The Timberland Company fourth-quarter net income was $38.3 million and diluted earnings per share (EPS) of 61 cents. Fourth-quarter diluted EPS was 65 cents when adjusted to exclude restructuring costs. These results compare to fourth-quarter 2005 net income of $46.9 million and diluted EPS of 71 cents, or 70 cents when adjusted to exclude restructuring and related costs and include stock option and employee stock purchase plan expenses.
For the full-year 2006, net income was $106.4 million and diluted EPS was $1.67. Full-year diluted EPS was $1.71 when adjusted to exclude restructuring costs. These results compare to full-year 2005 net income of $164.6 million and diluted EPS of $2.43, or $2.35 when adjusted to exclude restructuring and related costs and include stock option and employee stock purchase plan expenses.
Fourth-quarter revenue was up 4.9% as declines in boots and kids' sales were offset by gains in new brands (including SmartWool®), Timberland PRO® series, outdoor performance footwear and Timberland® apparel and accessories. Foreign exchange rate changes increased fourth-quarter 2006 revenues by approximately $9 million, or 2.0% due to the strength of the Euro and the British Pound, and increased profitability by approximately $3 million.
International revenue increased 17.4%, or 11.3% on a constant dollar basis, supported by strong growth in Europe, Asia and Canada. U.S. revenues decreased 1.0%, impacted by unseasonably warm weather trends which added to anticipated pressures on boots and kids' sales and offset benefits from the addition of the SmartWool® brand to the Company's product portfolio and gains in key expansion categories such as Timberland PRO® series footwear.
Fourth-quarter results reflected global gains in apparel and accessories revenue, which offset modest declines in global footwear sales. Apparel and accessories revenue expanded 26.1% to $130.1 million, supported by the addition of the SmartWool® brand and growth in Timberland® brand sales globally. Global footwear revenue fell 0.9% to $354.2 million as declines in boots and kids' sales offset gains in Timberland PRO® series, outdoor performance and casual footwear.
Global wholesale revenue increased 8.4% to $339.8 million reflecting strong sales in apparel and accessories. Worldwide consumer direct revenue decreased 2.3% to $148.4 million, impacted by unseasonably warm weather conditions in the U.S. and Europe which contributed to an 11.8% decline in comparable store sales.
Operating profit for the quarter was $57.5 million, down 17.8% from $70.0 million in the prior year. Operating profit excluding restructuring costs was $60.6 million, down approximately 12% versus comparable prior year levels adjusted to include stock option and employee stock purchase plan expenses. Profit declines were driven by anticipated pressures on gross margins and cost growth related to investments in growth strategies, including global business expansion and development of Timberland's brand portfolio.
Timberland repurchased approximately 824 thousand shares in the fourth quarter at a total cost of $25.2 million. It ended the quarter with $181.7 million in cash and no debt. Inventory at quarter end was $186.8 million, up 11.7% versus 2005 fourth-quarter levels. Inventory growth was primarily driven by increases in international operations, in part reflecting a strategic decision to increase inventory support in key markets like Asia in advance of critical retail selling periods, compared to less than optimal prior year levels. Inventory growth was also impacted by higher year-end levels in retail stores in the U.S. and Europe reflecting unseasonably warm weather this holiday season. Accounts receivable increased 21.1% to $204.4 million, impacted by later timing of shipments in the quarter.
For 2007, the Company is targeting solid growth across its casual, outdoor and industrial categories. The Company is also committed to improving performance in its boots and kids' businesses, supported by a disciplined product supply and distribution strategy that is aligned with the premium position the Company seeks to maintain with consumers. In this context, the Company expects to see significant sales declines in boots and kids' sales in 2007, likely in excess of $100 million globally. These impacts will likely limit overall Timberland revenue to prior year levels for the full year.
Lower boots and kids' sales and impacts from higher relative product costs will place continued pressure on operating margins, with expectations for full-year declines in the range of 300 basis points compared to prior year levels excluding restructuring costs. The Company expects sales and operating margin pressures will be greater early in 2007 given warm winter weather conditions, the lapping of prior year results and macro factors such as the implementation of EU anti-dumping duties. The Company estimates these factors will contribute to a decline in operating profits excluding restructuring costs in the range of $40 million in the first half of 2007, with most of this decline in the first quarter.
As a result of the recently announced decision to license Timberland's North America wholesale apparel business, Timberland will incur a pre-tax restructuring charge in the range of $4 million in 2007 to cover severance, outplacement services and asset disposal costs associated with implementation of this strategy. The Company anticipates that this action will result in cost savings in the range of $4 to $5 million in 2007, weighted towards the second half of the year. These savings have been factored into the Company's financial outlook.
The Company believes that continued global expansion of the brand, development of new brand platforms and expansion of its consumer direct platform globally are critical to the execution of its growth strategy and will continue investing in these platforms.
Jeffrey B. Swartz, Timberland's President and Chief Executive Officer, stated, “2006 was an eventful year for Timberland. We continued to expand our brand portfolio through the successful addition of businesses such as SmartWool® and made solid progress in developing our relationship with consumers across casual, outdoor and industrial usage occasions. We also managed significant pressures in our boots and kids' business in the face of evolving fashion trends and unseasonable selling conditions.
“Through these changes, we have remained committed to our mission and values as an enterprise and brand. We recognize that to capture our full potential, we will need to take aggressive steps to better serve our consumers and improve our performance. In this context, we have aligned our company's organizational leadership against our target consumers and have advanced key actions, including the licensing of our Timberland North America apparel business, to maximize our brand's potential.
“We are optimistic about Timberland's future and believe the strategies we are advancing to move closer to the consumer and leverage our strengths in product innovation will enable us to capture the significant growth potential we see for the Timberland brand and enterprise.”
In other TBL news, the company has entered into a five-year licensing agreement with Phillips-Van Heusen for the design, sourcing and marketing of apparel in North America under the Timberland® brand, beginning with the Fall 2008 line. Timberland will continue to design, source and market Timberland® apparel for its European and Asian operations through its London based design center. Excluded from the agreement with Phillips-Van Heusen are Timberland® Outdoor Performance apparel, which Timberland will continue to design, source and market worldwide, as well as Timberland PRO® apparel, which is the subject of an exclusive license agreement with Block Corporation for the United States and Canada, announced by Timberland earlier this week.
Jeffrey Swartz, Timberland President and CEO said, “We are pleased to enter into this agreement with a powerful partner like Phillips-Van Heusen. They have the capabilities to help us maximize our brand potential through an improved apparel offering and strengthened distribution under the Timberland® label. With their impressive portfolio of high-quality premium brands and our shared commitment to responsible manufacturing, I believe we are poised for success.”
Emanuel Chirico, Chief Executive Officer of Phillips-Van Heusen Corporation, added, “This is a very exciting partnership for both companies who have shared corporate values. We believe that we are uniquely positioned to partner with Timberland to grow this iconic authentic American outdoor brand in the apparel arena.”
Under the terms of the licensing agreement, PVH will design, source and market apparel in North America under the Timberland® brand. Timberland revenues for its North American Wholesale apparel business in 2006 were approximately $70 million. Timberland will incur a pre-tax restructuring charge in the range of $4 million in 2007 to cover severance, outplacement services and asset disposal costs associated with implementation of this strategy. The Company anticipates that this action will result in cost savings in the range of $4 to $5 million in 2007, weighted towards the second half of the year.
