Summary of TIMBERLAND CO - Yahoo! Finance

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial condition and results of operations of The Timberland Company and its subsidiaries ("we", "our", "us", "its", "Timberland" or the "Company"), as well as our liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the Company's unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.
Included herein are discussions and reconciliations of total Company, Europe and Asia revenue changes to constant dollar revenue changes. Constant dollar revenue changes, which exclude the impact of changes in foreign exchange rates, are not Generally Accepted Accounting Principle ("GAAP") performance measures. The difference between changes in reported

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Form10-Q Page 18 revenue (the most comparable GAAP measure) and constant dollar revenue changes is the impact of foreign currency exchange rate fluctuations. We provide constant dollar revenue changes for total Company, Europe and Asia results because we use the measure to understand the underlying growth rate of revenue excluding the impact of items that are not under management's direct control, such as changes in foreign exchange rates. The limitation of this measure is that it excludes items that have an impact on the Company's revenue. This limitation is best addressed by using constant dollar revenue changes in combination with the GAAP numbers.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales returns and allowances, realization of outstanding accounts receivable, the carrying value of inventories, derivatives, other contingencies, impairment of assets, incentive compensation accruals, share-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from our estimates. Because of the uncertainty inherent in these matters, actual results could differ from the estimates used in, or that result from, applying our critical accounting policies. Our significant accounting policies are described in Note 1 to the Company's consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008. Our estimates, assumptions and judgments involved in applying the critical accounting policies are described in Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2008.
Overview
Our principal strategic goal is to become the authentic outdoor brand of choice globally. We continue to develop a diverse portfolio of footwear, apparel and accessories that reinforces the functional performance, benefits and classic styling that consumers have come to expect from our brand. We sell our products to consumers who embrace an outdoor-inspired lifestyle through high-quality distribution channels, including our own retail stores, which reinforce the premium positioning of the Timberlandâ brand.
To deliver against our long-term goals, we are focused on driving progress on key strategic fronts. These include enhancing our leadership position in our core footwear business, capturing the opportunity that we see for outdoor-inspired apparel, extending enterprise reach through brand-building licensing arrangements, expanding geographically and driving operational and financial excellence while setting the standard for commitment to the community and striving to be a global employer of choice.
A summary of our second quarter of 2009 financial performance, compared to the second quarter of 2008, follows:
• Second quarter revenue decreased 14.4%, or 9.1% on a constant dollar basis, to $179.7 million.

• Gross margin decreased from 43.9% to 42.0%.

• Operating expenses were $111.9 million, down 8.4% from $122.2 million in the prior year period.

• We recorded an operating loss of $36.4 million in the second quarter of 2009, compared to an operating loss of $30.0 million in the prior year period.

• Net loss was $19.2 million in the second quarter of 2009, compared to $18.9 million in the second quarter of 2008.

• Loss per share increased from $(.32) in the second quarter of 2008 to $(.34) in the second quarter of 2009.

• Cash at the end of the quarter was $183.9 million with no debt outstanding.

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Form10-Q Page 19 The Company anticipates that the back half of 2009 will continue to be challenging due to the low levels of consumer confidence and the financial health of the global economy. Given the continued volatile nature of current economic conditions, the Company continues to believe there is not sufficient visibility to set expectations for the remainder of 2009.
Results of Operations for the Quarter Ended July 3, 2009 as Compared to the Quarter Ended June 27, 2008
Revenue
Consolidated revenue of $179.7 million decreased $30.2 million, or 14.4%, compared to the second quarter of 2008, driven by declines in Timberland® apparel and casual footwear worldwide and continued strengthening of the U.S. dollar against the British Pound and the Euro. On a constant dollar basis, consolidated revenues were down 9.1%. North America revenue totaled $86.3 million, a 13.3% decline from 2008. Europe revenues were $65.7 million, a 16.6% decrease over 2008, and down 2.5% on a constant dollar basis. Asia revenues decreased 12.3%, to $27.7 million, but declined 13.3% on a constant dollar basis.
Segments Review
We have three reportable business segments (see Note 7 to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this report): North America, Europe and Asia.
North America revenues decreased 13.3% to $86.3 million, driven by declines in our wholesale men's footwear business, where declines in casual footwear and boots were partially offset by increases in performance footwear. Our North America retail business had revenue declines of 1.3%, driven by an 8.2% decrease in comparable store sales partially offset by 2 additional stores in 2009 and strong growth in our e-commerce businesses.
Europe recorded revenues of $65.7 million, a 16.6% decrease compared with the second quarter of 2008. The strengthening of the U.S. dollar against the British Pound and the Euro reduced Europe's revenues by 14.1%. Growth in France and the Benelux regions, partially due to 11 new stores, was offset by weakness across the U.K. and Italy. Declines in wholesale sales of Timberland®apparel and performance and casual footwear were partially offset by continued improvement in boots, as well as SmartWool apparel and accessories. Continued softness in the wholesale business was partially offset by strong growth in retail, which combined growth from new stores with comparable store revenue growth of 7.3%. In Asia, revenue decreased 12.3%, or 13.3% in constant dollars, to $27.7 million, driven primarily by softness in both our retail and wholesale businesses in Hong Kong and Japan. Retail sales in Asia were down 13.9%, reflecting a 5.3% decline in comparable store sales and the closure of underperforming stores.
Products
Worldwide footwear revenue was $127.0 million in the second quarter of 2009, down $16.0 million, or 11.2%, from the second quarter of 2008. Declines in men's casual footwear and men's boots in North America were partially offset by continued growth in the boots business in Europe and Asia. Worldwide apparel and accessories revenue fell 24.6% to $47.2 million, driven by a global decline in Timberland® apparel. Royalty and other revenue was $5.5 million in the second quarter of 2009, compared to $4.3 million in the prior year quarter, primarily as a result of our wholesale apparel licensing arrangement in North America. Channels
Wholesale revenue was $108.4 million, a 20.3% decrease compared to the prior year quarter. Retail revenues decreased 3.5% to $71.3 million as a result of unfavorable movements in the British Pound and the Euro relative to the U.S. dollar and a decline in comparable store sales. Overall, comparable store sales were down 2.5% on a global basis, with declines in North America and Asia partially offset by increases in Europe. We had 217 stores, shops and outlets worldwide at the end of the second quarter of 2009, compared to 216 at the end of the second quarter of 2008.

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Form10-Q Page 20 Gross Profit
Gross profit as a percentage of sales, or gross margin, was 42.0% for the second quarter of 2009, 190 basis points lower than in the second quarter of 2008. The effects of higher product costs, the strengthening of the U.S. dollar relative to the British Pound and Euro, lower margins in our off-price business in certain regions and higher provisions for inventory were partially offset by favorable changes in channel mix.
We include the costs of procuring inventory (inbound freight and duty, overhead and other similar costs) in cost of goods sold. These costs amounted to $11.7 million and $16.5 million for the second quarter of 2009 and 2008, respectively. The decrease was primarily driven by lower costs associated with our wholesale apparel business as a result of our transition to a licensing arrangement in North America, as well as lower footwear sourcing and logistics costs.
Operating Expense
Operating expense for the second quarter of 2009 was $111.9 million, a decrease of $10.3 million, or 8.4%, over the second quarter of 2008. The decrease was driven by a $10.3 million decrease in selling expense. Overall, changes in foreign exchange rates reduced operating expense by approximately $7.7 million in the second quarter of 2009. We continue to execute cost containment strategies throughout our businesses and make selective investments behind strategic priorities.
Selling expense was $85.0 million in the second quarter of 2009, a decrease of $10.3 million, or 10.8%, over the same period in 2008. The decrease in selling expense was a result of reduced sales, marketing and distribution costs in our wholesale businesses as a result of lower volume due to softness in the markets, lower compensation and occupancy costs in Asia due to the closure of underperforming stores and a reduced cost base due to the exiting of certain specialty brands in 2008. The benefit from changes in foreign exchange rates was partially offset by increases in European compensation and occupancy costs associated with 11 new stores compared to 2008, as well as spring media spending and share-based and incentive compensation.
We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $8.0 million and $8.7 million in the second quarter of 2009 and 2008, respectively.
In the second quarters of 2009 and 2008, we recorded $0.3 million and $0.4 million, respectively, of reimbursed shipping expenses within revenues and the related shipping costs within selling expense. Shipping costs are included in selling expense and were $1.5 million and $3.3 million for the quarters ended July 3, 2009 and June 27, 2008, respectively.
Advertising expense, which is included in selling expense, was $5.6 million and $6.0 million in the second quarter of 2009 and 2008, respectively. Advertising expense includes co-op advertising costs, consumer-facing advertising costs such as print, television and internet campaigns, production costs including agency fees, and catalog costs. The decrease in advertising expense reflects lower levels of co-op advertising partially offset by our continued investment in consumer-facing marketing programs, primarily branding and media initiatives. These investments demonstrate our commitment to strengthen our premium brand position despite adverse economic conditions. Advertising costs are expensed at the time the advertising is used, predominantly in the season that the advertising costs are incurred. Prepaid advertising recorded on our unaudited condensed consolidated balance sheets as of July 3, 2009 and June 27, 2008 was $2.3 million and $3.4 million, respectively.
General and administrative expense for the second quarter of 2009 was $26.9 million, relatively flat compared to the second quarter of 2008. The slight increase was driven primarily by higher compensation and related costs. We recorded net restructuring charges of $0.3 million during the second quarter of 2008 to reflect costs associated with our decision to close certain retail locations.
Operating Income/(Loss)
We recorded an operating loss of $36.4 million in the second quarter of 2009, compared to an operating loss of $30.0 million in the prior year period. Operating loss in the second quarter of 2008 included restructuring charges of $0.3 million as described above.
Operating income for our North America segment was $5.1 million, a decline of 46.6% from the second quarter of 2008. The decrease was driven by a revenue decline of 13.3%, combined with a 175 basis point decline in gross margin, as higher product costs and inventory provisions offset favorable changes in mix. Operating expenses declined 7.6% primarily as a result of lower selling, marketing and distribution expenses on lower volume.

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Form10-Q Page 21 Timberland's European segment recorded an operating loss of $9.9 million in the second quarter of 2009, compared to an operating loss of $8.2 million in the second quarter of 2008. An 18.7% decline in gross profit was driven by foreign exchange rate movements, cost increases and higher markdowns, which offset favorable shifts in product and channel mix. The decline was partially offset by an 11.6% decrease in operating expense, driven primarily by lower distribution costs and the movement in foreign exchange rates.
We had an operating loss in our Asia segment of $0.6 million for the second quarter of 2009, compared to an operating loss of $1.4 million for the second quarter of 2008. The improvement over the prior year was driven by a 14.4% decrease in operating expenses, primarily related to lower compensation and occupancy costs in our retail business resulting from store closures. Gross profit was lower as a result of volume declines and mix, but benefited from foreign exchange rate movements.
Our Unallocated Corporate expenses, which include central support and administrative costs not allocated to our business segments, increased 3.6% to $31.0 million. Favorable purchase price and other manufacturing variances in 2008 were not achieved in 2009, as a result of lower volume and outsourcing. Such costs are not allocated to the Company's reportable segments. Other Income/(Expense) and Taxes
Interest income was $0.3 million and $0.7 million in the second quarters of 2009 and 2008, respectively, reflecting lower interest rates.
Other income/(expense), net, included foreign exchange gains of $0.7 million in the second quarter of 2009 and $0.1 million in the second quarter of 2008, respectively, resulting from changes in the fair value of financial derivatives, specifically forward contracts not designated as cash flow hedges, and the timing of settlement of our local currency denominated receivables and payables. These gains were driven by the volatility of exchange rates within the second quarters of 2009 and 2008 and should not be considered indicative of expected future results.
The effective income tax rate for the second quarter of 2009 was 44.3%. Based on our full year estimate of global income and the geographical mix of our profits, as well as provisions for certain tax reserves and discrete items related to the completion of audits, we currently expect our full year tax rate to be in the range of 33.0%. This rate may vary if actual results differ from our current estimates, or there are changes in our liability for uncertain tax positions. The effective income tax rate for the second quarter of 2008 was 36.0%. Results of Operations for the Six Months Ended July 3, 2009 as Compared to the Six Months Ended June 27, 2008
Revenue
Consolidated revenue for the first six months of 2009 was $476.4 million, a decrease of $74.0 million, or 13.4%, compared to the first six months of 2008. These results were driven primarily by declines in Timberland® apparel and casual footwear worldwide and the strengthening of the U.S. dollar against the British Pound and the Euro. On a constant dollar basis, consolidated revenues were down 7.5%. North America revenue totaled $206.2 million, a 13.1% decline from 2008. Europe revenues were $205.7 million for the first six months of 2009, a decrease of 15.5% from the same period in 2008, and a decline of 2.0% on a constant dollar basis. Asia revenues were $64.5 million for the first six months of 2009, a decrease of 7.2% from the same period in 2008, and a decline of 9.5% on a constant dollar basis.
Segments Review
The Company's North America revenues decreased 13.1% to $206.2 million, driven by declines in boots, as well as Timberland® apparel, due in part to anticipated declines from the decision in 2008 to transition our North America wholesale apparel business to a licensing arrangement, and declines in casual footwear. The continued weakness in these areas was partially offset by growth in performance footwear and SmartWool apparel. Within North America, our retail business had revenue declines of 5.2%, driven by a 9.0% decrease in comparable store sales.
Our Europe revenues decreased to $205.7 million from the $243.5 million reported in the first six months of 2008, largely due to foreign exchange rate impacts. Europe revenues declined 2.0% on a constant dollar basis. Softness in wholesale sales

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Form10-Q Page 22 was partially offset by strong comparable store revenue growth in our retail business. A difficult wholesale market across the U.K., Italy, and Spain was partially offset by growth in our distributor business as well as in Central Europe.
Asia revenues for the first six months of 2009 were $64.5 million, compared to $69.5 million for the first six months of 2008, a decline of 9.5% in constant dollars, due primarily to softness in our retail apparel business. Lower revenues in Hong Kong and Singapore, as well as weakness in the distributor businesses, were the primary drivers of this decline. Products
Worldwide footwear revenue was $338.6 million for the first six months of 2009, down $41.0 million, or 10.8%, from the same period in 2008, driven by global declines in casual footwear and our boot business in North America. Outside North America, we continue to see encouraging signs that our boot business is strengthening. Worldwide apparel and accessories revenue fell 21.6% to $125.9 million, as growth from SmartWool was offset by a decline in Timberland® brand apparel, reflecting the strengthening of the U.S. dollar relative to the British Pound and the Euro, softness in international markets, and the impact of transitioning our North America wholesale apparel business to a licensing arrangement. The Company ceased sales of in-house Timberland® brand apparel in North America through the wholesale channel during the second quarter of 2008. Royalty and other revenue was $11.9 million in the first six months of 2009, compared to $10.2 million in the prior year period, reflecting increased sales of apparel in North America under our licensing agreement established in 2008, partially offset by lower sales of kids' apparel in Europe. Channels
Wholesale revenue was $327.0 million, a 16.5% decrease compared to the first six months of 2008. Softness in certain of our key wholesale markets, such as the U.K., Italy, Japan and Hong Kong, was the primary driver of sales declines, along with the strengthening of the U.S. dollar in Europe and, to a lesser degree, the transition of the North America wholesale apparel business to a licensing arrangement.
Retail revenues fell 5.9% to $149.3 million, driven by unfavorable foreign exchange rate impacts and a worldwide retail market that continues to be difficult, especially with respect to apparel. Overall, comparable store sales were down 2.1% on a global basis compared to the first half of 2008, with favorable comparable store results in Europe being offset by declines in our North America stores.
Gross Profit
Gross profit as a percentage of sales, or gross margin, was 44.5% for the first half of 2009, or 90 basis points lower than the prior year period, as the impact of higher product costs, lower margins in our off-price business in certain regions and higher provisions for inventory were partially offset by favorable changes in channel mix.
We include the costs of procuring inventory (inbound freight and duty, overhead and other similar costs) in cost of goods sold. These costs amounted to $25.6 million and $36.0 million in the first half of 2009 and 2008, respectively. The decrease was driven by lower costs associated with our wholesale apparel business as a result of our transition to a licensing arrangement in North America, as well as lower footwear sourcing and logistics costs.
Operating Expense
Operating expense for the first six months of 2009 was $230.4 million, 10.2%, or $26.1 million lower than the first six months of 2008. The change is attributable to a $26.1 million decrease in selling, general and administrative expenses and a decrease in restructuring charges of $1.0 million. These decreases were partially offset by an intangible asset impairment charge of $0.9 million. Overall, changes in foreign exchange rates reduced operating expense in the first six months of 2009 by approximately $16.3 million. Selling expense for the first six months of 2009 was $177.3 million, a decrease of $24.1 million, or 12.0%, over the same period in 2008. The strengthening of the U.S. dollar relative to the British Pound and the Euro benefited operating expenses along with decreases due primarily to reduced sales, marketing and distribution costs in our wholesale business on lower volume reflecting continued softness in this market, lower compensation and occupancy costs in our retail business due to store closures, and the exiting of certain specialty brands in 2008.

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Form10-Q Page 23 We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $17.4 million and $18.6 million in the first half of 2009 and 2008, respectively.
In the first six months of 2009 and 2008, we recorded $0.9 million and $1.2 million, respectively, of reimbursed shipping expenses within revenues and the related shipping costs within selling expense. Shipping costs are included in selling expense and were $6.3 million and $8.4 million for the six months ended July 3, 2009 and June 27, 2008, respectively.
Advertising expense, which is included in selling expense, was $10.2 million and $11.1 million in the first half of 2009 and 2008, respectively. We maintained our commitment to strengthening our premium brand position despite adverse economic conditions during the first six months of 2009 and increased our consumer-facing marketing spending, primarily media production. This increase was offset by lower levels of co-op advertising.
General and administrative expense for the first six months of 2009 was $52.3 million, a decrease of 3.5% as compared to the $54.2 million reported in the first six months of 2008. The benefit from changes in foreign exchange rates offset increases in compensation and related costs.
Total operating expense in the first six months of 2009 also included a charge of $0.9 million to reflect the impairment of a trademark, as discussed in Note 2 to the unaudited condensed consolidated financial statements included in Part 1, Item 1 of this report, and restructuring credits of $0.1 million. We recorded net restructuring charges of $0.9 million in the first six months of 2008. Operating Income/(Loss)
Operating loss for the first half of 2009 was $18.2 million, compared to an operating loss of $6.7 million in the prior year period. Operating loss included an impairment charge of $0.9 million and restructuring (credits)/charges of $(0.1) million in the first six months of 2009, compared to restructuring charges of $0.9 million in the first six months of 2008.
Operating income for our North America segment decreased 34.8% to $20.1 million in the first half of 2009. The decrease was driven by a 265 basis point decline in gross margin, reflecting increased product costs, higher provisions for inventory and higher than anticipated sales returns and allowances, partially offset by a more favorable channel mix. The deterioration in gross margin was partially offset by an 11.2% decrease in operating expenses, principally selling, marketing and distribution expenses. Savings associated with the exiting of certain specialty brands in 2008 were partially offset by fixed asset write-offs related to our retail business.
Europe's operating income was $20.2 million for the first half of 2009, compared to $24.9 million in the prior year period, reflecting a 15.8% decrease in gross profit, in line with a 15.5% decrease in revenue. This decrease was partially offset by a 15.0% decrease in operating expenses, driven by reduced agency, marketing and distribution costs in light of lower sales volume and the impact of foreign exchange rate movements, partially offset by an intangible asset impairment charge.
Asia's operating income was $1.2 million in the first six months of 2009, compared to an operating loss of $0.7 million in the first six months of 2008, largely driven by a 10.5% reduction in operating expense, due principally to reduced compensation and occupancy costs in our retail business. Our Unallocated Corporate expenses, which include central support and administrative costs not allocated to our business segments, decreased 3.3% to $59.8 million. The lower expenses were driven by the benefit from the revaluation of the Company's existing inventory to new standard prices that is not allocated to the Company's reportable segments. Other Income/(Expense) and Taxes
Interest income was $0.7 million and $1.6 million in the first six months of 2009 and 2008, respectively, reflecting lower interest rates. Interest expense, which is comprised of fees related to the establishment and maintenance of our revolving credit facility and interest paid on short-term borrowings, was . . .