Timberland Trims Second Quarter Loss

North American retail revenues fell 13.4% as Timberland phased out its Timberland branded apparel in preparation for the launch of a new line, which will be produced by Phillips-Van Heusen under a five year licensing deal.  Excluded from the agreement with PVH 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.

The decline in North American sales also reflected a 12% drop in retail sales that was attributed to the closing of 17 stores and an 8% decline in same-store sales in North America. In Europe, sales were off 1.4% (8% in constant dollars) to $78.8 million, while Asian sales rose 7.8% (down 2% on a constant dollars basis) to $31.6 million.

The 30-basis-point decline in gross margins reflected increased off-priced closeout sales in Europe and Asia, where stores were being  shuttered. 

Inventories declined 9.7% to $195 million as the company made big strides in improving cash flow, which swung from a negative $50 million in the first six months of 2007 to $40 million in the first half of this year. The company used some of that cash to repurchase $15 million of its stock.

During the quarter, TBL closed four stores, bringing to 34 the number closed under a global restructuring plan that will likely close 45 to 50 stores by the end of the first quarter and trim the company’s store count to 200.

Timberland said it was maintaining its guidance for sales and operating margin as favorable foreign exchange benefits are expected to offset continued challenges in retail markets globally. The forecast calls for revenues to decline in the mid-single-digits, due in part to the fact that far fewer stores will be open in the fourth quarter compared to a year earlier. TBL expects flat to modest operating margin improvement. Operating income is expected to be in $45 million to $50 million in the third quarter.

Swartz said solid global sell through of the company’s Earthkeeper footwear collection shows a new creative process rolled out by the company in the last 18 months is working. The process shaved 5.5 months off the development cycle for City Adventure, a line of footwear for European and Asian consumers that is a response to the fashion influences of low-profile sneakers. Stella, Simona and Timberland will launch City Adventure collections in Spring 2009.  The next test of the product development process will come this fall with a critical re-launch of women’s product in key global markets. The re-launch is being guided by Pat Hambrick, the former marketing chief at Reebok from the 90’s, who more recently also did stints at Saucony and L’Oreal.
Swartz acknowledged women’s shoes should represent a far greater percentage of TBL’s sales.

Swartz also outlined details of TBL’s plans to spend 28% more on consumer marketing in 2008 and 2009 to deepen the company’s emotional bonds with consumers. He said a new campaign developed by Leagas Delaney will be anchored by three television commercials that will run over the next nine months. The first of the ads, a mini film dubbed “Podium,” will run in the United States during the men’s swimming final at the Olympics and focus on “the invigoration and inspiration of conquering life’s summits.” The second will focus on the Earthkeepers line and TBL’s environmental commitments. The third will highlight TBL’s commitment to being a four-season brand.

The advertising will be concentrated on so-called “fortress cities” like New York, London, Milan, Tokyo and even Beijing, where TBL expects to have 120 stores by year end. The idea is to focus store openings and advertising on these cities to leverage their trendsetting and distribution power to drive sell through, Swartz said.