring costs and a tax rate in the range of 40%.

For the second quarter we anticipate mid to high single digit revenue declines and an operating loss excluding restructuring costs in the range of $30 to $35 million consistent with the first half outlook provided in our fourth quarter earnings release. We also anticipate an additional $4 million in restructuring costs in the second quarter reflecting our previously announce retail closure plan which will result in total plan costs in the range of $15 to $16 million, $1 to $2 million below our original estimate.

Now, I’ll pass the call over to Jeff.

Jeffrey B. Swartz

Last year we articulated from investors a simple model that we said would drive our decision making as we devoted ourselves to improving Timberland’s performance for shareholders. We said we’d pursue three goals simultaneously: generating profitable revenue growth; improving gross margins; and reducing operating expenses. We set a goal of returning to 15% operating margins and we continue to focus all our efforts on demonstrating progress against this goal. Timberland’s first quarter results reflect some small indications of progress.

John updated you on the actions we’ve taken to streamline and rebase our operating expense structure to drive efficiencies across our organization, to improve financial returns and to drive operational flexibility in a challenging global retail market. This recalibrated op ex base enabled us to expand our first quarter operating margin excluding restructuring costs by 100 basis points even as we weathered modest constant dollar revenue declines and gross margin contractions.

In my remarks I’m going to focus on our efforts to revitalize revenue growth and to expand gross margins. While we do not yet report tangible results yet from these initiatives I believe firmly that we’re executing better on product creation and that we’re poised to sharply improve consumers’ perception of our brand via much more effective marketing. As a consequence, I believe we’re on the right brand building path, one that will earn revenue growth and margin improvements.

I’m going to begin with product. We’ve made three sharp improvements to the way we build product at Timberland. First, we’ve refocused our energies almost exclusively on our core brand and on our target consumer.

Second, we’ve spent real effort to more narrowly and powerfully and in succinctly define our brand DNA and as a consequence we’ve freed up our product design process for more creativity. We’ve boiled the Timberland brand down to the unique synthesis of four distinct and consumer relative values. We assert that only Timberland is the authentic sum of outdoor proven, industrial strength, environmental values in action, wrapped in a youthful New England aesthetic.

Only Timberland combines these four values and a market as cluttered and competitive as ours is globally being laser sharp about the brand we are building helps create relative distinction with consumers in our products and in our marketing.

The third element of improving our product process is the instance that we build big consumer ideas, ideas that our brand can own. Take as one example Earthkeepers first introduced in fall ‘07 as a small collection of men’s footwear Earthkeepers was from the start a big idea, the idea that Timberland is uniquely qualified to design and develop and to manufacture rugged handsome footwear from recycled earth friendly materials, not green shoes rather beautiful shoes that are built by a company that regularly wins awards for our commitment to environmental sustainability.

Beautiful shoes at relatively high price points in premium points of sales, backed up in fall ‘07 by the rain advertising that we ran in selective global markets Earthkeepers started as a small collection of men’s footwear but from the beginning it was a big consumer relevant global idea that we seek to own.

In spring ‘08 Earthkeeper footwear expanded in number of SKUs even as the total footwear SKU count for spring ‘08 was reduced compared to spring ‘07. The Rippler collection which is at retail now has retailed well globally. This is the Earthkeeper idea, the best boot maker on earth building beautiful shoes in a responsible way. In fall ‘08 Earthkeeper goes further footwear for men and women and now men’s apparel globally. In the US men’s apparel from Phillips-Van Heusen includes an Earthkeeper collection which has been well received. For spring ‘09 Earthkeeper continues to expand in to warm weather silhouettes and appropriate apparel.

My point is while the fall ‘07 commercial result was small; the strength of the sell through underscores our more focused approach to product and brand building. Big consumer ideas like handsome footwear and beautiful apparel built in a responsible fashion environmentally backed with creative marketing and executed with distinction. Big ideas like Earthkeeper is how Timberland will grow its revenues globally and expand its gross margins globally. Earthkeeper is a big idea and so is Timberland Boot Company. If Earthkeeper is Timberland’s proof test for environmental values in action then Boot Company is our highest most premium expression of best boot maker on earth.

We introduced Boot Company first in fall 2005 in the UK only. We built and delivered shoes for men that retailed then and now at prices over $250 US and carefully and thoughtfully we’ve expanded Boot Co. in the most premium global distribution from Barneys in the United States to Isetan in Japan, small business in fall ‘05 and fall ‘06 and still not a significant business in terms of revenue even in fall ‘08.

Boot Co. nonetheless is adding in real height back to the overall Timberland brand. This highest expression of our design ethos raises our stature as a brand with demanding youthful consumers in key fortress cities all over the world. Attracting early adopters, the most demanding kind of footwear consumers to the Timberland brand is how we plan to ensure that we develop a sustainable high energy following with the young consumers and Boot Co. is the edge of this brand’s strategy wedge.

Our success in terms of where the product is placed and how it is retailing gives me confidence that Timberland can grow its brand energy again among young influential consumers. Timberland’s PRO business is the ultimate proof of the brand value industrial strength and PRO continues to exceed our expectations in terms of brand quality and relevance and in terms of financial performance.

PRO has broadened product spreads within existing doors and thoughtfully and strategically grown the customer base geographically. With innovative product introductions, PRO remains sharply focused on the consumers they serve, the channels they serve and their formula for creating brand and financial success. By entering in to logically adjacent markets like the service sector and the first responders sectors PRO continues to grow its business and expand its share against well established competitors despite a largely flat marketplace.

Earthkeepers, Boot Co. and PRO are all examples of big ideas that generate revenue growth and earn superior gross margins and even as we introduce and expand these big ideas we are uncompromising in our commitment to doing fewer things and doing them better. One measure of our progress is SKU count. In fall 2008 which includes an expanded Boot Co. and an expanded Earthkeepers and new categories from PRO, enterprise footwear SKU count was down 20% compared to fall 2007.

One more anecdotal metric that speaks to bigger ideas better executed, when we closed our spring 2008 footwear collections the subsequent review of the product line with our sales team and customers generated 400 specific requests for additional products beyond the range that we have worked so hard to develop with our internal teams.

Spring ‘09 by contrast, the line that we just closed was subjected to the same exact review to the same people and it was remember based on lower additional SKU base to start with because we began with ideas based on real insight, even when that’s all done, on a lower base and with the same review process instead of 400 we generated exactly 25 total requests for product additions beyond the line. This is an anecdotal method but I think it speaks volumes for our better focused brand building effort.

Brand building that yields healthy revenue growth and margin expansion means big consumer ideas turned in to beautiful product and driven by more focused and better executed marketing. We said that part of the reduction in operating expenses that we achieved last year would be reinvested in building Timberland’s brand voice.

This year we are investing significantly in incremental consumer efficient marketing to include television advertising beginning in August. We are producing three distinct films for television, more than we have ever produced before and we’ll use TV and print, outdoor and point of sale to generate emotion and excitement around ideas like Earthkeepers.

The improvement in Q1 operating margin we report today largely reflects the discipline of attacking operating expense. We have not yet demonstrating to you the full value of the efforts we are devoting to rebuilding brand health and momentum but I believe that the efforts we are making will began to be seen by shareholders.

Although the retail environment globally remains difficult and we anticipate tough macro factors to continue, I believe with conviction that our focus on improving brand health and improving financial performance for our shareholders will bear fruit. So, please stay tuned.

John and I will now be happy to take your questions.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Shanley – Susquehanna Financial Group.

John Shanley – Susquehanna Financial Group

Can you give us an idea of when you anticipate showing some signs of improvement in the domestic boots and the kids’ footwear product line?

Jeffrey B. Swartz

John, we believe that serving youthful consumers with Timberland appropriate product is a big responsibility and a big opportunity and we believe that our focus brand building efforts, the way we’ve described them to you, is already beginning to show progress. John spoke about the ups and downs of off price sales being down and other parts of the business being up. Those are early indications to me of our brand building formula beginning to get traction against our target consumer. John did mention for example, a small increase in men’s what we’ve described before as boots in the first quarter in Europe.

But, I’ve said consistently and I’m going to continue to say that one of the things we have to position with investors is that the way we’re building our business is we are focusing with maniacal energy on trying to build one brand, one Timberland brand against men, women and kids. I’m talking about men and women for the moment now, which is a youthful edge. It’s not a 12 year old edge, it’s not a 40 year old edge, and we are absolutely maniacal edge John about focusing on the brand’s equities.

Outdoor proven industrial strength, environmental values in action wrapped in a youthful New England aesthetic that is a different more focused, more refined, more powerful brand building model than the over merchandised model that we’ve been pursuing in recent years past that says, “Let’s recolor up boots.”

I don’t say we’re being disrespectful of our customer or consumer, I’m just telling you that our brand building focus is not on boots, it’s on consumers, young consumers but it’s not on boots. If that doesn’t make sense please push harder on the point because I think that’s a fundamental dislocation between the story we’re trying to tell and the story as you guys are hearing it.

John Shanley – Susquehanna Financial Group

Boots have always been a core component of your overall merchandise mix, obviously a major profit center for the company as well and the last couple of years you’ve seen a fairly dramatic decline in terms of boot sales. What I’m trying to get to Jeff is do you need the boots, whether it’s the six inch yellow boot or variations therefore in order to get the company back on track in terms of top line and bottom line growth?

Do you need that boot category or can you work around it with these other products that you’re talking about? Will that be enough to augment what you’re not getting now from the boot category?

Jeffrey B. Swartz

I appreciate that, that question is clear to me and maybe it’s my thick head John but, you just made it much clearer to me. Boots are always going to be, the six inch classic boot, we don’t want to self proclaim it a classic but it’s proven to be, it is going to be part of our merchandise mix forever, forever.

I can say to you for example, that the retail price of classic product in the market, six inch core yellow boots for example, has stiffened up substantially. You can see it at retail, we actually raised the price on that product, you can see at retail some of the national guys, I don’t anybody is below $130 and some are showing the boot at closer to $150. We’ve been able to put it on QR, quick response, with some of the national retailers because our commitment to that consumer and to that customer and to that product is unflinching.

That’s sort of like apple pie and motherhood statement. The insight question that you asked is can Timberland grow its top line and create profitable revenue growth and 15% operating margins without the hyper consumer against yellow boots? The answer from our perspective is a resounding, emphatic, unambiguous and clear and its yes.

If you look at all our brand building efforts, if you look at the long range plan that we’re in the process of concluding and have worked on really hard, we absolutely believe that this brand building strategy obsession is absolutely able to yield substantial top line growth, substantial top line growth with appropriate operating margins.

By that, I don’t back away from, it’s our responsibility to deliver 15% operating margin. John, if young consumers switched back to the idea of hyper consumption of yellow boots that would be a fortuitous circumstance that’s not contemplated in our long range plan. We would be respectful of consumer because we always have been. We’d be service oriented relative to customers which we’ve always been.

But, if think about how we’re planning to grow our business it’s much more along the lines that I’ve described to you, big relevant consumer ideas that we think we can own like Earthkeepers and when you tier up those items, you ladder up the sum of the ideas that are in play, we absolutely can and will grow our top line even absent of the return of the hyper consumer.

John Shanley – Susquehanna Financial Group

The cost associated with the closure of the Mion and GoLite businesses was that material either in the quarter or will it come up somewhere during the course of fiscal 08?

John Crimmins

Actually, for us that was a second quarter event. We made a decision to discontinue the operations of Mion and GoLite. We continue to look at alternative ways to leverage some of the assets we have in those businesses but we don’t expect the decision to have any significant impact on the company’s financial performance.

John Shanley – Susquehanna Financial Group

But it would be a second quarter event anyway? Is that what you’re saying?

John Crimmins

Yes.

John Shanley – Susquehanna Financial Group

Can you give us an indication of the likely licensing revenues that your deal with PVH is likely to bring in to the company? And, how significant can that be going forward in terms of the bottom line contribution?

Jeffrey B. Swartz

I’d rather thing about it this way John, in the conversation we had with the senior leadership at Macy’s last week, Timberland and PVH made a presentation together to [inaudible] and Janet Grove talking about this fall and it was really organized around Earthkeeper but it was also a real powerful opportunity for us to demonstrate the value of this partnership in action.

Very senior executives of PVH took time to help our team sell the idea, the idea being Earthkeeper but also being the idea of partnership and we think about together creating a $100 million worth of apparel revenue in the United States in men’s apparel. That’s not a commitment, that’s a goal.

But, that’s how we think about the size of what we think we can create together and we hope that it will be really profitable business for them, a really profitable business for us and obviously a really profitable business for our retail partners. That’s the way I prefer to think about it if that’s okay.

Operator

Your next question comes from Kate McShane – Citigroup.

Kate McShane – Citigroup

Can you go in to a little more detail behind the pressure you saw on gross margins? Can you break down how much of that was from sourcing pressures, markdown activity and deleveraging? Then also in that same vein can you talk about some of the ways you’re trying to offset some of the higher sourcing costs?

John Crimmins

The margin story is a little bit complicated this quarter because we had a lot of different things go on and some of what directionally different region by region. So, there were of course downward pressures as we faced product cost increases during the quarter. We also had significant upside from foreign exchange benefits that flowed through in the quarter. And, within each region there were slightly different stories as to what happened in the business.

Globally consistent we had declining margins in our retail business related to our inventory liquidation activities, some of it driven by our store closure program, some of it just liquidation of inventory that was created on the wholesale side that we moved through our outlet business so, that impacted negatively our retail margins.

Wholesale margins, I mentioned earlier we actually saw pretty positive increase in wholesale margins in the US related to decrease off price activity resulting from pretty clean inventory positions at the start of the quarter. That’s the North American Story.

The European story was a little bit of downward pressure on margins as we did have some wholesale off price inventory liquidation activities. We had several factors working in two different directions that netted out to our 170 basis point decline.

Jeffrey B. Swartz

I was in China last week or the week before, I loss track, with our team and we met with every one of the major factory groups that we do business with, with their ownership. We had I think really important conversations about this subject but temporarily, how do we make the business this minute be better for both of us and I think significant is the long term, we talked about things we can do together.

There are some things like European Anti-Dumping Duties that are special experiences for the brown shoe guys as distinctive to the white shoe guys and we’ve done lots together, the factory owners and Timberland to try and emilurate some of those external things. But, within what is it we know that we can control?

There are three things that we focused on. One, is I wanted to make sure that we had open to listen from the factor owners meaning I wanted to make sure that they understood Timberland’s strategy, that they understood where we’re going and that we could answer their questions and sort of hopefully enlist them in rebuilding brand health and financial performance. I’d say that was an important objective but it was more easily accomplished than I guess I had perhaps feared. That went very well.

Then, we talked very practically about two specific things that we can do to improve procurement costs. One, is complexity and we’ve acknowledged, I have that the sheer volume of product development that we’ve been churning through these factories in the last several years has been inordinate. The complexity of our product line has just been a lot to grow, it’s too broad so as I sited to you in my script some of the very relevant statistics about reduction in numbers of SKUs is not cosmetic, that’s a real cost issue. The fewer things we do better and that was a big deal.

I can tell you John Shanely’s question about Mion and GoLite was on the minds of some of our factory partners because these are good ideas that just didn’t become powerful enough commercial realities and so they’ve created an incredible complexity of process. So, that’s not simply complexity of volume it’s also complexity of process because Timberland is different kinds of construction and different kinds of materials so whatever we can do we agreed together to reduce complexity on the dimension of process will also be a way to contain costs. So, the Mion and GoLite decision was well received by our factory partners.

The last thing we talked about was structural things that we can do and we talked about where to manufacture product. There’s some ideas that came from the sourcing base that I thought were interesting to listen too because Timberland has a successful business for example in Japan in brown shoes and that encumbers things like [terracotta] issues and there are very few environments where you can manufacture shoes with [terracotta] it doesn’t apply to Japan. We did discuss the potential to develop partners with these factory owners in environments that will allow us to access the Japanese market in a more cost advantage way, that’s a structural point.

Then the last thing we talked about was lean manufacturing which I won’t oversell to you but in our factories in the Dominican Republic the productivity we achieve per line employee in our factories is dramatically, remarkably, sharply, wicked big different then what’s achieved in Chinese factories.

I think one of the assets that we have in our own manufacturing facility is this intellectual capital called lean manufacturing. We have in some cases been very successful sharing that intellectual capital with Chinese source partners. That reduces the length of time it takes to make a shoe, it reduces the work in process on the floor, it reduces therefore the asset investment the manufacturer makes and it’s another structural way we can go about reducing costs.

So, complexity of volume, complexity of process, source of where do you manufacturer stuff and then the lean manufacturing, that’s a four point view of how I think we can, not in a trivial way improve the cost environment with our partners.

Kate McShane – Citigroup

For the last I guess over six quarters now there’s been a commentary on you reducing the amount of yellow boot that was in the channel. Where are we with that process? Has that been completed?

Jeffrey B. Swartz

The fact that we switched with major retailers in the US to quick response which is their term, all that means is we’ve established inventory levels and created a replenishment system against inventory levels is pretty good indication that yes the rebalancing of supply demand conversation is largely done with classic yellow boots. I don’t mean that there isn’t a retailer who is long and there isn’t a retailer who is short but that would be more likely a small independent.

The large volume national retailers I would say we’re pleased with how we’re positioned, not just how we’re positioned in the moment but how we’re positioned structurally. I think price point indicates that Kate and I think that if we look at our pattern of shipments and we look at the flow of inventory there is very solid data from my perspective that indicates, leaving aside market strategy so it’s like going dark, we have achieved a place where we have a base line of yellow boot inventory that is sustainable and we’re seeing that at retail price points and retail performance.

Operator

Your next question comes from Jeffrey Edelman – UBS Warburg.

Jeffrey Edelman – UBS Warburg

As we look at this $550 million operating expense for the year will your restructuring efforts and/or savings bring back down further next year? Or, will any further savings be offset by increased investment?

John Crimmins

We haven’t really talked at all about going past 2008. We’re in the midst of that planning process right now. I will tell you that we do view our op ex base as something that we’re trying to manage to be better leveraged across the business and so we don’t consider it to be a fixed number. We consider it a number that we need to manage to be appropriate for the size of our business going forward.

The $550 million range is our expectation for the balance of this year and it’s the result of many of the cost saving initiatives that I’ve described in previous calls offset with some reinvestment in key parts of our business including some incremental spend on consumer facing advertising, some investment in some of our smaller growth businesses where we see a high return and we believe they warrant continued investment.

Jeffrey Edelman – UBS Warburg

Will the restructuring that you’ve been doing carry through with expense savings in to next year? Or, are we largely seeing all of those savings this year on an annual basis?

John Crimmins

I think the specific activities that we’ve called out we have an annualized impact, so there’s an impact that happens in 2008 and then there’s a carry forward. I will say that most of the savings from the actions that we’ve seen it’s not 100% full year impact in 2008 so they’ll be some incremental benefit going in to 2009. But, most of the actions that we’ve taken we began to take in the second half of last year so a lot of the benefit will flow through in 08 but not all of it.

Jeffrey Edelman – UBS Warburg

Then on the gross margin side the guidance sort of implies relatively flat gross margins for the year give or take a little bit. And, given the hit that we saw in the first quarter what kinds of thing change it as we go through the year? Does FX become more important?

John Crimmins

Well, FX is a pretty significant component this quarter. We expect it to continue to be a significant component going forward. We have a continued downward pressure from cost impacts. I think I would describe this quarter as likely to be higher off price impact on margin return then you should expect for the balance of the year. We end the quarter with a pretty clean inventory position. Our excess and obsolete inventory is actually significantly better than we were at this same point last year. Our inventory balance is very comparable but more of the balance consists of core product that we don’t believe that we have to move through off price channels.

Jeffrey Edelman – UBS Warburg

So if we see some strengthen of the dollar than this starts to work against you? Or, have you got any hedging activities or anything else that might be able to offset that?

John Crimmins

This year for us is pretty much hedged to the degree that we do in our hedging programming. So, while there is some volatility, a lot of it is locked in based on the hedging program that we put in place for this year.

Operator

Your next call comes from Mitch Kummetz – Robert W. Baird.

Mitch Kummetz – Robert W. Baird

I’ve got a question on the guidance just to clarify a few points there. I think the prior guidance for the full year was for a low single digit revenue decline now it’s a mid single digit decline. Is the difference just that your prior guidance was compared with comparable results and now you’re comparing it to actual results so there was really no change?

John Crimmins

Exactly Mitch and thank you for asking the question, I wanted to be sure people understood that. The last time we spoke we did set it up to find the comparisons against comparable results. We thought it would be better to simply and just work against our reported results so we’re really trying to get you to the same place.

Mitch Kummetz – Robert W. Baird

Then as far as the full year sales guidance goes I think the way you were kind of breaking out first half back half last time there was some assumption of an improved top line performance in the back half versus the first half or, I should say less of the sales decline in the back half versus the first half. Now, that seems to have flipped flopped a little bit. Did something change? Or, are you just being more conservative with your back half outlook as it looks like the first half is coming in better than what you might have previously expected?

John Crimmins

I think fundamentally the picture for the full year remains the same. The first half actually isn’t coming in better than we expected, you’re seeing the first quarter a little bit better than where I think you might have been but I think it’s been consistent. Our first half outlook is still pretty consistent with what we expected.

The second half, our order book continues to build, it is a very difficult retail environment particularly in the US so we continue to look at the business outlook for the second half and we believe maybe it’s slightly worse than we thought when we first started to talk about the second half of the year which was back in November. But, we also believe that we’ll have a little bit of positive FX to offset that deterioration.

Mitch Kummetz – Robert W. Baird

In Q1 there was about $5.8 million of other income, what was that and what should we be thinking about that line item?

John Crimmins

You should not count on that necessarily recurring. That was related to, it gets a little bit technical but, it’s actually balance sheet translation or intercompany balances and it’s driven by some unhedged pieces that we had that were at high degree of volatility right at the end of the quarter. It’s a little bit of an anomaly it’s not something you should count on seeing going forward.

Mitch Kummetz – Robert W. Baird

Then last question, can you just comment a little bit maybe Jeff on your performance at retail in the first quarter? I mean it seems as if you did very well in your own stores although maybe some of that had to do with inventory liquidation. How did you perform with your wholesale accounts relative to maybe your competition or relative to the tough retail environment that we were in, in the first quarter? Where did you see some good strength or maybe you saw some unexpected weakness? Just comment on that.

Jeffrey B. Swartz

Your characterization of our retail is accurate. I’ll answer your wholesale question but I just want to say that you read it correctly that we had two different things going on in retail. We did have the stores that are closing disposing of inventory as part of the top line result. But, I also want to say that within the stores of the future, the stores that aren’t closing, we saw I think very encouraging performance. I saw us executing at a much higher level the way a retailer would as opposed to the way sort of wholesale brands that open retail stores do as far as being nimble and fighting hard one pair at a time stuff. I was proud of our retail teams results in specialty. It’s a smaller part of the overall number but I did want to say that.

In terms of wholesale I saw some good things in Asia, notwithstanding the results that John reported to you. I saw us retailing well in China. I saw us retailing well in Hong Kong. In the stores watching people selling things through not just selling things in. You know that our Chinese business is through partners, it’s other people’s stores so in a way I think about that as a wholesale business. In terms of straightforward wholesale I saw the same kind of hard stuff that I think has been over discussed in the marketplace. I see us making progress, I’ll give you a for instance.

At Nordstrom, I think our team has done a really good job, I talk about adding height to the brand, to me Nordstrom is a very important qualitative barometer of how we’re doing in terms of brand health in the United States. It is important for us to establish a broader presence on Nordstrom’s tables in men’s and women’s and kid’s floor and sell through and we’re getting healthy. We got, I don’t want to say surprising but I do want to say encouraging sell throughs in 1Q in men’s at Nordstrom.

I was and I am concerned that we have not performed as well as I would have liked to see us perform at Dillards. We have a very strong presence at Dillards and a really long standing relationship as brands together, Timberland and Dillards so I was disappointed with our retail performance. I feel like we’ve got to work harder to make that be more successful as the year goes on. So a positive side from Nordstrom and I don’t want to say disquieting but a disappointing result at Dillards that we have to work hard to improve.

Operator

Your next question comes from Virginia Genereux – Merrill Lynch.

Virginia Genereux – Merrill Lynch

Did you all give gross margin? Did you give a gross margin target for the year?

John Crimmins

We talked to operating margins not specifically to gross margins.

Virginia Genereux – Merrill Lynch

And what did you say about operating margins?

John Crimmins

We said for full year outlook we anticipate operating expenses in the range of $550 million and flat to modest operating improvement excluding restructuring costs.

Virginia Genereux – Merrill Lynch

That implies then that gross margins are sort of only slightly down for the year. You’ve got this currency help of $1.10 in the first quarter but ex that your gross margins were down almost 300. Why wouldn’t input costs be exerting more pressure as time goes on here? That’s what some other vendors have said. For instance, ‘09 is going to be the bigger input cost challenge year.

John Crimmins

I agree with what you’re saying about ‘09. I think we have a handle on what our costs will be for the balance of this year and that’s reflected in the guidance that we’ve shared. You’re right the pressure on product costs and transportation costs continues to get stronger on a daily basis. For us it’s more of a longer term impact, we’re comfortable with the assumptions we’re using for the balance of this year.

Virginia I just want to reiterate, the first quarter margin performance was significantly impacted by off price activity and it was particularly retail activity directly related to our store closure plan along with some wholesale activity in Europe. We don’t necessarily expect that level of activity to have the same impact on gross margin performance going forward.

Jeffrey B. Swartz

Virginia that’s why although we’re deeply respective of the point of import price pressure and input cost pressure and I tried to speak that to Kate McShane’s question, the larger issue for us in gross margin is more about profit margin than it is about input costs. The relative importance of the two, they’re not relatively close. It’s much more important to us to manage profit margin.

Don’t hear me saying that I don’t care about input costs just hear me tell you that our gross margin performance in ‘09, the story is not going to be labor costs in China but the story, if we are able to stay on our plan which is to expand gross margins profitable on revenues and improving operating margins, the headline of that story is going to be about profit margin, about getting paid for what we designed.

Virginia Genereux – Merrill Lynch

Right, maintained margins?

Jeffrey B. Swartz

Correct. That’s where the upside is on our gross margin performance

Virginia Genereux – Merrill Lynch

If you look forward Jeff and think about how you return to say double digit margins just generally speaking I would say that the driver of that is primarily top line recovery? If you were to force rank it, it’s sort of revenue growth number one and then maybe some gross margin recovery number two?

Jeffrey B. Swartz

Yes, I think you have it right. It’s not revenue called burned inventory, John said we’re running an incredibly disciplined balance sheet even in the difficult environment because in ordinal mode the third generation thinker says, “The balance sheet is going to be strong.” And it is and the inventory position is good and clean and so the whole question becomes can you translate the idea of big ideas in to profitable revenue growth? And, if you can the leverage there is substantial and so yes, the first issue is revenue growth.

But, I also want to be on the hook for that while we grow revenues we should be expanding margins not just on leverage against source infrastructure but simply on maintain margin. Then, we’ve demonstrated or at least we’ve attempted to demonstrate a fierce determination to control operating expenses allowing us to reinvest against consumer facing stuff that, see point one, should drive revenue growth.

Operator

Your next question comes from Heather Boksen – Sidoti & Company.

Heather Boksen – Sidoti & Company

You made a comment last week in an interview that you weren’t planning price increases to offset some of these rising costs. Can you maybe just explain the rationale behind that, give a little more color? And also, quantify exactly how much you’ve seen at least in the near term and for the rest of 08, how much you expect cost out of China to rise?

Jeffrey B. Swartz

I was asked if we’re going to raise prices in the second half of the year and I said that we have published our prices and we’ve traded the second half of the year in. That’s the question and maybe I didn’t understand it but that was what I was asked and that’s what I said. If what the reporter or you’re getting after is the gross margin question called given input costs do you have visibility? We do.

Do you have that visibility baked in to your view of what the second half of the year is? We do. Do we think that’s going to have an impact on us? We’re respectful of the fact that I would rather prices were going down enough but our outlook, our view, how we perform the second half of the year is as fully apprised of input costs as we can be at this point.

As I said earlier Richard was in China either last week or the week before kind of inspecting it on the factory line. I think we do understand the pressures and they are incorporated in our view of how we’ll perform in the back half of the year.

Heather Boksen – Sidoti & Company

So you do have some pricing increases in to you back half plan?

Jeffrey B. Swartz

No ma’am. We develop the collection and go to sell it in advance of the season. The prices are formed, for new product it’s not a price increase there’s a price point set. On existing product which is the only place I can imagine you’d want to take price increase, we haven’t done that. We have not with one exception, we did increase the price of yellow boots. I mentioned that earlier.

That had nothing to do with input costs it had all to do with the earlier conversation about making sure that part of our product collection was appropriately and positioned as a premium product in the market. So, on existing carryover footwear we don’t anticipate taking an out of phase price increase based on input costs.

The new product that’s part of our second half offering was the cost was built in to the pricing choices that we made. So, we didn’t take a price increase, we priced them to serve our consumers. And, with one exception, that’s the yellow boot, it had nothing to do with input costs it all had to do with how it’s positioned in the marketplace.

Operator

Your final question comes from Jim Duffy – Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

In your marketing sessions have there been any changes to kind of the way you define the Timberland persona? Then, if we look out two years from now what’s the Timberland brand going to mean to consumers?

Jeffrey B. Swartz

A picture is a million words on this one. I’m not struggling coming up with an answer, I’m struggling how to make the question really clear in words because I’m seeing the tape of the film we just completed the shoot of for the August advertising and I can tell you what it [inaudible] like, maybe that will help.

I want Timberland to invoke this exhilaration of what can be experienced by men and women when they’re in this expansive, grand environment called the outdoors. I want Timberland to feel as opposed, I don’t want it to be a thinking thing I want it to be a feeling thing. When you see this film and we’re going to send it to you, Karen and I talked about making sure as soon as the film is in the can we’re going to send it to you so you can see what we’re talking about.

The reason I’m so excited about the film is because the folks at Leagas Delaney have come back to our brand after 15 years helping create an incredible edge for our brand in Europe and Tim Delaney is a particular powerful thinker about our brand and he has this I think by the [inaudible], he’s got it right by the throat.

The sense of what it’s suppose to feel like, not what it’s suppose to do for you like waterproof and when it rains you stay dry and Timberland’s protection against the elements. It’s not an efficiency point it’s an exhilarating emotional point. This film that will debut in August is all about what it feels like to be out of doors and it is exhilarating and it’s about a sense of soaring.

When you see the store windows that go with this you’ll be walking down the street in Milan which is the most polluted city in Europe, it’s a beautiful place and everybody’s dressed so well, the two hand Windsor knot and all that stuff and even inside those suits are all these humans that want to be [inaudible] Milan, in the hills and they want to feel the wind.

It’s not the exclusive hanging off the ivory face naked by two finger nails I’m better than you outdoors. It’s not the me too I make it waterproof too outdoors. It’s not factory tested tough. It’s come on and soar baby, you want this feeling. That’s what I want Timberland consumers to feel when they walk by a store window two years from now. I want a sense of one inch taller and five heartbeats a minute faster and a sense of I can.

When you talk to consumers they say, “Timberland makes me feel confident. Timberland makes me feel powerful. Timberland makes me feel ready to go.” I want to invoke that sense of exhilaration that only the outdoors can deliver and I think respectfully only Timberland can delivery this blend of outdoor proven industrial strength environmental values in action with this unique youthful New England aesthetic.

We’re not talking about with deep respect the old man in the hill New England. We’re not talking about quack quack duck boots. We’re talking about the sense of come on and go contemporary and youthful and powerful and emotional. I’ve talked too much but I get fired up about that. This sense of the brand is liberating our creators and it will be in a store near you soon.

Jim Duffy – Thomas Weisel Partners

Then when you think about it from that perspective is that something that translates across all your product lines?

Jeffrey B. Swartz

That’s the right question. It’s a total failure if the answer is no. It’s an absolute success if the insistence is yes and that’s why, I’m not proud it took me so long to figure this out, but I have the zeal of a convert, the repositioning of all our product efforts, all our brand efforts against one brand proposition.

Footwear, apparel, accessories, men’s, women’s, kid’s means you take the entire wobble out of the conversation that says, “Well, how do we make this work for a 12 year old kid in Brooklyn? Or, how do we make this work for a 30 year old woman in Milan?” The answer is different aesthetically but it’s not different in terms of principle.

If you’re after one thing and in a market as cluttered as ours is if you’re not after one thing you either have to be wicked, wicked good or I don’t think you’re disciplined enough and in our sense we believe that we’re good and we’re disciplined and the consequence is we’ll take an idea like Earthkeeper and we will drive it.

If you see who is buying Earthkeeper and you see where it is being sold globally against the consumer they look different. If you put them on the screen the kid in Hong Kong that bought the shoe is different than the kid in London who bought the shoe. They look different and they live different but they believe in the same thing and that’s the power of a really laser focused approach to brand building. I don’t mean to sound excited but I am.

Operator

I will now turn the call back to Jeff Swartz for closing remarks.

Jeffrey B. Swartz

Thank you and have a good day.

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