Timberland Q4 Sales Inch-Up; Sees Slower 2006…

The Timberland Company saw modest sales increases during the fourth quarter of 2005 driven by gains in the U.S., Europe, and Asia while apparel and accessories were the strongest categories. The company is well on its way towards completing its Caribbean factory’s restructuring process, and is seeing some pressure from its Far East sourcing partners as labor costs increase in the region. The company will continue with its existing segmentation strategy into 2006 and further develop its multi-branded strategy with Mion and SmartWool.

Fourth quarter sales for the entire company increased 2.3% to $465.3 million. U.S. revenues grew 2.6% as gains in kids', men's casual, and Timberland PRO footwear and men's apparel sales offset anticipated decreases in women's casual footwear and boot sales. International increased 1.7%, or up 8.2% in constant dollars. This was driven by strong constant dollar sales gains in Europe and Asia in both footwear and apparel. The impact of foreign exchange rate changes reduced fourth quarter 2005 revenue by $9.6 million or 2.2% as the dollar becomes stronger.

Global footwear revenues grew 1.4% to $357.5 million driven by growth in kids', men's casual and Timberland PRO. Apparel and accessories revenue increased 5.4% to $103.2 million on strength in both the U.S. and international markets. Global wholesale sales increased 1.3% to $313.4 million. Direct revenue increased 4.5% to $151.9 million, with a 1.7% increase in Timberland-owned comparable store sales for the quarter.

Timberland’s domestic growth in its icon product continues to be hampered by trends in apparel, which is currently favoring athletic and dress footwear. While Timberland is still having success with its cold weather offering, the company is seeing “mixed progress” into warmer weather product with soft sell through rates in 2005 for spring and summer products. In response, management has added staff to its design and development teams and re-organized the department to address new and icon product separately. TBL is also refining and extending its scarcity and allocation strategies, but maintaining an agile production base to respond to ASAP orders if current trends change.

The company has seen some success in women’s product in Europe, but has “not been able to focus enough” to grow the category significantly on the domestic front. Management did not rule out acquisitions as a possible avenue to address the market, but still wants to try and expand the Timberland brand organically into the women’s category.

Gross margin increased 110 basis points to 48.2% from 47.1% last year while SG&A expenses inched-up 60 basis points to 32.8% compared to 32.2% last year. Restructuring costs related to the company's Caribbean manufacturing operations were $4.3 million in 2005 and are estimated to be approximately $300,000 in Q1 2006. Fourth quarter net income was $46.9 million compared with $45.0 million. Diluted EPS was 71 cents versus 64 cents.

For 2006, the company is targeting mid-single-digit revenue growth and moderate declines in comparable EPS to 2005. Timberland started 2006 with a wholesale order backlog approximately 1% below the prior year in nominal dollars and up 6% in constant dollars. Benefits from SmartWool contributed approximately 3% to overall backlog growth. For the first half, TBL management is anticipating higher gross margin pressures in the range of 200 basis points reflecting less favorable product mix and pressure from macro factors like higher oil and labor costs.