Columbia Sportswear Co (COLM) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Misty, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Columbia Sportswear fourth quarter and year end 2002 conference call.

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

After the speaker's remarks, there will be a question and answer period.

If you would 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.

You may press the pound key.

Thank you, Mr. Beers.

You may begin your conference.

Thank you.

Good afternoon everyone and welcome to Columbia’s fourth quarter and fiscal year 2002 conference call.

With me are Gertrude Boyle, Columbia's Chairwoman, Tim Boyle, Columbia's President and CEO, Pat Anderson, Columbia's Chief Operating Officer, Bryan Timm, Chief Financial Officer, [audio break]General Counsel

Continuing our standard practice we will review the results of the fourth quarter and fiscal year 2002.

Provide some guidance on future periods and field any questions that you might have.

You should have received a copy of the earnings release by now but if you have not please phone Mary Oxigar here at Columbia at (503)-985-4000 and one will be faxed or e-mailed to you.

In light of regulation FD, we encourage you to ask as many questions during the live call as you feel are necessary to get an understanding of the company's business.

Before we begin, Columbia's Chairwoman, Gert 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 operations.

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 quarterly report on 10Q dated November 12th, 2002, under the heading "factors that may affect our business."

Forward-looking statements in this conference call are based on our current expectations in place.

And we do not undertake any duty to update any forward-looking statements after the date of this conference call.

To conform the forward-looking statements to the actual results or to the change in our expectations.

Thank you Gert.

At this point I'll hand the call to Tim Boyle who will provide an overview of significant developments that occurred during the company’s fourth quarter of 2002.

Thank you and welcome everyone.

To reiterate some questions in the press release, Q4 2002 sales for the company grew by 1.4% to a record 217.3 million when compared to the fourth quarter of 2001.

The company reported record net income for the fourth quarter of 29.1 million at 20.2% increase over net income of 24.2 million for the same period of 2001.

Diluted earnings per share came in at 72 cents, compared to earnings per share of 61 cents for the fourth quarter of 2001.

For the fiscal year 2002 the company reported record revenue of 816.3 million, up 4.7% when compared to fiscal year 2001.

The company also reported record net earnings for fiscal 2002 of 102.5 million or $2.56 per share, an increase of 15.4% compared to 88.8 million in net earnings or 22.3 per share from fiscal 2001.

We are obviously pleased with today's announcements regarding the company's record setting operating results for both fourth quarter and full year of 2002.

I will provide additional detail and commentary regarding geographic and product line performance for the fourth quarter and full year of 2002 later in the call.

I think it's important to note that the results we released today were achieved despite a difficult retail environment compounded by slow overall economies in many parts of the world.

Updates.

European D.C. the company’s officially opened its new European distribution center in Camembert, France.

The new facility’s approximately 269,000 square feet and is currently being used for the distribution of Columbia’s apparel products throughout our direct European markets.

We anticipate that the facility will ship all Columbia products including footwear and apparel for the Fall 2003 season.

The construction of this new facility underscores our commitment to European business and our dedication to customer service generally.

I believe it will aid us in our effort to maximize our opportunities in Europe.

Canadian dumping case.

As we have previously discussed earlier this year Canadian government commenced that dumping investigation into certain cold weather footwear products imported into Canada from Vietnam and Macau including Sorel and Columbia products as well as other brands.

As we announced on January 8th, the company prevailed on the anti-dumping case filed by the domestic Canadian footwear industry for the sale of rubber-bottomed cold weather footwear in the Canadian market.

The Canadian international trade tribunal concluded that the dumping of these goods had not caused material injury and is not threatening to cause material injury to the Canadian foot year industry.

As a result of this legal victory, all marginal dumping duties previously imposed on the import of the boots into Canada from Macau and Vietnam will be refunded and the future dumping duties will not be imposed.

I believe this is a huge victory for Canadian consumers and retailers and will allow Columbia to continue to provide high quality fair value product in the region.

One final note prior to providing guidance.

As we are all aware the company has built a substantial cash position as of 12/31/02.

Our management team is aware of the impact that a significant cash position can have on a company's financial metrics and we are actively considering each of the potential alternative uses of cash including distributions and reinvestments of this cash.

In the meantime we're of the opinion that we’re having a strong balance sheet particularly in these difficult economic times provides us with a solid foundation and maximum flexibility as we expand our business going forward.

Guidance.

Please keep in mind this information is forward looking in nature and is therefore subject to certain risks factors many of which are described in the company’s 10Q, dated November 12, 2002 and which were expressed by Gert in her opening comments.

For Q1, our prior guidance remains unchanged.

To reiterate, we currently anticipate revenue growth for the first quarter of 2003 of between 13 and 15%.

For Q1, we are targeting gross margins in the 43.1 to 43.3% range and SG&A% is a percentage of sales in the 33 to 33.4% range.

Please note that we are currently modeling some gross margin expansion, do a favorable sourcing environment for spring merchandise generally.

On the SG&A line we are modeling some pressure due to additional depreciation and other general administrative costs principally resulting from the European distribution center coming on line.

Bryan will elaborate a bit more on the cost structure moving into 2003 momentarily.

For Q1 2003, we are modeling interest income of approximately $200,000 versus interest expense of $100,000 during the first quarter of 2002.

Therefore we are modeling an increase of net income for the first quarter of 2003, in the 14 to 16% range when compared to the first quarter of 2002.

At present, we are modeling the company's quarterly and full year effective tax rates for 2003 at 37.5%, and we are using 40.2 million shares for the purposes of EPS calculation.

For Q2 2003, we are currently modeling revenue growth between 13 and 15% when compared to the second quarter of 2002.

We are currently targeting Q2 gross margins to be roughly in line with last years Q2 gross margin of 43.6%.

Our current SG&A target is a percent of sales for Q2 is between 34.6% and 35%.

We are modeling interest income to be essentially flat at $200,000 when compared to the second quarter of 2002.

Again, at present, we are using 40.2 million shares for the purposes of EPS calculation.

This analysis implies Q2 net income growth in the 6 to 9% range when compared to the second quarter of 2002.

Of course there are additional factors which may move this guidance around for the first half of 2003 including the level of early fall shipping that may be executed in the second quarter.

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

In light of a continued poor economic environment in the U.S. in particular, we are prepared to say that for the year 2003 in total our goal is to achieve revenue percentage growth of between 5 to 7%.

However please keep in mind that we have limited visibility into Fall ‘03 at this point.

We are currently modeling some slight gross margin contraction in the back half of the year due to the anticipated product mix.

Moreover we see some SG&A pressure due principally to additional depreciation expense associated with distribution center projects which we previously mentioned and which Bryan will elaborate on in a moment.

Also we currently anticipate interest income of approximately $800,000 for the full year of 2003.

At 5 to 7% revenue increase for the full year of 2003 coupled with a slight contraction of gross margin and additional fixed cost our modeling currently suggests the potential for earnings growth of up to 2% for 2003.

I can assure you that we will challenge ourselves to be diligent with cost controls to maximize our operating profitability for 2003.

We will provide more specific quarterly guidance for the back half of 2003 at our Q1 conference call when we announce the full backlog.

That call is scheduled for April 24th, 2003.

Again, please keep in mind that this information is forward looking in nature and is therefore subject to the risks factors as previously mentioned.

Please consult the company's quarterly report on form 10Q dated November 12th, 2002.

At this point I'd like to hand the call over to Bryan Timm, Columbia’s Chief Financial Officer who will review with you Columbia’s financial statements for the fourth quarter and full year of 2002.

Thank you, Tim.

Let me remind everyone that our business is seasonal and the bulk of our sales occurs in the fall and to a lesser degree the spring and summer quarters.

The fourth quarter is typically the period during in which the company cleans up its fall inventory and begins shipping spring merchandise to the customer base.

We'll start with a review of the fourth quarter income statements and is customary I will compare current quarter line items in a five year period to get an accurate comparison.

Starting with the top line, net sales for the fourth quarter were 217.3 million, an increase of 1.4% over the 214.3 million of net sales for the same period of last year.

By region, domestic shipments in dollars were down 4.5% to 145.8 million.

Canadian shipments increase 3.3% to 24.9 million.

European shipments increased 16.1% to 23.1 million, and other international shipments increased 33 1/2% to 23.5 million.

We measured in constant dollar terms the company's European sales grew by 6.4% for the fourth quarter of 2002.

The company's consolidated gross margin for fourth quarter 2002 expanded by 139 basis points to 47.2% and 45.8% for the fourth quarter 2001.

The strong margin for the quarter was primarily the result of favorable sourcing environment generally as well as closeout margins achieved during the period which were bolstered by optimal weather conditions in the northeastern U.S.

The company's SG&A decreased by 2.4% or 1.4 million on an absolute basis to 56.2 million or 25.9% of sales for the fourth quarter of 2002 versus a 57.6 million or 26.9% of sales for the fourth quarter of 2001. 100 basis points decline in SG&A as a percentage of sales was the result of continued operating efficiencies coming from the infrastructure investments we made over the last several years coupled with a continued focus on maintaining prudent cost controls given the current economic environment.

Depreciation and amortization total 4.9 million for the fourth quarter 2002 compared to 4.8 million in the same period of the prior year.

Looking out in 2003, D&A will increase substantially as depreciation related to investments in 2002 come on the line.

I'll update you further on the specifics in just a moment.

Given the company's strong cash position we earned net interest of income during the fourth quarter of 2002 of 316,000 compared to the net interest expense of 825,000 for the fourth quarter of the prior year.

Applying effective tax rate 37 1/2% for the quarter and the company reported net income of 29.1 million for the fourth quarter of 2002 versus net income of 24.2 million for the fourth quarter of 2001.

This resulted in earnings per share for the fourth quarter of 2002 of 72 cents versus earnings of 61 cents per share for the fourth quarter of 2001.

This based on a diluted share count of 40.3 and 39.9 million respectively.

Turning now to the full year ended December 31st 2002.

Net sales were 816.3 million.

An increase of 36.7 million or 4.7% over the 2001 sales of 779.6 million.

Regionally the U.S. business increased by 6.2 million or 1.1%.

Canadian sales increased by 5.4 million or 6.6%.

European sales increased by 13.6 million or 16 1/2%, and finally other international sales increased 11.5 million or 17.8%.

Again, we measured cost in dollar terms the companies European sales grew by 12.3% for the full year of 2002.

Gross margins for the full year increased 56 basis points to 46.4% from 45.8% for 2001.

The increase was due primarily to favorable sourcing and effective inventory management.

In addition, favorable weather conditions in the northeastern U.S. allowed for timely shipping of full priced fall goods and better margins on closeouts.

The company’s SG&A increased by 2.8% or 5.9 million on absolute basis to 214.9 million or 26.3% of sales for 2002 versus the 209 million or 26.8% of sales for the full year of 2001.

The dollar increase was driven primarily by additional selling and administrative cost to support the higher level of sales.

The ability to leverage SG&A's percentage of sales, despite the lack of strong top-line growth, was due to our continued focus on maintaining prudent price controls.

The guidance provided during 2003 will have additional pressure on SG&A as depreciation associated with the capital items that we'll discuss momentarily from online.

As I mentioned a moment ago, given the company's strong cash position, we earn net interest income during the year of 354,000 compared to net interest expense totaling 2.6 million for the full year of 2001.

Our effective tax rate decreased from 39% as reported in 2001 to 37 1/2% to 2002, which is due to several factors including a relative mix of international and U.S. profitability and the utilization of foreign tax credit.

Net income for the year December 31st, 2002, was 102.5 million, a 13.7 million or 15.4% increase over the 88.8 million in net income that the company reported in 2001.

I’ll now review the balance sheet highlights and again I’ll be comparing December 31st 2002 balances to December 31 2001 balances.

Our balance sheet continues to remain very strong.

Our cash and cash equivalents totaled 194.7 million versus the 79.1 for the same time in the prior year.

This cash was primarily generated through operations as less working capital was required to fund our growth.

Accounts receivable was down 0.8% to 154.1 million for December 31st 2002 versus the prior year balance of 155.3 million.

The accounts receivable aging is in very good shape and reflective of the strong cash collection efforts for the period especially in the U.S.

Inventories were down 17.4% and 94.9 million in December 31st 2002 compared to 114.9 million at the end of the fourth quarter of 2001.

This is in line with our previous guidance and is due to the following significant drivers.

First, a reduction of raw materials in working process inventory as a result of less CMPQ and more packaged or FOB sourcing of goods.

And second a reduction in Spring 2003 inventory receipts at year end compared to Spring 2002 receipts.

The inventories consist primarily of Spring 2003 finished goods, a manageable amount of close out inventory.

Incorporated into our current guidance for the first quarter of 2003 we're anticipating shipping slightly less closeout products or 8 million versus the 9 million for the first quarter of 2002.

Overall we're pleased with the inventory conditions given the current retail environment.

I'll now move to a quick recap on capital spending.

As you all recall the European distribution center in Camembert, France was a primary driver of the capital spending plans for 2002.

For the full year 2002 we spend approximately 38 million on capital and maintenance projects.

Of that, 26.9 million relates to the European distribution center, and 11.1 million relates to other North American distribution related projects completed earlier in the year as well as maintenance capital.

Turning now to 2003, we anticipate a total cap ex budget in the range of 15 million consisting of approximately 10 million in maintenance cap ex and 5 million in anticipated I.T. and distribution products.

At this point we have 24 million projected for depreciation and amortization in 2003 which is an increase of approximately 6 million from the 18 million incurred in 2002.

The European distribution center will start depreciating in January with full year depreciation expense of about 5 million dollars.

The remaining 1 million is related I.T. and U.S. distribution projects as well as maintenance which is expected to be depreciated radically over the four quarters.

That covers the financials for the fourth quarter and full year of 2002.

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

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

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

Thanks Bryan.

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

Outerwear,130.8 million versus 131 million last year, essentially flat for the period.

As you will recall, we made some additional unplanned outerwear shipments in the third quarter that was previously scheduled for the fourth quarter due to customer requests.

This is the primary reason for the flat outerwear shipments for the period.

Sportswear, 40.7 million versus 33.8 million an increase of 20.4%.

Sportswear was a key driver for the period and we experienced very strong increases in both the U.S. and European markets for this category.

Footwear, 34.2 million versus 38.7 million a decrease of 11.6%.

This decline was not unanticipated and is reflective of a weakness in the footwear backlog that we reported in the April conference call.

Of the total footwear business during the period, Sorel contributed 9.9 million, an increase of 16.5%.

I want to remind everyone that the Columbia brand footwear division is under new management.

Due to timing of the changeover this group did not have the ability to positively impact footwear design and sales during the 2002 year.

That said let me also tell you that I'm optimistic about the future of our footwear division starting with the spring 2003 product, which is currently being shipped.

As a reminder the company posted a 15.2% backlog increase going into the spring shipping season and footwear was a key driver with an increase that was significantly above the corporate mean.

Accessories, 11.6 million versus 10.8 million an increase of 7.4% driven in large part by shipments in Canada and Europe during the quarter.

Now let's run through the categorical results for the full year of 2002 with comparisons to the full year of 2001.

Outerwear, 422.5 million versus 403.3 million last year an increase of 4.8%.

Outerwear growth for the period was driven by the U.S. and Europe though all markets experienced an increase for the year.

Sportswear, 245.2 million versus 232.9 million, an increase of 5.3%.

Sportswear growth for the period was also driven by the U.S. and Europe though all markets experienced an increase for the year.

Footwear, 110 million versus 108.6 million an increase of 1.3%.

Though we experienced healthy increases in our footwear business in our European and distribution based markets, footwear shipments in the U.S. were off significantly for the period.

Again this was not unanticipated given the soft footwear backlog that we discussed in April of 2002.

Of the $110 million in footwear sales for the year, Sorel contributed $22.1 million of 33.1% increase.

We are very pleased by the reception that the Sorel brand in general has received from consumers and we anticipate that there is significant additional opportunity to generate revenues with the Sorel brand name.

Accessories, 38.6 million versus 34.8 million an increase of 10.9%.

All foreign markets experienced strong accessory shipments for the period.

Geographically, let me give you some basic background in that area for the fourth quarter of 2002 with comparisons to the fourth quarter of 2001.

USA, sales of 145.8 million versus 152.7 million, a decrease of 4.5%.

A large piece of the decline in the U.S. was a result of shift in timing of approximately $4 million from the fourth quarter end of the third quarter due to customer demands which are mentioned previously.

Sportswear was a right spot during the period for the U.S.

Canada, sales of 24.9 million versus 24.1 million an increase of 3.3%.

Growth in Canada for the period was driven by increased shipments of Sorel footwear.

Europe, sales of 23.1 million versus 19.9 million for the same period last year an increase of 16.1%.

Europe reported solid increases in each merchandise category for the period.

Other international, sales of 23.5 million versus 17.6 million, an increase of 33.5%.

Japan, a component of other international recorded sales of 10 million versus 9.1 million for the same period last year, an increase of 9.9%.

Now let’s run through the geographic results for the full year 2002 as compared to 2001.

USA, 557.5 million versus 551.3 million last year an increase of 1.1%.

Outerwear, sportswear and Sorel footwear all posted gains for the year in the USA.

Canada, 86.7 million versus 81.3 million last year, an increase of 6.6%.

Growth in Canada for the year was driven by increase shipments of outerwear and Sorel footwear.

Europe, 95.9 million versus 82.3 million for the same period last year, an increase of 16.5%.

Europe reported solid increases in each merchandise category for the period.

When measured in constant dollar terms the company’s European sales grew by 12.3% for the full year 2002.

Other international, 76.2 million versus 64.7 million last year an increase of 17.8%.

Japan a component of other international recorded sales of 31.4 million versus 28.6 million for the same period last year an increase of 9.8%.

Let me provide you some additional commentary regarding sales efforts here in the U.S. and internationally.

U.S, in the USA for the fall 2002 season we experienced a real diversity in sell through activity throughout the country.

Generally speaking the Columbia brand performed well in the Northeast and most categories given a very cold winter that region has been experiencing.

In other regions where weather has been less cooperative including the upper Midwest and the Northwest, our weather sensitive products have not sold through as well as we would’ve liked.

Nevertheless, we did experience great sale through of our sportswear products generally.

Looking forward into fall 2003, the potential impact of current weather patterns across the country is incorporated into the guidance I provided earlier.

Specifically we would anticipate additional business in all categories with key Northeast customers based on sales activity to date and additional growth with customers that are expanding their door base generally.

At the same time we will be challenged to grow in weather sensitive products in most regions that did not experience seasonal weather this winter.

Despite this we are on track to accelerate growth during 2003 compared to the 4.7% top line growth we announced today for 2002.

Maintaining tight inventory controls and constantly working on evolving the business into less weather sensitive categories will help to ensure that we maximize the growth opportunities we see in the U.S. as well as other key markets around the world.

Europe;

Europe reported another solid growth year though certainly not up to historical rates.

Nevertheless, I remain encouraged regarding our European opportunity, given the increasing penetration into new accounts, and the growing business with key retailers throughout the region.

As a point of reference, France remains our second largest country within the European region, while Germany is now the second largest market having overtaken Spain.

In terms of top accounts we continue to carve our business with key retailers including Decathlon in France, Blacks in the U.K. and Karshtet in Germany as well as more specially accounts throughout the region.

Although weather during the early winter selling season was quite mild and hampered sell through activity, lately the weather has gotten much colder throughout the region and the anecdotal [inaudible] is that Columbia brands are currently selling through very well at retail.

This goes well for the fall 2003 selling season which is currently underway in Europe.

We'll provide additional detail on this front on the April conference call.

Canada, I'm pleased to report that Canada reported solid numbers for the full year 2002.

However the region was also hampered to some extent coming into this year due to the warm winter they experienced last year.

That said, Sorel was a bright spot overall for the region during 2002 and there appears to be significant opportunity for the Sorel brand in 2003 and beyond.

Growth for the region in general will be a function of continuing to drive more business with several large key retailers with whom we have great how long-term relationships.

I am optimistic that through effective product development and business execution we will continue to carve out growth opportunities in Canada going forward.

Japan, we experienced strong sell through activity for apparel products in Japan during the fall season.

Given the sell through activity in the region we are optimistic about potential to grow the Fall 2003 business, though the order-taking period in Japan is later than the U.S. so we have very limited visibility at this time.

Despite tough economic environment in Japan, we continue to increase market share and I remain optimistic about the long-term potential for the region.

In closing, I would like to thank our hard working employees for a job well done as we wrap up the most successful year in the company's history.

Due principally to employee efforts we were able to grow every product category in every region around the world during the year.

Going forward our business strategy remains steady and we will continue to focus our attention on growing the business through the four key growth strategies that we so frequently articulate.

First, we will continue to enhance the channel productivity of our existing customers through effective operation of retail merchandising program including concept shops and focus areas.

Second, we will continue to leverage our brand internationally and focus on building the business in Europe in the near to mid term.

Third, we will continue to develop the merchandising categories of sportswear and footwear more completely which includes drawing our footwear business in part through the Sorel acquisition.

Fourth we will continue to add distribution as we seek to grow a department store and specialty footwear store 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 Sorel brands.

That concludes our report.

Thanks for listening in and we will be happy if you have any questions.

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.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Bob Drbul of Lehman Brothers.

Hi Bob.

How are you?

Good.

Can we start on the guidance?

Certainly.

You talked about limited visibility thus far in the fall, can you give us an idea how much of your order book is already done and where you're at in it and sort of the level of conservatism that you're talking about here?

Certainly.

I think we are probably just slightly over half on the order book in that range, and as customary for the company, we want to make sure that we give investors the full range of our thoughts on where the business is going to end up.

It's a very difficult retail environment now, but there is opportunity to enhance still in our current guidance.

And as well, on our expense levels, I think that everyone that's familiar with the company has seen our business models change on the expense side greatly as it relates to the sales efforts, and we're mindful that we're deleveraging at a certain amount at this time of this year and the year is not baked, and we will be cognizant of our own internal plans to add leverage to the company.

In terms of being about halfway through, have there been any major changes from your major retailers, any different directions going with categories or anything that is different as you look at the back half of next year?

No.

No major changes with major customers or even with any -- any customers.

No, we're just seeing a difficult retail environment, and caution on the part of our retailers.

Okay.

And the final question is just on sort of outerwear as a category, Tim, do you think that if you had to put a growth rate on outerwear as a category, is it a mature category?

Are your market share opportunities still there?

Where do you come out on that?

Well, certainly in North America, outerwear is our most mature business.

We believe that there's still opportunity in North America, but we believe that the biggest opportunities on outerwear, specifically, are in Europe or in other parts of the world where our business is much less mature.

Okay.

Thank you.

Thank you.

Your next question comes from Carole Buyers of RBC Capital Markets.

Couple of questions just piggybacking on the backlog question, I know you don't provide specific guidance, but can you give us a little bit more color on the retail environment when it comes to negotiations does it seem like retailers are just holding back and do you think that they might end up ordering later in the year because of what's going on out there?

Is that kind of your interpretation?

Well there's a little bit of that.

There's a little bit of the company's presence on the Western part of the United States, I would call that from the upper Midwest, call it Minneapolis and Chicago West where we have had a poor weather year.

It's been cold but there’s not been much snow.

In fact in the West, there’s not been much snow or much cold.

So those guys are guided by the impacts of weather.

But I think in general retailers are being cautious.

And as you know, as it relates to our business model, we do a significant assessment of the marketplace in general around the time of our Q2 -- Q1 ending at March 31 where we'll take an analysis and a speculate position.

I would expect, frankly, that our position at that time would be reflective of what we believe the markets sort of fully-bought position is.

But again I wouldn't expect it to be wildly different from our historical norms.

Okay.

And then just one follow-up question on the gross margin.

When you look at the improvement you saw this quarter, how much is related to selling the speculative inventory at a better margin?

Well, certainly some of it.

You know, as you know, we model this inventory to be sold at closeouts, and when we have -- when we have nice shot from the weather in the Northeastern part of the U.S., like we had this year, we get an improvement.

But in general, we've seen gross margin improvements throughout the year, but there's a significant portion probably due to that later part.

Thank you.

The next question comes from Virginia Genereux of Merrill Lynch.

Thank you.

Let me ask also, Tim, it seems sort of implicit in your guidance is a back half that's up sort of 2 to 3% and change.

And let me ask, it sounds like implicit in that sportswear and footwear are doing very well, hearing good things about that, that outerwear is probably down, particularly in the U.S.

And let me ask you, if -- we think about your U.S. business sort of two-thirds sporting goods -- you know, 65% sporting goods independent, and one-third department stores.

The publicly traded sporting goods guys are opening more doors, they’re sort of up 10-11%.

Kohl’s growing 20% -- I mean I know it's in warm weather.

I mean are you losing share?

Is deflation becoming a factor in outerwear?

Could you comment on that?

Yeah, I wanted to make sure that people know it's way too early in our booking for us to really give a lot of guidance on the componentry of the back half business.

There's lots of footwear business to come in, a lot of outerwear business to come in.

And, so, I wouldn't want people to leave with the impression that the outerwear business is in the tank.

But we certainly know that our sportswear -- our sporting goods customers and Kohl’s and other department stores we're working with are being cautious on their outerwear purchases, even though many have had fabulous winters -- winter this year, they're still mindful of the risk in the outerwear business and the weather-sensitive business based on the trend of the last several years.

So, you know the company's very fortunate that it's got a full quiver of ammunition to work from and, you know, all these things will be strengthened and stressed as we go forward.

Okay.

And can y'all refresh me on the SG&A side?

It sounds like, again, in the first half -- and I guess particularly in the first quarter, and we know we've got the depreciation, the D&A up, you know, a million and a half or so each quarter -- that your SG&A will still be up on an absolute basis, a fair amount in the first half, and then you will be -- you know, then it's not up in the back half much.

Can you comment a little about what's going on there, too?

Because you've got such SG&A leverage this year.

Right.

Well, we just want to be mindful -- the company is a growth company.

We want to be mindful that, you know, we're showing operating margins which are, in many ways, stratospheric in comparison to the industry and that we don't put ourselves in a position where we're emphasizing too greatly leverage to the expense of growing the business.

So a good example of that would be the investment in this European distribution center which is going to be significant and over time add a lot to the company.

On the other hand, we don't want to get too far ahead of ourselves on other components of SG&A including salaries and other spending to the point where we're not spending appropriately on the short term commensurate with the rates of growth.

So I would say the guidance we've given today on the full year of 2003 is, in many ways, our look at the business in today's environment, and certainly has the opportunity to change and improve based on improved selling trends and improved cost control trends, both of which we have proven that we're capable of undertaking.

Great.

And lastly, are you seeing any pricing pressure?

I mean, I know it looks like the first margins for the first quarter, your guidance is down a tad from where you were, and you do have seller margins.

I completely appreciate that.

Are you seeing pricing pressure in any of your businesses.

Yeah, I would say from maybe -- I'm going to talk about the purchasing side first that we've seen almost bottoming out of the savings available in Asia due to demand.

You know, the demand and supply side over there is sort of equalized a bit, so we don't see the kinds of terrific savings we’ve seen over the last several years as a result of the demand imbalance over there.

On the selling side, we want to be mindful that we've attracted, you know, competitors over time, and we don't want to get ourselves in a position of letting our value equation erode.

So on those two fronts, you know, that's our best look at how the business will play out for 2003.

Just answering your prior question, on deflation, there's no question that, over time, these products will get less expensive.

A lot of that's due to the demand side in Asia, plus, you know, over time the duties -- excuse me -- the quotas will be eliminated which will be another significant reduction in the cost side of the equation.

You know, companies like ourselves that have efficient infrastructure can handle more units cheaply.

So we think there's a significant advantage for us there.

Thank you so much.

You bet.

The next question comes from Jeff Edelman of UBS Warburg.

Thank you.

Tim, this call and guidance is very reminiscence of last year at this time when you were forecasting relatively flat earnings and, obviously, we saw things come in at up 15%.

If we try to go through the major categories, X outerwear, you should have good momentum from all the footwear -- the new footwear line, at least evidence from what you saw this spring.

Obviously feedback we've gotten on the Sorel apparel is pretty good, so we should see continuation there.

The colder weather in Europe is something obviously in your favor.

So realizing that Kohl’s and the major sporting goods channels are increasing their store base, are you seeing a significant fall off in their orders in outerwear?

No.

Okay.

We're seeing, you know, conservatism in the purchase of outerwear.

We are not seeing major fall of with any customer in any category, but we are seeing conservatism.

Okay.

So the potential for the upside to your forecast would really be orders you would book over the next two months.

Does it go beyond that?

Or when's the cut off for fall?

Well, the cutoffs -- there are various cutoffs.

Many have already expired and going forward.

Then we have the geographic cutoff issue, which in Europe everything is later.

Basically you've got it right.

We have the opportunity to add more business over the next several months.

We've got the opportunity to -- you know, to take a position speculatively, which the company's shown.

We'll be -- you know, we'll approach the inventory risk very cautiously.

And then there's continuing cost savings, opportunities for the company which go beyond our guidance today and, you know, frankly, the company's mindful of our own goal of leverage, even though we are at operating margins that are very high and will make leverage more difficult in periods when we're growing, you know, approaching double digit.

Is the growth in the footwear business additive or delutive to your gross margin?

Probably slightly delutive at this point.

Currently the guidance we've given anticipates a mix that we believe will occur.

Okay.

What else in the mix lowers your gross margin?

Well, the highest gross margins for us are outerwear and footwear and sportswear are generally lower.

Accessories are slightly higher, but it's a smaller number.

The business you're booking with your major customers, if I'm not mistaken, you earlier said you're still booking up; is that correct?

Well, we're still taking orders.

I'm sorry.

That's a question?

Yeah.

I mean, are you planning your business with all of your existing customers to be up?

I believe you answered --

Oh, I see what you're saying.

Of those customers that I've reviewed, I would say we have a very high percentage of them up.

The ones that are not up are not significantly down, but there are some that are down.

Okay.

In the past, and you've had some warm winters, what percentage of the business typically gets booked by this time and how much carries through later going back a couple of years ago?

If you remember, we had a warm winter.

How would you use that a guideline?

We talk a lot about order creep here.

Our order deadlines are very early by comparison to some of our competitors, and it's not unusual and is certainly a period like we have now that a customer places an order at the deadlines and then comes back and asks to increase the order based on weather activity subsequent to the order deadline or just selling activity or sort of the dust settling in terms of his other competitive opportunities.

That's something that we've seen happen frequently.

So that opportunity also exists to advance the business.

Fair enough.

Thanks.

Thanks Jeff.

The next question comes from Jennifer Black of Wells Fargo Securities.

Good afternoon.

Hi Jennifer.

I wondered if you could talk a little bit about the European distribution center, and I wondered when you think you would see efficiencies?

Okay.

The European D.C. -- I'm going to let Pat speak to that.

He's the guy on the firing line there, but I can tell you it's been running well since we opened it and I think we had record days in terms of capacity.

So, Pat.

Hi, Jennifer.

Hi, Pat.

Yeah, we started shipping there in January, and we haven't stressed it on the shipping side.

January is certainly not a big shipping month, but when we do stress it, we are hitting appropriate process rates for the near term business as far as receiving goes we've brought -- we have hit peak receiving rates there which will handle anything we've got going on this spring.

So really we're very pleased with the progress.

It's going very well.

As you know, we did our facility last year, was totally maxed out, so we had a pretty -- we were getting efficiencies nearly what we've got here domestically over there.

But, you know, that was a system that was about ready to break, so we have taken a step backwards on a unit pricing or a percent of sales.

And we probably are a season away from getting back to efficiencies that we were seeing maybe a year or two ago when -- or two years ago when we started this process, putting a new building in place.

Okay.

But it will be a ways before we get down.

And I don't know if we'll ever approach the U.S. efficiency, just given the high cost structure over there.

But I would say that that would continue to come down and within a year or two we will be back to where historically we were when we were a third party there.

Okay.

I wondered if we could go back to Europe for a minute because I was under the impression that it wasn't a real cold winter in Europe.

And can you talk a little bit about that and what's going on in the competitive environment as far as small -- the smaller fragmented companies, you know, go out of business over a period of time?

Can you speak to that?

Certainly.

Well, the weather in Europe in the early part of the season even, I'd say up to the middle of December, I was in France in late December and it still had not gotten cold enough there for some of the ski areas to open.

But it's subsequently gotten cold and business has picked up as a result of that.

Our biggest competitor over there is the same as here.

It's our customer's private label merchandise and we continue to make inroads against those really big customers.

But in terms of a branded position, our customers with -- excuse me -- our competitors that are localized by market, you know, some of them have gained a little bit of strength, most of them are deteriorating.

There's been some transactions in the press on a couple of our competitors in the last year.

I don't know what -- how you might read those, but there have been a couple of areas where businesses have been sold.

And we're just expecting it over time, that we'll have a lot fewer competitors there.

Okay.

So gosh and then I guess when -- when -- somebody might have already asked this, but when’s the cutoff period for your orders?

You said orders have been half-way placed.

And how much of those orders are domestic versus European.

I don't have that in front of me.

I'd say in total, though, the book is like half full.

We have multiple, staggered order dates for different categories of merchandise.

The U.S. has the earliest deadlines, but footwear -- we've not had a footwear deadline yet.

European deadlines are all later than the U.S.

I'm not even sure we had a footwear deadline -- an apparel deadline in Europe yet, and we have in Japan is probably the latest but it's a smaller component of the business.

We certainly have what we believe to be a book that we could make a reasonably accurate prediction on.

Okay.

How much do you think -- I mean, could it be that these retailers are waiting to see what happens as far as the war that is, you know, pending?

Nobody really knows what's going to happen.

How much do you think of that has to do with anything?

Well, there's no question that the consumer confidence is low right now and the purchases of products of all types from, you know, hammers and saws to apparel products is weak.

And our retailers are approaching the business cautiously and leaving themselves maximum flexibility.

Do you think they could be too cautious?

Well we'll know a lot more when our dust settles here.

You know, another three to six weeks and we've had a chance to meet with everybody, see how they're looking at the world, what they're expecting from us, and what they'd like to see from us.

If we didn't get an order from somebody, where does it go?

Did it go to a competitor, did it go to a private label?

We'll just have to analyze that, and then we'll take a position, you know, around that March 31 period which takes into account our historical enormous and what our then view of the marketplace looks like.

And, so, how do you plan your at-once business which you typically plan at, what, 5%?

Yeah, March -- well, at-once being today, our spring business, we plan very conservatively for very little reorders, and that's been a historical mandate of ours.

In fall where we have much greater history and much greater visibility in terms of the whole market, we'll take, you know, sometimes a 6, 8% speculative position, sometimes a 3, 4% speculative position.

I'd say on average the company takes about a 5% speculative position on an order book on March 31.

So we'll just have to wait till we get out there and see what it looks like and then we'll make what we think is the appropriate call.

Okay.

And can you speak to men's versus women's versus kids', and then also speak to your largest customers, Kohl’s and Penney’s, how that part of your business has been .

Okay.

Yeah, I would say that, in the case of children's apparel, outerwear and other children's apparel, that was probably one of the weakest categories we had.

And all of our customers, regardless of brand, had a weak children's business this year, and we really can't -- we don't know the answer to that, but that's reality.

Women's continues to be strong.

Men's is probably, I would say, around the average of what we've seen historically, sort of unexcitingly, you know, average.

Uh-huh.

So women's is still, you know the fastest growing part of the business.

At least men are buying something.

And then what about Kohl’s and J.C. Penney.

Both of those customers are great.

Kohl’s is relatively new, as you know we just started with 2000.

And they're a growing customer not only with us but also in their own customer base.

Now, we're fortunate when they open stores in colder areas.

We have less impact on our business when they open stores in warmer areas where our business is just not -- our categories are not as developed as they are in the cold areas.

So those -- that's sort of a summary on both of those two guys, I guess.

Okay.

And one last question, then I'll leave you guys alone.

Would you say that your footwear line has tripled going into this new season as far as the size that you're offering?

Well, the skew count is -- I don't know if it's tripled, but it's significantly larger.

It's an area that we knew we needed to add more product to.

Right because it looks great.

Thank you very much and congratulations on a good quarter.

Thanks Jennifer.

The next question comes from Margaret Mager of Goldman Sachs.

Hi, Tim.

Both Tim and Gert if you're still there.

I'm still here, thank you.

I have a few questions, actually, first of all, I'm looking back at your guidance last year, and you came in remarkably close on your sales guidance for 2002.

And I'm just wondering, there's a lot of questions here that we’re sort of trying to get at.

Could you do better than your sales guidance that you're giving for this year?

And you're pointing out you don't have all the orders, but last year at this time you didn't have all the orders either.

So seems like you're pretty good coming out to where your sales are likely to shake out.

Is that a fair comment, Tim, or do you feel that there is meaningful upside to your guidance, particularly in the the second half, on sale.

Well, we are, you know, it's our goal to be as accurate as we can when we set guidance.

Again, we have limited visibility, and there is the opportunity for the order book to creep.

That's why we've avoided discussing our backlog prior to March 31st because it's a less -- it's a less scientific way to look at the business.

But, you know, we've talked a lot during the call about the things that can impact the sales number positively.

We haven't spent as much time talking about the expense side of the business which also has opportunities for management as well.

Yeah.

No, I mean, it's, you know, it's very similar to the discussion that you had last year at this time, but the truth be told, your sales came in pretty much in line with the guidance you gave for 2002, but, you know, your earnings were a lot better, as somebody else on the call pointed out, so your margins just came in much higher than you expected.

Uh-huh.

But, you know, the sales guidance really wasn't that far off.

So, you know, what would it take for the margins to be -- let's assume the sales are what they are.

Okay.

That the guidance is accurate.

What is it going to take to get the margins, you know, higher than where they shake out to a 261 or essentially a flat estimate?

You're talking about the operating margins now?

Yeah.

Okay.

I think we're talking about a 2% lift in operating margins from this year, although deleveraging.

Am I correct?

Okay.

I'm talking about -- yeah, the -- well, again, when we look at the business relative to our competitors and we look at our operating margins being if not the highest in the industry, certainly among the highest, we don't want to be focusing solely on leverage to the expense of investment that can grow the business.

So that being said we have calculations internally, and since I've made one mistake, I'm going to ask Bryan to be more accurate in how we've looked at the business and what kind of savings/additional gross profit margin would be required to give us leverage.

Yeah, start specifically on the gross margin line.

For the first half, we have models, at least as it relates to the first quarter, we have models of slight improvement.

And that's a fall out of the sourcing that we're able to do for fall 2002 carrying forward into spring 2003.

In the second quarter, as you know, our business is very much a spring 2003 business as well as a fall 2003 in terms of the shipments.

So we are expecting a little bit of contraction in the gross margins in the back half of the year as it relates to product mix.

As Tim pointed out earlier, we do have -- we do have, you know, and part of our growth strategy, frankly, is to grow warm sportswear business.

And as we grow with them, our margins may reduce a little bit but certainly that kicks off more gross profit for the company.

As it relates to the SG&A, which I'll explain briefly so I can get to the operating margin, but SG&A is going to increase $6 million this year.

If you look at the -- if you look at the amount of sales that we could get on the high end of that range, that's certainly adds quite a bit of pressure on the SG&A and, therefore, our operating margins for the year compared to the 20% operating margin that we have this year is going to feel some pressure potentially up to a full point.

That's helpful.

It sounds like -- yeah, it seems like you really surprise yourself on your SG&A leverage.

Though, we can talk about this little bit more after the call.

The -- there's a lot of people just wondering what's going on with Kohl’s and a lot of talk in the market about Kohl’s.

What is their sort of cancellation posture?

You have some pretty big sales increases expected in the first half of this year.

Are you susceptible to cancellations from Kohl’s or any of your other customers in the first half?

Maybe you could review your policy.

Our policy we feel accept cancellations from customers up to 45 days prior to shipment, and we have cancels from many customers.

But I can tell you in my experience with Kohl’s, specifically, we have had virtually no cancels also.

That's not none, but virtually none.

They've been a terrific customer, and when they give us an order, we and they expect to take it, and that's been our experience with them over the last several years.

Okay.

And on the markdown front, you don't find them particularly pushy for markdowns?

No, not at all. .

Can you give us some guidance by either region or product category in terms of, you know, how your sales are going to look?

I don't know if you do that or if you want to talk about that offline, too.

And I can just sort of give you a general overview, in areas where we've had weather, we can say that our business will be quite good and weather sensitive category -- weather sensitive products.

Although, it's been a bit of a surprise that when we've had, you know, fabulous weather, we haven't seen fabulous results.

It's just the consumer appears to be laxidazical [ph], I would say.

And then in areas where we've had warm weathers -- warm Winter/lack of precipitation which includes Minneapolis, Chicago West, those businesses have been tougher in weather sensitive products.

You were very clear in your description of that.

I was looking for more specific guidance for the year in category and region.

It's a huge matrix at this point.

Do you want me to talk to Sean after?

Yeah, that would be great.

One more question.

To that point of the regional mix, just wondering roughly, how does your business look by region?

Is it 40% Northeast and Midwest and 60% upper Midwest and West?

Can you give us a sense of how you mix regionally in the U.S?

I'm going to let Sean take a cut at it.

We control all of these customers not by door but by where the headquarters are.

Texas looks bigger when we look at it sometimes, but Sean I know you've spent some time on the door mix.

I can give you a little color there.

Again, it's an imprecise analysis based on the fact that I've basically -- I can't really give you door information, but in terms of where our rep base is located throughout the country, you're probably running that high 20% range, which would be for the northeast of total sales, with something closer to 40% being what I would consider the Midwest, maybe the mid 30s, 40s.

Another, you know, 25 or up to -- 25 to 25%, maybe, on the West Coast, call it, and then the balance would be sort of Southeastern portions of the United States.

So there's some geographic mix for you.

Okay.

Margaret.

Yes.

This is Karl.

If you've got questions, I'd encourage you to ask them now rather than, you know, later offline or something, as you suggested, because, obviously, anything that we have to say, we're willing to say here on line.

Right.

Okay.

Well, maybe, you know, I know there might be one or two more people who really want to get their question in.

It's been a little over an hour, so maybe I'll come back on to the queue for the detailed guidance by segment.

Because we really kind of neat at least some sense of how you see that mixing.

Okay.

And before I go this time, though, just wondering, on your 261, would you consider that, you know, sort of the worst case scenario for 2003 so you give us your most conservative estimate?

Well, our goal is to give information as accurately as possible.

I think if you look at the company's history, we've gotten better each time in terms of being close to -- close to guidance when we finally report.

So I would expect that hopefully we would get closer every time to what our opportunities are for the future.

Not worst case scenario.

Sounds conservative to me the way you guys do things.

I think you should take a look at our his historical patterns and maybe draw some inferences from that.

Okay.

Thank you.

Thanks Margaret.

Your next question comes from Noelle Grainger of JP Morgan.

Hi.

Hi Noelle.

A couple of things.

First, on the comments that Sean just gave with respect to the kind of regional mix in the U.S, historically -- and this may be too detailed to really get after, but have you seen differences either historically or this year in the timing that those regions book their business?

Oh, no.

I don't -- you know, what typically happens, again, as I described earlier, and this has been -- I don't want to say a common phenomenon, but this certainly has happened many times in the past that a customer places an order well within our -- with our company's order date guide license, and then when the final clean up of his inventories happen during the months of January, February, March, even, sometimes, they'll reanalyze their open to buy and add to their order.

And that has happened.

But I don't think it's regional.

It tends to happen more frequently when there's warm winter, but it happens with some regulator.

Okay.

Hoping, Tim, you might be able to comment a little bit more on your other international business for the quarter.

You know, it was pretty strong growth, but you called out Japan, which didn't seem like it was leading the pack, and I was wondering what else might be worth talking about there.

Certainly.

We've had some pretty significant growth in the business from eastern European markets that seem to be very robust at this time.

We've had some good business in Russia that we're pleased to get, and the business there seems to be tracking along nicely.

Our China business is really quite lower in terms of its volumes, and the Korean business has been a nice addition over time but not big.

So Eastern Europe and Russia are the guys leading the pack there.

And your comments versus your historical comments on Japan seemed to me to be a little bit more optimistic.

Is that fair?

You approached that business cautiously over the past couple of years.

What I hear from people who are way more competent than myself in international economics is the Japanese market is the 14th or 15th of year of recession.

It's difficult there to get very excited about it, although our business seems to progress nicely and tracks, you know, terrifically.

It's difficult for us to talk with a lot of enthusiasm to investors about Japan just because of the fragile nature of the economy there.

So it's growing nicely.

I don't want to say it surprises us, but, you know, it's a nice -- nice addition to the business.

But before we start shouting about its successes, we want to make sure there's a lot of stability there, and we don't see that at this time.

Okay.

So that really hasn't changed.

With respect to the U.S, can you comment at all with respect to the competitive landscape here?

Obviously, I know you've been very clear that your most direct competitors is private label, but some of the more frequently talked about branded names, specifically North Face has been making a bigger push.

Are you seeing any, you know, impact on your business from that that you can identify?

Well, you know, again, I'll answer the question, but, again, I'll be able to answer it better when we get out further.

We can tell if we got an order or if we didn't get an order why it happened.

The North Face is a well run company, they are a division of a great big company and are focusing their efforts globally on making that brand better.

You know, when they bought it, it was really in tough shape and really had nowhere to go but up and, you know, them and other branded competitors certainly see us as an opportunity to get into our business.

That's why we've been focusing on managing our gross profit margin to maintain our value story and invested heavily in the infrastructure to give us high service levels so that, you know, there's lots of things to think about when a customer goes to buy from a branded resource.

But, yes, there are additional competitive pressures from all sorts of people.

Okay.

Just two more questions, if I could.

First, I was very interested in your comments, Tim, about sourcing and kind of the supply/demand profile in Asia shifting back a little bit.

Did that happen more quickly than you had expected?

And I'm curious, as you move through 2003, does that really -- it helps in Q1, and then, you know, it's not going to be a benefit anymore, or how does that flow through the quarters with respect to the sourcing benefits?

Yeah, I'm going to give you sort of my overview and then ask Pat to chime in a bit.

But, no, it wasn't unanticipated.

There were significant drops in pricing over the last, I would say, 18 months based on low demand from Europe, the U.S, and Asia for apparel products.

Those kinds of balances in supply and demand from a factor standpoint can only go so long because they have people going out of business.

And I think there are still going to be reduced prices over time in Asia.

We probably just won't see that kind of a precipitous drop that we saw, you know, and took advantage of for the last 18 months.

But, Pat, maybe you want to chime in.

No, I think that's right.

You know, we started to see the first benefit slightly in spring 2002.

It really came on board in fall 2002 and into spring 2003.

And we booked, you know, or at least scheduled much of our production and at least costed it for fall 2003 and I think the best way to describe that is that pricing didn't continue to fall, but we didn't really see any pressure, any substantial upward pressure on pricing either.

Okay.

Great.

And the last question would just be to, I think, help us all out if you could make some comments with respect to -- on a category basis for the year, for 2003, your kind of preliminary take.

You know, is outerwear, you know, going to be down and we should be looking for footwear, you know, to be the biggest on the percentage basis driver with sportswear up as well?

Is that the right way to be thinking about it?

Yeah, I'm not trying to dodge the question, but I want to make sure everybody knows we're going to have a lot better look at this in March 31.

We have a couple of things going in opposite directions.

One is the maturity of the business in North America on outerwear and the immaturity of the business in outerwear in Europe.

And where that all settles out, you know, it's going to be difficult to say specifically.

But, you know, I think we've been pretty clear that the categories of footwear specifically in sportswear will be solid drivers of the business gone forward and from a geographic standpoint, Europe.

Okay.

Thanks very much.

Thanks.

Your next question comes from Jamelah Leddy of McAdams Wright and Ragen.

Most of my questions have been answered.

I wanted to see quick little things.

With respect to your spring business right now, how much extra inventory did you -- did you build over what you had originally ordered?

Oh, yeah.

I would say modest would be over emphasizing it.

We, sort of from a historical background, we take like a 5% speculative position on winter goods.

We take a much lower position in spring goods.

So --

Okay.

Very low speculative.

Great I understand you don't announce any backlog numbers till April, but can you give any initial impressions about how the line has been accepted so far or if there's any strong points or just any gut feeling that you have at this point?

Yeah.

Well, all that -- all that is a complex matrix that gets baked into the guidance that we gave today for the back half of the year.

You know, I would say, frankly, the biggest overhang for us is just the generally move by retailers and consumers about wanting to get sort of beyond this war, whether it happens or not, I think is not going to be material in how consumers view life.

Just the overhang seems to be over what we see, the landscape.

So it kind of sound like to me your guidance for the first half is pretty strong growth, both on the top line as well as the bottom, and then you're being quite conservative in the back half, but as you said maybe you don't phrase it conservative, but you just don't know at this point, so this is your best guess, but it's --

Fair statement.

Okay.

We have some visibility but not enough to really have very, very clear guidance.

Thanks a lot.

Thank you.

Your next question comes from Kerry Meyer of G.A. Davidson.

Good afternoon I'd like to clarify a few things on Sorel for the full year.

You noted the footwear sales, and I know it's primarily footwear, but what were the total sales for Sorel in 2002?

I'm going to have to ask Shawn.

Yeah, right about $23 1/2 million.

Okay.

A little over a million dollars apparel sales for the year.

And what portion was that in Canada?

Of the -- for the footwear number, specifically, Sorel represented, you know, roughly a third of all footwear sales for the year under the Sorel brand, and they also did approximately, I would say, about $500,000 of apparel sales for the year.

And can you characterize for us the type of growth opportunity you see in Sorel, especially as you roll out more apparel offerings in fiscal '04?

Certainly.

Well, we think there's obviously opportunity in the Sorel footwear brand to grow.

But probably the most rapid growth is likely to come from this apparel opportunity.

And I think we've targeted it to expand pretty significantly, but it's from a small base.

Right now, it's targeted as a work wear, casual line.

And as the business continues to evolve and the brand becomes more available, it could, in fact, be larger brand than that and a more -- a broader category than that.

But we think it's very significant.

And certainly by almost any measure when you look at the purchase price of the asset, it's been a very significant positive to the company.

Do you think you'd explore any other multi-brand strategies going forward?

Well, you know, as I mentioned earlier in the call, the company's cash position is very significant, and, you know, we've never told investors that we're going to grow the business through acquisitions, but, you know, we have certain strengths, including operating prow Wes and cash that, you know, could be positive to a company that doesn't have those two things.

And, so, yes, there's opportunity in the future.

All right.

Thank you.

Thanks, Terry.

Your next question comes from Mitch Kummetz of Wedbush Morgan.

In terms of your sales guidance for 2003, and I realize it's early, and your 5 to 7% is subject to change, but just two quick questions there.

First of all, outerwear, at this point in time, do you expect it to be up or down?

And then U.S. same question, do you expect it to be up or down based on the assumptions in that 5 to 7% growth?

I think it's probably too early for us to have a lot of data on that, but certainly the U.S. will be up.

Okay.

Great.

Thank you.

And then, just in terms of your sales, seems to me that the progress through the year as you spell it out in your guidance, it's decelerating in Q2 from Q1 on a year over year basis and decelerating in the back half and the first half.

Is that a function of the back half of the year being more outerwear driven and that's a mature category or do you actually see the back half of the year worsening in the environment?

No, -- well, first of all, Q2 is our smallest sales quarter of the year, so that could be impacted by a few orders from fall moving forward depending on the customer's requests.

So I wouldn't take anything from that.

We just -- we see a general malaise in the retail business and not only in our products, but in our kinds of products, but in other products as well that just lead us to be approaching the back half, you know, with the guidance we've given, and knowing full well that we'll have a chance to reset guidance when we have more visibility.

Okay.

And then just to get a little more color on the operating expenses.

As I look at the operating margin, I think you mentioned that it could be down as much as a point.

If I strip out the 6 million in additional depreciation, it looks like it's going to be sort of flattish to maybe down as much as 40 basis points.

Is that accurate, and sit going to be more of an impact on the second half than the first half?

That's how I read in the guidance.

I'll let Bryan speak to that specifically.

I agree on you on the SG&A but also affecting the operating margin is a little bit of contraction on the gross margin side.

So if you took the additional D&A we're talking about, at least as you talk about the full year effect, and add to that, you know, some sort of pressure on the gross margin line, maybe up to 50 basis points, I think that's going to be, again, most of the -- most of the pressure that we're talking on the operating margin line.

In fact, that will be it.

And to your question, that is going to come more in the back half of the year than the first half of the year.

Okay.

Could that improve as you drive some efficiencies in the new D.C. in Europe?

Is there more potential for upside to that forecast in the back half than the first half?

With respect to leverage, there's -- as Tim pointed out, I mean, there is -- you know, we don't have a full order book at this point on the sales front.

And as it relates to cost control measure, and what not, those have been in place for -- you know, for some time, and we will continue those efforts, at least in those leverage that we can control in the business, make sure that we do as much as we can to improve.

Okay.

And then lastly, on your footwear business, obviously strong growth in terms of the backlog for spring.

Where is that coming from?

Is it in -- and the line has gotten larger.

Is that mostly what's driving the strength of the backlog?

Or are you also adding additional distributions?

Is it one more than the other or is it a function of both?

Can you clarify?

Yeah in terms of points of distribution, we're not adding much in footwear.

There's also some.

We still are underdeveloped in footwear-only stores.

But our growth in our footwear backlog in spring was as a result, really, of better product.

And we expect to see that going forward, and we'll fully maximize our opportunities by being creative and making better product.

What would drive better penetration in those foot wear-only retailers?

Well, today, our best successes have been in weather-related -- winter-related merchandise.

So some customers don't consider us to be a full-year round supplier, and as our product line gets better in spring, then we'll be looked at more as a full year supplier of footwear products.

And that's when a specialty store or a footwear only store is likely to give us additional opportunities.

Maybe some that aren't carrying it at all that would give us some opportunity.

Especially when you talk about the population centers south of the snow line.

That changes from year to year.

Yeah, I know it.

Thanks a lot.

Your next question comes from David Campbell of Davenport.

Good afternoon, Tim.

Hi, David.

I was wondering if you could comment on how your market position and outerwear in the U.S. is evolving.

I mean given the increased competition, do you see yourself continue to maintain or increase your share here?

And then I have a follow-up question.

Certainly.

Against our biggest competitor which is private label, we continue to make inroads and gain share from that competitor.

As it relates to other branded competitors, there is some pressure.

And, you know, no one's immune from competition, so there's some of that.

But I think, in general, we're going to maintain our position as the strongest by a significant factor over other branded -- branded merchandise suppliers.

But again, our opportunity, we think, is to continue to displace those private label guys, and we've shown that we're continuing to do that.

Right.

Okay.

And you said that you expect your mix to change in the second half of this year.

Can you say what mix you're assuming that would put the pressure on the gross margin, and how much pressure are you talking about?

Well, I don't know that we'd be able to give you a very specific guidance on mix, but, you know, we certainly expect there to be continued strength in footwear and sportswear which are lower gross profit margins poor the company.

Uh-huh.

And then we have, you know, some competitive pricing pressure, but all that bakes into about what you're saying.

It's difficult, without a lot of analysis when you're talking about multiple geographic bases, multiple categories, it's difficult to give you a real clear cut answer.

Okay.

How are your sales with Mervin's this year?

I believe you started that account.

We did.

You know, and is the case when we start working with a large account such as a Mervin's, it's -- we want to be caution in terms of how we go forward so that we don't have a -- that it's a successful program all the way through, and it certainly appears like our test was successful and we're going to be expand our business there at the appropriate levels.

We don't want to get ahead of ourselves.

And do you care to offer a forecast on your Sorel business for 2003?

I think it's going to be one of the quickest growing parts of the business.

Certainly the apparel sales by all measures were very successful in fall of 2002.

So from a small base, it's going to grow very significantly.

It may not -- it may not be a super large business in 2003, but it has all the earmarkings of being a very successful product category for us.

Thank you.

Thanks David.

Your next question comes from Eric Schergal of Giewber and McVain.

Thank you.

Seems to me like your guidance for the second half incorporates three separate challenges.

One the economic environment, two, an increase in what you're expecting for depreciation from the European D.C. versus what the analysts had originally model and three somatic conservatism given the good results today making for a difficult comp.

If you had to roughly -- in fact you agree that it's those three items kind of weight those three as a percentage basis under your guidance?

'm going to start with the last one first, because we want to make sure that the investors understand that we're very proud of the company's financial results and the strength of the company not only from a balance sheet perspective, but from an operating entity.

However, we don't -- we're mindful that -- concentrating on that one measurement only could stop us from growing as fast as we want.

There's going to be additional investments required.

So that's a key for us to -- you know, you mentioned difficult comps.

It's just going to be -- we want to make sure we have the investments properly made.

You're going to have to ask me one and two again.

I divided it into three categories: Economic environment, the depreciation you expect over the course of the year versus what the analysts originally modeled and lastly --

Comp-.

The depreciation would be covered under my first comments regarding difficult comparison.

We have made investments in order to bolster what we think is a huge opportunity for the company.

Economic conditions, you know, we're not immune to retail malaise.

It just hits us a little later than retailers.

I'd also point out I'm not sure -- we talked about additional depreciation in the last quarter, maybe it's not in all models, I don't know who you're referring to nor do I need or want to know but the point is that's been out there.

Okay.

Thank you.

Thanks.

You have a follow-up question from Jeff Edelman of UBS Warburg.

Thanks.

I guess if you added it all again you had give a less conservative guidance.

But I wouldn't even touch that.

Are you incorporating your second quarter sales guidance more or less fall product than you shipped last year?

Same.

And because that's such a small sales quarter, it can be impacted by a few orders even.

It incorporates the same amount of fall merchandise.

If we're using warm weather throughout, what, 80% of the country here as a reason why orders might be light, would you talk about where you stood in terms of the margin realized on the incremental sales this year let's say versus normal on the scale of 1 to 10, how does it stack up with the normalized period?

Because seems to me you probably have some benefit in the fourth quarter next year or fourth quarter this year now.

Well, again, it’s little bit tough for us to make a quick answer because of the multiple geographies we're dealing with.

But, you know, I guess it all points to the fact that the company's gotten quite good at managing inventory.

So it's our hope that we could continue with that expertise in making sure that what we're buying and the amount of speculative position we take and what merchandise we buy reduces top risk significantly and allows us for maximum opportunity to -- for good margin when we liquidate.

You know, as it relates to the conservative question -- the conservatism question, we're trying to be better predictors of the future, but we're not perfect.

Not to belabor, but you still sold a fair amount of product off price in the fourth quarter?

Yeah, we always -- yes.

We sold some.

I don't know, today, how much the off price -- the total volume of off price was in Q4 versus Q4 '01, but I do know that the margin was stronger.

Right.

Jeff, what -- on that front, I think it was in terms of just the dollar volume basis, we did probably move similar to a little bit of an uptick on the closeout margins.

But Tim just pointed out we got better margins on those because we moved them earlier in the season as we started getting weather in the northeast.

Thanks.

You bet.

You have a follow-up question from Margaret Mager of Goldman Sachs.

I guess to answer my question, somebody else asked it.

But I thought of another one.

Just this whole question about deflation and sourcing.

Yes.

I guess there's really a whole separate question related to that, and it has to do with prices at retail out the door, which you don't worry as much about, I guess, but do you have any sense of, you know, what's going on with maybe your products at retail?

Well, not that we don't care about it, because we know that the report card that we get from our retailers includes sell true and margin they received on that purchased.

Let me speak first to the deflation their issue.

You know, it's contemplated and it's likely to occur that quotas will be removed from all this merchandise.

I think Karl, maybe 2005.

So depending on the category there's a lot of cost built into what a consumer bias just to cover that quota.

That's going to be a reduction in the selling price at retail.

In terms of us monitoring or managing the retail margin on our products -- and we would hope that we would continue to be in a better position than other competitors because of our highly efficient infrastructure to be able to provide more garments to retailers because there will be more sales we believe at lower prices per unit, perhaps, but we can very efficiently provide those.

Now, I understand the sourcing and how that will ultimately relate to lower prices, but there's a whole another question of saturation of retail and just the fact that there's just too much apparel out there in the U.S. marketplace, and that pressures prices.

It's more than just sourcing is what it seems to me.

And, so, that's what I'm asking is.

Do you have any idea of, like, how your products are going out the door in terms of, you know, price, real price, out the door price, not retail, you know, false retail price.

Right.

I don't have enough information to be able to talk --

I mean, it's not your business, right?

Right.

But it's part of this deflation conversation that seems to have heated up quite a bit on Wall Street right now.

Uh-huh.

So, anyway, that was one thing.

And let me just check with my associate and see if she has anything.

Okay.

All right.

Well, thank you.

Thanks Margaret.

Talk to you later.

Okay.

Bye bye.

You have a follow-up question from Virginia Genereux of Merrill Lynch.

We have been going for two hours here, guys.

That's okay.

Let me ask you two quick ones.

Is there a possibility, one, that you could get -- that the tax rate could be lower next year with a little more of the business in Europe and maybe some --

Bryan, do you want --

Yeah.

At this point in time, and again, there's several variables with respect to our tax rate including, you know, where the profitability is coming from, our foreign tax credits which we have talked about and, of course, the foreign source of income for them.

And, so, I would say that where we've got that model in at 37 1/2 which is what our effective rate was this year is probably most appropriate this given time I mean yes, that could change and, of course, it [inaudible] once that does change we'll certainly follow up with you folks and let you know

But nothing you see on the horizon that swaise you?

It could get a couple of points lower .

Yeah.

And secondly the European business at 12 1/2% constant growth this year.

Are you guys please with that rate of growth?

Should we expect it to be with the DC in place?

I don't know if that has anything to do with it.

But should we expect an acceleration in constant dollar European growth in '03?

Well, we think the opportunity in Europe is among one of the largest in the company.

So we -- we've made significant investments there.

We expect that we'll be rewarded by our customers and with our investment.

So that's the plan.

And the European backlog grew -- the European backlog was up more than it was -- it grew faster -- the spring backlog was up more than it was --

Correct.

Thanks a lot.

Thanks, Virginia.

At this time, there are no further questions.

Thank you all for listening in and we'll talk to you soon.

That concludes today's Columbia Sportswear fourth quarter and year end 2002 conference call, you may now disconnect.