Columbia Sportswear Co (COLM) 2004 Q2 法說會逐字稿

Good afternoon ladies and gentleman and thank you for standing by.

Welcome to the Columbia Sportswear second quarter 2004 financial results conference call.

At this time all participants lines have been placed in a listen-only mode.

Following today's presentation instructions will be given for the question and answer session.

If anyone requires assistance on today's conference, please press star followed by zero and an operator will assist you.

As a reminder, this conference is being recorded, Wednesday July 21st of 2004.

At this time I would like to turn today's presentation over to Mr. David Kiser, Investor Relations Manager.

Please go ahead sir.

Thank you Andrew.

Good afternoon and welcome to Columbia Sportswear second quarter 2004 financial results conference call.

With me are Gert Boyle, Columbia's Chairwoman,Tim Boyle, Columbia's President and CEO, Pat Anderson, Columbia's Chief Operating Officer, Bryan Timm, our Chief Financial Officer. and Peter Bragdon, Columbia's General Counsel

Continuing our standard practice, the purpose of this call is to review second quarter operating results.

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

You should have received a copy of the earnings release by now if not please phone Carolyn Greenwood here at Columbia at 503-985-4000 and one will be sent to you.

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

As a courtesy to all participants and consistent with prior quarters we can ask you limit follow up to one or two questions to allow all parties the opportunity to ask questions.

We invite you to reenter the queue if you have additional follow up questions.

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.

Actual results may differ materially from what is projected.

Many of these risks and uncertainties are described in Columbia's quarterly report on form 10 Q for the quarter ending March 31,2004.

Forward-looking statements, as in this conference call, are based on our current expectations and beliefs, and we do not undertake any duty to update forward- looking statements after the date of this conference call, to conform the forward-looking statements to actual results or the change in our expectations.

Thank you Gert.

At this point I will hand the call over to Tim Boyle, who will provide an overview of significant developments that occurred during the company's second quarter 2004.

Tim?

Thanks David.

Welcome everyone and thank you for joining us.

We are very pleased with our second quarter results and the continued positive momentum in our business.

Let's begin with a review with some highlights from the press release.

2/2/2004, Net sales for the company, grew by a solid 12.5% over the comparable period of last year to a 2nd quarter record of 171.1 million.

Excluding changes in currency exchange rates, consolidated net sales increased by by 10.1% in the 2nd quarter, driven by growth in sportswear and footwear categories.

Net income was record 10.7 million, compared with 9.4 million for the same period of 2003, a 13.8% increase.

And diluted earnings per share for this quarter, came in at 26 cents compared to EPS of 23 cents for 2nd quarter of 2003.

Again we were pleased with our 2nd quarter quarter results, continued solid top line sales growth in our spring related sportswear and footwear products.

Updates, Kentucky distribution center - The construction of our Kentucky distribution center continues according to schedule.

We are currently installing inventory management equipment and are hiring and training supervisory personnel and remain on schedule to begin shipping products in 2005.

To date we have incurred approximately $33 million in capital expenditures related to this project, and expect to capitalize approximately $40 million in total Cap Ex.

Our retail footwear customers have expressed enthusiasm for this facility, which will improve proximity for the majority of our footwear retailers, and should facilitate shorter shipping times and reduce shipping costs for our customers.

Mountain Hardware - sales for Mountain Hardware were 6.8 million during the 2nd quarter, a 7.6% increase year over year.

Mountain Hardware remains sharply focused on developing highly technical apparel and equipment for distribution through the outdoor specialty channel.

We intend to grow the brand through increased penetration of existing retail customers, any by opening new retail distribution points in this channel.

We are currently integrating our support infrastructures in Europe, to facilitate distribution of Mountain Hardware products in that market.

The Spring '05 Mountain Hardware line is broadened in high end technical and casual apparel, with emphasis on women's technical products.

The line is currently being favorably received by the specialty retail channel.

We believe Mountain Hardware's technical and competitive strengths will give them an opportunity to expand their specialty retail business both domestically and internationally.

Sorrel - Sorrel sales were 1.5 million in the 2nd quarter, a 20.9% increase year- over-year.

Sorrel has historically been recognized for it's cold weather heritage.

But through the efforts of our Sorrel design and sales teams, we are focused on making the brand more relevant on a year round basis.

We are pleased with the progress to date.

Licensing.

Our net licensing income increased to $781,000 with strong increases in camping gear eyewear and watches during the quarter.

Today we license our brand in 12 complimentary product categories which extend our product offerings and expand the global awareness of our brands.

Many of these licenses are relatively new and we are generally pleased with the progress they are making with our brands.

While we do not expect licensing to be a significant income driver, we expect healthy growth from many licensees producing highly profitable income for the company, and extending our brands to complimentary product categories.

Management changes.

Turning your attention to some recently announced management changes, Mark Sandquist has been named Vice President in Columbia Sportswear apparel.

In his new role, Mark will be responsible for Columbia's outerwear and sportswear, allowing us to maximize our merchandising and design resources, to provide better opportunities for synergies among product categories.

Mark has most recently served as General Manager-sportswear merchandising, a position he has held since the year 2000.

Under his stewardship, our sportswear category has grown to more than $300 million in sales worldwide and is a key driver of the company's overall sales growth.

Doug Prentice who has served as VP, General Merchandising Manager for Outerwear has accepted the position of Vice President - Global Outerwear Integration.

We will rely on his exceptional knowledge of high performance outerwear and internation brand development in integrating outerwear products for the Columbia Sorrel and Mountain Hardware brands globally.

Doug has led our outerwear business for many years, and has been instrumental in developing Columbia into one to largest outerwear manufacturers in the world and the leading seller of skiwear in the United States.

I would also like to publicly express my appreciation to Carl Davis, who recently stepped down as General Counsel, and has accepted the position of VP of Corporate Affairs.

Carl will work part time assisting us with lobbying activities and political affairs as he improves his golf swing for retirement.

We welcome back Peter Bragdon to Columbia to his new position as VP in General Counsel.

Peter worked at Columbia for several years prior to taking a leave of absence, to serve as the Chief of Staff in the Oregon Governor's office for last 18 months.

Peter will be a strong addition to our executive team.

I am confident these new assignments will help drive the worldwide growth of our company and express my appreciation for the efforts of these key managers.

At this point I would like to hand the call over to Bryan Timm, our CFO, who will review second quarter financial results and will discuss the financial guidance we reported today.

Bryan?

Thank you Tim and Good afternoon everyone.

I will begin with a brief review of the second quarter income statement, as customary.

I will compare current quarter line items with prior year periods facilitating accurate comparison.

It is important to note that the 2nd quarter is our most volatile quarter as we wind down our spring shipping and start our fall business.

And variances can be amplified as it is our lowest volume quarter.

Net sales for the second quarter were 171.1 million an increase of 12.5% over the 152.1 million of net sales for same period last year.

Growth in consolidated net sales was a result of strong customer demand for our spring product and the continued strength of foreign currencies on our international direct business.

Excluding changes in currency exchange rates, consolidated net sales increased 10.1% in 2nd quarter.

Our consolidated gross margins for the 2nd quarter of 2004 were 42.8% or an increase of approximately 20 basis points when compared to 2nd quarter of 2003.

Foreign currency strength, a lower mix of international and distributor sales, and higher gross margins on sales of closeout products, benefited gross margins.

This increase was offset by the continued sales mix shift to the sportswear and footwear product categories, which have lower gross margins than outerwear.

Our gross margins have also been impacted by shifts in product mix, within each of our product categories.

The company's SG&A expenses increased by 15.9% or 8 million on an absolute basis to 58.3 million or 34.1% of sales for the 2nd quarter of 2004, versus 50.3 million or 33.1% of sales in comparable period of 2003.

Film expenses increased due to the increased level of direct sales and associated commissions and marketing costs for the quarter.

Operating expenses increased primarily due to additional personnel related costs, but decreased as a percentage of sales due to the strong sales in the quarter.

Depreciation and amortization totaled 4.1 million for the 2nd quarter of 2004.

Compared to 5.9 million in the same period of the prior year, as we experienced some depreciation roll off from prior year capital expenditure projects.

Net interest income for the second quarter, increased to $953,000 from $189,000 last year.

Due to our strong cash position, higher capitalized interest related to Kentucky distribution project and the higher interest rate environment.

Our effective tax rate 35.5% is compared to 37.5% in 2nd quarter in 2003, due primarily to increasing revenues in jurisdictions with lower overall tax rates.

We reported net income of $10.7 million or 26 cents per share for the second quarter of 2004 versus net income of 9.4 million or 23 cents per share for the second quarter of 2003, based on a diluted share count of 41.1 million and 40.6 million respectively.

Last quarter our Board approved a share repurchase program.

To date we have not purchased any shares under this program.

I will quickly touch on key items in the balance sheet, and again I will be comparing June 30 2004 balances to June 30, 2003 balances.

The balance sheet remains very strong with cash and cash equivalents totaling 284.7 million versus 158.8 million at same time last year.

Consolidated accounts receivable at June 30, 2004 was 138.5 million compared to 128.2 million an 8% increase and slightly less than the 12.5% quarterly sales increase due to increased cash receipts in quarter.

Consolidated inventories were 209.4 million, compared to 181.6 million a year-ago, 1 15.3% increase and in line with our current outlook for the second half sales and can be largely attributed to current fall season inventory.

Capital expenditures were 15.5 million during the second quarter the majority of which to increase our distribution capacities.

We continue to model cap ex of approximately 45 million in 2004, consisting of approximately 15 million in maintenance cap ex and 30 million in distribution projects including expenditures related to our Kentucky distribution center.

We continue to expect approximately 19 million in depreciation and amortization in 2004.

As we benefit from depreciation roll offs from previous IT and distribution capital out positions.

That covers the financials for the 2nd quarter of 2004.

I will reiterate from a balance sheet perspective, we remain very pleased with the way the 2nd quarter was managed.

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

Now let's turn our attention to financial guidance.

Given the results that we have reported today, we are in a position to give guidance for the 3rd quarter and update everyone on our guidance for the full year 2004.

Please keep in mind that this information is forward- looking in nature, and is therefore subject to certain risk factors, many of which were described in our quarterly report on form 10 Q in the quarter ended March 31, 2004 and which were expressed by Gert in her opening comments.

Based on our current outlook we anticipate Q3 2004 consolidated revenue growth to be 9-10% when compared to the same period last year, and are anticipating Q3 gross margin contraction of approximately 140 basis points, placing us between 46.4% and 46.6% of estimated sales.

This contraction is primarily due to the product mix shift of footwear and sportswear which generally have lower gross-margins than outerwear and is expected to be partially offset by moderate gains from currency exchange rates.

Again our gross margins are also impacted by shifts in product mix within each of our product categories.

Our current SG&A target for Q3 2004 as a percentage of estimated sales is 21.8% to 22%.

This increase is primarily due to increased personnel related cost and marketing spend for the quarter.

At present we are modeling the companies estimated quarterly and full year effective tax rates at 35.5% and we're using 41 million shares for purposes of Q3 and full year EPS calculations.

We anticipate net licensing income of approximately $1 million.

And net interest income of $500,00 for Q3.

This analysis applies an increase in Q3 net income of 3-5% when compared to 3rd quarter of 2003.

Turn our attention to full year 2004, we believe that our strategics will enable us to generate consolidated revenue growth of 12-13% for the full year 2004 when compared to 2003 revenue.

And we anticipate net income growth for approximately 10-11% for the full year of 2004.

Factored in to this guidance of approximately 100 basis points of gross margin contraction, due to the continued sales mix shift to lower margin product categories and less benefit from appreciation of foreign currencies than we experienced in 2003.

Additionally, we plan to maintain SG&A as a percent of estimated net sales at 2003 levels.

We anticipate net licensing income and net interest income for the year for approximately 3.3 million and 2.5 million respectively.

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

Please consult the companies quarterly report on form 10 Q for the period ended March 31 2004.

I will now hand the call back to Tim who will review both geographically and categorically our business environment.

Tim?

Thanks Bryan.

I will begin with a review of the 3rd quarter 2004 consolidated categorical sales results with comparison to the second quarter of '03.

In reviewing these results, you should remember that the second quarter is our smallest revenue quarter of the year as we wind down our spring shipments and begin shipping fall products late in the quarter.

Due to the comparatively low revenue levels in the quarter, changes in shipments in any one channel or category may be excessively pronounced and may not necessarily be indicative of future expectations.

Outerwear. 40.8 million versus 46.7 million last year, 12% decrease during the quarter for the first six months of 2004 outerwear sales were down in the low single digits.

As we discussed previously, the decrease in second quarter outerwear shipments can generally be attributed to weakness in the youth outerwear category.

All youth outerwear begins shipping late in the 2nd quarter.

During the second quarter, we saw continued strong sales in polyester and fleece sweaters, vests and pullovers.

These products are included in our sportswear category.

Sportswear 90.4 million versus 68.8 million in Q2 of '03, an increase of 31.4%.

Sportswear growth was very strong across gender and categories with particular strength, with particular strength in the outdoor issue and GRT product lines.

Footwear 30.7 million versus 28.3 million, an increase of 8.5%, led by the U.S., Europe, and Canada.

Accessories 6.6 million versus 5.8 million, an increase of 13.8%.

Equipment 2.6 million versus 2.5 million, an increase of 4%.

Geographic sales.

Let me give some additional geographic sales commentary for the second quarter, with comparisons to the same period of 2003.

Again remember our second quarter results are seasonally volatile to comparatively low revenue levels in the quarter.

U.S.A.- sales of 105.9 million, compared to 90.5 million, a 17% increase for the quarter.

The overall U.S. retail environment has been helping this spring.

Sell through rates of our products have been strong and overall inventory levels at retail appear to be in good shape as we close the spring '04 season.

The general mood at retail is quite positive.

Categorically growth in the U.S. 2nd quarter sales was led by the strong demand for key sportswear styles driving overall sales growth.

Products like the men's Rock short and Rock pant and women's shorts and capris continued to perform well this spring. 2nd quarter footwear sell throughs in the U.S. was also solid and footwear inventory levels at retail appear to be in good shape.

Early indications from buyers are that the spring '05 line is being well received in U.S. , particularly in our sportswear and footwear categories.

We will report spring order backlog results at our next quarterly conference call in October.

Canada sales of 12.5 million versus 11 million, an increase of 13.6% for the second quarter, or 7.9% excluding changes in currency exchange rates.

Weather has been cool and damp across almost the entire country this spring, negatively impacting sportswear and footwear sell through.

We have also been disappointed with outerwear sales given the poor weather this spring.

Early feedback on the Spring '05 product line from key customers in the region has been very favorable despite cool weather.

With positive reception from our customers in the sportswear and footwear product categories under both the Columbia and Sorrel labels.

We believe our relationships more strong and growing customers in the region bode well for further growth in Canada.

Europe - second quarter sales of 24.5 million versus 20.4 million for same period last year, an increase of 20.1% or 9.9% excluding changes in currency exchange rates.

Cool and damp weather and difficult economic environments in key European markets have led to poor sell through in a highly promotional retail environment in Europe this spring.

In the 2nd quarter, sales were up in every category in Europe despite these conditions with footwear and sportswear sales driving growth in the region.

The Spring '05 line is being well received by key customers in the region with particular positive feedback on our footwear line.

Over the past several seasons we have proven that we can grow our business in difficult economic environments.

Market opportunities for our products in Europe are very significant, but we are under penetrated in European distribution channels.

We believe that we can continue to gain market share in the region.

I continue to believe that Europe is our most important growth opportunity among internation markets for the foreseeable future, and am encouraged by level of acceptance or brands have experienced in the market, despite difficult economic environments.

Other International - 2nd quarter sales of 28.2 million versus 30.2 million for same period of '03, a decrease of 6.6%, or 10% excluding changes in currency exchange rates.

International distributors - a component of 'other international' recorded sales of 15.4 million compared to 19.9 million in the 2nd quarter of 2003, a 22.6% decrease.

The vast majority of sales to international distributors are denominated in U.S. dollars.

Shipments to Russia which comprised the largest segment of international distributor business declined primarily due to timing of some Russian shipments that shipped into the 3rd quarter.

Shipments of cold weather footwear were also down due to unseasonably warm weather conditions last winter.

The Russian market has expanded very rapidly the past several seasons, and we continue to be very pleased with our Russian distributor, who is doing a quality job both promoting and distributing our products.

Despite decreased sales of cold weather footwear, our Russian business will still show growth for the year.

On a combined basis we forecast strong growth in our overall international distributor business for 2004 with strong revenue contributions from Hong Kong, China, Chile, Switzerland, and Hungary.

Japan - a component of 'other international' recorded second quarter sales of 7.5 million compared to 6.5 million, a 15.4% increase or 5.9% excluding changes in currency exchange rates.

In general retail sell through in Japan has been mixed.

Unseasonable weather at the beginning of the quarter has generally hindered spring sell through in Japan, however our products are performing reasonably well in the department store, sporting goods, and outdoor specialty channels.

Although indications are that the Japanese economy is starting to show some signs of improvement, the near term business climate remains difficult and as such we continue to maintain a cautious stance for the time being.

Overall, we are very pleased with our 2nd quarter sales results and the progress we are making in growing our business across geographic and product categories.

In closing going forward our business strategic remains steady.

We will continue to focus our attention on growing the business to the 4.5 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 programs including concept shops and focus areas.

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

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

Fourth, we will continue to selectively add distribution as we seek to grow our 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 the Columbia sportswear brand.

That concludes our report thanks very much for listening in.

We'd be happy to field any questions.

Operator, can you please help us with that? [Begin Q-And-A]

Ladies and gentlemen, if you would like to ask an audio question, please press the star followed by the 1 on your push button phone.

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One moment please for your first audio question.

Our first audio question comes from Robert Durham with Lehman Brothers.

Please go ahead with your question.

Good afternoon.

Hi Bob.

Couple of questions for you, Tim, I guess first can you give us and update in terms of concept shop installation program that you talked about on the 1st quarter for this year where that is going how that is progressing this year.

Second question, can you talk a little bit with some of the consolidation going on with your retail partners sort of how that may or may not impact you for the rest of this year and looking forward, let's start with those.

Absolutely.

Bob, in concept shop, I think we are on pace to open more than one a day for the balance of this year.

So we have got very strong acceptance to that concept shop program and our major customers and big investments going on in the part of the company for that.

If you remember we get approximately a 50% lift on our sales in any one store where we've put one of those in.

And the retailers ends up with generally with a couple points of gross-profit margin improvement, because more of their merchandise sales at that price.

A big part of the company's marketing budget going towards that, and continuing acceptance by our customers with those great features.

In terms of consolidations, obviously as announced, the Dick's sporting goods guys are going to be consolidating the Dallion stores into their operation.

Both great customers of ours.

Both have fairly a high penetration of Columbia products in their stores.

We would expect it should be transaction close and no reason to believe that it won't.

That will be positive for the company.

I bet there are store closings which have been announced.

We don't know much about the geographic where those store closings are going to be.

In general, our position would be a healthy retailer with the appropriate amount of retail stores is much better than those that are stretching to keep places around.

We also had consolidation of Marshall fields being acquired by May Corp and probably stores to be closed on that transaction.

In general, our guidance today contemplates any changes that we would foresee with those two mergers.

Again we think the healthier customer is much better than one that has too many stores.

Okay.

Great.

And when you look at the rest of the year, Tim, in terms of European business in terms of the direct business versus some of the distributor business where do you think that shakes out in terms of cost and dollar growth from your perspective for a full year number.

I am going to let Bryan maybe talk about specifically about the cost and dollar thing since his currency data bank in some of this stuff.

Basically we expect continued strong expansion in Russia from our Russian distributor, a very strong operator, and that we can expect to continue to grow lots of opportunity there.

The biggest single opportunity for the company probably still remains in western Europe just based on the penetration in markets like Germany and Austria and the U.K., based on their size.

But there could also be a healthy lift from improving economies in these new members of of EU who we think are going to do nothing but expand in terms of their operating size.

In terms of the cost and dollar impact on Europe, I don't think currency from a caution dollar standpoint, there's a lot of difference there.

You will recall last year, they grew in Europe well ahead of our corporate average.

So, this year I would expect them to be much ahead of corporate average as well both on a reported as well as constant dollar basis.

Great.

Tim, is there any update in terms of management team over in Europe in terms of the search and where things stand with that.

The firm that the companies hired to do the search has brought us, I want to say, maybe ten potential candidates with very likely strong half dozen to be reviewed by the company here.

I just want to emphasize that the changes we made and the timing on the change here was based on the real level of competence that we have in our deep bench in Europe to sustain the business and grow it while we're searching for a strong GM to help us.

We would expect over the next several months we would have an announcement.

In any case business is well in hand with a solid team of people we've had a long time tenure with the company.

Great.

Okay, Thank you very much.

Thanks Bob.

Our next question comes from Jeffrey Edelman with UBS Paine Webber.

Thank you.

Couple of questions one on the inventory, inventories were up 15% you said in line with your second half sales plan which is closer to 10%.

Where is the disconnect here.

Is it just timing of receipts or are you expecting the potential force of increased fill in business?

Jeff, I am going to let Bryan speak to that question.

When I say in line I guess I am also looking at our back half of the year we've given specific guidance 9-10% for Q3.

Our full year guidance bakes in for the back half probably closer to 11-12% range, so now we are talking about between 12-15% differential there.

I would say you are correct, part of that is, as we mentioned at the last conference call with our announcement of our fall backlog, there is a little more speculative inventory position planned for our fall selling season.

That is the piece of the other fill in/reorder business.

Okay.

Fine.

Second, your footwear business showed a noticeable slow down from impressive gains earlier.

There is a business, Tim, you said you felt could equal that of apparel.

Could you sort of tell us what went on with footwear in the quarter.

Sure again we need to make sure we view this quarter as not a politicite for the balance of the business because volumes are so small.

So we grew the business even though we have this short fall in our Russian business.

So I am still convinced we are on the right track here and the business will be strong over all and our customers are telling us the same thing.

We just need to be a little bit cautious about looking at this one quarter.

Revenues are so small, an investors could get the wrong impression.

But, absolutely will be the strongest product category in my opinion over time and has ability to become the biggest product category in the company.

Finally on a longer term basis you felt you could pretty much maintain a 20% operating margin realizing that the shift in mix of business will produce a lower gross- margin as we're seeing now, but the double digit sales increase should be able to generate some operating leverage.

Where do you see that starting to play in here?

Well we always talked about the long term goals of the company being very lofty profitability, including leverage, and obviously when we have value in one of our key words it gets more challenging because we want to make sure we don't allow anybody to come into the market underneath us.

With that having been said, the company, if you look at the historical results, ebbs and flows on its operating profitability, based on investments that the company makes to foster future growth.

We've been riding a great waive of high profitability based on investments the companies made over the last several years, and while the goal is always to lever on operating margins, there are additional investments required now to take us to the next level, and we just want to make sure that we aren't being greedy from an operating margin stand point.

We want to be prudent.

We know that we need to make these investments to continue the company's growth at the high level.

Right.

Okay.

Thank you.

Thank you sir.

Our next question is from Carole Byers with RBC Capital Markets.

Please go ahead with your question.

Hi good afternoon.

Few questions.

On the revamp of the youth line is this confined to outerwear or are you making any changes to footwear and sportswear as it is related to use.

Second you mentioned in your remarks earlier, that the mix in certain categories were unfavorable, can you give us specific examples of that.

Sure, well as it relates to the youth product categories, the primary emphasis is on youth outerwear that's where we feel we need the most work and the area that will receive the most concentration.

At you know the Sorrel and Columbia footwear businesses, especially in winter, have a component of kids product and those sell very well.

Again emphasis on the outerwear component for children's.

As it relates to intra product category margins, we just want investors to understand that product categories which we report to Wall Street, simplify the business and make it as transparent as possible, include multiple kinds of products in those particular grouping, some have higher and some have lower margins.

Is it specific to any one category.

Is it footwear, different varieties of footwear, which has the highest diversity of margins.

The highest margins that the company has from a category that we report to Wall Street is outerwear.

But each product category: sportswear, footwear, Accessories, outerwear all have margins inside those categories which are higher and lower.

I guess I asked my question wrong, what I meant was, which category has the highest diversion or the highest gap between margins within a category.

Oh sportswear.

Okay.

Thanks.

Thank you.

Our next question comes from Robbie Holmes with Banc of America Securities.

Please go ahead with your question.

Thanks.

Just a follow up on outerwear, can you review with us the timing on when you think you will get outerwear back to positive growth.

Also can you talk a little bit more about outerwear's performance by region in this quarter and your outlook for outerwear by region.

So, U.S. versus Europe sort of what is going on there.

I want to make sure investors know that the company will have a positive growth in outerwear this year.

It is not growing at speed we want it to but certainly will have and positive growth.

Again 2nd quarter is the finish up of spring shipping for the company, and the very beginning of fall outerwear shipments globally.

So, the bulk of outerwear shipments in this quarter typically tend to be youth outerwear.

Maybe I'll let Bryan speak to the specific geographies in terms of where we are for this quarter and maybe what our announced guidance has been for the quarter.

Yeah, maybe just to focus on the year.

If we look at it, as Tim said, we're expected to grow in that category this year.

Definitely pick-up the growth rates from 2003.

Looking at starting with the U.S, that is probably going to be more in mid single digit range as I look to our second biggest market, Europe, it will definitely grow a lot faster than the guidance given for full year.

I would say Canada is going to follow the U.S. in kind of the same growth rate.

Japan and Korea will lag those a little bit as well, but overall, I think we've commented that we expect that to be in the high single digits for the year on a consolidated basis.

Is there something that has happened in the relative growth rates of outerwear versus activewear, etc. that as you look to the back half has made your guidance on gross-margin be down more dramatically than it would have been if I had asked you that question 3 months ago.

I will let Bryan speak specifically to guidance.

I don't think we changed the guidance --

Really the margin contraction is something we have been talking about since the first time we gave guidance for 2004.

It is really is one of the product mix shift.

As we are growing a lot faster in the sportwear and footwear product categories.

It is going to lower your overall margin, increase your profits obviously, which is going to help us leverage fixed cost of business.

This is something we've seen this ahead of the game and again, that is why we are we are putting investments back this the business in SG&A, but trying to toe the line as well, keeping the percentage of sales somewhat constant to '03 levels.

So the rate that each of the categories is growing is in line with what you guys would have expected going into the year.

Yes.

Great thanks a lot.

Your next audio question comes from Virginia Genereaux with Merrill Lynch.

Please go ahead with your question.

Thank you good afternoon.

How are y'all?

Let me ask you, maybe Bryan, about the SG&A spending, cause your outlook for Q3 in particular, suggests that SG&A as we pencil it will be up 11.5 million and change kind of taking the midpoint.

My question is, I know you had you -- I think you said last quarter you will have more international distributor sales in September, which are lower gross-margin but also lower SG&A, so you had less international distributor sales in June quarter and SG&A kind of paced up 8 million year-over-year.

I'm just thinking, and it sounds like you were doing some of the investments you were talking about continuing in September.

I was just wondering why the sort of year-over-year increase in SG&A might accelerate, especially given that you might have more distributor sales.

Let me comment on the distributor sales piece of the business.

It is not as impactful in Q3, certainly as we look back to last year what happened in Q2, it was a dramatic effect in both gross-margins as well as SG&A because the amount of international distributor and the overall mix for Q2.

In Q3, where you have significantly more volumes from a revenue standpoint that is masked to some degree.

So the biggest two items, is really what we commented on, which is putting some investments back in the business in terms of merchandising and design, sales etcetera, in form of personnel related cost.

The other piece of it would be also the advertising spend for the quarter.

There really is not a lot of other factors that I can speak to.

Okay, okay.

Thank you.

And then if I may, on the backlog, or your sort of speculative inventory position, that I think on last quarters call, you said you had ordered a little more than you usually do, maybe 7.5% versus 5, can you review for us again, when typically do you sell that product?

I want to say December.

And is the mix, is that mix primarily outerwear or this year is it more sportswear looking.

If you could talk about that a little bit.

When we we talk about the speculative inventory position, that is a snapshot at March 31.

We sell that stuff all the way along.

We've been selling it.

It depends on a lot of factors but it gets sold all the way through the year starting really, with March 31 and beyond.

It is really outerwear, that is where we focus our speculative purchases.

That is the business we know most about and that is the area where we feel we have the most confidence in our ability to predict needs.

Thank you Tim that is helpful. one more.

If -- you have a, your cash balance is so usually comes off this quarter working capital wise you have -- you're still at $6.50 a share in cash, you didn't buy back stock, are you going to be opportunistic in doing that or are you thinking about other uses of cash.

We talked a lot about the four main uses of cash.

Our first choice would be use it as working capital to grow business rapidly.

Obviously, the other uses of cash, would be to pay a dividend, buy back shares, make on acquisition.

We want to make sure we have the ability to manage the business from a strong balance sheet perspective, take advantage of opportunities, but at the same time, we understand that investors expect us to be responsible and have high returns with all of our assets.

Now that having been said, even with high cash balance we have, we still have a remarkable ROE for the business.

That having been said, we think that our cash position is very adequate at this point, and it is an area that we constantly work on to make prudent use of that asset.

Thank you.

Thank you ma'am.

Your next question comes from David Campbell with Davenport and Company.

Please go ahead with your question.

Hi Tim.

I wanted to ask you about the purpose of merging the outerwear and sportswear businesses and what you expect to accomplish from that exactly.

Can you also update us on the pricing environment in 2005 as well as your plans around the quota elimination next year.

Certainly I might ask Pat to help us with the quota.

As you know the company has grown a lot over the last several years, we have a nice strong tether on the top line.

Historically the company has looked at its products from a silo viewpoint.

We had distinct design members in outerwear, sportswear, in accessories, in footwear.

At the end of the day when we viewed our product offerings there ended up being a fairly significant amount of duplication within those silos.

So the object here is to maximize our design resources and to allow for more efficient use of our design resources, all the while making sure that we have a very strong presence in outerwear.

We have a very senior executive here that has a lot of experience with the company and the outerwear industry in general, and we wanted to make sure that his strong abilities from not only the design but also a brand building standpoint, internationally were maximized.

There was a good opportunity to take advantage of that situation and accomplish a couple things here that will make us much more efficient in the way we offer products globally.

So I hope that answers your question on that standpoint.

I want to ask Pat to make a quick comment on quota.

Hey David.

On quota, we really didn't see any significant shifts in either costing or pricing for spring '05 based primarily on the timing of the production and the elimination of quota on January 1.

And then I think also playing into that was the uncertainty of what may happen whether quota will or won't be subject to some protection as we move to verify year-end.

For fall, that will be the first season where it is sourced under a completely quota free environment, pending or assuming that there are no measures taken.

We actually start costing next month.

There is really still a lot of uncertainty out there, so we are still evaluation the impact and kind of waiting for the results of our costing.

There is a lot of information or misinformation out there right now so we are kind of playing a wait and see, to give more guidance, probably most likely at the next call.

Okay.

Thanks.

Also I have a question for Bryan, can you explain a little bit more the difference in the sales and earnings growth expectations between the 3rd and 4th quarter.

Sure.

Again, as we look out at order book currently, there is really no major shifts in terms of customer requested ship dates.

I know we given a range of Q3 of about 9-10% range, that implies a much larger Q4 probably in the range around 13%, let's call it for discussion purposes.

I think that is probably indicative of taking, again a little bit more, speculative inventory risk this year which as Tim said earlier, we are taking reorders for that every day, but that is likely to ship in Q4, much the same as previous years.

That is really all that is going on with respect to the timing of our revenues in back half.

Okay and the gross-margin seems to be playing down quite a bit in the 3rd quarter, but the first half saw basically gross margins flat.

I know you might not expect as much currency benefits in the 3rd quarter, but what else would cause the gross-margins to go down that much.

Again you are right.

I'm not expecting the big currency gains that we did receive.

Again I expect further product mix shift, which we talked about, which will be more dramatic in the back half of the year than in the front half of the year, because it is primarily our biggest outerwear shipment.

The inner product shifts, that Tim talked about, geographic mix shifts, that's really all that is playing a factor in the gross-margin contraction, in both the back half as well as between Q3 and Q4.

That hundred basis points range, it is a little bit more amplified in Q3 at 140 basis points down, but for entire year as you said, we did a get a little bit of benefit in Q1 and Q2 that's going to moderate that to really only be about a contraction of a full point for the entire year.

Thank you very much.

Thank you sir.

Our next is from Noelle Grainger with J.P. Morgan.

Please go ahead with your question.

Hi good afternoon.

First I guess kind of a combo, Bryan, Tim question maybe.

On SG&A your 3rd quarter guidance for SG&A would imply that I guess for the 4th quarter you are looking for some SG&A leverage, a decline in the ratio.

After your discussions about marketing spend and a couple of quarters of it being up year-over-year, I was hoping you could just walk us through that a little more.

Related to that how do you look at your marketing needs longer term?

Do you think the shop pace continues into '05 at the pace we've seen in '04.

Let me talk about the long term strategic on marketing.

The company is committed to the in store presence and it is going to be a continuing part of our marketing strategy.

It is very efficient very effective.

In terms of its continuation we are continuing to see as retailers get one, two, three, four shops installed, they want more.

The demands from the retail side end up becoming enhanced.

These shops, while we expense them the day they are installed pay big dividends longer term.

I would expect the foreseeable future would be installing at current rate or possibly slightly higher.

That is not to say that we aren't spending on print, TV, and outdoor mediums where we also want to make sure that the brand gets exposed.

Bryan is that pushing up marketing as a percentage of sales this year, next year as we continue to look out.

There is a small increase.

But again, I would really going really back to Virginia's comment as well, I would say the main increase in the back half of year is going to be personnel related and advertising spend.

The leverage comment is really one of the sales growth that we get between Q3 and Q4.

Again 9-10 percent in Q3, we are expecting better revenue growth in Q4, we believe we will have the inventory to get there.

That is how we are leveraging in Q4, at least anticipating on leveraging in Q4.

Great.

On a follow up Tim on kind of the management changes, was this a decision driven by cost reduction, or the right way to do things, making better product?

I am just trying to figure out the driver behind the impetus for the change.

Sure, well I would say cost reduction only in so far as, we have had experience with duplicate efforts on product categories.

Just by the nature inside Columbia of the way the business has been organized.

So we had sportswear items being developed in our outerwear teams and outerwear products being developed in our sportswear teams.

We had a lot of efforts being duplicated.

From a cost reduction standpoint, this is about efficient use of the design talent that the company has.

When we look at the future of the business we want to make sure areas that could be strengthened by our strong personnel here, got strengthened.

The coordination between the brands, so we don't have duplication and replication of effort among the brands that the company has, was addressed.

And we also had maximized our talent pool here.

As somebody would typically look at cost reduction, no, but as the way we look at it being more efficient with our personal assets, this will make us more efficient.

Okay.

Related to that cross brand coordination.

Mountain Hardware was only up 8% in the quarter.

I am wondering is that according to you plan?

What is your objectives for longer term growth for the business, it seems it should be a little higher.

I think the company on a year-over-year basis will be growing quite a bit faster than Columbia business.

You have to remember again, Mountain Hardware small business very replicative of Columbia's early days, where it was primarily a winter business, even though they have a high concentration of tents and other equipment it is really a winter business.

Again we want to make sure we emphasize this quarter is really.

You have to be careful when analyzing this business based on this quarter, because it is the lowest volume .

In order of, actually sleeping bags or jackets for that matter, that goes from one week to the next to the end of June can be impactful.

Same seems to be true with Columbia.

So we just have to make sure that you look at Q2 as a very low, very volatile quarter, and not to extrapolate from it.

Fair enough, thanks a lot.

Thank you.

Our next question comes from John Shendley with Fescue Hana.

Please go ahead with your question.

Good afternoon.

Tim I wonder if you can walk me through the outerwear products once more.

I know this is somewhat redundant tonight.

If you look at the outerwear and factored out the youth portion of the product line, were the sales considerably better than the negative 12.6% for entire group?

Well again, we have to make sure that we talk about this quarter being very volatile, because of it's low topline, so in order shifting a few days one way or the other can be impactful here.

We look at the outerwear from an annual basis, in that we expect the business to be up.

The reason it is not going to be up stronger is because of the short fall in youth outerwear which starts shipping in the 2nd quarter and is the biggest component of outerwear shipments in the 2nd quarter.

We expect our outerwear business to be up.

It is not up as much as we wanted, but one of the reasons was the short fall in relation to the youth business.

Fair enough if you looked at it from a preline basis in term of discussion of some of the key domestic accounts, does it look as if the youth portion of the business will get north of the 10% or so area that you indicated in your comments.

I'm sorry I want to make sure I understand.

I think in general the overall outerwear business will be in line with projections.

I am talking about the young product line that you are mentioning.

Does it look like it is going to be stronger just based on indications you're currently getting or reads your getting from some of your key retail accounts.

Well, the merchandise that we have shipped this quarter looks to be well received.

We have got some strong delivers, currently in Europe, especially like [El Courtney Glass] which has taken a pretty strong position.

So we are expecting that once the merchandise is in the stores we'll have solid sell through but we don't have any reaction yet.

Still too soon.

Alright.

Fair enough.

Looking at Europe as a whole, were there certain counties that were particularly strong for you in the quarter, and are there indications you will do particularly well and gain share or shelf space in certain markets rather than across the board.

I am trying to get a sense of where your business is really evolving in Europe.

Our biggest market is France.

Second is Germany, but frankly a very close third is Spain.

So we are really under performing in Germany and Austria and I think very significantly in the U.K. as well.

We think we have the right folks in place to make that business grow.

We wish that the German market was a little bit better economically.

That having been said, we expect the continued focus on those markets will allow us to grow probably most rapidly in those markets, with France being not mature, but certainly the furthest along in the business.

Do you feel you have been successful in convincing a lot of the European retailers to treat sportswear somewhat differently than they have been.

In other words, are they giving it separate [inaudible] and combining it with your outerwear product category as you mentioned to us in the 1st quarter.

In Europe, we are less further along, if that is proper English, in our penetration of department stores.

In my opinion European sportswear sales much like U.S. and Canadian sales are really dominated by department stores.

Our best penetrations is in sporting goods and we're making great progress there, but at the end of the day, sporting goods operations do a much better job of selling outerwear than they do sportswear, so we'll have to continue our expansion there in growth and focus ourselves as well in Europe on the department store market there as well.

Last question on Europe once again what is the promotional climate?

Is it tough right now or again on a country by country basis in terms of the promotional activity that you are seeing in the marketplace.

I think this year, this season, this spring has been more promotional than we've seen in the past.

Weather there has not been conducive to selling spring product, so there has been much more promotions than we typically see.

That's almost a Pan-European phenomenon.

Okay.

Thanks a lot, appreciate it.

Thank you sir.

Our next question comes from Elizabeth Montgomery with SG Cowen.

Please go ahead with your question.

I was wondering if you could comment on what you said on the last quarter conference call about plans to launch a casual outerwear collection for '05.

Maybe if you could update us on where you are in that process and if you have gotten any response from retailers.

Sure, we had and expansion of our outerwear, I guess we would call it casual outerwear product this spring, with a very successful jacket called the rock jacket, aptly named after one of our great selling men's pant and women's pants for that matter.

It was a very successful product.

We are going to be expanding that and doing, we believe, a good job capturing that product category which for us has been, our focus has been in the past, historically much more on performance than on more casual outerwear.

We think there is an opportunity there.

And so far the products we have shown to retailers have been very well received.

It is very early on.

We actually had good sales of our rock jacket for fall.

We are expecting good things here.

Thanks a lot.

Thank you ma'am.

Our next question comes from Margaret Mager with Goldman Sachs.

Please go ahead with your question.

Hi its Margaret how are you.

I have a couple of questions.

First of all, on the Kentucky distribution center, what is the total cost impact for that project on the P&L for 2004, if there is any call out?

And you talked about it saving money on out bound freight, is that a cost that is charged to your customers at the moment or one that you incur that you will then save?

And then related to that just what are the savings benefits you see from the Kentucky distribution center

I will give you a rough overview, and Bryan and Pat will correct me if I misstate myself.

There is no charges to the '04 statement the building is not in use yet.

It is going to go into use in '05.

In terms of the companies sales policies have always been in the USA, the merchandise is FOB our dock, or in the exceptional case of direct shipments which are direct are Asia, then we transfer title at the port of entry.

So the savings, there will be some additional cost to Columbia to bring the merchandise from the west coast to Kentucky, but the costs, that will be a slight increase, the cost for our customers to ship the merchandise from Kentucky to various locations will then be reduced.

Now in addition to cost reduction our customers will get, will be quite pronounced on the real bulky winter footwear that the company does so well with.

In addition to cost reductions, there is also a pretty significant time saving on shipments.

So, the highly accurate weather system is forecasting snow for Manhattan we can get those boots there in two days, as opposed to 7 days from our Portland operation

Tim, just want to clarify, the shipping cost from the Columbia distribution center to the customer, the retail customer, that cost is the retailers cost, correct ?

In the U S A yes.

In other places we prepay

So they are the ones who will save money which will make them like you better.

Yes, If it is possible to like us better, they really like us.

I know you are easy to like.

But the savings is it doesn't sound like you are talking about meaningful cost savings for Columbia, it seems like extra cost to ship from west coast to Kentucky, but you're going to have better customer service and that translates into revenue opportunities .

Yes, but the cost savings actually can be very significant for the customer.

For example a couple of pairs of Sorrel boots or Columbia winter boots, shipped from Portland can cost 15% of the cost of that product, to ship to an east coast location.

Right

It can be very significant

I would say the lower cost the item, the more is the percentage

Yes

Okay that is interesting thank you.

Second topic I wanted to ask about was commissions?

That was an impact to SG&A this quarter.

I was just wondering do -- your commission rates, how do they vary across product lines, i.e. categories outerwear, sportswear, footwear within the Columbia brand, and how do they vary across brands, Mountain Hardware, Sorrel, Columbia , and if there is any additional twists as it relates to Europe, I guess what I'm getting at, is there a mix shift in commission rates happening?

Let me give you some color.

And I know Bryan would like to jump in here too.

Typically our commission rates do not differ by product category, they differ by geography, so Japan, Europe etcetera.

And then by brand they vary slightly as well.

Again I want to make sure when we are talking about the 2nd quarter, because of the low volumes and variance in one customer or one geographic area can be impactful.

We also have customers of the company where we don't have commissioned sales people involved, so a shipment to one of those customers or another in the quarter again, a low volume quarter like this can be down.

Great can you give me some sense of how much of you business is subject to commissions, commission sales. versus accounts that are not on commission

That is a tough one.

Because for example, in Japan we have almost no commission.

In some parts of of Europe, we have company employed sales people.

That would require a lot of analysis to give you an accurate number.

I think you can take a look from a historical perspective the company's commission rates over time have been fairly flat to declining.

I would expect that at the end of the year, Bryan, correct me if I'm wrong here, that we are going to be seeing a noticeable shift from prior periods.

Let's see from '03 I think we will be about the same

Third topic, if I could, since you mentioned about sportswear, the biggest channel being department stores, any rethinking of your customer strategy for sportswear in the U.S. ?

No it is still solid.

Our plans are still to grow with our current customer base and add where we think it is appropriate and where the company's business model lines up.

So no change in the way we're selling and no real change in the strategy.

We just think the product keeps getting better and acceptance is better and it bodes well for future continued growth

Okay.

On this related topic as you look out Kohl's is going to be taking in Chaps, and I am wondering if there is any impact on Columbia men's sportswear at Kohl's as a function of a large new vendor.

We are not completely concluded with our spring selling, but I am not anticipating a very significant change.

I am not expecting significant

Then to comment, a last comment.

Ron loves the rock pants .

Great

And you also have rock shorts don't you?

Does he have a pair of those?

He has those and loves those too Alright Gert,Take care

Thank you ma'am.

Ladies and gentlemen if there are additional audio questions please press star followed by one on your touch tone phone.

As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment please for the next audio question.

We do have an additional audio follow-up question from Virginia Genereaux with Merrill Lynch.

Please go ahead with your question.

Thanks, while I got you.

Not to harp on this.

In the quarter gross-margin I think your guidance Bryan was a little, 43-43.2 for the quarter and your gross-margin were a touch below that, and still very strong and up year-over-year and you said that F X and cleaner clearance, and less distributors were boosts offset by product mix and of mix within categories.

Can you elaborate maybe on the mix within categories part, and whether, relative to your planned gross margins, and I know this is a tiny quarter.

Was there anything that made gross-margins come in just a touch lighter than you expected

No, as I look at the differential between where we guided and where we came in.

It really is pretty much on par.

I think we are 20 basis points under the range that we gave, again I would say that is probably coming more from that product mix, as you mentioned, kind of that intra product mix issue.

Much to what Tim had mentioned earlier, that is probably coming more, especially this quarter, from the sportswear product category.

And as Tim mentioned, you can have a lot of different margins in that category.

At the front end of a season, when you are trying to forecast you margins and whatnot, to guide appropriately, there maybe some mixes in both quantity moreso than the actual selling prices, probably more of a quantity in terms of what ultimately you ship that quarter versus what you planned on shipping in terms of each product.

It can move around.

When you look at Q2, it can certainly amplify the movements.

So that is really all that is going on there.

There isn't to your sportswear point, it isn't the rock pant is a much lower or higher margin than just another type of like rock short or capris or something.

Are there margin differentials you can tell us about by product.

It is compilated by product, category, geography, it is just one of these, an areas that to predict, 20 basis points, I guess is where we got close to it.

That's remarkable anyway.

It is you give a lot of detail you get -- right?

Right

Thank you all.

Thank you ma'am.

Our next question comes from Lynn Dunn with Prudential.

Please go ahead with your question

Thank you.

I apologize for calling in on a cell phone, I'm travelling so it was unavoidable.

I have two quick follow up questions to Margaret's questions.

First, relating to the Kentucky distribution center, how many years are you depreciating that over, which I guess we will start to see in 2005, and then second you mentioned the cost for your customers going down dramatically and your cost increasing slightly.

But it seems like a pretty dramatic cost for the customer.

I just wanted to make sure that that cost isn't being completely transferred to Columbia.

It is going to be more efficient for you because you're sticking it on a train versus a truck.

Could you help quantify what sort of additional costs you'll have in transporting it across the country?

Thanks.

Bryan, do you want to take the ones that are appropriate to you and I'll finish up

Sure on the first one in term of the depreciable lives for that asset, it is going to vary certainly by the different asset classifications.

If you try to bucket those I would suggest that the average for the entire facility would be between 8 and 10 years.

If you look roughly at about a $40 million project ,it is roughly going to be in about $5 million depreciation per year on a full year basis.

So, depending on when that is placed in service, we'll tell you the additional D&A for 2005.

Okay.

Great.

Thanks.

As it relate to the cost the dramatic cost savings I would say would be a customer ordering one or two pairs of winter boots quickly to get them for a customer, those would be the area where we have the most dramatic cost savings.

Again, not only the costs would be reduced for customer but also the speed to that market

But your costs aren't going to be --

I'm going to get to is that

I'm sorry

That's okay.

The overriding reason for putting Kentucky distribution center where it is, is the proximity to markets, where about 70% of the company's retail sales volume exists today.

Secondarily, there will be a slight increase in cost on the product, [Inaudible] --, a few percentage points at the very highest, to get the product from the west coast to the customer, sorry, to the distribution center.

However, there is a lot of involved in how we price the product, how we design it, and how we structure it, that may or may not be transparent to our customers at the end of the day.

Again you should not expect any gross-margin reduction in the product category of footwear, based on where the visible location of the distribution center is in the U.S.

Okay, that's helpful, thank you.

Thank you.

Thank you ma'am.

Ladies and gentlemen, at this time we appear to have no additional audio questions, so please continue with any concluding remarks

I want to thank you all for listening in, and hopefully we have been able to answer your questions and look forward to talking to you again in October.

Thank you.

Thank you management.

Ladies and gentleman at this time we will conclude today's teleconference presentation.

We thank you participating in the conference call.

At this time you may now disconnect.