The Timberland Company reported that second quarter net income declined 19.4% to $6.3 million, or 9 cents per diluted share, compared with net income of $7.9 million, or 11 cents epr diluted share, in the year-ago quarter.
Second quarter revenue increased 4.4% to $240.3 million, driven by gains in international markets which offset moderate declines in the U.S.
International results (+14.9% or +10.8% in constant dollars) were driven by strong constant dollar sales gains in Europe and Asia. U.S. revenues declined 2.5%, as anticipated decreases in footwear sales offset double-digit gains in Timberland® apparel. Overall revenue growth benefited from favorable foreign exchange rate changes – which added $3.7 million (or 1.6%) to second quarter 2005 revenue.
Second quarter results were supported by global gains in footwear and apparel and accessories. Global footwear revenues expanded 2.4% to $177.6 million, driven by growth in outdoor performance, kids', Timberland PRO® series and men's casual footwear. Global apparel and accessories revenue grew 9.0% to $59.6 million, reflecting gains in U.S. and international markets.
Revenue growth was balanced by channel. Global wholesale revenue expanded 4.4% to $168.8 million. Worldwide consumer direct revenue also expanded 4.4% to $71.5 million, supported by a 0.7% increase in global retail comparable store sales.
Operating profit for the quarter decreased 30.4% to $8.4 million. Moderate gross profit gains were offset by higher growth in operating expenses, in part reflecting investments in international retail infrastructure and global organizational capability over the past year. Operating margin decreased 170 basis points to 3.5%, impacted by higher levels of off-price sales and product mix impacts in the Company's U.S. business. For the quarter, foreign exchange rate changes contributed approximately $0.5 million to operating profit.
Despite anticipated pressure on second quarter results, Timberland delivered record profit levels for the first half of 2005 – with operating profits up 18% and diluted EPS up 31% versus the prior-year period.
During the quarter, the TBL continued to support its share repurchase program, buying back 1.0 million shares at a total cost of $37.2 million. The Company currently has 2.6 million shares remaining under its existing share repurchase program, which was increased in conjunction with its 2-for-1 stock split on May 2, 2005.
Timberland ended the quarter with $189.8 million in cash and no debt outstanding. Timberland's strong recent earnings growth and disciplined approach to asset management supported an increase in annual return on capital from 31.0% to 32.3%. Timberland's inventory at the end of the second quarter of 2005 was $216.5 million, 26.6% higher than at the end of the 2004 second quarter.
As previously disclosed, second 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. Timberland estimates that second quarter 2004 inventory and accounts payable balances would have increased by approximately $32.8 million, or 6.3% and 21.5%, respectively, if similar arrangements had been in place last year.
For the balance of the year, TBL continues to target low- to mid-single-digit revenue growth and is anticipating relatively flat operating profits in its base business. It expects that the third quarter will be the more challenging quarter from a profit perspective, driven by expected pressure on U.S. sales and gross margins that will likely yield an overall decline in Timberland's third quarter gross margin in the range of 100 basis points. These base business financial objectives exclude restructuring costs related to the previously announced consolidation of manufacturing operations in the Dominican Republic and related closure of Timberland's manufacturing facility in Puerto Rico. As previously disclosed, Timberland estimates that one-time pre-tax restructuring costs related to its closure of its Puerto Rico manufacturing facility will be in the range of $2.5 million in the third quarter and $3.0 million in the fourth quarter.
THE TIMBERLAND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
For the For the
Three Months Ended Six Months Ended
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July 1, July 2, July 1, July 2,
2005 2004 2005 2004
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Revenue $240,269 $230,210 $594,480 $551,987
Cost of goods sold 122,289 115,713 289,339 271,039
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Gross profit 117,980 114,497 305,141 280,948
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Operating expense
Selling 85,238 81,316 185,977 176,668
General and administrative 24,340 21,101 48,842 44,442
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Total operating expense 109,578 102,417 234,819 221,110
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Operating income 8,402 12,080 70,322 59,838
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Other income
Interest income, net 1,063 206 2,164 440
Other, net 148 (87) 1,138 206
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Total other income 1,211 119 3,302 646
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Income before provision for
income taxes 9,613 12,199 73,624 60,484
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Provision for income taxes 3,268 4,331 25,032 21,472
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Net income $6,345 $7,868 $48,592 $39,012
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Earnings per share
Basic $0.09 $0.11 $0.72 $0.56
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Diluted $0.09 $0.11 $0.71 $0.54
