Timberland's third quarter net income was $69.2 million and diluted EPS of $1.02, compared with third quarter 2004 net income of $68.6 million and diluted EPS of 96 cents. Third quarter 2005 results included previously disclosed pre-tax costs of $2.5 million related to the Company's restructuring of its Caribbean manufacturing facilities. Third quarter 2005 EPS excluding these restructuring charges was $1.05.
Third quarter revenue increased 2.4% over strong prior-year results to a record $505.9 million, driven by gains in international markets which offset moderate declines in the U.S. International results (+14.1% or +14.2% in constant dollars) were driven by strong constant dollar sales gains in Europe and Asia in both footwear and apparel. U.S. revenues declined 6.1%, as anticipated decreases in women's casual footwear and boot sales offset gains in Timberland PRO® series and kids' footwear. Foreign exchange rate changes reduced third quarter 2005 revenue by $0.3 million or 0.1%.
Third quarter results were supported by global gains in footwear. Global footwear revenues grew 2.8% to $399.0 million driven by growth in kids', outdoor performance, men's casual and Timberland PRO series categories. Apparel and accessories revenue increased 0.1% to $101.5 million, as gains in international markets offset softer U.S. retail sales results.
Global wholesale revenue expanded 3.1% to $420.2 million, supported by strong gains in international markets. Worldwide consumer direct revenue declined 0.8% to $85.7 million, reflecting a 3.2% decrease in global comparable store sales.
Operating profit for the quarter was $105.1 million, including restructuring costs related to the consolidation of the Company's manufacturing operations in the Caribbean. Operating profit excluding restructuring costs was $107.6 million, 1.5% above prior-year levels. Comparable operating margins were slightly lower, reflecting moderate anticipated declines in gross margins versus strong prior-year performance levels. For the quarter, foreign exchange rate changes contributed approximately $6.9 million to operating profit.
EPS for the quarter, excluding restructuring cost impacts of $0.03 per share, increased approximately 9% versus prior year levels. EPS gains reflect operating profit gains and benefits from lower levels of shares outstanding. During the quarter, the Company bought back 1.5 million shares at a total cost of $50.3 million. In August, the Company's Board of Directors approved a new 2.0 million share repurchase authorization. Timberland currently has 3.1 million shares remaining under existing share repurchase authorization programs.
Timberland ended the quarter with $117.6 million in cash and no debt outstanding. Strong operating margins and disciplined asset management supported a 31.7% annual return on capital. Timberland's inventory at the end of the third quarter of 2005 was $242.6 million, 32.6% higher than at the end of the 2004 third quarter. As previously disclosed, third quarter 2005 reflected the Company's conversion to new sourcing arrangements with independent suppliers, resulting in an earlier transfer of title for certain third party shipments. The Company estimates that third quarter 2004 inventory and accounts payable balances would have increased by approximately $43.5 million if similar arrangements had been in place last year. Adjusting for this impact, inventory increased 7.1% on a comparable basis.
For the fourth quarter of this year, the Company is targeting flat revenue growth and a high single-digit decline in operating profits, reflecting current trends in the U.S. business, the overall consumer climate and plans to invest in brand building activities for the Holiday season. For the full year, Timberland remains on track to deliver strong financial results. These financial objectives exclude previously disclosed restructuring costs related to the consolidation of manufacturing operations in the Dominican Republic and related closure of Timberland's manufacturing facility in Puerto Rico, which Timberland estimates will be in the range of $3.0 million in the fourth quarter.
Jeffrey B. Swartz, Timberland's President and Chief Executive Officer, stated, “Timberland delivered record revenue and profits in the third quarter as benefits from our global portfolio enabled us to offset pressure in the U.S. with continued strong expansion internationally. While we work through challenges in key businesses, such as U.S. boots, we continue on track towards delivering solid full year financial gains.”
“Looking ahead to 2006, we continue to target expansion of Timberland's brand franchise, building on our positive momentum and growing presence in international markets. We do anticipate continued growth challenges in Timberland's U.S. business in the first half of 2006, which will contribute to likely pressure on first half 2006 revenue and earnings. We believe our continued focus on increasing our penetration with targeted consumers, delivering innovation and value through purposeful product grounded in Timberland® brand values, actively pursuing opportunities to leverage our enterprise capabilities through new brand platforms, and executing with distinction will enable us to address these near-term challenges and capture our full potential.”
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
For the For the
Three Months Ended Nine Months Ended
---------------------- -----------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2005 2004 2005 2004
----------- ---------- ----------- -----------
Revenue $505,913 $493,933 $1,100,393 $1,045,920
Cost of goods sold 258,555 250,161 547,894 521,200
----------- ---------- ----------- -----------
Gross profit 247,358 243,772 552,499 524,720
----------- ---------- ----------- -----------
Operating expense
Selling 111,259 110,761 297,236 287,429
General and
administrative 28,462 26,994 77,304 71,436
Restructuring 2,531 - 2,531 -
----------- ---------- ----------- -----------
Total operating
expense 142,252 137,755 377,071 358,865
----------- ---------- ----------- -----------
Operating income 105,106 106,017 175,428 165,855
----------- ---------- ----------- -----------
Other income/(expense)
Interest income, net 570 196 2,734 636
Other, net (900) 205 238 411
----------- ---------- ----------- -----------
Total other
income/(expense) (330) 401 2,972 1,047
----------- ---------- ----------- -----------
Income before provision
for income taxes 104,776 106,418 178,400 166,902
----------- ---------- ----------- -----------
Provision for income
taxes 35,624 37,778 60,656 59,250
----------- ---------- ----------- -----------
Net income $69,152 $68,640 $117,744 $107,652
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Earnings per share
Basic $1.04 $0.98 $1.76 $1.54
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Diluted $1.02 $0.96 $1.72 $1.50
=========== ========== =========== ===========
Weighted-average shares
outstanding
Basic 66,175 69,924 66,892 69,970
=========== ========== =========== ===========
Diluted 67,697 71,423 68,359 71,735
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