Columbia Sportswear Co (COLM) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2004 Financial Results Conference Call.

At this time, all participants are in a listen-only mode.

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

If anyone needs assistance at any time during the conference, please press the star, followed by the 0.

As a reminder, this conference is being recorded Thursday, October 28 of 2004.

I would now like to turn the conference over to Mr. Dave Kiser, Investor Relations Manager.

Please go ahead, sir.

Thank you.

Good afternoon, and welcome to Columbia Sportswear's Third Quarter 2004 Conference Call.

With me are Gert Boyle, Columbia's Chairwoman;

Tim Boyle, Columbia's President and CEO;

Bryan Timm;

Columbia's CFO;

Pat Anderson, Columbia's Chief Operating Officer; and [Peter Bragnan][ph], Columbia's General Counsel.

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

You should've received a copy of the earnings release by now, but if you've not, then please phone [Carolyn Greenwit][ph] here at Columbia at 503-985-4310, and 1 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, please limit your initial follow-up to 1 or 2 additional questions to allow all parties the opportunity to ask questions.

We invite you to re-enter the queue if you have additional follow-up questions.

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

Thank you, David.

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

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

Many of these risks and uncertainties are described in Columbia's Quarterly Report on Form 10-Q for the quarter ending June 30, 2004.

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

Thank you, Gert.

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

Tim?

Thanks, David.

Welcome, everyone, and thank you for joining us.

As you can imagine, we're pleased with our solid third-quarter financial results.

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

Q3 2004 sales for the Company grew by a strong 11.4 percent year over year to 415.8m, a third quarter record.

Excluding changes in currency exchange rates, consolidated sales increased by 9.3 percent.

Net income for the third quarter was a record 68.6m, a 7.9-percent year-over-year increase.

Diluted earnings per share for the third quarter came in at $1.68 compared to $1.56 for the third quarter of '03.

Again, we're pleased with our solid third quarter financial results.

These results were driven by outstanding sales growth of sportswear and footwear products in the U.S. and strong sales of outerwear products in Europe and other international markets.

Updates -- spring backlog.

Please note that we only disclose consolidated future spring order backlog.

We do not provide specific backlog results by product category, brand, or geography but may give general comments regarding categories.

Today we reported strong global spring backlog results.

Spring product backlog at September 30, 2004 was 339.5m, an increase of 16.1 percent over last year.

Excluding changes in currency exchange rates, spring backlog was up a strong 14 percent.

Consolidated backlog, which includes fall global orders, increased 16.5 percent to 586m.

Spring backlog growth in the U.S. was exceptional, meeting growth for all geographic regions.

Bookings for spring-related sportswear and footwear products was very strong in the U.S. with particular emphasis on our niche products, sportswear brands PFG and GRT, and men's, women's, and kids' sandals.

International distributor bookings were also very strong, with healthy increases in Russia, Hong Kong, China, and other distributor markets.

Backlog increased in Europe and Canada due to the continued strength of foreign currencies, but excluding changes in currency exchange rates, bookings were marginally down in those markets, primarily due to difficult economic environments and poor weather conditions in many geographic regions.

Overall, we're pleased with the spring backlog growth we reported today.

Please note that there are a number of factors that could cause our future sales to differ from reported future backlog, including order cancellations, reorders, and fluctuations in foreign currency rates.

I would also like to remind you that Columbia is a seasonal business, with the majority of our orders shipped and revenue recognized in the third and fourth quarters of each year.

Revenue from the spring backlog that we reported today will begin to be recognized when these orders are shipped beginning late in the fourth quarter of this year and continuing through the third quarter of next year.

I would also caution you to note that the growth in our spring season may not be indicative of revenue growth for the back half of next year.

Beginning today, we will hold our U.S. fall 2005 sales meeting and begin taking orders for the fall '05 season on November 1.

Fall 2005 backlog as of March 31 will be reported 6 months from now on our first quarter 2005 financial results call.

Midwestern U.S. footwear distribution center -- the construction and planned opening of the Kentucky distribution center is continuing according to schedule.

We're in the final stages of completing the facility, testing systems, and training personnel in preparation for scheduled opening in January 2005.

We have capitalized approximately $40m in expenditures related to this facility.

When placed in service, we expect to incur approximately $5m per year in additional depreciation and amortization expense related to this facility.

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

Licensing -- net licensing income increased 128.6 percent to 1.6m in the third quarter, with strong increases in home furnishings, socks, watches, and leather outerwear.

We recently announced 2 new licensing agreements for insulated coolers and outdoor accessories to be marketed under the Columbia label.

California Innovations will develop and market insulated coolers, and Coast Cutlery will produce a line of outdoor accessory products.

Both licenses are for North America, and products will be available beginning in spring 2005.

Today, we license our brands in 13 complementary product categories, which extend our product offerings and expand the global awareness of our brands.

Many of these licenses are relatively new, and we're pleased with -- we're generally pleased with the progress they are making with our brand.

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 complementary product categories.

Management changes -- turning our attention to some recently announced management changes, Paul Gils has accepted the position of General Manager Europe and will join the Company on November 15.

Paul joins Columbia with a strong background in sales and operations in the European market.

He most recently completed a 10-year career with Nike Europe, having served most recently as General Manager Footwear in Germany.

His strong and linguistics skills will prove invaluable as we focus on building our business across Europe and particularly in Germany and other Northern European markets.

We also recently announced that Mike Prendergast has accepted the position of President of the Sorel Division.

Mike has been National Sales Manager and a key member of Sorel's management team for the past 2 years.

His 30 years of industry experience will prove invaluable in the continued development of the Sorel Division.

For the third quarter, Sorel's sales were 19.6m, a 36.1-percent increase over last year.

We have a strong team in place that's committed to reestablishing the Sorel brand as a dominant cold-weather footwear resource in North American markets.

Now, in hardware -- hardware sales were 18.3m during the quarter, a 40.8-percent increase over last year as the division continues to develop new and expand existing relationships within the specialty dealer base and expands distribution in international markets.

At this point, I'd like to hand the call over to Bryan Timm, our Chief Financial Officer, who will review third quarter financial results and will discuss the financial guidance we reported today.

Bryan?

Thanks, Tim, and good afternoon, everyone.

I'll begin with a brief review of the third quarter income statement, and as customary, I will compare current quarter line items with prior-year periods to facilitate an accurate comparison.

Net sales for the third quarter were 415.8m, an increase of 11.4 percent over the 373.4m of net sales for the same period last year.

Consolidated net sales to growth was driven by strong gains in our sportswear and footwear product categories and continued strength of foreign currencies in our international direct businesses.

Between changes in currency exchange rates, consolidated net sales increased 9.3 percent in the third quarter.

Our consolidated gross margins for the third quarter of 2004 contracted by 70 basis points to 47.2 percent when compared to 47.9 percent during the third quarter of 2003.

This contraction was expected and incorporated into our prior guidance and was primarily the result of a sales mix shift between product categories and an increase in the sales from our lower-margin international distributors' business.

These decreases in our gross margin were partially offset by the favorable impact from changes in currency exchange rates.

For the third quarter, the Company's SG&A increased by 17.8 percent, or 14m on an absolute basis, to 92.7m, or 22.3 percent of sales for the third quarter of 2004 versus 78.7m, or 21.1 percent of sales, for the comparable period in 2003.

The increase in selling expense was primarily the result of increased advertising costs and commission expense.

Operating expenses increased primarily due to additional personnel-related costs, partially offset by a decrease in depreciation expense.

Depreciation and amortization totaled 4.2m for the third quarter of 2004 compared to 5.8m in the same period of the prior year as we experienced some depreciation roll-off this year.

Net licensing income increased 0.9m, or 128.6 percent, to 1.6m in the third quarter of 2004.

Net interest income for the third quarter increased to 1m from 148,000 of net interest expense last year due to the strong cash position, higher capitalized interest related to the Kentucky distribution project, and the higher rate environment generally.

Our effective tax rate was 35.5 percent, which compared to 36.8 percent in the third quarter of 2003, due primarily to increasing revenues and jurisdictions with lower overall tax rates.

We reported net income of 68.6m, or $1.68 per share, for the third quarter of 2004, versus net income of 63.6m, or 1.56 per share for the third quarter of 2003 based on a diluted share count of 40.9m and 40.8m, respectively.

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

The balance sheet remains very strong, with cash and cash equivalents totaling 123.3m versus 85.9m at the same time last year.

Consolidated accounts receivable at September 30, 2004 was 374.7m, compared to 321.2m a year ago.

The increase is more than the 11.4-percent quarterly sales increase due primarily to the appreciation in foreign currencies, as well as significant growth in shipments made late in the quarter.

Consolidated inventories were 194.4m compared to 166.1m a year ago, a 17-percent increase and in line with our current outlook for our fourth quarter sales and can be largely attributable to current fall season inventory.

Capital expenditures were 11.8m during the third quarter, the majority of which will increase our distribution capacities and domestic IT maintenance projects.

We continue to model CapEx of approximately 45m at 2004, consisting of approximately 15m in maintenance CapEx and 30m in distribution project capital expenditures, primarily related to the Kentucky distribution project.

We continue to expect approximately 19m in depreciation and amortization expense in 2004 as we benefit from depreciation roll-offs from previous IT and distribution capital acquisitions.

In April 2004, our Board of Directors authorized a purchase of up to 100m of common stock.

During the third quarter, we repurchased approximately 654,000 shares at an aggregate purchase price of 35.2m.

To date, approximately 798,000 shares have been repurchased for 43.1m.

That covers the financials for the third quarter of 2004.

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

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

Now, let's turn our attention to financial guidance.

Given the results that we reported today, we're in a position to update everyone on our guidance for the balance of the year and for the first quarter of 2005.

Please keep in mind that this information is forward-looking in nature and is, therefore, subject to certain risk factors, many of which are described in our 10-Q for the period ended June 30, 2004 and which were expressed by Gert in her opening comments.

Based on our current outlook, we are raising fourth quarter and full-year 2004 guidance.

We currently anticipate Q4 2004 consolidated revenue growth to be 13 to 14 percent when compared to the same period last year and are anticipating Q4 gross margin contraction of approximately 140 basis points, placing us between 45.3 percent to 45.5 percent of estimated sales.

As we have discussed previously, this contraction is the result of a sales product mix shift to footwear and sportswear, which currently have lower margins than outerwear, a higher mix of international distributor sales at lesser margins, and lower planned margin from sales of closeout products.

Our current SG&A target for Q4 2004 as a percentage of estimated sales is 25.5 percent to 25.7 percent, a decrease of approximately 160 basis points as compared to Q4 2003 as we made incremental investments in promotional activities in the fourth quarter of 2003, coupled with a reduction of depreciation expense this year.

At present, we are modeling the Company's quarterly and full-year effective tax rates at 35.5 percent, and we're using 41m shares for purposes of Q4 EPS calculations.

This analysis implies an increase in Q4 net income in the range of 17 to 20 percent when compared to the fourth quarter of 2003.

As stated in today's press release and based on the aforementioned outlook for the fourth quarter, we believe full-year 2004 revenue growth of approximately 14 percent and net income growth of 14 to 15 percent is achievable when compared to the full year 2003.

Turning our attention to the first quarter of 2005, based in part on the reported spring backlog and taking into account slightly less foreign currency translation benefits in the future, we currently anticipate Q1 2005 consolidated revenue growth to be approximately 13 percent when compared to the same period last year and are anticipating Q1 gross margin contraction of approximately 50 basis points, placing us between 44.8 percent to 45 percent of estimated sales.

Our current SG&A target as a percentage of estimated sales for Q1 2005 is 32.1 percent to 32.3 percent.

As we look forward to 2005, we anticipate SG&A expense will increase as a percentage of net sales.

The expected increase is due primarily to the operating costs associated with the new distribution center in Kentucky, as well as incremental personnel costs needed to support our growth strategies.

We expect the depreciation and amortization will increase to 26m in 2005 as we place the new distribution capital acquisitions in service.

The Company's 2005 effective tax rate is modeled to be 35 percent, and we're using 41m shares for purposes of Q1 EPS calculations.

This analysis implies flat Q1 2005 net income when compared to the first quarter of 2004.

Please note that our next quarterly conference call, we will still be taking orders for our fall 2005 season, and we'll have not complete visibility of our fall order backlog.

We will give color on the progress of fall backlog in our next quarterly conference call and expect to provide detailed full-year 2005 guidance at our first quarter conference call in April, when we will have completed our fall 2005 order-taking season.

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

Please consult the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004.

I'll now hand the call back to Tim, who will give you both geographically and categorically our business environment.

Tim?

Thanks, Bryan.

I'll begin with a review of third quarter 2004 consolidated categorical sales results with comparisons to the third quarter of 2003.

Outerwear -- 224.4m versus 220.9m last year, an increase of 1.6 percent.

We're seeing healthy growth in outerwear sales in Europe and international distributor markets, which was offset by a decline in U.S. outerwear sales, which can generally be attributed to continued weakness in outerwear sales.

Sportswear -- 108.4m versus 86m, an increase of 26 percent.

Sportswear growth in the third quarter was driven by very robust sales in the U.S.

Footwear -- 62.7m versus 46.2m, an increase of 35.7 percent.

Footwear shipments were strong across all major geographic markets.

Footwear sales were our fastest-growing product category during the third quarter and represented nearly 40 percent of our total increase in sales.

Footwear and sportswear continue to be our fastest growing product categories this year.

Accessories -- 18.6m versus 18.9m last year.

Equipment -- Equipment sales were 1.7m compared to 1.4m last year.

Geographical sales -- let me give you some basic information and additional sales commentary here in the U.S. and internationally.

U.S.A. sales -- 264.4m versus 249.8m, an increase of 5.8 percent.

U.S.

Sportswear sales were outstanding in the third quarter.

Sell-through of broadly distributed value-oriented fleece products in men's and women's is strong right now.

The [Rock][ph] and GPS pants and key styles in men's hoodies and sweatshirts also continue to do remarkably well.

U.S. outerwear sell-throughs of key [soft shell] styles in our Titanium line have also been strong this fall season.

Canada -- Canada recorded a relatively flat year-over-year sales of 49.5m and down 4.1 percent, excluding changes in currency exchange rates.

Third quarter Canadian sales were flat year over year, primarily due to a shift in the timing of some fall-related product shipments to fourth quarter of this year.

In general, the current retail climate in Canada remains steady for sporting goods retailers, and we are well positioned with strong and growing relationships with key customers in the region.

Europe -- Sales of 58.5 -- excuse me, 58.8m versus 45.7m for the same period last year, an increase of 28.7 percent, or 18.9 percent excluding changes in currency exchange rates.

Third quarter sales were very strong in Europe, driven by accelerating sales in outerwear and footwear.

Retail sell-through of fleece, soft-shell, and other non-weather-dependent products has been positive early in the season.

Our relationships with key customers across the continent is broadening, and we continue to receive very high marks for service levels, which bodes well for continued growth in the region.

I believe that we continue to be well positioned in the European market when compared to our competition.

Other International -- sales of 43.1m versus 28.5m for the same period last year, an increase of 51.2 percent, or 47.8 percent, excluding changes in currency exchange rates.

International Distributors, which comprised the largest component of Other International, recorded sales of 28.6m compared to 16.3m in the third quarter of last year, a 75.5-percent increase.

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

We saw exceptional growth across multiple international distributor markets during the third quarter, with specific emphasis on Hong Kong, China, South America, and Russia.

We are pleased with the progress of our international distributor business and the solid job these distributors are doing of promoting and distributing our products in their respective markets.

Japan, a component of Other International, recorded sales of 9.7m compared to 8.7m in the comparable period last year, an 11.5-percent increase, or 3.4 percent excluding changes in currency exchange rates.

Overall, we're very pleased with the third quarter sales results and the progress we're making in growing our business across geographic and product categories.

Going forward, our business strategy remains steady, and we will continue to focus our attention on growing the business to our 4.5 key growth strategies.

To reiterate --

First, we will continue to enhance the channel productivity of existing customers through our effective point-of-purchase marketing activities;

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

Third, we will continue to develop the merchandising categories of sportswear and footwear; and

Fourth, we will continue to selectively add distribution as we seek to grow our department store and specialty footwear business.

And last but not least, we will continue to seek favorable licensing opportunities as we leverage the strength of our brand.

1 final note -- I contemplate selling up to 150,000 shares of Columbia stock, or less than 1 percent of my stock ownership, to facilitate some personal financial planning.

Following these sales, I will continue to own over 15m shares, or approximately 38 percent of Columbia's outstanding shares.

I'm deeply committed to the long-term success of Columbia Sportswear.

There are no further sales planned by me at this time.

That concludes our report.

Thank you for listening in.

We'll be happy to field any questions.

Operator, could you please facilitate that?

Thank you, sir. [Caller instructions.]

Robert Drbul, Lehman Brothers.

The first question, Tim, can you talk a little bit about inventory levels at retail, you know, with many of your companies with the outerwear and how you think they're positi1d?

Then I guess can you just give us an update on where you guys are with the speculative position that you've taken for this year?

Sure.

I think, based on prior years, that the inventory positions in outerwear, certainly in the U.S. -- and I think this probably applies in North America generally and in Europe -- are at average or just slightly below average, and so I think that bodes well for our investment in speculative inventory, and I guess I'd have to refer back to our guidance here today to tell you how I think we're -- that investment's going to pan out.

But I think it was the right decision, and so far, we're showing that -- our guidance, I guess, would show we think that that's what's going to happen.

Great, okay.

And can you give us an update in terms of where you are now on the in-store shops, the Concept Shop investments that you've been making?

And I guess as you look into the first quarter with some of the deleveraging that you're going to get in the first quarter, is there also some investment going on there with some additional shops?

Well, the shop -- the Concept Shop installation process has been going very well.

We've got -- we installed in the U.S. al1 over 1 a day since the -- since the early part of the summer.

So we've got lots of progress there.

There's also not as significant an investment outside the U.S. but certainly very significant investment as it relates to the percent of our marketing spend.

The shop investment for the first quarter will probably not be as significant as it was in the last half of the year.

We based on schedules I've seen so far.

And I would say the bulk of our deleveraging, as it were, is a function of the footwear distribution center coming online early in the quarter and just the additional personnel that we've added to continue to grow the business.

Great.

And a quick question for Bryan.

When you look at the year-end balance sheet expectations, in terms of working capital and where the cash position ends up, can you just give us an idea what you're thinking at this point?

Sure, Bob.

I guess maybe taking the two biggest pieces, I do believe we'll be in, you know, certainly use-of-cash positions for both inventory and accounts receivable.

I would expect -- I believe last year our inventory levels on a consolidated basis were around $126m mark.

I would expect this to be probably a bit north of that but not -- but not, you know, too outside that range, maybe call it close to, you know, around $10m more than last year's level.

Accounts receivable, certainly a use of cash there, and I would expect overall our cash position to probably be right around that $300m level, just a little bit above maybe where it was a year ago at year-end.

Okay, great.

Thank you very much.

Thanks.

Robby Ohmes, Bank of America.

Two quick questions. 1, can you -- on the U.S. spring backlogs, you know, being pretty strong, can you give us a sense of, you know, sort of new accounts versus existing account penetration on that?

And then the second question would just be, you know, with the new management in Europe under Paul Gils, I know it's early, but can you tell us, you know, what, if anything, you think will change over there in your approach to Europe?

Thanks.

Certainly.

Yeah, I can tell you on the USA backlog for spring, there was no significant new accounts, so there were some.

They were insignificant in terms of the backlog.

The bulk of the volume is on our growth in our existing accounts.

And Paul's experience is very significant, especially in Northern Europe.

His most recent assignment at Nike was as the general manager for the country for footwear.

He's got a significant amount of experience in that part of the world and has actually quite vast language skills, at least by comparison to the prior incumbent.

So we would expect that the process of getting the Company taken more seriously as a significant vendor to large customers, especially in the Germany, Austria, U.K., Northern European markets where the Company has underperformed, is really a focus for Paul and 1 that we think there's an opportunity for very significant growth.

So Paul's official day starting is November 15, so it's -- we're a few days off here, but he's been attending our U.S. sales meeting, and just the more time I spend with him, the more confident I am that we're going to have a really significant player for the Company in total and a very significant business in Europe.

Great.

Thank you very much.

Thanks, Robby.

Jeffrey Edelman, UBS.

Tim, the first question has to do with domestic outerwear.

I guess we've sort of seen 2 trends taking place. 1, it appears as if the market's shifting more towards fleece, and if I’m not mistaken, don't you classify that as sportswear?

That's correct, we do.

Oh, okay.

So it's not as -- and how -- has the market moved that way, also?

Well, I think -- you know, the reason we categorize fleece as sportswear is in many of our customers, and especially the department store customers, fleece and sweaters are almost interchangeable.

So oftentimes, that stuff was purchased by the sportswear buyer.

That's why we categorized it there.

I would say that our fleece products, you know, probably bridge the 2, and, you know, I think we're seeing, you know, obviously an increase in fleece sales, but some of that's just a better replacement for sweaters over time.

Okay.

Then as part of that [indiscernible], you mentioned increased markdown to clear some merchandise.

Going through some stores, it looks as if there's been quite a nice display of Columbia product in Marshall's and TJX.

Was this what you were referring to?

Were these 1-time deals?

Could you sort of give us some background?

Because I've never really seen such an in-depth presentation as we've seen recently.

I don't remember, Jeff, making any comments regarding markdowns.

Or increased closeouts, I'm sorry.

Oh, I think that's -- that's maybe a reference to our --

Guidance for --

-- our margin guidance for Q4, so that's a future event --

Okay.

-- where we're talking about that.

But, no, we've -- you know, the Company's been committed to not having outlet stores, and we have relationships not only with our great retail customers but also with some folks that run those kinds of businesses.

And our business with Marshall's has been a long time, and the product categories that are there are -- you know, are prior-season merchandise.

Okay.

And then just, finally, as it relates to the operating margins, you've often said that while the change in mix goes against gross margin, you would expect to see the incremental volume at least more than offset that and be able to let you catch up to that 20-percent operating margin.

Does it appear as if the ongoing investment in the business -- in-store shops, higher depreciation, whatever else might come along -- would hold you back from attaining that?

I don't think so.

I mean -- you know, our goals still are very clear that we want to have leverage as we grow.

It, of course, becomes more difficult when you get to the operating margins that the Company's been very fortunate to attain.

Leverage is difficult at the 20-percent operating margins.

But that's the goal.

And, again, you know, these investments and the subsequent revenue gains generated by the investments don't necessarily happen in the same quarters, so we've got some investment ahead of the -- ahead of the business, and we would expect that over time we've made the right decisions on these investments.

They're longer term, and the results will be quite good for the Company, but they may not happen in the same quarter they're expended.

Right.

Great.

Thank you.

Thanks, Jeff.

Carole Buyers, RBC Capital Markets.

Just real two quick questions.

First, with Europe being strong this quarter, up 19 percent, but an indication that the backlog is not as strong, can you elaborate on this?

And then, second, I was wondering if you strip out footwear and sportswear from your business and you just look at gross margin year over year this quarter and, say, over the last 4 quarters, has it been up?

And can you quantify the magnitude from a basis-point standpoint?

Well, I'm going to let Bryan work on question number 2 while I answer question number 1.

So did you -- do we have that one?

Well, anyway, let me answer question number 1.

You know, we've talked at length about Europe being this very strong geographic opportunity for the Company to expand, and you know, we've had a great role in Europe, and we're not done there yet, you know, as evidenced by the strong sales volume in this quarter.

Our business in Europe for the spring period, which we announced today, is disappointing from my point of view, and primarily the shortfall in results have been in the Northern countries, those specifically that we expect some significant support from Paul and his experience levels there.

So we've had growth in all of our major key accounts in Europe, but from a geographic standpoint, we had weakness in those countries where we've traditionally underperformed, so [we've said][ph] further weakness.

We also were hampered a bit by weather in Europe, although we don't want to complain about the weather, but spring weather really didn't happen in enough time to -- for our dealers to move the merchandise.

But, in general, our poor performance can be pointed right to the Northern countries, where we expect our new GM to help us to get better penetration there.

Great.

Thanks.

Also, and if I understand your question, let me try to phrase it like this, and if I don't answer it completely, certainly come back to me.

For Q3 -- and I think your question was more related to stripping out the footwear and sportswear as it relates to product mix, what's happening to margin -- and really, Carole, that's really what's happening in the third quarter.

So if I -- if I look at our -- if our gross margin went down 70 basis points in the third quarter, most of that was certainly product mix shift.

In fact, about 210 basis points, what I would equate to both product mix shift and then intra-product mix shift that we've talked about before.

Then, of course, that's offset this quarter by currency, and just the overall hedged rates last quarter against this quarter, and then any additional sport transactions at very high currency rates as it stands in the third quarter.

But -- and then from a year-over-year -- so from a year-over-year standpoint, you're saying that gross margins in those 2 businesses are somewhat -- are basically flat?

Relatively, yes.

Okay.

Okay, thanks.

Thanks, Carole.

Noelle, Grainger, JP Morgan.

Just back on Europe for a minute.

Can you talk about [Kerstad][ph] and what you're seeing in your business with them as they've announced, you know, pretty significant closures and some spin-offs?

Is that -- I'm just trying to get a sense of, you know, how much of it is macro or retail market over there versus kind of Company-specific challenges.

Well, as you relate to [Kerstad], I think it is -- I have to think about this for a minute here.

They're 1 of our top customers in Germany, but they're certainly a long way from being a top customer in Europe overall, even in the Company's overall business.

In our business, I believe for spring, I’m almost positive it was up with [Kerstad] over last spring, but it would still -- we would still put [Kerstad] in the category of areas where we can vastly improve our penetration now.

But if I look at the German backlog for spring, sort of in the summary form, the biggest impact or areas we had were just in the smaller German customers.

So I would think, you know, Germany we've underperformed, and it's been the function of, you know, certainly a poor economy over there, but also much of the blocking and tackling in that market, and just the whole issue of being taken seriously by serious customers over there.

So as it relates to -- I don't want to spend too much time on that, but there is a serious opportunity for the Company to turn that -- that part of the world around and have it be a significant contributor.

Qualitatively, have you found that the region has taken you more seriously in outerwear than in sportswear and footwear?

Not necessarily.

Actually, I think our mix of product in Europe is probably much more equal -- well, it's less dominated by outerwear than the rest of, frankly, the North American markets.

We see that as an opportunity and also, you know, positive as it relates to the business over there.

Okay.

And then relative to the fourth quarter, I guess, can you kind of just call out maybe what you're more confident in, what's really kind of the incremental positive?

Are you -- have you changed your markdown assumption relative to your 7.5-percent speculative ownership?

No, I think -- you know, there's lots of -- there's lots of moving parts, obviously, in this plan, and our analysis shows basically -- some of our analysis shows what we talked about today in terms of guidance, but I wouldn't say that there's any leverage that worked 1 way or the other with any significance.

It's more just looking at the general business and saying, you know, out of all the things we expect to happen, here's what we think the result will be.

Yeah, maybe just briefly, you know, top line, certainly, currency rates and translated back into the U.S. dollar is helping us out a little bit on net sales.

We've talked a little bit about gross margins being -- you know, contracting approximately 140 basis points.

That's offset by, you know, better comp on the SG&A line between the promotional and advertising costs that we talked about Q4 of last year.

And it's really just more of a Q3/Q4 split.

We really decided to ramp that up in Q4 of last year.

So I think those are really maybe the only things netting to maybe a little better Q4 than when we met, you know, 3 months ago.

Okay, thanks a lot.

Thanks.

Virginia Genereaux, Merrill Lynch.

Maybe just first a couple of housekeeping items.

Bryan, did you guys -- D&A for next year of 26m, I had it a lot lower.

I had it a good bit lower than that, and I feel like I've talked to you guys about that before.

Is D&A for next year coming in kind of higher?

I don't know.

Was that sort of a revised upwards --?

Well, not -- well, it depends on how we look at it.

I don't think we've ever really been specific in terms of when we expected the Kentucky distribution center to come on line.

As we've mentioned today, we do expect that that will come on line in January, so, really, we do have the entire $5m additional add, as Tim mentioned earlier.

So, you know, we're expecting 19 this year, 5 added to that, plus another 2m in various IT and distribution projects that we have going for next year that should come on line fairly quickly and add to that depreciation expense is what we see right now.

Okay, thank you.

And then on the share repurchase, it looks like you guys were pretty active in the September quarter, and you've continued that into October.

Is that, Tim, something we should think more about going forward?

You obviously have, you know, a ton of --

Yeah, I'm going to ask Bryan to speak to that specifically.

Yeah, certainly I would take, you know, our purchasing and, you know, our feelings about, you know, our Company and the growth strategy that Tim talked about longer term.

You know, with respect to how we're going to continue on that, you know, we'll continue to upgrade everybody on a quarterly basis, as kind of we've done historically here.

Okay.

And then, lastly, the -- as you think about the sort of play between sourcing on the gross margin side next year and then maybe some of these higher investments in SG&A spend, are you getting better -- are you getting sort of better sourcing terms for next year and so might -- might that obviate some of the gross margin pressure that you're seeing from the mix shift?

I know you talk about March down 50 [bips][ph], but you know, there's --

Well, when you say -- do you mean -- you're talking about the -- actually the sourcing pricing, not the terms because the terms are fairly --

Yes, Tim, I'm talking about sourcing pricing.

I'm talking about, you know, might you get some sourcing margin help next year that you're -- that you've maybe decided to redeploy, in part, in SG&A?

Well, we've pretty much baked the changes that we expect in sourcing into the guidance for Q1.

Maybe I'll ask Pat to speak a little bit to sort of the sourcing environment generally, but we've taken a cautious approach to moving sourcing around from our historical base just in order to guard against any risks of -- in position of other measures -- you know, protectionist measures that might be appointed specifically in China.

But, Pat, do you want to talk a little bit about maybe what we -- how we see the environment today?

Yeah, I mean we've -- we've been seeing outerwear pricing in general -- or, actually, all of our pricing coming down over the last 3 or 4 years, and we haven't really -- we didn't see any real large drop-off this year.

We've generally been producing in quota-free countries anyway, so all the countries have been becoming more competitive, but, you know, so has the competition and the pricing.

So I'm not sure that we're looking for any incremental increase in our margins this year.

Okay, Pat.

I mean if you saw 100 [bips] of gross margin pressure in the back half of '04 and '05, it's a long way out, but can you say anything about that directionally in the back half of '05?

Should -- could '05 be less than that?

I mean assuming the same things are growing, you know, you have the mix shift, might '05 be better than that relatively?

Well, a couple different points.

First, let's take, you know, Q1 kind of isolated.

I think the 50 basis points we're talking about is some further product mix shifting, especially kind of between intra-product mix, between the sportswear category and also within the footwear in terms of just the products and the margins that they enjoy.

Closeout activity in the volume and potential you know, margins are something that we're also forecasting in Q1.

You know, this year, if I look at kind of the whole year compared to next year, our margin and more of the product mix shift was maybe even more pervasive than I think that we would initially expect for next year just because our outerwear generally was down a bit, that we've commented before, specifically, really the youth -- the youth portion of that outerwear business was down.

And, obviously, we hope to regain some of that next year.

So all in all I would expect the product mix shift to be less -- less of an issue next year than in '04.

Okay, okay, and then just 1 more, if I may.

On your SG&A spend, it looked like it -- just in the quarter, it looked like it came in a little higher than you guys had -- had guided previously.

I just -- was there anything in the quarter?

I mean it looks -- just, you know, a little over 3m higher than you first anticipated.

Was there anything in the quarter, maybe of some of the pull-forward you talked about with the fourth quarter?

Maybe a little bit, but I would say most of it is just a lot of small, incremental-type SG&A costs.

And that would include everything from -- I know it's pervasive in all public companies, but professional fees, specifically around the whole 404 process, you know, Sarbanes-Oxley.

That takes its toll a little bit in the SG&A.

But it's a lot of little items, and again, just some of the personnel costs that Tim alluded to earlier.

Right.

Thank you all.

Thanks.

[John Chandley][ph], Susquehanna Financial Group.

Tim, I wonder if you can give us an update on what U.S. retailers are indicating to you has been the consumer reaction so far in possibly sell-through levels on the new youth-focused outerwear product category that you've launched for the current fall selling season?

Well, the bulk of -- John, the bulk of our work on improving our youth product is for -- scheduled for fall '05.

So we're in the process.

Now, I think we've had maybe 1 or 2 reviews with some customers, but we're really talking about changes that we made this year for our fall '05 line.

So that's -- we're just starting to show that product, and we've had positive reactions.

So far, we think we've done what we can to get ourselves righted in that situation, and we'll really -- we'll know a lot more as we complete the fall selling season.

All right.

So there's none of that product in the marketplace today for the fall '04 season, is that correct?

No, that's correct.

Fall '04 -- the stuff that's in the marketplace now we sold last year for delivery in December.

Okay.

All right, fine.

And then, Bryan, I want to make sure I understand correctly your comments about the late deliveries and what impact that may have had on the increase in the receivables and inventories.

Is that the bulk of what caused the increase of 17 percent in both parts of your balance sheet?

Or were there other factors at work?

No, it is -- it is merely the late shipping, you know, in the quarter, and that's both domestically and internationally.

And then as I mentioned, too, just the translation was the other piece.

So, you know, if I look at our overall, you know, domestic book specifically, we're in very good shape from a -- you know, from an overall portfolio of our accounts receivable, so really those factors solely.

All right.

The late deliveries -- is there any risk that some retailers may cancel on you because of late receipt of product?

Or is that just a more or less normal kind of occurrence for you?

Yeah, it's a normal occurrence.

Some customers wanted to get the merchandise in closer to the need, and that ends up putting it slightly towards the end of the quarter.

Okay, so no risk of cancellations?

Oh, these have all been shipped.

This merchandise has all been shipped.

All right, fine.

And the last question I had is the "Other" geographic region is becoming a -- at least in the third quarter was a very important component, up 51 percent.

Can you clarify that a little bit for -- is that mainly Asian sales, or is there other geographic areas that also performed very well in the quarter?

The 3 geographic areas in Q3 that we've talked about and did quite well were Russia, China/Hong Kong -- that's a combined distribution agreement for us with this wire group of very significant collection of companies based in Hong Kong, and South America.

So those -- those 3 areas did well.

We also did some shipping to a new distributor down in South Africa.

Wasn't tremendously significant but just indicative that the brand is strong in geographic areas around the world.

Tim, are we likely to see continuation of strength of the brand in markets like Russia and Asia?

Is this basically the beginning of a -- what you think may be a trend in those geographic areas?

Well, in Asia, we've been very, well, flattered and not surprised, but really, it's been a real eye-opener to the strengths that the brand has in China, specifically.

Hong Kong has been a really great market for us, and obviously, as those markets continue to expand, there's great opportunities for the Company, and it's really in the very beginning stages.

So we would expect that that 1 over time is going to be very significant for us.

Russia just continues to move forward, and our partner there is -- our partner distributor or our partner there has done a great job of really making the brand important and visible and have a great relationship with them.

But we hope that will continue to grow as well.

Super.

Thanks a lot, guys.

Thank you.

Thanks.

[David Campbell][ph], [Thompson, Davis, and Company][ph].

I was wondering if you might touch on fourth quarter outlook again and explain exactly what is a little bit better than you previously expected in the fourth quarter?

Is that all -- is that entirely the delayed shipments in Canada, or is there something else?

No, the shipments in Canada, I would say, would be an insignificant portion of the expected up side in Q4.

It's more our view of the available inventory that we have, what the market looks like, what -- you know, what our customers appear, and a little bit of spring in there as well.

And there's some areas, but in general, it rolls up to what we think is a nice Q4.

Is -- can you categorize that by geography at all?

Would it be more U.S. or --?

I think U.S. is still going to be the dominant, you know, market for the Company, and we would expect that that would probably be so in Q4.

Okay, and turning to your 2005 expectations, you said you wouldn't issue those until April.

I believe previously you have done that in January, if I'm not mistaken, so can you explain what's going on there?

Yeah, let me ask Bryan to maybe comment on that.

Yeah, I think most of the time, David, we'll try to give some color around the January timeframe, and in some parts, that's setting a little bit of a fence around the year.

But we rarely go through detailed guidance, as we do in our April conference call, where we really do have that visibility.

As you'll recall over the past years, you know, there is -- you know, we just -- you know, we're so -- you know, especially and it's probably with the growth of international markets, with the growth of footwear much later lady -- you know, later ordering patterns, much more of a reorder business, it's just we can do a lot better job of guiding, you know, outsiders to the Company in that April conference call.

So I think it is somewhat consistent to kind of past practices.

Okay, thanks very much.

Thank you.

Jamelah Leddy, McAdams Wright Ragen.

With respect to your spring orders, I'm wondering if more of your spring business may be coming [at once orders][ph] did not show up in backlog?

No, I'm having a difficult time hearing you, Jamelah, but I think what you're asking is whether or not the -- we're going to have a reorder position in spring.

Is that right?

Yes, and if more orders are coming from products like footwear or things that may not have shown up in your backlog currently?

Well, footwear is growing, 1 of our strongest categories.

But I -- at the end of the day, I would expect our spring merchandise is not going to be as heavily influenced by reorders as our fall merchandise is.

So I don't expect any change from that once orders are really for spring.

There may be some improvement in our Europe book as we, you know, get closer, but those would be probably well in advance of the season, and you know, we think that our guidance for Q4 -- excuse me, Q1 today is probably the most likely occurrence.

Okay, thank you.

And then with respect to increased advertising expenses, is that primarily in-store fixtures?

Or are there other advertising expenses that you're thinking about?

No, there's -- in-store is a component of our marketing budget, and we roll all that up and talk about it as advertising and marketing together.

But, no, there's no other new initiatives that we haven't talked about with investors so far.

Okay, thank you.

And then my final question is at what time do you need to make the decision for how much speculative inventory you will be producing for the winter of '05?

And given the fact that you increased that this past year, and it appears that you were correct in increasing that, might you decide to increase that from the traditional 5-percent amount going forward?

Well, we would make the decision around the close of our ordering seasons.

Call it March 31 of ’05, and you know, probably the latest we can make any purchases that would be delivered on in any kind of a timely manner would be some time in April.

And we would really make that decision at that time.

And again, from a historical perspective, you look at how we’ve made these investments in speculative inventory, it’s really based on our view of what the market looks like, how much inventory there was out there, what the competition looks like, and so we would delay making that decision till we had all that information.

So that would be delayed till end of March or early April of ’05.

Okay, great, thank you very much.

Thanks, Jamelah.

Liz Dunn, Prudential.

Hi, thanks.

My first question is on the ports.

I know most of the slowdown that’s happening currently is happening in California, and your stuff comes up in Oregon.

But is it impacting you at all, you know, in terms of availability of ships, or if ships are stopping down South first, and then moving up north?

Well, Liz, Carl Davis is here.

Most of you know Carl.

He’s helping us on a part-time basis now between his golf game.

But he’s managing -- he’s probably the most experienced person here in terms of that.

So let me just ask Carl to speak that.

Although the LA Port has been quite congested, it continues to be a problem for most importers, we import less than 10 percent, presently, through that port, so it hasn’t really been a problem for us.

And in fact, most of the stuff that we have coming in there comes in on some of the smaller ships, which haven’t been impacted as much as the bigger ships.

So, thus far we’ve been in good shape on that, and haven’t had any problems.

Okay, great.

Then on the advertising and promotional spending, you talked about easier comparison to fourth quarter of last year, can you just tell us what percent advertising and promotional spending is up for the back half of ’04 versus ’03, and then what it is Q3 and Q4?

Well, in general, and I think it’s inverse to that, it’s in Q4 of 2003, again we made some very conscious decisions to increase our advertising spending Q4 of last year.

Specifically, as we talked about in more of the promotional areas, which would include Concept Shop rollouts more aggressively in Q4 of last year.

So that’s really what we’re talking about on a comparative basis.

Our advertising spent this particular Q4 is more in line with historical percentage of sales, which is roughly about 4.5 percent.

But are you spending less, or did you just shift it to the third quarter?

Or, you know, have you done all your advertising spend, or your in-store shops, or your fixturing this year?

Yeah, let me characterize Q3 of this year, I mean, we definitely aggressively, you know, went after the in-store presentations.

So it’s a little bit of a Q3/Q4 shift in kind of an advertising spend, which is certainly more noticeable in Q4 with lesser revenues.

Okay, and then my final question is just when exactly will the new Kentucky distribution center start shipping?

And what are your plans to migrate from your facility in Oregon to Kentucky?

Will there duplicative shipping for some portion of time, or are you just gonna move it all at once?

How will that play out?

Well, yeah, we have a team that’s been working on this, obviously, for quite some time.

I’m going to let Pat speak to the specifics of that.

Yeah, on that, we will -- our last shipping out of River Gate, which here in Portland, will be on December 30, and then we will shutdown the footwear shipping for two weeks, and we’re doing that on January 18 from there.

So that gives us plenty of time to shift all of our goods.

Obviously, this is a strategy to move goods that are coming in for Spring directly there, and then transfer a minimal amount.

But we’ve been working very closely with our sales reps and our retailers to facilitate that shut down.

So, again, this January we’re shipping into there.

Okay, thanks very much.

Margaret Mager, Global Packs.

Oh, I’m still at Goldman Sachs.

Hi, Margaret, how you doing?

Didn’t change firms yet that I know of anyway.

Anyway, okay, I’m good.

How’re you, Tim?

Great.

Well, it looks your on track for another double-digit year.

Have you -- you haven’t had anything less than a double-digit year since you went public?

I’d have to say I’d have to think back.

I don’t remember it or either we did.

But I guess my memory -- we had 1, Bryan says.

What?

Okay.

2002, we only grew the top line about 4.7 percent.

Well, I was talking earnings, but.

Earnings?

Yeah, that’s --

Earnings?

Yeah, we were double-digit that year.

They were.

Well, we’ll forgive you.

The -- my question is, basically, I wanted to ask you, Tim, about Europe, and most CEOs probably wouldn’t consider a 29 percent increase disappointing.

But I’m just wondering what would not be disappointing?

Well, I guess when I categorized disappointment, I’m really talking more about the spring book.

And you know, to the extent 29 percent is a solid performance, against what the opportunity is, which I consider to be enormous, anything less than enormous, I guess, is an area where we know we’re underperforming.

So if we could get the kind of penetration, kind of consumer and retail acceptance in the large wealthy, northern European countries that we have in France, in Spain, we would have an opportunity to have a very, very large business.

That’s why we talk about it so extensively with investors and internally.

So, it’s just the fact that we know what the opportunities are, and anything less than that, it’s a disappointment.

Is there something about the competition in Europe that you, you know, think you may have to overcome to reach your potential?

Well, certainly, you know, coming at that market as Americans, there’re a lot of peculiarities in the marketplace that you just aren’t prepared to deal with as an early Company.

So as the Company’s grown and has prospered over the years in Europe, we’ve encountered many of those, and we’ve overcome many.

But at the end of the day, the similarities at retail and with the consumer are -- way outweigh, in my opinion, the dissimilarities.

And again, it just gets all back to the people. so I think that the change we made in the GM position in Europe is going to help us to get some real traction with a very serious senior guy who’s got great understanding, knowledge of those northern markets where we’ve underperformed.

And I think he’s equal to the serious team of people we’ve had in place in Spain and in France, and in other markets where we’ve done well.

So, it’s all about just getting the right folks in place, and the strategies delineated and then rolled out.

Do you have to change anything about the approach to distribution?

And what I mean by that is retail in Europe.

I don’t think so.

I can -- you know, the process we’ve got in place, and the strategies to attack the retail market are correct.

It’s just a matter of getting taken seriously by large customers in those northern markets.

And you can only, in my opinion, do that through great relationships, an obviously, great product.

But those are going to be the key parts and key strategies.

Are there any Pan European brands there that you’re going up against in basically every country?

Well, you -- yes, there are some Pan European brands, and we would put, obviously, Nike and Reebok, Adidas, North Face has a Pan European presence.

They’ve been there a lot longer than we have, as does Helly, although their business has not been as -- has not grown as much, I mean, as it should.

But the bulk of our competition is local brands.

There’s obviously a dominant local brand in each 1 of these markets.

And then just like everyone else in the world, our customers.

So private label from Inner Sport, and other, you know, Sport 2000, other players in the market dominate that.

Okay, well, it’s hard to compete with Nike’s marketing budget.

Yeah, I think we have an opportunity there.

And obviously, we’re in a bit of a different business there.

But we think we have an opportunity that continues to grow and strengthen ourselves, and we’re looking forward to proving that we can do it.

Yep.

And I just wanted to ask you, Tim, about the apparel business.

Just roughly, what does it look like categorically in terms of gender?

And I don’t know if there’s any other way that you would slice and dice it by category without getting too detailed, but gender would be helpful to know.

It is largely a men’s business, right?

Well, actually in outerwear it’s almost 50/50 now.

So the merchandise is men’s and women’s almost equal.

Sportswear, however, is dominated by the men’s business.

However, our biggest, some of our biggest growth has come in the women’s category.

But I guess in many ways, if you asked consumers, they would consider us to be more a men’s company.

That might be from our hunting heritage.

We don’t have a big women’s hunting business.

But --

Yeah, I know.

Not many of us have taken up the sport.

Not enough, anyway.

Much too smart for that.

But kids, does it fit in there at all?

Well, when we look at kids, obviously, we design different products for boys and girls.

But that’s an area that the Company’s underperformed.

And we really sort of excise that, and talk about that sort of in a genderless way, at least to investors.

But it’s an area where we could -- we now we can do better from a product standpoint, and we hope that we’ve gotten those products put together.

We think we have.

Well, I can tell you, it’s not easy to find kids’ coats anyway.

So you -- I think there’s an opportunity.

I agree.

Okay, well, thank you.

And yeah, that, you know, I don’t see any less than double-digit earnings year.

So, not on my model anyway.

I like that.

Great.

Thanks, Margaret.

Good luck in the fourth quarter.

Take care.

Thank you.

[Jennifer Black] [[ph?]], Jennifer Black and Associates.

Hey, good afternoon, guys.

Hi, Jennifer.

I wanted to know, you guys have done such a great job in doing special makeup for all of your retailers, and I was wondering in going into the fall of ’05, if you saw a change?

If you saw it staying the same with your special makeup in all three of your categories?

And then I also wondered if you could talk about in all three of your categories what percent of your business is on automatic replenishment?

Certainly.

Well, the SMU business has been key for us.

It allows us -- it’s an age in our segmentation policy, and allows us to late in our development cycle, if we’ve missed something, we can certainly go back, and you know, fill a hole with a special makeup product.

So we intended to continue to grow that.

I don’t think that it will outpace the average of the Company.

So I would expect it to grow about the same as the rest of the Company.

Nothing special there.

I wasn’t writing fast enough.

The second question was --

Automatic replenishment?

Oh, I’m sorry, automatic replenish, yes.

Well, we talked a little bit about our pant business getting stronger.

Especially with the Rock pant and the GPS pant.

And those, in order to be really successful in those categories, you need to have auto replenishment.

So we have instituted that, and we have a number of customers replenishing their pants business on auto replenishment, but at the end of the day, it’s still a relatively small percentage of the total business.

I would say, without the benefit of the exact data here, it’s got to be less than 5 percent, if not even a smaller number than that of the Company’s total.

It really is that the model for the Company is really still sell in advance, and then bill to order.

Okay, all right.

Well, thanks a lot, and good luck.

Yeah, thank you, Jennifer.

[Sam Poser] [ph], Mosaic Research.

Good afternoon.

(indiscernible)

I just want to follow-up on the inventory levels 1 more time.

Can you give us a breakout of how that falls out by the different categories?

I mean, because it is significantly above current trend in total.

Yeah, I don’t know that we’ve in the past given guidance all the way down to the detail level of our inventory book.

Our inventory levels currently are all imbedded in the guidance that we give for Q4.

Part of the inventories, fall inventory, that will ship in Q4, some of that will carry forward into Q1 of next year.

As it relates to spring inventory, we have a fair amount in work in process currently on the spring side.

So, I think I mentioned earlier to Bob’s comment that I do believe it’ll be up at year-end, but nothing significantly.

I guess my question is then, what is it that’s leading you to believe that sales will accelerate to the degree that they will to your guidance in Q4, because that is a momentum pickup from where you currently are.

Well, you know, our guidance is really based on our view of the marketplace, the fullness of the channel, you know, our inventory positions in various categories.

And it’s really a -- it’s a broad based look at the business and the environment, and also obviously includes some orders that we already have on the books.

So it’s a bunch of different factors.

I think, too, Sam, it’s also what Tim mentioned earlier in terms of just our customers really demanding the products, you know, closer to the retail market.

So, I think I commented at the end of Q2 that, you know, that’s a part of the reason that an equal split between Q3 and Q4 just -- you know, as we saw the orders, wasn’t going to be possible.

So, it is a little bit of a ramp-up in Q4, and that’s really at customer request.

Okay, great.

And then 1 last question.

You’re raising -- with the quotas lifting out of China, are you, as your prices may improve, or your costs may improve, how much of that are you going to put into, keep into margin versus quality, just in general in apparel and outerwear, in sportswear and all the outerwear?

Yeah, the bulk of the savings we’ve determined really appropriately belong either on the garment, or to helping our retailers enhance their gross margins with our product.

Okay, great.

Thank you.

Thanks, Sam.

[Mike Marionachi] [ph], [Ragner Olti] [ph] Capital.

Yeah, hi, Bryan.

I think there was 1 other person in the telephone book who didn’t get to ask first.

I had a question, regarding the AR allowance.

Do you just have that number?

Let me -- I’ve got a relative amount for that.

I want to -- I’ll round it significantly.

Let me try to put my hands on that.

Roughly, 9.5 million.

Okay, very good.

Thank you.

Thanks.

[Michael Gamsen] [ph], Cobalt Capital.

Hi, good afternoon.

Couple quick things. 1, on the DC, you talked about the 5 million or so extra D&A.

Is there going to be also incremental operating expenses, or was that sort of baked into that Q1 SG&A guidance assumption?

Absolutely.

Yeah, I think, you know, if you look at just Q1 as an isolate -- I think, you know, we’ve commented that 5 million for D&A.

That’s roughly, what? 1.25 million.

And then we will have an additional, you know, operating costs that are baked into Q1 and beyond for next year.

Right, so it’s, on an operating basis is the DC, I assume, going to be a negative cost, at least through next year, till your sort of fully leveraging the facility?

Yes, absolutely.

It will definitely be under-utilized as we look to ’05.

And another question.

I just wanted to clarify an earlier question about the gross margins.

You talked about, I guess, the product margins versus the currency.

Um-hum.

And I just wanted to make sure I got that right.

You said, product margins are actually down 210 basis points on a constant currency basis?

Well, let me rephrase that, and characterize it a little differently.

No, what I mentioned is really just the product mix shift is one of the biggest reasons for our margins to contract.

And that’s where we are selling faster in footwear and sportswear in -- versus outerwear products.

And they just -- the margins that we get for those products are less than outerwear.

Sure.

And so that was a bit of a shift mix.

And then currency, goes the other way, in terms of we get a little bit of a lift with the currencies against the US dollar.

Right.

You said the currency was 140 basis points this quarter?

No, actually it was more -- well, actually, yes.

The overall basis points down in gross margin was 70.

Currency was 140 to the positive in the product mix, and kind of intra-product mix was about 210 negative basis points.

Right, and I assume it was really the inter-product mix between footwear/sportswear has a much greater impact than the intra within each category’s (indiscernible) mix.

Um, yes, it, well, if I understood you right, it is more of inter-product.

So, the more between selling, you know, as we -- you saw with our great footwear numbers this quarter, they have lesser margins.

So that’s more of an impact for the overall gross margin of the Company.

Great.

And one other thing, I don’t know if you guys would care to comment on.

Obviously, in 1 of your big segments is specialty stores, there’s been some M&A activity, obviously TSA was a year ago or so, and Dick’s and Galyan’s more recently.

Any comments on, I guess presumably you’ve benefited, as TSA was certainly under-represented in your product.

Wonder if you think there’s still more opportunity on the TSA side to increase penetration, both from the old TSA stores towards overall?

And whether your thoughts are on Dick’s and Galyan’s as well?

If that’s continued good opportunity as well?

Yeah, we think, obviously, TSA, we think there’s still continued opportunity for us to grow the business, especially in the cold weather categories in their eastern stores.

You know, they’ve been typically underperforming in that, and we don’t think that they’ve caught up completely in 11 years.

So we think there’s still more opportunity there.

We also have some -- many, many concept shops that we’ve installed there.

So in addition to just getting the products in the stores, we think it’s going to be -- it’s going to look better, because we’re spending time and effort together with them to make the product more valuable at retail.

So, we still expect TSA to continue to be a good healthy growing customer for the company.

As it relates to the Dick’s-Galyan’s amalgamation, you know, both were great customers.

We consider Dick’s to be a very significant operator on that side of the business.

And we’ve talked to investors about the combined companies not being as large a business as each store was separately and then combined.

So we would expect that Dick’s would be more disciplined in terms of their, or have a different approach to the merchandise necks, which at the end of the day will be very good for the Company, but probably won’t equal right away on the same amount of business that the two did combined.

Got it.

Okay, great, I appreciate it.

Thanks, guys.

Certainly.

Thank you.

Ladies and gentlemen, if there’re any additional questions, please press the star followed by the 1 at this time.

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And at this time there’re no further questions.

Please continue with any closing remarks.

Well, we thank everyone for listening in, and look forward to talking to you in January with our Q4 results.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the third quarter 2004 financial results conference call.

Thank you for participating.

You may now disconnect.