The Timberland Company first quarter net income was $29.2 million and diluted earnings per share were 45 cents, compared with first quarter 2005 net income of $42.2 million and diluted EPS of 61 cents. For the purpose of comparison, Timberland estimates that its 2005 diluted EPS would have been approximately 58 cents in the first quarter, including costs related to stock options and its employee stock purchase plan. First quarter 2006 results included pre-tax costs of $0.5 million related to the final closure of the Company's Puerto Rico manufacturing facility and its establishment of a European finance shared service center. These restructuring costs had an immaterial impact on EPS.
First quarter revenue decreased 1.2% from $349.8 million as constant dollar growth in international markets and gains in the U.S. were offset by foreign exchange impacts. On a constant dollar basis, first quarter revenue expanded 2.4%. U.S. revenue grew 1.7%, benefiting from Timberland's recent acquisition of SmartWool and from gains in targeted expansion categories such as the Timberland PRO® series, outdoor performance and casual which offset anticipated declines in boot sales. International revenue decreased 3.5%, reflecting significant changes in foreign exchange rates over the past year. On a constant dollar basis, International revenue grew 3.0%, supported by gains in Asia and Canada. Foreign exchange rate changes reduced first quarter 2006 revenue by $12.9 million or 3.6%.
First quarter results reflected global gains in apparel and accessories revenue, which offset a modest decline in footwear revenue. Apparel and accessories revenue increased 8.0% to $91.4 million supported by growth in Timberland® apparel sales globally and the addition of the SmartWool® brand to the Company's product portfolio. Global footwear revenues fell 4.5% to $253.9 million as strong gains in men's casual and Timberland PRO series footwear offset declines in boots, outdoor performance and kids'.
Global wholesale revenue expanded 1.4% to $279.6 million. Worldwide consumer direct revenue declined 10.6% to $70.2 million, reflecting a 10.8% decrease in global comparable store sales due to warm weather conditions in the U.S., later Easter timing and lower excess product sales globally in Timberland® outlet stores.
Operating profit for the quarter was $42.3 million, including the above noted restructuring. Operating profit excluding restructuring costs was $42.7 million, 31.0% below the prior-year level. Comparable operating margins decreased 530 basis points to 12.2%, reflecting lower gross margins and higher levels of operating costs driven by investments in new businesses and international expansion. For the quarter, foreign exchange rate changes reduced operating profit by approximately $2.5 million.
EPS for the quarter decreased 26.2% from the prior-year level as the decrease in operating profit was partially offset by benefits from lower levels of shares outstanding. During the quarter, the Company bought back 1.0 million shares at a total cost of $34.5 million.
Timberland ended the quarter with $125.3 million in cash and no debt outstanding. The addition of the Company's new SmartWool and Mion businesses contributed to moderate increases in working capital levels. Timberland's accounts receivable increased 2.4% to $192.1 million, with all of the increase associated with its recent acquisition of SmartWool. Its inventory at quarter end was $174.9 million, 8.6% higher than at the end of the 2005 first quarter, with the bulk of this growth related to SmartWool and the expansion of the Company's Mion(TM) and Timberland Boot Company(TM) brands.
While the Company's first quarter results were largely in line with its expectations, it is modifying its 2006 financial outlook to incorporate the impact of provisional anti-dumping duties on European Union (EU) footwear sourced in China and Vietnam, proactive steps that it is taking to ensure balanced inventory positions for its retail partners in the U.S. boot business and continued soft trends in U.S. boots. For 2006, the Company is now targeting flat to modest revenue growth and declines in comparable EPS in the 20-25% range. For the purpose of comparison, Timberland estimates that its 2005 EPS would have been approximately $2.35, after excluding restructuring costs and including costs related to stock options and its employee stock purchase plan. Included in this outlook is an increase in the Company's overall effective tax rate to 34.5% due to the imposition of provisional EU duties.
Impacts from these factors are expected to be greatest in the second quarter of 2006. Timberland anticipates second quarter sales declines in the mid single-digit range and an operating loss in the $20-$25 million range. For the second half, it also expects lower comparable earnings – impacted by anticipated pressure on third quarter results. In the third quarter, the Company now expects low single-digit revenue growth overall and gross margin declines in the 300-400 basis point range – including impacts from EU duties in the $5-6 million range. For Q4, it is targeting improved performance, with mid single-digit revenue growth and more moderate gross margin pressures.
Jeffrey B. Swartz, Timberland's President and Chief Executive Officer, stated, “We have always taken a long-term view toward building the Timberland® brand and business portfolio. Despite near-term challenges, we are on the right track, with the right initiatives, to strengthen our business portfolio and capture the full potential we see for our brand and enterprise. We will continue to deploy appropriate strategies in the U.S. while expanding our global reach. We will also continue to aggressively pursue the significant opportunities we see to achieve growth with premium casual consumers, to reassert Timberland's heritage strength in outdoor and industrial categories, and to develop new brand growth platforms globally.”
THE TIMBERLAND COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
For the Three Months Ended
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March 31, April 1,
2006 2005
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Revenue $ 349,811 $ 354,211
Cost of goods sold 173,708 167,050
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Gross profit 176,103 187,161
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Operating expense
Selling 104,740 100,739
General and administrative 28,629 24,502
Restructuring and related costs 481 -
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Total operating expense 133,850 125,241
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Operating income 42,253 61,920
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Other income
Interest income, net 1,105 1,101
Other, net 1,202 990
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Total other income 2,307 2,091
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Income before provision for income taxes 44,560 64,011
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Provision for income taxes 15,373 21,764
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Net income $ 29,187 $ 42,247
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Earnings per share
Basic $ .46 $ .63
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Diluted $ .45 $ .61
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Weighted-average shares outstanding
Basic 63,583 67,587
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Diluted 64,996 69,026
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