The Timberland Co. reported revenues declined 2.2% to $423.6 million in the third quarter ended Sept. 26 as declines in Timberland brand apparel were partially offset by currency translation, strong growth in Timberland PRO series work boots and SmartWool.
By region, North America revenue declined 8.8% to $184.5 million, reflecting soft consumer spending in the U.S. Europe revenue increased 4.4% to $199.9 million and increased slightly on a constant dollar basis, driven by strength in all footwear categories. Asia revenue decreased slightly to $39.2 million, and decreased 5.4% on a constant dollar basis, driven by declines in the outdoor performance and casual footwear businesses.
Apparel and accessories revenue decreased 11.7% to $102.7 million, driven by anticipated declines in Timberland brand apparel in North America, which is now being made by Philip Van Heusen under a licensing agreement. Global footwear revenue increased 1.0% to $313.5 million driven by strong demand for Timberland PRO series footwear as well as strength in the boots business in the European and Asian markets. That offset declines in the mens casual and outdoor performance categories. Smartwool sales continued to grow at a double-digit rate.
Global wholesale revenue decreased 1.0% to $340.6 million. Worldwide consumer direct revenue decreased 6.9% to $83.0 million, reflecting a difficult worldwide retail environment and revenue declines associated with TBLs decision to close certain retail locations. In North America, retail revenues fell 18%, reflecting 15 fewer doors and a 14% decline in comp store sales. Timberland said it had closed 41 or approximately 50 specialty and outlet stores as part of a global restructuring and expects to close three more by the end of the first half of 2009. It will keep the remaining six stores open.
Favorable exchange rates shielded the company from declining sales by boosting revenue by $10 million, or 2.2% and operating income by $3 million.
Gross profit declined 3.1% to $197 million, but net earnings rose 18% to $30.7 million, or 52 cents a share, from $25.9 million, or 42 cents, a year earlier thanks to dramatically lower restructuring costs. Restructuring and related charges were $200,000 in the third quarter of 2008, compared to $7.5 million for the third quarter of 2007. Excluding those costs, earnings would have still increased to 52 cents a share, up about 6% from 49 cents a year ago. Gross margin for the quarter was 46.5%, down 40 basis points for the prior-year period, as product cost increases and changes in channel mix partly related to store closures offset the benefit of stronger selling currencies.
Operating income for the quarter was $53.2 million, a 19.2% improvement from the prior-year period. Operating income excluding restructuring and related costs was $53.4 million, a 2.3% improvement compared to the prior year level. Inventory in the third quarter decreased 16% to $219 million.
For the full year, the company is still targeting mid-single digit revenue declines, due in part to its closure of certain underperforming retail stores and the licensing of its North America wholesale apparel business. But the company said it now expects that weaker consumer spending globally will result in additional margin pressure and now anticipates flat to modest declines in operating margins for the full year.
Swartz said he felt the boot business was stabilizing and the company has high expectations for Mountain Athletics, a line of outdoor footwear it plans to launch in Fall 2009. The line features “soft against the ground, firm underfoot” technology successfully tested with mountain athletes. The footwear is lighter, faster, and more durable and will use “green rubber” developed through a patented process as part of an enhanced sustainability story.
The company has gotten good response to an integrated marketing communications plan launched in the second quarter judging from a 32% surge in traffic to its e-commerce site. Orders at its U.S. site rose 23% in the first weeks after the campaign, which features television and print ads, started. Swartz said basic “iconic” boots that were neither retro or high fashion were selling well. Consumers are snapping up boots at $139, even though thats $10 more than last year.
“It just says that if youre focused on what you can defend and what you stand for, you can be successful, even in this climate,” said Swartz.
Timberland remains committed to serving young consumers but has changed to a more sophisticated strategy that goes beyond cranking out a top selling boot in a new color. For instance, the company has had success selling its Avignon Collection through the high end Fred Segal boutique in Los Angeles, a retailer where it has never appeared until now. “Were beginning to demonstrate, both with the core business that’s selling, and with this elite collection, Avignon, which is getting established, that the full story of Timberland’s relationship to young consumers is by no means done,” he said
Timberland is getting reports that its apparel, now being made under license by Philip Van Heusen, is selling well through Macys in the east.
The company said that given continued price pressure from Asia and the volatility of commodity prices, its unclear how much falling oil prices will help margins next year.
COMMENT: Selling shoes through high-end boutiques is a far cry from the margin rich $300 million a year urban boot business that made TBL such a hot stock earlier in the decade.
