The Timberland Company saw third quarter results outpace market expectations as the company said it is seeing growing momentum in Europe, regaining traction in the classics business with its iconic boot and handsewns, and forecast improved gross margins in the fourth quarter. The news sent Timberland's shares up 12.4% last week.
“We should see gross margins improve versus the third quarter and last year as we have less excess and obsolete inventory to eliminate,” CFO Carrie Teffner said on a conference call with analysts. Lower leather prices are also expected to help.

Revenues in the quarter dipped 0.4% to $421.8 million, but were up 1.7% in constant dollar terms. Strong growth in the boots business in Europe and SmartWool offset declines in casual footwear and Timberland brand apparel, which is now licensed.  Foreign exchange rate changes decreased revenue by approximately $9 million due to the strength of the U.S. dollar relative to the British pound and the euro.
Global footwear revenue increased 1.8% to $319.1 million, driven by strong gains in boots and gains in outdoor performance that offset declines in casual footwear. Ms. Teffner said Timberland's “renewed focus on classics and our continued efforts to drive brand heat through focused advertising are showing signs of success.” 

Apparel and accessories revenue decreased 6.7% to $95.8 million as continued softness in Timberland brand apparel across all regions offset growth in SmartWool.

Global wholesale revenue was relatively flat at $342.2 million, reflecting strength in boots and outdoor performance. Worldwide consumer direct revenue decreased 4.2% to $79.5 million, due primarily to declines in North America outlet stores. Global comps were down 7%.

In North America, sales grew 2.0%, reflecting strong growth in SmartWool and kids’ boots as well as growth in outdoor performance. North America retail revenues were down 8%, with a 14.6% comp decrease due to declines in outlet stores. North America specialty retail comps were up 1%. The new Fortress City store in lower Manhattan is performing well above internal expectations due to strength in the Timberland Earthkeeper and Elite collections, particularly Boot Company.  E-Commerce also “performed very well” in the quarter.

In Europe, sales were up 3% on a constant dollar basis. Strength in boots and outdoor performance offset softness in casual footwear. A 3% increase in comps, the strength in boots and the net addition of nine new stores drove strong growth in retail excluding the impact of foreign exchange.

In Asia, sales declined 9% in constant dollars due to softness in both wholesale and retail. Declines in the distributor markets and Hong Kong offset strong growth in Japan. Retail sales declined 9%, excluding the impact of foreign exchange, reflecting a 2% comp dip and the closure of 17 underperforming stores since Q308.

The bottom-line improvement reflects a 5%, or $8 million, reduction in operating expenses, reflecting cost-reduction efforts, and a $4 million benefit from foreign currency movements.

Gross margins were down 40 basis points primarily by the impact of higher product cost, foreign exchange impacts and lower margins on closeouts, partially offset by favorable mix and pricing on selected products. The company ended the third quarter with $113 million in cash and inventories down 8%.

Discussing growth initiatives, TBL President and CEO Jeffrey Swartz said the company is on track to add $65 million in revenues in 2009 from its Earthkeepers line, which uses green rubber and was launched  in fall 2007. By fall 2010, it expects Earthkeepers will make up more than 10% of footwear sales and more than 50% of its apparel sales.

Year-to-date, Timberland's classics business has grown double-digits and continues to generate healthy margins, Swartz said. Across its Europe retail portfolio, classics are a key driver of its mid-single digit YTD comp increase.  Buzz around classics has been helped by limited edition collections in Europe as well as a “Design Your Own” program in Japan. In the U.S., collaborations with Boot Company and Abington are helping bring the brand to Nordstrom and Saks Fifth Avenue.

Timberland Mountain Athletic, aimed at a “younger, faster outdoors consumer,” was introduced this fall at Dick's Sporting Goods, and Swartz gave the launch effort a grade of a “C.”

Swartz stressed they thought Dick's SG is the right account for the program, and said TBL executed “really powerful marketing,” but didn't push far enough in terms of product aesthetic. “We made capable product but not sexy capable product,” he said. Sell-through to-date was said to be “only okay.”  Mountain Athletics has reportedly sold through very well in the TBL stores, but “to a consumer a shade older” than they had in mind.  Timberland is fine-tuning Mountain Athletics’ design for Spring 2010 and Swartz noted that DKS ” remains committed to the strategy.”

Looking ahead, even though the classics business is seeing momentum, Swartz cautioned that boots are a replenishment business — much more so than athletics — and retailers are keeping their open-to-buy dollars tight. He also noted that buyers may not look to invest in some strong categories, mentioning the success of SmartWool socks, because overall sales may be down. Overall, he said a near-term focus by retailers makes it challenging to gauge spring order prospects.  “Everybody's eyes are on what's going to happen in the next 60 days,” said Swartz.