Timberland Focuses on Brands; Cuts Guidance…

Timberland came off of a slow first quarter with a softening market for their U.S. boot business and new import duties in Europe challenging the company on all geographic fronts. In spite of challenges in the urban market, Timberland did have several aspects of their business that showed promise with the company’s on-going multi-brand strategy with Mion and SmartWool performing well and the Timberland PRO division gaining momentum. In spite of these positive steps, it was not enough to offset the softening of Timberland’s core boot business.

In response, the company will be pulling back its distribution to re-build the cache of the 6-inch wheat boot. TBL will virtually eliminate the boot from Timberland outlets and their lowest tier retailers. Management said that this pull-back will improve TBL’s profitability as a brand as well as their trade partners. TBL estimates these actions will lower 2006 operating profits in the neighborhood of $10 million.

This supply contraction, when combined with estimated impacts from the new provisional duties on footwear imports in the EU, will pressure Timberland’s full-year performance. The new EU provisional duties on footwear sourced in China and Vietnam are estimated to lower pretax profits by approximately $10 million in 2006 and impact Timberland's overall effective tax rate. Timberland is actively working on lobbying efforts to eliminate these provisional duties.

While the EU duties did not impact first quarter international sales, exchange rates did. The 3.5% decline was entirely due to “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%.

Sales of Timberland PRO product and Outdoor performance products were able to offset some of the declines in the core boot business and international markets. Timberland management is in the process of creating an outdoor specific global business unit to mimic the success of PRO. The portfolio includes Timberland OP, SmartWool, and Mion and Timberland will create a global outdoor performance sales team devoted to serving the needs of outdoor specialty accounts. The new team has opened over 300 new sports specialty accounts in the U.S. and bellwether accounts in Europe.

Timberland continues to perform well with its retail partners. U.S. wholesale revenues grew nearly 7% in Q1, thanks in part to the addition of SmartWool, which contributed approximately $8 million to overall wholesale gains. Smartwool’s sock and apparel sales increased in the “double-digits” during the quarter. TBL organic sales were flat.

TBL president and CEO Jeffrey Swartz said that the SmartWool brand “continues to perform extraordinarily well” and has successfully extended into apparel and lifestyle socks. SmartWool added new distribution with a separate segmented product offering for retailers like Nordstrom and The Walking Company. SW was also able to use TBL’s international distribution to expand their presence overseas with a planned launch in Timberland's retail doors worldwide later this year.

Mion product reportedly sold in to retail well, but there are no sell-through figures to report yet. The brand opened up over 200 doors for the Spring season. Mr. Swartz said that Mion will continue to be a small “nimble” brand. “I don't think Mion is a $500 million retail idea. It's not. It's focused much more narrowly on a specific end use and that's good,” he said.

Timberland gross margins were pressured downward by product mix related to lower boot sales, higher comparable product costs reflecting macro factors such as increased oil related commodity costs, and relatively higher levels of sales, discounts, and allowances. Foreign exchange had a minimal impact on overall gross margin, but reduced operating profits by nearly $3 million. Operating expenses grew slightly due to increased costs associated with business development, international expansion, and new accounting requirements for equity compensation.

Timberland lowered its 2006 financial outlook due to the supply contraction and the EU footwear duties. 2006 EPS is expected to decline 20% to 25% from pro-forma EPS of $2.35 reported in 2005. Previously, TBL management said that 2006 EPS would show only “moderate declines” compared to 2005. Revenue for the full-year is expected to show flat to modest growth.

>>> Is the issue with Timberland in the urban market a matter of over-distribution or is it a much deeper issue related to a shift in the fashion tastes of that consumer?