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

• Gross margin decreased 40 basis points to 46.1%.

• Operating expenses were down 5.4% to $136.0 million.

• Operating income increased 9.8% to $58.5 million.

• Net income increased from $30.7 million to $37.8 million.

• Diluted earnings per share increased from $.52 to $.68.

• Cash at the end of the quarter was $112.9 million with no debt outstanding.

Results of Operations for the Quarter Ended October 2, 2009 as Compared to the Quarter Ended September 26, 2008
Revenue
Consolidated revenue was $421.8 million, relatively flat compared to the third quarter of 2008 and up 1.7% on a constant dollar basis. Strong growth in boots, SmartWool® products, and performance footwear were offset by declines in Timberland® apparel, casual footwear and the strengthening of the U.S. dollar relative to the British Pound and the Euro versus the prior year period. North America revenue totaled $188.3 million, a 2.0% increase from 2008. Europe revenues were $195.2 million, a 2.3% decrease over 2008, but rose 3.3% on a constant dollar basis. Asia revenues decreased 2.3%, to $38.3 million, and declined 9.1% on a constant dollar basis. Products
Worldwide footwear revenue grew $5.6 million, or 1.8%, to $319.2 million in the third quarter of 2009, compared to $313.5 million in the third quarter of 2008. Growth in boots and performance footwear offset continued declines in casual footwear. The launch of Timberland® Mountain Athletics® collection favorably impacted global performance footwear revenues for the quarter. Worldwide apparel and accessories revenue fell 6.7% to $95.8 million, driven by a global decline in Timberland® apparel which was partially offset by strong growth in SmartWool® products. Royalty and other revenue was $6.8 million in the third quarter of 2009, compared to $7.4 million in the prior year quarter, reflecting a decrease in sales of licensed children's apparel internationally. Channels
Wholesale revenue was $342.3 million, relatively flat compared to the prior year quarter. Growth in North America, driven by demand for kids' boots and SmartWool® products, was offset by lower revenues in Europe due to unfavorable foreign currency impacts, and declines in Asia, where growth in Japan was offset by declines in Hong Kong and the Asian distributor business.
Retail revenues decreased 4.2% to $79.5 million as a result of unfavorable foreign exchange rate movements and challenges in the North America outlet and Asia specialty markets. Overall, comparable store sales were down 6.6% on a global basis, with declines in North America and Asia partially offset by growth in Europe. We had 213 Company-owned stores, shops and outlets worldwide at the end of the third quarter of 2009 compared to 210 at the end of the third quarter of 2008. We continued investment in our retail infrastructure in North America and Europe, but closed underperforming stores in Asia. Gross Profit
Gross profit as a percentage of sales, or gross margin, was 46.1% for the third quarter of 2009, 40 basis points lower than in the third quarter of 2008. The effects of higher product costs, the strengthening of the U.S. dollar relative to the British Pound and Euro and lower margins in our off-price business in certain regions were partially offset by faster relative growth in high margin regions and products, sourcing cost initiatives, and lower provisions for inventory and returns.
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 $18.0 million and $20.5 million for the third quarter of 2009 and 2008, respectively. The decrease was primarily driven by lower costs associated with our transition to an outsourcing arrangement for our international apparel sourcing and, to a lesser extent, our transition to a licensing arrangement in our North America wholesale apparel business. Operating Expense
Operating expense for the third quarter of 2009 was $136.0 million, a decrease of $7.7 million, or 5.4%, over the third quarter of 2008. The decrease was driven by a $6.8 million decrease in selling expense and a $0.7 million decrease in general and administrative expenses. Overall, changes in foreign exchange rates reduced operating expense by approximately $3.5 million in the third quarter of 2009. We continue to execute cost containment strategies throughout our businesses and make selective investments behind strategic priorities.

Selling expense was $107.3 million in the third quarter of 2009, a decrease of $6.8 million, or 5.9%, over the same period in 2008. The year over year improvement reflects the benefit from a strong U.S. dollar, a decline in advertising expenses and other discretionary spending from our cost containment initiatives and lower volume-driven costs in our wholesale business. These benefits were partially offset by increases in incentive compensation and provisions for doubtful accounts receivable related to certain franchisees. We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $10.2 million and $11.3 million in the third quarter of 2009 and 2008, respectively.
In the third quarters of 2009 and 2008, we recorded $0.7 million and $0.9 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 $5.2 million and $5.8 million for the quarters ended October 2, 2009 and September 26, 2008, respectively.
Advertising expense, which is included in selling expense, was $8.8 million and $11.1 million in the third quarter of 2009 and 2008, respectively. Advertising expense includes co-op advertising costs, consumer-facing advertising such as print, television and internet campaigns, production costs including agency fees, and catalogs. Increased investment in consumer-facing marketing programs such as radio and internet initiatives was offset by lower levels of television and co-op advertising. Television advertising in the third quarter of 2008 included a global campaign which coincided with the Olympics. Our commitment to strengthen our premium brand position through consumer-facing advertising initiatives remains key to driving our strategy forward. 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 October 2, 2009 and September 26, 2008 was $2.4 million and $4.7 million, respectively. General and administrative expense for the third quarter of 2009 was $28.8 million, a decrease of 2.3% compared to the third quarter of 2008. The decrease was driven primarily by favorable foreign exchange rate movements and a reduction in discretionary spending, partially offset by increases in incentive compensation.
We recorded net restructuring charges of $0.2 million during the third quarter of 2008 to reflect costs associated with our decision to close certain retail locations, compared to a credit of $0.1 million in the third quarter of 2009. Operating Income/(Loss)
We recorded operating income of $58.5 million in the third quarter of 2009, compared to operating income of $53.2 million in the prior year period. Operating income as a percentage of revenue improved 130 basis points to 13.9% compared to the same period in 2008. The year over year improvement was driven by reduced operating expenses.
Other Income/(Expense) and Taxes
Interest income was $0.1 million and $0.4 million in the third quarters of 2009 and 2008, respectively, reflecting lower interest rates.
Other income/(expense), net, included foreign exchange gains/(losses) of $1.5 million in the third quarter of 2009 and $(1.9) million in the third 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 third quarters of 2009 and 2008 and should not be considered indicative of expected future results.
The effective income tax rate for the third quarter of 2009 was 38.2%. The rate was impacted by the release of approximately $0.8 million in tax accruals as a result of the lapse of certain statutes of limitation in the third quarter of 2009. The effective income tax rate for the third quarter of 2008 was 40.0%. 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 certain tax audits, we currently expect our full year tax rate to be in the range of 28.5%. This rate may vary if actual results differ from our current estimates, or there are changes in our liability for uncertain tax positions.

                                                                       Form 10-Q
                                                                         Page 22

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.
Revenue by segment for the quarter ended October 2, 2009 compared to the quarter
ended September 26, 2008 is as follows (dollars in millions):

                                           For the Quarter Ended
                                  October 2,      September 26,       %
                                     2009             2008          Change

                 North America    $    188.3      $      184.5        2.0 %
                 Europe                195.2             199.9       (2.3 )
                 Asia                   38.3              39.2       (2.3 )

                                  $    421.8      $      423.6       (0.4 )

Operating income/(loss) by segment and as a percentage of segment revenue for the quarter ended October 2, 2009 and the quarter ended September 26, 2008 are included in the table below (dollars in millions). Segment operating income is presented as a percentage of its respective segment revenue. Unallocated corporate expenses are presented as a percentage of total revenue.

                                               For the Quarter Ended
                                  October 2,                September 26,
                                     2009                       2008
         North America           $       47.3     25.1 %   $          44.1     23.9 %
         Europe                          42.0     21.5                51.5     25.7
         Asia                             4.1     10.8                (0.8 )   (1.9 )
         Unallocated corporate          (34.9 )   (8.3 )             (41.6 )   (9.8 )

                                 $       58.5     13.9     $          53.2     12.6

North America
North America revenues increased 2.0% to $188.3 million, driven by strong growth in our wholesale business from increased sales of kids' and men's boots, SmartWool® accessories and men's performance footwear which offset declines in casual footwear and Timberland® apparel. Our North America retail business had revenue declines of 8.1%, driven by a 14.6% decrease in comparable store sales partially offset by strong growth from 2 additional store openings and our e-commerce businesses.
Operating income for our North America segment was $47.3 million, an increase of 7.3% from the third quarter of 2008. The increase was driven by a decline in operating expenses of 12.2%, primarily as a result of a decrease in sales and distribution expenses, lower marketing expenses due, in part, to the timing of advertising campaigns, and a reduction in discretionary spending. This was partially offset by a 160 basis point decline in gross margin, as higher product costs offset favorable changes in mix, strategic price increases in certain product lines and a reduction in provisions for inventory and returns. Europe
Europe revenues decreased 2.3% to $195.2 million compared with the third quarter of 2008, but increased 3.3% on a constant dollar basis. Growth in Italy, the Benelux region and France was partially offset by declines in our distributor businesses, primarily in Eastern Europe, the Middle East and the Mediterranean. Both wholesale and retail channels showed strong growth in boots offset by declines in casual footwear and Timberland® apparel. Retail growth was driven by the net addition of 9 new stores and comparable store sales growth of 2.9%. Timberland's European segment recorded operating income of $42.0 million in the third quarter of 2009, compared to operating income of $51.5 million in the third quarter of 2008. Gross profit decreased 470 basis points as foreign exchange rate movements, cost increases and higher markdowns were partially offset by favorable shifts in product mix. The decline

was partially offset by a 4.1% decrease in operating expense, as the benefit from a stronger U.S. dollar offset government taxes on certain foreign investments, higher rent and occupancy costs associated with additional stores, and increases in the provision for doubtful accounts for certain franchisees. Asia
In Asia, revenue decreased 2.3%, or 9.1% in constant dollars, to $38.3 million, as growth in Japan was offset by declines across the rest of Asia, including our distributor business. Retail sales in Asia were down 4.1%, driven by a 2.3% decline in comparable store sales, primarily related to the specialty retail market, and the closure of certain underperforming stores. We have opened 9 stores and closed 17 stores in Asia since the end of the third quarter of 2008, leaving us with 85 stores at the end of the third quarter of 2009 compared to 93 stores at the end of the prior year period.
We had operating income in our Asia segment of $4.1 million for the third quarter of 2009, compared to an operating loss of $0.8 million for the third quarter of 2008. The year over year improvement was driven by a 17.0% decrease in operating expenses, reflecting a reduction in employee compensation and related costs, lower occupancy costs resulting from store closures, and decreased marketing expenses. Gross profit benefited from foreign exchange rate movements and mix impacts, which offset volume declines. Corporate Unallocated
Our Unallocated Corporate expenses, which include central support and administrative costs not allocated to our business segments, decreased 15.9% to $34.9 million. The main driver of the decrease was a positive impact from certain costs/credits that are not allocated to the Company's reportable segments, such as provisions for sourced inventory and manufacturing variances. Corporate operating expenses increased 7.9% due to increased incentive compensation costs.
Results of Operations for the Nine Months Ended October 2, 2009 as Compared to the Nine Months Ended September 26, 2008 Revenue
Consolidated revenue for the first nine months of 2009 was $898.1 million, a decrease of $75.8 million, or 7.8%, compared to the first nine months of 2008. These results were driven primarily by the strengthening of the U.S. dollar against the British Pound and the Euro versus the prior year period and declines in casual footwear and Timberland® apparel, partially offset by strong growth in boots internationally as well as SmartWool® products. On a constant dollar basis, consolidated revenues were down 3.5%. North America revenue totaled $394.4 million, a 6.5% decline from 2008. Europe revenues were $400.9 million for the first nine months of 2009, a decrease of 9.6% from the same period in 2008, but essentially flat on a constant dollar basis. Asia revenues were $102.8 million for the first nine months of 2009, a decrease of 5.5% from the same period in 2008, and a decline of 9.4% on a constant dollar basis. Products
Worldwide footwear revenue was $657.7 million for the first nine months of 2009, down $35.4 million, or 5.1%, from the same period in 2008, driven by global declines in casual footwear and our men's boot business in North America. Outside North America, we continue to see signs that our boot business is strengthening. Worldwide apparel and accessories revenue fell 15.8% to $221.7 million, as growth from SmartWool was offset by a decline in Timberland® brand apparel, reflecting softness in international markets, the strengthening of the U.S. dollar relative to the British Pound and the Euro, 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 $18.7 million in the first nine months of 2009, compared to $17.6 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 kids' apparel sales in Europe. Channels
Wholesale revenue was $669.3 million, an 8.6% decrease compared to the first nine months of 2008. Softness in certain of our key wholesale markets, such as the U.K. and Hong Kong, 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 drove the year over year wholesale decline.

Retail revenues fell 5.3% to $228.8 million, driven by unfavorable foreign exchange rate impacts and a retail market that continues to be difficult, especially with respect to apparel. Overall, comparable store sales were down 3.6% on a global basis compared to the first nine months 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 45.3% for the first nine months of 2009, or 60 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 $43.7 million and $56.3 million in the first nine months 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 an outsourcing arrangement for our international apparel sourcing and 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 nine months of 2009 was $366.4 million, 8.5%, or $33.9 million lower than operating expense for the first nine months of 2008. The change is primarily attributable to a $33.5 million decrease in selling and general and administrative expenses, and a $1.3 million decrease in restructuring charges. 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 nine months of 2009 by approximately $20.0 million.
Selling expense for the first nine months of 2009 was $284.6 million, a decrease of $30.9 million, or 9.8%, 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 and the exiting of certain specialty brands in 2008. These benefits were partially offset by increases in incentive compensation costs.
We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $27.4 million and $30.8 million in the first nine months of 2009 and 2008, respectively.
In the first nine months of 2009 and 2008, we recorded $1.6 million and $2.1 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 $11.5 million and $14.1 million for the nine months ended October 2, 2009 and September 26, 2008, respectively.
Advertising expense, which is included in selling expense, was $19.0 million and $22.2 million in the first nine months of 2009 and 2008, respectively. We maintained our commitment to strengthening our premium brand position despite adverse economic conditions during the first nine months of 2009, and the decrease was primarily the result of lower levels of co-op advertising, as well as a shift in the timing of print and television advertising campaigns. General and administrative expense for the first nine months of 2009 was $81.1 million, a decrease of 3.1% as compared to the $83.7 million reported in the first nine months of 2008. The benefit from changes in foreign exchange rates offset increases in compensation and related costs.
Total operating expense in the first nine months of 2009 also included a charge of $0.9 million to reflect the impairment of a trademark and restructuring credits of $0.2 million. We recorded net restructuring charges of $1.1 million in the first nine months of 2008.
Operating Income/(Loss)
Operating income for the first nine months of 2009 was $40.3 million, compared to operating income of $46.5 million in the

prior year period. The decrease in operating income was driven by lower gross profit, primarily due to lower sales volume, partially offset by an 8.5% decline in operating expenses. Operating income included an impairment charge of $0.9 million and restructuring credits of $0.2 million in the first nine months of 2009, compared to restructuring charges of $1.1 million in the first nine months of 2008. . . .