Columbia Sportswear Co (COLM) 2002 Q2 法說會逐字稿

Good afternoon, my name is Andrea, I will be your conference facilitator today, at this time I would like to welcome everyone to the second quarter earnings release conference call.

All lines has been placed on mute to prevent any background noise.

After the speakers remarks there will be a question and answer period.

If you like to ask a question during this time simply press star and the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you Mr.Beers you may begin your conference.

Okay.

Thank you.

Good afternoon and welcome to Columbia Sportswear second quarter 2002 conference call.

With me this afternoon Gertrude Boyle, Columbia's Chairwoman, Tim Boyle, Columbia's President and CEO, Pat Anderson, Columbia's new Chief Operating Officer, Carl Davis, Columbia's General Counsel and Bryan Tim, Columbia's newly appointed CFO.

Continuing on are standard practice, we will review the results of the second quarter, provide some guidance on future periods and fill any questions that you might have.

You should have received a fax copy of the earnings release by now and if you have not then please phone Mary

here at Columbia at 503-985-4000 and she will either fax or email you a copy immediately.

In light of regulation

we encourage you ask as many questions during the live call as you it necessary to understand the company's business.

Before we begin, Columbia's Chairwoman Gertrude Boyle has a comment to make.

Good afternoon, this conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operation.

Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what is projected.

Many of these risks and uncertainties are described in Columbia's annual report 10-K for year 2001 under the heading `Factors that may affect our business` Forward looking statements in this conference call are based on our current expectations and beliefs and we do not take any duty to undertake to update any of this forward looking statements after the date of this conference call.

To confirm the forward looking statements to actual results are to change any of our expectations.

Okay thank you Gertrude.

At this point I would like to hand the call to Tim Boyle who will provide an overview of the performance that occurred during the company's second quarter of 2002.

Tim.

Thanks John.

Prior to reviewing the quarter, I want to spend a few minutes discussing recent management and board changes at the company some, which were announced earlier today in a separate press release.

First Don Santorufo our Chief Operating Officer will be retiring at the end of the year but will remain with the company until then to see several long-term projects through to completion.

Don has been with Columbia for 23 years and was instrumental in establishing our highly successful offshore sourcing operations.

Additionally he contributed greatly to the company's success in many ways over the years including overseeing the implementation of the company's state of the art distribution systems.

Next, as we announced on July 16th that Ed Howell will officially join the company in September as Global President of the company's Sorel division.

I have known Ed for many years including his most recent tenure as CEO of the Eastern Mountain Sports.

Through out this time I have been impressed by Ed's business acumen and merchandizing skills.

I am therefore very pleased that he will be joining our team.

In light of his hiring, I know many of you would have questions related to our updated outlook and opportunity for the Sorel business going forward.

The guidance we will discuss later in the call as reflective of our current estimates for the full 2002 Sorel business.

I will remind everyone that we believe Sorel brand to be a valuable asset, which we were able to purchase on favorable terms and which has significant long term potential.

We believe that the Sorel operation should be somewhat segregated from the Colombia operations.

Therefore Ed's primary charges to optimize the potential that I believe exists for Sorel

brand.

Because ED has not assumed his position yet I'm not in a position to provide additional financial details about the opportunity.

Next as we announced on July 22nd Steven Babsen of Endeavor Capital has been appointed as Colombia's board of directors.

Steven brings a wealth of business and legal experience to our board having served his principle outside corporate council to both public and privately helped clients including Columbia Sports Company.

I believe that Steven's expertise and perspective will be of great value to the company.

As announced earlier today Colombia's board of directors has appointed Pat Anderson the company's former Vice President and Chief Financial officer to the position of Vice President and Chief operating officer.

Pat's intimate Knowledge of our business in the industry based on his 10 years of excellent service have prepared him well to assume this leadership role within the company and I'm confident that he'll do a superb job.

Also announced earlier today Bryan Timm, Columbia's corporate controller has been named Chief financial officer.

Bryan has been a key player on our finance team since prior to our company's public offering, including extensive involvement in every facet of the financial reporting and management process.

His leadership during this time has given me confidence in his finance and accounting capabilities and I am pleased that he has agreed to take on these additional responsibilities.

Brian started his career as an auditor at JPMG.

And has held various positions at Origan steel mills, a local public company, including as divisional controller for CF&I Origan steel mills largest division.

Although Pat will guide us through this quarter's report due to timing of this announcement Pat and Bryan are both available today during the question and answer periods.

And Bryan will be proactively meeting with investors for the for the serving months.

Let me now turn to the financial results reported earlier today.

To reiterate the highlights in the press release Q2 2002 sales for the quarter grew by 2.2percent to a record 124.4 million when compared to the second quarter of 2001.

The company reported net income for the second quarter of 7.5 million a 17.2 percent increase over net income of 6.4 million in the same period of 2001.

Diluted earnings per share for the second quarter of 2002 came in at 19 cents on 40.1 million shares compared to dilute earnings per share of 16 cents on 40.1 million shares for the second quarter of 2001.

Geographically key to the performance to the second quarter was the strength of our other international business, which grew by 25.4 percent year over year to reach record 15.3 million sales for the quarter.

Additionally we continued to experience strong growths in other key markets including Europe where sales grew by 9.6 percent to 14.8 million for the second quarter.

While sales in the US and Canada declined by 1.3 percent and 8.9 percent for the period respectively based on previously announced order trends we are optimistic that our spring business is back on a growth trajectory.

I will provide additional information in this regard shortly.

On a cost to dollar basis other international sales increased 27.8 percent, European sales increase by 7.7 percent and Canadian sales declined 7.8 percent.

In the current quarter we saw strengthened footwork, which was up 43.3 percent when compared to the second quarter of 2001.

Last first quarter was up 1.8 percent and outerwear declined by 8.5 percent.

This was due to the timing shares between Q1 and Q2 2002.

I will provide additional detail and commentary regarding geographic and product line performance for the second quarter later in the call.

Now I would like to update you on some recent events, on our distribution expansion, the European distribution center product in Columbia and France is progressing on schedule.

We are in the process of staffing and testing the facility and currently anticipate that the facility will officially open as planned in early Dec. for the spring 2003 shipping season.

At this point we are pleased with the progress that has been made.

That will provide an update on our expenditures on this and other capital projects more materially.

Licensing update: On July 9th, we announced and we signed a licensing agreement with Excelled Sheep skin and Leather

which is based in Quadrate, New Jersey and designed manufacture and marketing at men's, women's and children's leather coats in the US and Canada.

The collection what the view in the US in a selected number of stores for the 2002 holiday season, with a larger product launched plan for the US and Canada for 2003.

To remind everyone at this point, we have now entered into 12 licensing agreements to use the company's trademarks on various products ranging from socks and thermal underwear to watches and

.

We remain encouraged by the level of interest in our brands and are optimistic about the opportunity to grow each of our current license categories.

We will also continue additional licensing opportunities for the Columbia and

names as appropriate.

Guidance: Given a second quarter results, we have reported today we are in a position to update everyone on our guidance for the balance of fiscal year 2002.

Please keep in mind that this information is forward-looking in nature and is therefore subject to many risk factors, including but not limited to many that are described in the company's 10-K, dated March 29, 2002, and which were expressed by Gertrude in the opening remarks.

We currently believe that the additional sales and earnings that have been reported for Q2 will not come with the expenses, expense of Qs 3 and 4.

In fact at this point we see net income up side for the year, which is not previously incorporated in our guidance.

We currently anticipate revenue growth for the full year of 2002, and view the high-end of our previous guidance in the 2 to 4 percent range when compared to 2001.

We currently foresee net earnings growth for 2002 in the high single digit percentage range.

This increase in our net income guidance for the year is the result of several factors including,

profit margin improvements versus prior expectations reduced borrowings for the year and reduction in the corporate tax rate going forward.

Continued cost controls will also aid our efforts at maximizing profitability levels during the 2002 fiscal year.

We will obviously. pleased with the quite look at this point,

As was evident in previous quarters our results may fluctuate due to a number of variables some of which are outside our control.

Let me break down Q's three and four for you in some detail, based on improved visibility at this time.

For Q3, we now believe growth in the top line of six to seven percent as achievable, for Q3 we are targeting gross margins in the 48.4 percent to 48.6 percent range and SG&A as a percentage of sales in the 21.4 to 21.8 percent range.

Gross margin improvement is to result favorable sourcing environment, as we have discussed in the past, which affords us the opportunity to pass some of the savings along to our customers.

We anticipated increase in SG&A as a percentage of sales during the third quarter, due to the additional depreciation in costs associated with the European distribution center startup.

We are currently modeling interest expense to be approximately 500,000 dollars for Q3 2002 versus 1.1 million during the third quarter of 2001.

Therefore we currently have net income growth modeled in the eight to ten percent range for the third quarter of 2002, when compared to the third quarter of 2001.

For Q4, which I would remind you, is more weather sensitive, we now believe growth in the top line of up to one percent versus the fourth quarter of 2001 is achievable.

Our current expectations for moderate growth in the fourth quarter is largely due to seasonal shipping patterns which are more heavily waited to the third quarter this year, when compared to the same period in 2001.

For Q4, we are targeting gross margins in the 46.5 to 46.9 percent range and SG&A as a percentage of sales of approximately 27 percent.

We are modeling gross margins strength year-over-year in the fourth quarter due and part to a lower expected level of close outs during the fourth quarter of 2002 and was actually shipped during the same period in 2001, in addition to the favorable sourcing environments we have previously discussed.

For Q4 we are modeling interest expense to be less than 100,000 dollars; therefore, we have net income growth currently modeled in the 8 to 11 percent range, when compared to the fourth quarter of 2001.

At present we are modeling the company's quarterly and full year effected tax rates at 37.5 percent and we are using 40.1 million shares for the purposes of EPS calculations.

Pat will elaborate on reductions in the corporate tax rate momentarily.

I know that this guidance incorporate an approximate two cents per share contribution from the licensing program for the full year 2002.

Please remember there are factors, which may be out of our control that can move this guidance around for the third and fourth quarters of 2002.

Among other things we are particularly mindful of risks associated with potential labor disruptions at U.S. ports, fluctuations in currencies, weather risks, uncertain economic conditions, and the continuing potential for disruptions generally from terrorism or military actions.

Please keep these factors and the factors previously mentioned in mind with modeling the company.

One final note regarding Spring 2003, which we began selling here in the U.S. six to eight weeks ago; although, it is too early to extrapolate a completed global bookings number, I will see that the products we are showing have received very positive feedback from our customers.

Based on this initial response, we are optimistic about our ability to grow our Spring business even in the phase of the continued uncertain retail and overall economic environment.

As is customary, we will announce the Spring order backlog at the Q3 conference call in October.

Of course we have no visibility in the fall 2003 at this point, so I won't speculate as to how the fall 2003 business will grow but I will say that we are excited about the product launch for the next fall.

We certainly believe that our position in the fall outerwear, sportswear, and footwear markets globally affords us the opportunity to continue growing our fall business.

Bearing all this mind, we will continue to the operate the company in the lean, low speculative inventory model while maintaining prudent credit extension practices with the objective of preserving a very strong balance sheet.

Again please understand that this information is forward-looking in nature and is therefore subject to the risk factors as previously mentioned.

Please consult the company's annual report on form 10-K dated March 29th 2002.

At this point I would like to hand call over to Pat Anderson, Columbia's newly appointed Chief Operating Officer who will review with you Columbia's financials statements for the second quarter.

Pat.

Thank Tim.

I will start with the quick review on the second quarter income statement and as is customary I would compare current quarter line items with prior year periods to facilitate an accurate comparison.

Net sales for the second quarter were 124.2 million an increase of 2.2 percent over the 121.5 million of net sales for the same period of last year.

To reiterate the top line increases largely attributable to relative strength in our European and International distributor businesses.

From a categories standpoint footwear was the key driver behind the growth for the period.

By region US shipments were down 1.3 percent to 86.9 million, Canadian shipments decreased 8.9 percent to 7.2 million.

European shipments increased by 9.1 percent to 14.8 million and other international shipments increased 25.4 percent to 15.3 million.

Significant component of the other international increase is contributed by our international distributors which when combined reported an increased shipment of 43.9 percent to 6.5 million for the second quarter.

The company's consolidated gross margins for the second quarter 2002 contracted by 20 basis points to 43.6 percent from 43.8 percent during the second quarter of 2001.

Gross margin results for the period was consistent with what we anticipated when we provided the guidance on the April 25th conference call.

The company's SG&A increased by 1.9 percent for 792,000 dollars on absolute basis.

The 42.8 million or 34.5 percent of sales versus 42 million or 34.6 percent of sales for the comparable period of 2001.

The dollar increase was driven principally by increased depreciation and personnel cost for the period.

It should be noted that the company benefited approximately 570,000 dollars from the settlement of several intellectual properties related legal matter during the period, which were included in SG&A.

Also included in SG&A for the current quarter are net licensee revenues of 188,000 versus 98,000 in the prior year quarter.

Exclusive of these two income items, SG&A was 43.5 million for 35.1 percent of sales for the second quarter of 2002 versus 42.1 million or 34.6 percent for the second quarter of 2001.

Depreciation and amortization totaled 4.5 million for the second quarter of 2002 compared to 3.8 million for the second quarter of 2001.

The primary effective tax rate of 34.9 percent, the company reported net income of 7.5 million for the second quarter of 2002 versus net income of 6.4 million for the second quarter of 2001.

This resulted in earnings per share for the second quarter of 2002 of 19 cents versus earnings of 16 cents per share for the second quarter of 2001 based on diluted share count of 40.1 million for both periods.

The lower effective tax rate contributed approximately one cent per share for the quarter.

For the full year 2002, the

reduction in our effective tax rate from 39. 5 percent as we original projected to 37.5 percent as we are now modeling, is due to several factors including the relative mix of International and U.S. profitability and to a lesser degree the utilization of foreign tax credit.

All though some of the items in the current rate may not recur annually, we do anticipate 37.5 percent effective tax rate to continue in subsequent years due to anticipated reduction in foreign tax rates as well as the continued International profitability.

I would like to point out that reduction in our effective rate to 34.9 percent for the second quarter is due primarily screwing up the rates for the first half of the year to the currently anticipated full year rate of 37.5 percent.

I will quickly run through the balance sheet and again I will be comparing June 30, 2002 balances and June 30, 2001 balances.

Accounts receivable were up 5.4 percent to a 103.1 million on June 30, 2002 versus a prior year balance of 97.8 million.

The increase is in line with the sales growth in the second quarter.

Inventories were down 8.7 percent for the period to a 170.7 million compared to a 186.9 million at the end of the second quarter of 2001.

The goods inventory consists primarily of fall 2002 inventory in our distribution centers and on the water to support the fall sales season.

The remaining inventory consists primarily of raw materials and working process to support the fall 2002 and Spring 2003 seasons.

The most significant component of the decrease in inventory is attributable to raw materials and working process inventory associated with our

production. .These accounts are approximately 12 million of the overall decrease.

Reduction in the CMPQ business is reflective of the favorable price we are receiving on packaged production due to excess capacity and aging generally and the recent access to Vietnam productions for delivery into the US.

Our price inventory relating to Spring '02 and prior seasons is minimal and will not adversely effect the growth margins in future periods.

Overall, we remain comfortable with our inventory position.

As we discussed previously and as Tim mentioned in his opening remarks, the company is making significant progress on the distribution center project in France.

As you recall, this project is the primary driver for our capital spending for 2002.

Year-to-date, we have spent approximately 15 million on the European distributions center with a total for the year projected to be 29 million dollars for this project.

Maintenance CAPEX is currently budgeted approximately 10 million for 2002.

This combined with other distribution related projects completed earlier this year brings the total 2002 capital spending projections to approximately 41 million.

At this point, we have 18.6 million dollars projected for depreciation and amortization in 2002, which is an increase of approximately 2.3 million dollars from the 16.3 million dollars for 2001.

That covers the financials for the second quarter of 2002.

I will reiterate that from a balance sheet perspective, we remain very pleased with the way the second quarter was managed.

Inventories and receivables remained in good shape and the balance sheet is very strong.

At this point, I will hand the call back to Tim who will review Columbia's business environment and development.

Thanks Pat.

Let me just run through for you the second quarter 2002 categorical sales results with comparisons to the second quarter of 2001.

Outerwear 41 million versus 44.8 million last year, a decrease of 8.5 percent.

The decrease here was primarily the result of timing shifts in the US where we saw a higher mix of outerwear shipping in the year when compared to last year.

Sports wear: 60.7 million versus 59.6 million, an increase of 1.8 percent.

Sports wear shipped as planned in each region.

From a close up perspective, we are coming through the Spring sportswear season with very modest levels in inventory, most of which have been pre-sold at this point.

Footwear 17.2 million versus 12 million, an increase of 43.3 percent.

The US, Europe, and Japan were all key drivers of growth in footwear shipments for the period.

As we discussed during the Q1 call, the shipment scheduled for Spring footwear this year were somewhat more seasonally back-end loaded than last year.

Year-to-date footwear has posted a respectable 15.1 percent increase.

Accessories, 4.9 million versus 5.1 million, a decrease of 3.9 percent.

Geographically let me give you some basic background for the second quarter in 2002 versus the second quarter of 2001.

U.S.A. sales of $86.9 million versus $88.0 million, a decrease of 1.3 percent.

U.S. performed as planned for the period based on previously discussed order trends.

Columbia-branded footwear was a bright spot during the period and again from an inventory standpoint we are well positioned as we wrap up this spring 2002 shipping season.

Canada sales of $7.2 million versus $7.9 million, a decrease of 8.9 percent.

Outerwear sales in Canada were down while footwear posted a small positive gain for the period.

Europe recorded sales of $14.8 million versus $13.5 million for the same period last year, an increase of 9.6 percent.

Footwear was the key driver of growth in shipments during the period in Europe.

Sports wear also posted a modest gain during the quarter.

Other international sales of $15.3 million versus $12.2 million, an increase of 25.4 percent and a component of other international reported sales of $5.8 million versus $5.4 million for the same period last year, an increase of 7.4 percent.

Wealth in Japan was also driven by footwear shipments.

Increased outerwear shipments also contributed to Japan's growth for the period.

I will be providing some additional commentary regarding sales efforts here in the U.S. and internationally.

U.S. - Based on our internal data, sell-through rates for most categories were actually better than anticipated in spite of less than optimal weather conditions.

On a relative basis customers across all distribution and geographic points are telling us that women's sports wear and our fishing apparel have been strong performers year-to-date.

I will note that sell-throughs for sandals have been quite tough this season in many parts of the country due primarily to the cool conditions in the early-to-mid parts of the selling season at retail.

We spring our tree in the US.

Our strategies and product innovations leave us optimistic about our ability to resume growth in our Spring business generally.

In fact men's, women's, and kids sportswear has been showing well as customers are telling us that great styling fabrication and value are propelling interest in the sportswear category for Columbia.

Europe - as I mentioned Europe was a geographic bright spot for the quarter with revenue growth of 9.6 percent.

Within Europe, France was the strongest of our major markets during the quarter and the year-to-date period.

Sell-through was solid during the period in key accounts including the decathlon and Gasport.

I will note that the retail environment in Germany seems to be very challenging at the moment and several important retailers are experiencing difficult business conditions currently.

That said, we are working hard to maintain and grow our relative positions within German key retailers.

Specifically we did see very healthy sell-throughs and reorder activities from globetrotter, which is one of our larger retail customers in Germany.

At this point, we have only just begun showing Spring '03 product in Europe and as such there is very little data in the system at this time.

Although we are receiving strong early feedback from key customers who were responsive to the new GRT offerings and the sandal and hiking footwear products we are showing for Spring '03 presented today.

Canada's performance has been below that at the corporate average during the quarter and year-to-date period.

This is principally due to the soft bookings we reported last call for Canada for the Spring season.

Of those sell-throughs across most product categories has been quite good in Canada as of late due in part to very good weather conditions.

For weather in Canada got off to a late start and created some pressure on early season

activities in the region.

Looking into Spring 03 in Canada, we are receiving positive feedback and order trends in both men's and women's apparel and footwear.

Additionally men's

has been received well by several key retailers in Canada.

Japan - As mentioned, our Japanese business grew 7.4 percent for the period, which is relatively strong given the very tough business climate that persists there.

During the Spring 02 seasons in Japan, we experienced strong sell-through rates on our GRT sportswear offering and Colombia branded footwear.

While we remain optimistic about the prospects for growth in Japan over long-term, the near-term business climate is expected to remain tough and as such we are maintaining our cautious stands for the time being.

In closing, going forward our business strategy remains steady and we will continue to focus our attention on growing the business through our four key gross strategies.

To reiterate, first we will continue to enhance the channel productivity of our existing customers to affective point of purchase marketing activities.

Secondly, we will continue to leverage our brand internationally and focus on building the business in Europe.

Third, we will continue to develop the merchandized categories of sportswear and footwear more completely.

Fourth, we will continue to selectively add distribution as we seek severely the department stores and specialty footwear businesses.

And last but not least, we will continue to seek out attractive licensing opportunities as we attempt to leverage both the Columbia and the

brands.

That concludes our report.

Thank you for listening in.

We will be happy to field any questions.

Operator can you please help us?

At this time, I would like to remind everyone in order to ask a question please press star and then number 1 on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Bob

from Lehman Brothers.

Good afternoon.

Good afternoon.

Hi Bob.

Nice quarter once again.

I guess Tim, could you elaborate further a little bit more on maybe the sportswear and footwear

for those categories throughout the rest of this year and you cared to sort of maybe throw a number out there for the Spring in terms how positive the feedback has been so far?

Well, to answer the first part of the questions as it related to 02, we have done a considerable amount of work on guidance which we discussed in the call and I think those would be baked in, those rate of increase would be baked in there.

As you know, we have made changes in the semi recent past in both categories of management from sportswear and footwear and we believe that the true reaction to those changes is just now coming on board.

As it relates to 03, you know we have been very adamant that we stick to our backlog numbers being released at certain times during the year because it gives ourselves and investors a much stronger and more accurate reflection of the business.

That having been said, we have seen frankly very rewarding trends as it relates to our current business and we would expect that we will be back on a growth track, you know, to be announced at the third quarter conference call.

Okay.

All right thanks.

Thanks Bob.

Your next question comes from Jeffrey Edelman from UBS Warburg.

Thank you, Good afternoon again.

Nice quarter.

Congratulations to Jeff and Bryan .

Pat, a question for you - if we assume you get back to a double-digit growth in 03, what kind of a swing could we see on the SG&A line from increased efficiency actually that the operating margins from increased efficiencies and elimination of start up expenses in the distribution in France?

Well, I am just trying to think through that.

We haven't really modeled that up too much in detail.

We would expect to I suppose on the SG&A side we would pick up, we would show some leverage on that type of a growth given that we would, you know, not have the double expenses over there and you know we held the, we have been very tight on cost controls this year.

We would have some investments, we would need to make in internal infrastructure here to grow that business but, you know, I would expect to see some slight leverage.

Could I ask it the other way.

What was the double or the incremental expense to get that started?

To get the European distribution Center?

Yes.

I think, if I were to kind of pencil it out right now, we were looking at probably 450,000 to maybe 500, 000 of expenses this year and we would probably, a quarter million of expense last year in this quarter over there.

The third quarter, I think, was probably looking to be about enough similar numbers to last year and maybe 500,000 to 600, 000 of double expense.

In the fourth quarter that kind of, start up cost will be fully staffed at that point, it will probably be in that 750 to may be closed to a million of expense, probably about 750 I guess, and for the quarter.

And I would point out that last year in the fourth quarter we did have a fairly high rate of expenses associated with that start up and/or with European distribution and that we did spend some abandonment cost over there for the current facilities and also some kind of stay on bonuses that we were able to estimate.

So, first quarter maybe more of a loss and I think we will yield out in our guidance where we talked about 27 percent SG&A this year, and it was similar to that last year on the same on nearly flat top line growth.

Okay.

So, finally that's not a big first quarter?

Yes.

So, next year probably positive swing of about 600 to 700?

Yes.

Thank you.

The next question comes from Virgina Genereux from Merrill Lynch.

Thanks, guys.

On the increase this year, it was sort of a top at the 2 to 4 percent range on the revenue side.

Is that more kind of tired of the at once footwear business or what's taking sort of the revenues to the high end of the 2 to 4, I know you talked about what happened in this quarter, but if you can just?

Well, we were just, as we get closer to the periods during fourth quarter, we have more visibility and it is not really significant improvement , but we feel more comfortable in those ranges now than we did upon at the top end of the ranges that we did before.

So, you know, just as we get closer in time, we can get more visibility in and frankly there has been some positive signs on selling at retail for merchandise.

So, we received orders from our customers to take in some of the speculative inventory that we built.

So, just as we get closer to the quarter, we get a better feel for, and that's why we are under the recent guidance at this time.

Okay.

Great thanks, and then on the, if you look....

Some SG&A level were possible if revenue growths returns to double digits.

On the gross margin side can you address your outlook given you know, one may be you are getting some currency help on the gross margin side in the O3 at least in the first half but I don't know if items are, if sourcing might be costing you a little more because of the same currency bang and that is the mix shift to more footwear and more sportswear if that can pressure the gross margins.

If you could just give us a report there.

Right we've talked before about this category of merchandize being over the next several years and maybe decades, they are generally deflationary, so I think our part is that they will not, until it becomes a significant amount of pressure, and increased volumes from other customers being, to our sourcing countries that we don't expect a significant change in our costing, either up or down, or I should say generally down with the next several years, but currencies may make their part but we don't expect there to be at we don't expect it to be a very significant cost growth on our products over the next several years.

And how about the sort of category mix?

Footwear is a strong category for us and it does have a lower margin to it.

So that is fixed and it may offset some of the more favorable pricing we are seeing, but I wouldn't expect to see anything, substantial pressure on margin based on mix given the pricing was

.

Okay great and that goes for sportswear as well?

Yeah.

Really across all categories at this point.

Okay.

Thanks a lot.

Thanks.

The next question comes form Margaret Major from Goldman, Sachs.

Hi this is Caroline Jency on behalf of Margaret Major.

Hi Caroline.

Hi, excellent quarter.

I just have a couple of questions.

Could you just talk a bit more about why there is such a strong swing in the sales between 3Q and 4Q?

Well, the demand from our customers is much larger in Q3, and so that's when our customers are buying from us, early in the cycle.

You know they want to make sure if they have the product on hand for the post earnings season that is generally in Q3.

Q4 for us is generally residual sales and filling in the final pieces of the business for customers and is more weather sensitive and is reflected, whereof weather trends at the time.

Last year we had a pretty good swing or shift from the third quarter to the fourth quarter with some of our larger customers to wanting to shift from September to October deliveries.

They went fairly flat with this.

We haven't seen that shift continues over third quarter.

We are seeing the growth in fourth to be similar to last year.

So does this mean that people want to get product earlier or that they are delaying their fourth quarter?

That is the way we have to thing about it?

No, I think this is very normal.

I mean, the volume trends between third and fourth quarters are very normal, but when you look at other companies over several years.

Okay.

Last year might have been the abrasion where we did see the shift go to the fourth quarter with its bigger customers and we haven't really seen that continue, I mean, that number will be similar to last year.

Okay.

Also if you could comment on what sort of impact is income or what likelihood that there is a good strike on the west coast now?

Well, Carol can probably speak about that similarities, he watches most closely.

Carol , we keep a real close eye on this.

As you may know, the union rejected the first formal offer yesterday form the shippers but they are continuing to work on the 24-hour extension basis.

We think that may continue for a period of time.

The Bush administration has indicated that they will probably evoke the

act if the strike is called.

But the longer this thing goes the more optimistic we are that, ultimately going to reach a settlement and our ability to potential should exist at present we don't see adverse impact on sales at this point of time.

We are continuing to ship right on through as normal.

But they have to withdraw as of today, would substantially receive for the fall of 2 seasons so, and it is quite a bit on the locker as well.

So we are probably in relative good shape in that perspective.

Okay great.

And then the other international distributors that was quite strong, and I was wondering if there is any other comment you can give on that?

Well most of our markets, which are covered by the other international category just seem to be performing well.

Most of them are newer in stature and history with the company and are just gathering some critical mass in how they are doing business.

And then finally, one question on the footwear business.

It is interesting that the sales are obviously very strong and then you talked about some soft sandal sales and I want to talk about what is selling well for you?

Well, we are fulfilling orders the customers wrote months ago, so when we talk about soft sandals selling that is at retail, by way of giving some color to the, what's the shelter activity that is happening at retail.

We have seen good selling, with our, as we call it SUV program, which is our light hiking merchandize, and that is probably the brightest point in the category today.

What's for selling right now for next spring that activities ongoing and we will have much more to look forward on that during the Q3 conference call.

Okay great, thank you very much.

Thank you.

Your next question is from Jennifer Black from Wells Fargo.

Good afternoon, can you hear me?

Yeah absolutely.

Congratulations on a good quarter in a

environment.

I was curious to know it was very noteworthy that your Arctic Fleece collection in both women's and kids at the North term anniversary sales is blowing out of the stores and in some stores it can't even be found.

I wondered if that was something......

How much did you buy?

I wondered if that was something you bought?

it wasn't just me.

I heard this across the lots and lots of stores.

Are you in a position to be able to replenish that because I know you guys don't speculate on inventory.

Can you comment on that?

I wouldn't, without checking I wouldn't be able to tell you specifically on those styles but can tell you that the early selling reports that we've got from some of our key retailers for full merchandise has been very good and including North term.

So you know, if we have some, believe me, they can get it from us but in general we're quite, we restrict the book of our re-order activity to a small speculative amount which is our best style so without looking I wouldn't know about those stuff, but we've been very pleased with our Fleece business so far this year.

Well I know that they ran a lot narrower and deeper in their assortment and so it had to be something that you could give them.

I'm guessing that's the case, but we heard all about it though.

Thank you.

Thanks Jennifer.

Your next question comes from Noelle Grainger from J.P Morgan.

Afternoon.

Good afternoon.

Congratulations, Pat and Bryan.

Thank you very much.( Bryan and Pat)

A couple of questions.

First, Tim you've made a couple of comments now about some positive early signs you've gotten in sell through for fall.

Wondering if your guidance includes any change to kind of your close out assumptions for the back half.

Are you feeling any more optimistic or bold about the level of that replenishment that you may sell at full price?

Well just to remind you, we quote that number based on our March 31st snapshot of the inventories and so we continue to sale from March 31st, obviously sales are gone.

At this point we've had enough activity in that area to have more visibility and we start more inventory sale, obviously more orders to write, but its limited in terms of what we can sell, but we have enough visibility on that we can feel more comfortable on that area.

Yeah, we are still modeling at normal amount, normalized amount of inventory, so to the extent of

close out.

So, to the extent that we do get strong reorders, you know, there is a potential for that some creep there and most of it being margin as oppose to additional sales.

Great, okay.

Pat can you talk a little bit about currency impact and is that start to become a little bit of a positive for you at all this year?

Yeah, I mean its a positive, you know we have got some fairly substantial sales in some currencies that have been pretty beat up recently, the Yen, the Canadian Dollar, and the Euro.

There is a little bit of that baked into our guidance but given the volatility, you know, we are not necessarily, we haven't maybe brought all of that and based on current rates, I know, we are looking at 1.59 Canadian Dollar few weeks ago 1.0 to 1.51 which would have, you know, about three or four couple of million, I guess, additional revenue dollars in but now it went, jumped back to 1.58.

So, we haven't really faced that in or relied on our guidance too heavily.

Okay.

But then you know if you see a very strong foreign currencies, yeah that would be a little bit of upside from that.

Okay, Tim can you elaborate a little bit more on your European business or it had some other kind of retailers or industry players talk about the shopper being a little distracted by the World Cup away from some their products and your European business seems relatively healthy, I was hoping you could elaborate a little bit.

Well, we are still, you know, very embryonic in Europe.

So, I think, you know, I guess those are mega trends sometimes not affect us just because our businesses are small over there and we are really not athletic oriented.

So, I guess, I am sure our customer over there in Europe is a World Cup enthusiast, but he may be continuing to do his outdoor activities regardless of what's happening in the Soccer field.

Yeah, I think, I probably would point to the major trends that are, when we talk about all the time on it from the European businesses, yeah being significant opportunity for us their and almost because of the size of the business so much despite the number of issues.

Okay and then just a last question will be on Sorel.

Tim can you elaborate at all at this point in, you know, where you are thinking of taking that business if you look out in next year and any kind of early read on some of the outerwear product, because that's shipped for fall right?

Yeah, that will shipped here.

Some of that may have shipped.

Without looking at it I couldn't be able to tell you exactly, but it may have shipped already but certainly in this quarter we will be shipping some.

It really is a true test the fall apparel.

It's just way too early to know how that's going to do but we feel very comfortable with our position and investment in that area.

Obliviously we think the opportunity is very significant we got a Senior Executive joining the company who is going to be focused on making that a bigger business and we very felt that in order to maximize the opportunity, a champion is required inside the company to make that business grow and we are thrilled with Ed's abilities in that area and we know it will help us a great deal.

The more time we spend on Sorel frankly it is more excited we get about, we want to make sure that the opportunity is maximized with the a real strong merchant and good business manager looking after it.

When do you expect to, kind of, have a more developed plan for that business?

Well.

Ed doesn't officially join the company until the 1st of September.

So he will spend the first three months this year really learning how business dealing our customers and frankly by the time he starts here, our fall '03 lines will have been totally completed and buttoned up, because we started selling that stuff in November.

So the impact he will have in the short term will be modest.

But we would expect that he will have full plans developed by, around the first half of the year.

Okay, great.

Thanks very much.

Your next question comes from Carol Murray from Salomon Smith Barney.

Hai, good afternoon.

Hi Carol, how are you?

Very well, thank you.

Congratulations to all and I do not if

is on the call, but we will miss you.

Couple of questions.

First, you mentioned about, you know, the strike basically hasn't really impacted on, you know, flow of product yet.

Did you at all ship anything early in the second quarter?

A number of, you know, companies and the industries indicated that there was some early shipping in the second quarter just because some retailers wanted to ensure that they have the product.

Did that impact you at all?

No, there was no early shipping.

We did a little bit of early receiving, but was minimal.

Secondly, on the other International, would you expect that height of gross going forward over their couple of markets in the second quarter that, as you said, you know, we are just reaching critical masses there really some momentum building that will sustain that trend into back half of the year.

Well, I guess I would, you know we talk a lot about our International opportunity and the other International markets, include those which are smaller and well some day have price potential we believe, but some of them include markets which are turbulent including Japan and Argentina, and other areas like that.

So we hesitate to speculate much on that basket of customers just because some may be very strong and, you know, some may be weaker just based on the fragility of that kind of a market.

Are they on in order of booking system or not?

Yes they are in booking systems.

So that the sales that we have planned in those markets would be taken with the guidance we have given you.

You know but back rows will likely supercede the cooperate average.

As I used to say might I think, I think I am sorry about I think that is, that?s true.

I mean we could have very strong growth in those categories in those markets but they are still relatively small.

Right okay.

I'm sorry.

You know this seems to be a little bit of recovery on, there is certainly in retailer view for the United States on you know, it is a fall you know it started out with sincerely low, low vantage points obvious.

Do you see that at all impacting the appetite in Canada that do seems to move in tandem with a slight lag on Canada's part?

Yeah.

You know I think probably our business in Canada is, is going to be more impacted than the company average on the weather frankly.

It is, every reliance on winter footwear and winter outerwear there.

Canada's working for fall were up around the company's average or at the high end of the company's average so I do not know that it is lagging as much.

They had a, they must, they obviously had a better winter than we did last year.

Yes, but it was not good, it was not a good winter I mean it still was, was behind the average in terms of temperatures.

What is your crystal ball saying for this wet winter?

We are going to rely on your weather report, oh god please?

oh God!

Please.

We are managing the, I mean the only thing we can do is manage the inventories.

So we would spend so much time on that part of the business but you know we can probably crop up opportunity if it is really cold but we aren't

if it is not.

Last question.

We have heard a lot of discussion more as the department stores but you know it is also happening in modern retailers about other men's wear metrics changing in sportswear and also among certain categories as the department stores really try to reinvigorate men?s wear sales, which has been under a lot of pressure.

Have you seen any evidence on, you know we have heard your name from a couple of retailers as you know, a potential add in on the matrix are getting more safe.

I was wondering whether you could comment on that.

Well, I mean it is flattering we have, you know we have had a, as the brands visibility extends with prominent retailers it is really flattering to see others that have, maybe have been less enthusiastic about the line get interested but we always have to have a very full discussion of our business practices because they just sometimes don't fit.

So we could, we could have a much larger department store business if we had a different business model.

That, even though the customers maybe enthusiastic sometimes we just are not able to provide them more with enough risk reduction to, to be as big as may be we could be in some of the customers.

Does the mark tarnish you still remains or did it always remain as an impediment?

Yes, we adjusted all the business conditions and we just want to make sure that our customers are comfortable with our business model and you know because we do not want a failure on anybody on any part from certainly lack of understanding.

So we spend a lot of time in discussions on those particular subjects and sometimes they just does not cruise or something into a lot of businesses but in other cases when we can match up, we have done very very well.

Okay.

Right, I have one more question.

Okay.

On Sorel gentleman who is going to be joining comes from ENS, which is a retailer obviously.

Right.

Are you at all contemplating doing a Sorel retail concept?

No.

No?

Okay.

But we are wholesalers.

His background, probably if you look at his resume, he was at

for a considerable period of time at EMS, but he was also at

for a number of years.

So, he has got a great background and good business sense and he will be very helpful for us but we are not going to be retailers.

Okay.

Thanks very much.

Good quarter.

Thanks Carol.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

Your next question is from Jack Facker of Facker Investment.

Good afternoon guys.

Hi Jack.

Based on your historic top line growth rate being significantly greater than you are experiencing this year obviously, what at this point of time is your opinion of the overall retail environment as you are seeing it out there right now in the United States?

Well.

I think it is still challenging when you look at our, the size of our company and the landscape were still very small by comparison to many of our competitors and so these trends have impact on us, but frankly we will have much more success when we concentrate on product development internally and that's where we can make the biggest impact on market and have the biggest opportunity for growth when we have very significant opportunities.

We have been pretty clear with our investors that we over the long term expect high-teens growth and we think that, you know, not retail

conditions withstanding but despite those we have the appropriate products and we know we have the appropriate strategies to bring us to that level.

That have been said at a retailer environment it is still challenging in the United States.

It would appear that has an awful lot to do with your stock price at this point as opposed to your own internal performance which you cite, you know, it looks very good, but it really does look like you drag down with everybody else just based on pessimism above retail.

Yes. possibly I am not a good bell holder,.

I only own one stock. "laughter"/> Okay.

Thanks.

That answers my question.

I was just trying to get your perspective.

Thanks Jack.

You have a follow-up question from Carol Murray from Salomon Smith Barney.

Could you address what you are thinking of for the uses of your cash balances because the legacy had a big capital spending this year and are still few more to be done but, you know, you all generate fairly healthy cash flow and you know, if I just run some numbers by the end of next year, you know, you will probably end the year with an even higher cash balance.

You know, are there some big investment needs that are coming up on a horizon or what you are thinking about in terms of redeployment of cash?

Well.

We get that question frequently from investors.

More frequently now than before and I guess I would answer that in sort of several steps.

First of all we want to make sure that especially in this environment we maintain a very strong balance sheet.

That is you know one of the areas of strengths to the company and so that is sort of a tenant that we work on.

Secondarily, we have never talked to investors about us being an acquiring company.

That having been said there are opportunities, we have taken advantage of one as you know that are, Sorel but there are other opportunities that we see coming along and thirdly as our footwear business grows we will have another requirement for the capital expenditures footwear specific warehouse at some point in time as the business demands.

Those are, I guess, the 3 primary answers but that having been said we certainly are mindful of it and we discuss you know to cash at every board meeting but so far we have decided that we think this opportunities where the company utilize the cash for a go-forward basis in some of these areas.

Okay thank you Tim.

Thanks Jill.

You have another follow up question from Jennifer Black with Wells Fargo.

I wonder if you guys could say if your percent with Coles is staying about the same.

It seems like it was somewhere between 5-7 percent.

Your percent of business you are doing with COLM.

We are looking at some notes here.

Yeah against 2001, there is some slight increase in the size of COLM's business as a percent of our business for the whole year.

And what percent do you expect that to be?

We are not sure yet and we may or may not have a 10 percent customer in 2002.

Okay.

That is cool.

Alright.

Thanks a lot.

Okay.

And another follow up question from Noelle Grainger from J.P.Morgan.

Hi.

Two questions actually.

On the use of cash potentially for acquisition opportunities, that seems like maybe it moves up on the priority list a little bit or opportunity list and I was wondering if you might be willing to comment on particular areas of your business that you felt were well suited to have something plugged into it?

Well, in terms of the first question, in terms of the elevation, it just as the cash grows it obviously, it sure makes the question and we may have spend more time on the subject of acquisitions and now when we did in the past just because the capital's available, but we always go back to, you know, a very stringent reviews, of any potential acquisition can be of pricing and evaluation, and I guess that have been said the Strobe brand creates a perfect example of what an another acquisition might look like for the company as one that would be, you know, fairly to even, you know a barge in price on the asset and area we can bring our sourcing expertise in to enhance the value of the asset, the one that we can manage and will fit our business models.

I guess that would preclude any kind of equipment, I wouldn't consider an equipment maker, it would probably include some apparel product and one that when we thought we saw could bring our expertise of sourcing and our capital base to get some free quick look.

I guess that I would have to say that we would expect that industries would think in lights of the companies stated goals of growing, you know high teens, that anything we've got, anything required will have to grow faster than that since we really think that the strategy we put in place can give us the kind of growth.

Okay and then my second question would be, can you comment what you see happening on the competitive landscape specifically the North Face has announced the new line in sportswear.

Is there going to be a launching at a more moderate price point?

Have you seen any, you know, impacts on that and to see your

on the competitive landscapes at the moment?

Sure, well, you know we talk a lot about competitors.

Everybody has them.

Its a great way to keep us and others rolling and challenged.

So we always talk about the three key competitors that we have being Timberland, Nike ACG, and North Face.

So they are all active, aggressive, and talk a lot probably about our space and wanting to be in it.

As it relates to North Face specifically, we've heard a little bit about the product.

I haven't personally seen any but I know our customers have seen it and have given it pretty good reviews.

I don't know frankly that we have gotten any reduction in our open-to-buy as based on our product category, but we will know more about it, when we start discussing our backlog.

I guess I would say that it is to be expected that they are going to get better and they couldn't be worse than they were and so we are expecting that you know, much like any other competitor will have to be, very mindful and do our best to produce great products and great values to compete.

Okay.

Thanks.

You got it?

Thank you very much.

Your next follow-up question comes from Virginia Genereux from Merrill Lynch.

Thank you, on the, two questions.

On the SG&A side this year, you know, you take this quarter, it was up 800,000 year-over-year and that's basically what your depreciation, what D&A was up and as a look out on your guidance for December, you are talking about sort of a million dollar increase in SG&A and I know you said there was dip just looking at the cost last year, but are you running the business extremely leanly?

I mean the SG&A leverage has been very impressive the way the SG&A has not sort of increased.

Are you taken stuff out of the business or is it lower bonus approvals or can you give us a sense?

Well, you know, in second quarter we talked about having some legal settlements there and that helped out also and we have also, we have got the licensing in that number which, I think, comes up to across to 800,000 net for the year.

You know, we have always said it was in SG&A that would break it out when it became material.

Its, you know, not that significant at this point so we have left within there.

So there is a couple of things like that, that we have discussed that are floating around in there.

Yeah, we are incentive based on the compensations.

So that is a third and fourth quarter.

In last year we had a great year.

So there was, you know, a higher percent in there when you are seeing recruited for this year.

Also we are seeing some descent leverage on the selling expenses where we have driven our commission rates down somewhat in some of these bigger customers that have grown nicely with us have lower commission rates and we, you know, lower selling expenses in Europe.

So that said, we have got very tight cost controls, we have had very few additions to the head count, new positions we probably had and net decline over the year, and just managing business very tightly.

Okay Great.

And again there were some additional, you know, to look the last year I did point on a couple, you know, bonus

that would be one.

There were some high professional fees last year.

We implemented some International restructuring and there are few projects going on with, you know, we delayed off this year earlier.

Tight cost control this year end and reasonably easy comparable to last year.

And Patrick, could you throw out a D&A number for '03 for me, if you are 18.6 this year.

It increases likewise, you know, up another 2 to 2.5?

Well that full year European

come on.

So I am going to guess we are going to be probably 22.

Okay, Great.

And number 2 is interest expense.

I had a slight expensive quarter, you came in positive.

Yeah, we have couple of things on that.

Obviously, we got capitalized interest associated with European distribution center.

The

of business, I referred to the has the lower, that has lowered our inventory.

You know that probably, 12 million dollars running over for the course last couple of quarters, which was their last year, and this year, as for this year.

So it is put us in a bother, flattened out our receiving schedule for all products this year.

So we have a, we have maintained a fairly high, higher than anticipated, I guess, cash balance, I think we are little bit conservative based on the retail environment and our modeling of the receivable DSO.

We have been very pleased with the question of resale or so.

Overall, we just, you know had a great year and as far as borrowing goes and again with the capitalized interest put us in to an income position.

Okay and what is your short note on debt costing you right now? may I ask?

You know, on a long-term debt, majority of its domestic, that is the 25 million dollars that does have a

expense of a, we are not availing domestically, and we are just starting to live up you know, put us in the below 3 believe.

I don't think we have got any outstanding at this point.

Really our short-term is outstanding currently as mostly based on 1.75 percent.

Great thanks so much.

At this time, there are no further questions.

Thank you all for joining here.

We will talk to you at the end of the third quarter and give you some results on our sound activities and backlog.

Thank you very much.

This completes today's second quarter earnings release conference call.

You may now disconnect.