Columbia Sportswear Co (COLM) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Columbia Sportswear second quarter 2005 financial results conference call.

[OPERATOR INSTRUCTIONS]

At this time, I would like to turn the call over to David Kiser, Director of Investor Relations.

Mr. Kiser, you may begin your conference.

Thank you.

Good afternoon and welcome to Columbia Sportswear's second quarter 2005 financial results conference call.

With me are Gert Boyle, Columbia's chairwoman;

Tim Boyle, Columbia's President and CEO;

Pat Anderson, Columbia's COO;

Bryan Timm, Columbia's CFO; 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 that you might have.

You should have received a copy of the earnings release by now, but if not, then please Trudy Collins 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 request that you limit your initial follow up to one or two 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.

Good afternoon.

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

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

Many of these risks and uncertainties are described in Columbia's quarterly report on form 10(Q) for the quarter ending March 31, 2005.

Forward-looking statements in this conference call are based on our current expectations 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 statements to actual results or to changes in our expectations.

Thank you, Gert.

At this point, I will hand the call over to Tim Boyle, who will provide an overview of some developments that occurred during the Company's second quarter of 2005.

Tim?

Thanks, David.

Welcome, everyone.

Thank you for joining us.

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

Q2 2005 net sales for the Company were $186.2 million, an 8.8% increase over the comparable period, driven by sustained growth in sportswear and footwear categories.

Excluding changes in currency exchange rates, consolidated net sales increased by 7.1% in the second quarter.

Net income was $6.3 million compared $10.7 million for the same period last year, and diluted earnings per share for the quarter came in at $0.16 compared to earnings per share of $0.26 for the second quarter of '04.

As anticipated, net income for the first -- for the quarter decreased primarily due to increased level of closeout products at lower margins and increased SG&A investments to support future growth.

Updates -- Management additions -- We're excited to welcome two experienced industry veterans to the senior ranks of Columbia Sportswear.

Brad Gephardt has accepted the position of Vice President of Footwear, where he will be responsible for the global strategic vision for the Columbia's Footwear team and for overall direction for the footwear design and merchandising functions.

Brad will join the Columbia team in October.

Brad has extensive experience managing large footwear organizations.

He joins us following a 10 year career with Adidas Solomon, where he most recently served as Director of Outdoor for Adidas.

In that position, he was responsible for creating the global footwear apparel and accessory strategies for the Adidas outdoor business and held P&L responsibilities for product development, merchandising, and marketing for the Adidas' global outdoor business.

He was also head of global footwear and head of global footwear operations for Solomon, while residing in France, and has extensive experience in footwear merchandising, marketing, product development, and Asian sourcing.

Brad has also held project management and development positions for both Adidas and Nike, where he began his footwear career.

I'm also pleased to announce that Mark Koppes will join Columbia in the beginning of August as general merchandise manager for men's apparel.

As we have discussed previously, we have realigned our apparel design and merchandising teams to be focused on gender rather than product categories.

This initiative has increased focus on gender-specific product development and merchandising, and has maximized our merchandising and design resources to provide improved opportunities for synergies among product categories.

Mark will play a key role in the men's global apparel merchandising managements.

In this newly created position, Mark will be responsible for global leadership of the men's apparel division that includes developing and executing the brands' global strategic merchandising plan.

Mark joins Columbia following a 16 year career with Nike, where he most recently served as Sport Apparel GM.

In that position, he was responsible for men's and women's apparel design, development, and merchandising, for six sport categories.

He was also a men's apparel GM for Nike and has significant European apparel design and merchandising experience, having resided in Holland and in France while working with Nike Europe.

I'm confident that the addition of Brad and Mark to their new senior management positions will strengthen our management team and will continue to drive the worldwide growth of our Company.

Distribution projects -- We're currently finalizing designs for enhancements to our distribution centers in Portland and in Cambria, France.

In Portland, investments will be made to upgrade equipment and systems that will be at the end of their useful lives and to better utilize the additional space generated when footwear products were transitioned to the new Kentucky DC.

When operational, these investments should significantly improve the utilization and capacity of the facility.

In France, we are expanding capacity at our existing facility to support our expected growth in European markets.

Particularly, our growth in footwear, which requires a greater storage capacity than apparel.

We expect to begin construction in the third quarter.

We anticipate both projects will be operational during the 2007 calendar year.

Now in hardware -- Our hardware sales were $8.7 million in the second quarter, a 27.9% increase year-over-year.

Mountain hardware remains sharply focused on developing highly technical apparel and equipment for distribution to the outdoor specialty channel and has solidified its technical position as compared to the competition. second quarter sales of Mountain Hardware -- Mountain Hardware's expanded spring sportswear and outerwear product lines were strong.

Mountain hardware sales were being driven by further development of existing distribution and by expansion of new distribution opportunities in the specialty channel, both domestically and internationally.

The spring 2006 Mountain Hardware product line has continued to broaden in high-end technical and casual apparel, with emphasis on women's technical products, and while still early in the order-taking season, the line is currently being received extremely well by the specialty retail channel.

Sorel -- Sorel sales were $2.6 million in the second quarter, a 73.3% increase year-over-year.

Sorel has historically been recognized for its cold weather heritage and consistent with its brand identity, we are focusing on developing fall product opportunities for the brand.

During the quarter, we announced that Mike Pendergast, the former President of Sorel, has left the Company.

We are confident that our Sorel management team, leveraging Columbia's infrastructure, will provide strong leadership for the division, while we conduct a search for Mike's successor.

Licensing -- Net licensing income increased 16.1% to $907,000 with a strong contributions in camping and hosiery income.

During the quarter, we signed two new licenses.

A global licensing agreement with Worldwide Cycle Supply for the design, manufacture, and marketing of a new line of outdoor bikes and bike accessories, and a new license with a firm called Another Line, for distribution of women's belts in North America.

Starting in spring 2006, we will address the global bag and pack market opportunity internally and will not renew our licensing agreement for this product category.

We have hired an experienced team to focus directly on this product line going forward.

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

It's important to note that the second quarter is our most volatile quarter as we wind down 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 $186.2 million, an increase of 8.8% over the $171.1 million of net sales for the same period of last year.

Growth in consolidated net sales was primarily the result of excess inventory sales during the quarter.

Excluding changes in currency exchange rates, consolidated net sales increased 7.1% for the second quarter.

Our consolidated gross margins for the second quarter of 2005 were 39.5%, or a decrease of approximately 330 basis points when compared to the second quarter of 2004.

Gross margin contraction was driven primarily by increased volume of closeout product sales at depressed margins.

Also contributing to the contraction in gross margin was both a shift in product mix from outwear to sportswear and footwear products and a geographic shift to more international distributor sales, which have lower gross margins.

The Company's SG&A expenses increased by 13.4% or $7.8 million on an absolute basis, to $66.1 million or 35.5% of sales for the second quarter of 2005 versus $58.3 million, or 34.1% of sales for the comparable period in 2004.

Sale expenses increased due to the higher level of direct sales and associated commissions and advertising costs.

Operating expenses increased due to the additional personnel-related costs, additional depreciation and operating costs associated with our new distribution projects, and other miscellaneous operating expenses.

Depreciation and amortization totaled $5.6 million for the second quarter 2005, compared $4.1 million in the same period of the prior year as new capital projects were placed in service this year.

SG&A was less than the anticipated due to lower personnel-related costs, variable selling costs, including lower commissions on closeout sales, and lower operating costs on higher international distributor sales.

Net interest income for the second quarter increased $1.3 million from $1 million last year due to our strong cash position and higher interest rate environment generally.

Our effective tax rate was 34.5% as compared 35.5% in the second quarter of 2004, due primarily to increasing income in jurisdictions with lower overall tax rates.

We reported net income of $6.3 million or $0.16 per share for the second quarter of 2005, versus net income of $10.7 million or $0.26 per share for the second quarter of 2004 based on a diluted share count of $39.3 million and $41.1 million respectively.

I'll quickly touch on key items in the balance sheet, and again, I'll be comparing June 30, 2005, balances to June 30, 2004, balances.

The balance sheet remains very strong with cash equivalents and short-term investments totaling $242.9 million versus $284.7 million at the same time last year.

Consolidated accounts receivable at June 30, 2005, was $165.3 million, compared to $138.5 million a 19.4% increase and more than the quarterly sales increase due to primarily significant increases in shipments in the latter part of the quarter.

Additionally, a large portion of our factory-direct international distributor shipments for which we don't have complete control over timing occur from mid June to mid July.

We significantly improved our inventory position as we sold through the vast majority of our spring and remaining fall excess in close out products during the quarter.

Consolidated inventories were $215.9 million compared $209.4 million a year ago, a 3.1% increase, largely attributed to current fall season inventory on hand.

Capital expenditures were $7.7 million during the second quarter the majority of which were to increase our distribution capacities.

We continue to model CapEx of approximately $40 million in 2005, consisting of approximately $15 million in maintenance CapEx and $25 million in distribution projects, including projects described by Tim.

We now expect approximately $23.5 million in depreciation and amortization in 2005.

During the second quarter, we repurchased approximately 2.6 million shares at an aggregate purchase price of $116.5 million.

We have repurchased a total of approximately 3.5 million shares at an aggregate purchase price of $164.1 million since the inception of the program.

That covers the financials for the second quarter of 2005.

I'll reiterate that from a balance sheet perspective, we remain very pleased with how the second 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 we've reported today, we're in a position to give guidance for the third quarter and update everyone on our guidance for the full year, 2005.

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) for the quarter ended March 31, 2005, and which were expressed by Gert in her opening comments.

Based on our current outlook, we anticipate a Q3 2005 consolidated revenue decline of approximately 3% to 4% when compared last year.

And are anticipated Q3 gross margin contraction of approximately 70 basis points, placing us between 46.4% to 46.6% of estimated sales.

This contraction is primarily due to the product mix shift to footwear and sportswear which generally have lower gross margins than outerwear.

Our current SG&A target for Q3, 2005, as a percentage of estimated sales is 24.2% to 24.4%.

This increase is primarily due to the increased personnel-related costs, additional depreciation and operating costs associated with our new Kentucky distribution center, and increased marketing spend for the quarter.

At present, we are modeling the Company's estimated and full-year effective tax rates at 34.5%, and we're using 38.4 million shares for Q3 and 39.2 million shares for full year EPS calculations.

We anticipate net licensing income of approximately $1.3 million, and net interest income of $400,000 for Q3.

This analysis implies Q3 net income decline of 12% to 14% when compared to Q3 2004.

Turning our attention to full year 2005, we reaffirm our prior guidance and continue to expect consolidated revenue growth of approximately 5% for the full year 2005 when compared to 2004 revenue.

And we anticipate net income decline of approximately 8% to 12% for the full year 2005.

Factored into this guidance is approximately 130 to 150 basis points of gross margin contraction due to the additional closeout sales and the continued sales mix shift to lower margin product categories.

This is more contraction than originally planned due to the higher volume and related margins on closeout sales in the first half of 2005.

Additionally, we plan SG&A expansion of approximately 160 to 180 basis points, or 28.2% of estimated net sales in 2005.

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

In the short term, we continue to manage operating costs diligently and reduce or defer spending as appropriate.

We anticipate net licensing income of approximately $4 million and net interest income of approximately $4 million for the year.

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

Please consult the Company's quarterly report on form 10(Q) for the period ended March 31, 2005.

I'll now hand the call back to Tim to review geographically and categorically our business environment.

Tim?

Thanks, Bryan.

I'll begin with a review of the second quarter 2005 consolidated categorical sales results, with comparisons to the second quarter of '04.

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 product late in the quarter.

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

Outerwear -- $40 million versus $40.8 million last year, a 2% decrease during the quarter.

Weakness in North America outerwear shipments in the second quarter was offset by Europe and other international markets.

Sportswear -- $102.4 million versus $90.4 million in Q2 of 2004, an increase of 13.3%.

US sportswear shipments were strong, driving growth in this category.

Footwear - $34.3 million versus $30.7 million, an increase of 11.7%, driven by strong growth in international distributor markets.

Accessories -- $6.8 million versus $6.6 million, an increase of 3%.

Equipment -- $2.7 million versus $2.6 million, an increase of 3.8%.

Geographical sales -- Let me give you some additional geographic sales commentary for the second quarter with comparisons to the same period of '04.

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

USA -- sales of $110.3 million compared $105.9 million, up an 4.2% increase for the quarter.

Second quarter USA sales was driven by healthy increases in sportswear, particularly in men's knits and women's shirts -- excuse me, and woven shirts and short styles as we concluded spring season shipping.

As expected from the fall orders reported last quarter, we continue to see weakness in the US fall outerwear youth category, which typically ships late in the second quarter and negatively impacted outerwear shipments in the quarter.

The overall US retail environment has generally been healthy this spring.

Early spring weather conditions were cool and wet, but as weather conditions have improved, sell through rates of shorts, men's woven shirts, and sandals have been good.

Generally, inventory levels at retail appear to be in good shape.

And the general mood at retail is positive.

Early indications from buyers are that spring 2006 line is generally being well received in the US, particularly in our sportswear and footwear categories.

Women's capris and skirts and products in our Titanium product line are showing well for sportswear and sandals, trail and hybrid products in the footwear category are showing generally well.

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

Canada -- sales of $9.7 million versus $12.5 million, a decrease of 22.4% for the second quarter or 28.3% excluding changes in currency exchange rates.

Spring shipments in the second quarter were down across product categories in Canada, due to an increasingly challenging retail environment.

Second quarter sales were also impacted by a shift in the timing of spring goods from the second quarter to the first quarter of this year.

Canadian sales for the first six months of the year are essentially flat, as expected from the Spring order backlog reported last fall.

Retail sell through of men's and women's sportswear products has been solid in Canada this spring; however, footwear has been challenging.

Early feedback on the spring '06 apparel product line from key customers in the region has been generally favorable, with positive reception to our sportswear product category.

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

Europe -- second quarter sales of $25.4 million versus $24.5 million for the same period last year, an increase of 3.7% or a decrease of 0.8% excluding changes in currency exchange rates.

As expected from the spring order backlog reported last fall, spring shipments in Europe for the first half of this year increased but not to the desired growth rates.

Our new European management team is sharply focused on improving our performance in northern European countries, and we have made sales management changes to maximize our opportunities in these markets.

The current retail environment in Europe is challenging and is becoming increasingly promotional.

Overall retail sell through has been generally weak for most brands.

We have proven historically that we can grow our business in difficult economic environments.

While still early in the order-taking season, spring '06 is showing well and key accounts are providing a very positive reception to our apparel and footwear lines.

On July 1, we acquired our Swiss distributor for approximately $2.1 million, and began selling products directly in the Swiss market in July.

The purpose of the acquisition was to own and directly control our product in the important Swiss market.

I continue to believe that Europe is our most important growth opportunity among international markets for the foreseeable future.

Other international -- second quarter sales of $40.8 million versus $28.2 million for the same period of 2004, an increase of 44.7% or 41.2% excluding changes in currency exchange rates.

International distributors -- a component of other international reported sales of $23.9 million, compared to $15.4 million in the second quarter of 2004, a 55.2% increase.

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

Second quarter international distributor shipments were very strong in varied international geographic markets.

Shipments to our key distributors in Hong Kong and China were strong, and southern hemisphere distributors in Australia and Chile are developing well.

We believe we are well positioned for continued growth in international distributor markets.

Japan -- A component of other international, recorded second quarter sales of $9.3 million compared $7.5 million, a 24% increase or 22.7% excluding changes in currency exchange rates.

Our market opportunities in Japan are improving as the overall Japanese economy recovers.

Retail sell through rates of our spring 2005 products are ahead of last year, and early indications for spring '06 bookings are positive.

Last fall, we made some changes in key general management positions in Japan, and recently added new footwear sales management.

I am pleased with the overall improvements we are making to our Japanese operations.

Overall, while sales results increased in most key spring product categories and geographic markets, we recognize the challenges lay ahead and we must be extremely focused as we execute our business strategies.

Going forward, our business strategy remains steady, and we have made significant investments in distribution infrastructure and a design, merchandising and production personnel that we believe position us for long-term growth.

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

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

Our new European management team is committed to strengthening our market presence in the less-developed northern European markets, while maintaining the momentum we have developed in France and Spain.

Third, we will continue to develop the merchandising categories of sportswear and footwear more completely while maintaining the strength of our core outerwear business.

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 out report.

Thank you much for listening in.

We'd be pleased to field any questions.

Operator, could you please help us with that?

[OPERATOR INSTRUCTIONS]

And your first question comes from Jeff Edelman, UBS.

Thank you, good afternoon.

A number of retailers have indicated that they definitely placed orders later than, say within the last three months for fall.

You have not changed your -- your sales guidance, so my question is to what degree with your shortened cycle time and probably available capacity to be able to scramble and ultimately get more product into the retailers as they had requested without you taking an increased speculative stance on inventory?

Okay, well, we announced -- when we talked about our fall backlog last quarter, we talked about the speculative position that we took, which was slightly larger than average, but behind last year's speculative position.

So to the extent we have additional inventory available for sale, we certainly would be thrilled to take those orders.

And, Yes, as we say, we've received orders every day.

We also get cancels from time to time.

So we're -- we're pleased with the results so far.

And we're -- we're looking forward to a great fall season.

But it will be limited to the extent of our speculative purchase.

Okay.

But in terms of having reacted to orders subsequent to when you provided guidance and the -- the capacity and your shorter cycle time, there is no -- there is no ability to get additional product out at this point?

Well, we would be limited to what product we have speculated on, and that -- that decision was made back in the early part of April.

So, you know, we've detailed our -- our position there, and it would be limited to that amount.

Okay, thanks.

Yes.

Your next question comes from Bob Drbul, Lehman Brothers.

Hi, actually it's Holly Morrison calling in for Bob.

I think you've spent some time in Europe recently with Paul Gills, who's now about seven months into the job.

Can you provide us with any updated thoughts you may have on the opportunities both near and long term in Europe?

Certainly.

Yes, I spent a week in much of Europe with Paul, and our sales team.

Both with customers and talking to the press there about the Company's plans.

And they really are unchanged in that we -- we expect Europe over time will be the largest and most important geographic region for the Company.

Both in terms of growth and -- and in absolute -- absolute volumes.

Again, our expectations are that we can get Germany, Austria, the Scandinavian countries, and even the UK up to near where our French penetration is, and that's going to be very significant growth for the Company.

So, moving along, not as rapidly as I personally want.

But we think we have the foundation in place for a great business in Europe.

Okay, great.

And also, can you just elaborate on some of the investments you've made, as well as any changes in your product design?

Certainly.

Well, the investments are ongoing, mostly they -- they are for enhanced distribution capacity to support the Company's future growth.

Those are the primary investments that the Company's made and will continue to make over time.

I'm sorry, I've forgotten the last part, the last question.

Well -- any change -- you mentioned in the press release that you made changes in product design or investments in product design.

I just wondering if you could elaborate on that?

Yes.

Really those changes are all around our discussions of the change in the apparel development process and design process to be going from a categorical process to a gender process.

And -- and those would be, you know, summarized with our discussion of -- of the addition of Mark Koppes as men's manager, as well as the important discussion of hiring of Brad Gephardt, the new footwear VP, who is really going to be key to realizing our potential in the footwear area.

Great.

Thanks a lot.

Your next question comes from Liz Dunn, Prudential.

Hi, thank you.

Congratulations on a quarter that was I think a little bit better than we were mostly expecting.

Thanks, Liz.

In terms of your operating margin, longer term, what sort of potential do you think you have to get back to historic levels?

I mean, it seems like the mix issue will likely play out for the foreseeable future.

And as I look at your outerwear business, I don't think your competitors are running at this sort of operating margin.

So -- and it does seem like you've been challenged on the competitive front.

So how should we think about operating margins going forward?

Are 20% operating margins just in the rear view mirror and we won't get there again, or what?

Well, there's a number of components to operating margins that the Company's experienced recently.

And those would include the contribution of licensing, which obviously is -- is a growing part of the business.

So when we look at those parts of the business that are under pressure and would be, you know, outerwear, as you pointed out, we also have opportunity over time to grow our gross margins and, thus, our operating margins in the footwear category by building the business quicker and with a -- with a better utilization of the mold amortization charges.

So I think there's opportunity over time for us to be a very, very profitable Company as we are today.

And to increase our profitability.

But it's going to be an -- it really will require increased growth margin in footwear, in my opinion, and -- and, you know, contribution from licensing as well as other -- other really top-line issues.

Are you experiencing any pressure in terms of gross margin from -- from currency, both in terms of, you know, China and, you know, expected as a result of translation of -- of the Euro?

And then also, what will SG&A growth look like going forward?

Yes.

Let me ask Bryan to maybe speak specifically to those subjects.

He's the guy that has his finger on the pulse there.

Yes, Liz.

In terms of gross margin, let me just back up for a second and comment a little bit about our operating margin.

I think that it's important to note that this year was definitely from, you know, in terms of Tim's goals and in terms of our plans with the Company, much less on the top line in terms of what our projections are for this year of around 5%.

So when you look at the operating margin, I don't know if it's as much of a factor of the gross margin contraction from some of this product mix shift.

But I equate more of it to just an SG&A deleverage.

We built, as Tim mentioned, a lot of infrastructure to support growth.

And unfortunately, the growth on the heels of a fairly warm winter last winter, and some also increased competition just don't afford us the ability to have the operating margins closer to that 19% as we reported last year.

So where they go from here, I think that it's going to be a factor of, you know, a resumption of our top-line growth rates.

You know, whether they're at, you know, the rates in which Tim kind of set out in terms of goals of the Company or something less than that, I think it -- our operating margins are going to be more a factor of the fixed cost leverage than they are continued contraction due to the product mix shift.

From a currency standpoint, I think that in the back half of this year, we've kind of modeled slight improvement on a hedge race basis.

I think for next year looking out on the gross margin line, it's probably a little early to tell.

I would say that at least in the front half, it -- it's really going to depend on where currencies go, coupled with -- coupled with just in terms of the volumes and whether or not, you know, we're able to get some of that outerwear piece back in Q2 of next year.

From an SG&A perspective in terms of leverage, I really think that we're doing a -- as good a job as we can currently and really looking at our operating costs.

Where we can cut to not hurt the long-term business.

We're doing so.

So I think in -- in looking out to next year, we're going to continue to manage costs as diligently as we can, and really focus on the top line, which is going to be more impactful in terms of spreading those, you know, those gross profits over the fixed costs.

Okay, thanks.

See you next week.

Your next question comes from Virginia Genereux, Merrill Lynch.

Thank you, all.

Hey, Tim.

First if I could ask, on the SG&A side and maybe for you, Bryan, I think you all were talking about a -- you had indicated a $70 million number this quarter.

SG&A came in a good $4 million less than I think we were thinking, and it even seems for the full year that you've dialed back on SG&A by a decent amount.

And the SG&A delevering was one of the surprises in the last quarter.

Could you first talk about that, what you were able to control there?

Sure.

Yes.

As you point out, it really is, you know, this year in terms of what we had projected ahead of the quarter to -- to our actual results is a little bit of -- I think we lost a little bit on the gross margin line.

And of course, that's -- that's a factor of really shipping through a lot of our closeouts, which would include some spring closeouts that -- you know, in the past and historically have gone more in Q3, as well.

On the SG&A line, as I -- I think I mentioned in some of my prepared remarks, it really was and -- and I think you'll probably recall that, you know, in -- in quarter two, we have a tremendous amount of our growth coming from the international distributor business.

Those margins on that business, and I should be specific here, those gross margins on that business are a lot less than we typically enjoy with our direct businesses.

The good part about that is the SG&A costs are very minimal with that business, as well.

So that puts a little bit of -- little bit of a skew to our -- our SG&A percentage of sales.

The other thing I'm -- that I think we commented on was just the -- the bulk of those closeout sales also happened in Q2.

We don't have commissions on those sales.

So that also skews some of our variable costs in the selling -- selling expenses.

So I think those two combined with some of the more controllable items that I think we talked about in terms of personnel costs, and I'd also comment on, you know, again, this year in terms of where we're projecting it, it's certainly not, you know, it's not at the level that we expect.

It's certainly not at the level that Tim expects or our board expects.

And I I believe some commensurate reductions will be in some of those other areas of personnel costs, which would include incentive pay.

Thanks.

That's helpful.

Following on that, Bryan, how should we think about the variables to gross margin, like take this last quarter or take your September outlook, if you think it's going to be down 70.

What could flex that up or down?

You know, you mentioned, I understand, closeouts might have pressured June.

But I guess you -- maybe you pulled forward a little bit of those.

But you -- you knew you had a lot of closeout inventory to clear.

I mean, what are the variables now, you know, you were the guys who don't give sort of markdown support?

But what are the variables that can impact besides sort of the mix really in your sales to retailers intra-quarter?

What can impact the gross margin line?

Right.

No, your question is a good one.

I think that it really is that there are a number of variables.

In fact, that's part of the, you know, the complexity of really forecasting our gross margins in business.

And that would include everything from product mix to foreign currencies, obviously with -- with, you know, close or over 40% of our revenues coming outside the US.

That's impactful.

Geographic mix, which would include some of these international distributor mix compared to our direct businesses.

Obviously, as we found out last year, weather is a very impactful piece of the business.

In the associated closeout sales that otherwise come from poor weather or, in our case, not cold enough weather.

So I think those are some at least of the touchpoints that -- that make it very difficult for us to kind of forecast our margin in a very tight range of accuracy.

Can you tell us -- say, what's your cancelation rate running, may I ask now?

Again, if that's a variable component in terms of your retail relationships?

What's your cancelation rate running, and what's been the flex, maybe, on that?

Terms of percentage?

Can you -- ?

You know what, we don't have that close at hand.

But I can tell you it's not different than it has been in prior periods.

It's not significantly different.

Yes, plus, I think it's a little early in our fall, you know, shipping at this point in time to really have a lot of cancelations.

I think as Tim mentioned earlier, cancelation reorders happen every day.

But I think most that activity is probably upcoming as opposed to, you know, what we're experiencing, you know, currently.

Understood.

I wanted to get historical perspective.

You've had variability in your gross margin relative to your expectations.

You know, even if I go back to December, so -- we can talk about it more later.

Thank you, all.

Thanks.

Your next question comes from John Shanley, Susquehanna Financial.

Good afternoon.

Either Tim or Bryan -- I wonder if you can elaborate about the press release comments about the ability of the Company to clear out some inventory during the second quarter and maybe give us a sense in terms of whether that was predominantly outerwear, or was it a mix of all three merchandise sections, and a sense of going into the second half.

How you balance in terms of -- of your inventory positions in the key outerwear product category.

Sure, John.

In terms of just kind of reflecting on -- on the last couple quarters, I think as everybody will recall, you know, exiting 2004, we did have a -- a surplus of fall outerwear products that ultimately because of the weather patterns didn't afford us the ability to move those through the channel during that quarter.

At the kind of margins that we otherwise expect.

Hopefully everybody will also recall that Q1, I think we -- we worked through a little over half of those fall surplus goods in quarter one.

And I think that we mentioned that we probably continue to ship those in the second quarter and be pretty clean at this point.

That's -- that is -- that is true for -- in terms of where we -- where we ended up this quarter.

Also, typically, we'll ship some spring clothes out in quarter two.

But I think traditionally, we'll also ship a few of those in quarter three.

And I think we made it very strong, a strong corporate push to really clean our inventory position.

And -- and we just decided because of some of that demand to -- to really move some of our spring products.

Mostly sportswear-related products, through the channel in Q2.

So going into our fall, which is our peak shipping, we're very clean on our inventories and really are set up for, for the most part, with fall 2005 goods.

So really all of the fall and winter products from '04 are pretty much gone -- ?

Yes.

That is correct.

That's great.

And Tim, I wonder if you can give us a -- a sense of the outlook for some of the European retailers and particularly in the western part of the continent that you deal with.

What's their sense of business conditions as we go into the second half, and also are you seeing any positive or negative impact from Adidas' recent determination to offload Solomon?

Well, Yes.

As I said earlier, I just came back from spending, you know, a little over a week in our key European markets.

And I -- I think the mood over there is quite good.

I mean, what we see happening is -- is continuation of those issues that we've talked about where, you know, for -- whether it's consolidation, meaning a cross border consolidation of retailers or expansion of retailers across borders is really -- has been a -- a depressant to their interest in local brands.

And I guess, you know, when we see Belgian companies acquiring companies in the UK or Spanish companies expanding beyond the Spanish border, we just see continued reliance on the international brands or the global brands which were considered to be a premiere example of that.

So I just continue to see increasing opportunities for our business in Europe.

And especially prevalent when we look at the size of these markets where the Company's been underperforming.

Those have -- those have really been, you know, just -- the opportunity there just continues to be enormous.

And then as a result of the Adidas selling of the Solomon brand, really not much comment at all.

The players that we're working with were really mostly talking about the apparel business.

Those are the primary discussions and -- and Solomon is considered really an equipment line over there.

A small amount of footwear, but really we talk mostly about apparel and, frankly, the subject didn't come up very much.

Okay, can you give me a sense in terms of the retailers' open to buy position in Europe, are these increasing, decreasing, holding steady, what's the general sentiment with the major retail accounts you deal with?

I didn't see much change frankly in the discussions that's we had with our customers.

Their open to buy positions, I would say would be on average about where they were in prior periods.

You know, some guys have held money out to buy later in the season.

But in general, most people have spent the bulk of their open to buy so far.

Great.

Thanks a lot.

Appreciate it.

Thanks, John.

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

Morgan Chase.

Hi, good afternoon.

Hi, Noelle.

Just to make sure I'm clear on the gross margins for the second quarter, is it fair to say that the deferential between what you reported in -- in your forecast is attributable to this incremental spring off price sales that you did relative to last year?

Yes.

Definitely in terms of ahead of the quarter, we did not -- at that point in time, we knew we were planning on shipping the lion's share if not just about every piece of fall 2004 through the system.

We didn't contemplate at that point in time for shipping, you know, the spring-related products.

Again, we typically will, you know, ship a few of those in Q3, and kind of spread those things out.

And again, kind of corporate push to really clean our inventory position.

We ended up shipping those this quarter.

I would also point out -- I think I mentioned last call that we did build, I think, historically we don't build a lot of spring on a spec basis.

But we did build just slightly a little bit of spring products.

Again, kind of more for these promotional events that we had.

And I would point to a more like Mother's Day, Father's Day.

So we did have a little bit of spec position to sell probably over and above what we did in Q2, 2004.

Okay.

Bryan, can you quantify what the -- the spring closeout was that you moved in Q2?

I don't have the absolute dollars in front of me.

I will say that it was -- that it was about as impactful as the -- as the fall, you know, as the fall piece of it that we had to move through, as well.

Margins were definitely a little bit less.

And I think that's probably what we have experienced historically is the better margins of closeout products are on our outerwear products as opposed to sportswear.

But I will say that of the 330 basis points contraction, it was definitely well over half.

It was equated to the sale of the closeout merchandise at lesser the margins.

It was the primary driver.

Okay.

Thank you.

In looking at -- at other international which was very strong in the quarter -- I know it's a small quarter, but Tim, could you talk about what's going on in those markets?

Are you adding doors, is it increased penetration?

Do you think kind of these very healthy growth rates are sustainable?

Well, some of these are -- there's a mixture of all these things happening.

Depending on the particular market.

But in general, it's -- I would say these are relatively new distributors for us.

For example, our -- our China, Hong Kong group grew very significantly.

And they're a relatively new customer of the Company.

They've made heavy investments both in Hong Kong and in China in stores and in wholesale accounts.

And those are growing rapidly there.

You know, our Russian business is -- I don't want to call it mature by any chance, but it's not growing as rapidly as some of the other markets.

And there -- there are other businesses outside of, you know, those two issues which are -- those two geographic places which are also quite good.

And some of it is just that we're getting to the point where we're being recognized more in some of these markets.

The brand awareness is growing.

But I -- I would have to say that finding new, large markets that we can grow rapidly is less likely, frankly, than our future expansion in these more developed markets.

Are they adding a lot of doors in China right now?

They've been both building -- building stores and also adding doors, as well.

So yes, there's -- there's both of those things going on.

Okay.

And then maybe just one last question for Bryan in terms of -- so your full-year outlook hasn't changed despite coming in stronger for the second quarter.

So I'm wondering, you know, maybe what have you gotten more cautious on?

Yes.

I don't want to call, you know, a significant piece of it cautiousness.

But I will say that as we look out to the back half of the year, you know, I think we need to reflect on last year.

And -- and, you know, there's a number of variables that may or may not affect our margins.

Specifically our gross margin.

I think I went through those earlier in terms of, you know, currency rates, geographic sales mix, you know, weather and the amount of closeouts.

And ultimately the kind of margins that we get on those closeouts.

From an SG&A perspective, I've definitely, you know, accounted for some continued improvements there as evidenced in Q2.

Again, I think we experienced, you know, a little bit of that SG&A upside in Q2.

And I don't know if I necessarily forecast all of that in the back half of the year.

I would say that our full-year guidance has probably improved slightly.

But again, I think it's probably prudent at this point in time to -- it's in that range of kind of the decline of 8% to 12%.

And, you know, we'll -- we'll continue through the year.

But I think that's the best at this point.

Okay.

Thank you very much.

Yes.

Your next question comes from Jean Fontana, Lazard Capital.

Hi.

Thank you.

Just looking to 2006, you're probably not prepared to give any guidance, but with the investments you've been making in SG&A and now within, you know, distribution expansion and other investments, I mean, do you -- are you going to be at a point in 2006 where you're going to be cycling some of these costs, and we might see some leverage in the SG&A line?

Or do you still think you're going to be making, you know, increased investments?

Well, you know, the -- you're right about 2006 being a little too far away to guide on.

I mean, it's really a top-line story.

Maybe, Bryan, do you have some additional comments on -- ?

Yes.

I think, again, we're doing what we can in terms of those things that we can control for the back half of the year.

I think that sets us up nice going into 2006.

I wouldn't overplay necessarily at this point in time some of the additional D&A that will come on as a result of a couple of the projects that Tim mentioned earlier.

I do believe that we believe those will become operational in 2007.

So any effect if any of depreciation expense will be minimal in 2006.

So it really goes back to how Tim set this up.

It's really a top-line story for next year.

Okay.

What about vulnerability on the gross margin side?

Others have talked about raw materials costs going up and labor costs in China.

And, again, the four axe.

Can you sort of talk about where you think gross margins are headed?

You're cycling most of this product mix shift, I can imagine, by now.

There's got to be other factors in there.

Right.

I think that's a good point.

I think the product mix shift was probably -- that was probably larger in 2004 than what we've -- than what we've penciled it out being in 2005.

And even going further into 2006.

So it is -- it is at this point probably, you know, where do currency rates go?

As I mentioned, you know, a lot of our hedges for spring we've -- we have some hedges taking place, but again, you know, we don't have any hedges taking place right now for fall 2006.

So where currency rates go now is definitely going to impact us, whether positively or negatively.

So it is a difficult thing to really forecast where gross margins go next year.

From a -- from a raw standpoint, yes, there's been some cost improvements.

But we've also seen some going the other way.

So I think at this point in time, it's -- it's really a tough thing to put our finger on.

Other than to say that I think it's going to be more impactful in terms of SG&A and the top-line story for next year.

Your next question comes from Jim Duffy, Thomas Weisel Partners.

Hi, everybody.

Thank you.

Tim, wondering if you can provide commentary on the tone of business in the US market by the various channels.

Looking across sport goods, department stores, so forth.

Sure.

Well, I think the sporting goods group which is -- several years, been going -- undergoing some consolidation, we actually see a pretty good mood there.

That business, you know, is where the Company historically has grown from.

And I think the customers we have in that channel are generally in pretty good shape and, frankly, feeling pretty good about things.

The department store business, also consolidating.

And I would say the mood there is probably pretty good, as well.

As you look at your growth objectives going forward, do you see any channel mix shift in the US market or do you expect source growth from existing channels?

Well, I would expect that our existing customers would really be the focus of our growth with the exception that we, you know, we're very embryonic in our footwear business.

So we have very little business in what I would consider to be the footwear specialty channel.

And that's -- that's an area where we have a huge opportunity to grow.

And that would be the only kind of new, additional business that we'd be looking for, you know.

Our footwear business will probably grow most rapidly with our sporting goods customers.

But the -- the specialty footwear chain stores certainly have an opportunity for us to grow there.

Have you done anything with concept shops?

In footwear?

We had -- yes.

Yes, we have fixturing systems that we've been installing various places around the world.

And those have been impactful.

But we really haven't done anything in terms of specific installs in any kind of a major way with -- with large customers.

Okay.

Thank you.

Yes.

And your next question comes from [Shamo Hadukan].

Hi.

This is [Shamo Hadukan] with [Bastner Partners].

I have a few questions, they all involve North American outerwear.

What I'm -- I'm trying to think about the long-term economics of that catagory of business for you.

And I guess we -- we could look back five years and there could be two situations, right?

You could look back and you could say, you know, Columbia had some bad weather problems, and the competitors really came on strong.

This year -- so you sort of took a hit.

You know, then after that, Columbia was able to bounce back and sort of, you know, that business stabilized or continued to grow.

I could also look at it and say perhaps five years from now, I could look back and I could say, you know, when the North Face came on and Sauder and Marmot were in better financial positions, the -- it was just the beginning of an increase -- more competition in that space.

So Columbia really, you know, struggled a few years.

You had good product and whatnot, but just because the competition was better, it lost some market share.

I'm just wondering which of these two scenarios you think is sort of more likely long term in that segment of business for you guys as a Company.

Because I've done plenty of channel checks and it seems like everybody likes Columbia as a product.

But there's also this acknowledgement out there that there's more competition out there.

And nobody seems to have a good sense of what that means long term for that line of business.

Well, since the Company has been public, we've never talked about North American outerwear being a growth category for the Company.

We've been very keenly focused on expanding our business internationally with all our product categories, but especially in the US in sportswear and footwear.

The Company has a very high market share in North American outerwear.

And continues to be a well-respected, well-known brand.

But we have competition from everywhere, and frankly the -- none of the brands would come anywhere close to comparing to our biggest competitor, which is our customer's private label.

We're mindful of all those issues and diligent about those things that we can do something about.

Including the -- the appropriate styling that we have involved.

And the -- the value of components that are involved in our products.

But at the end of the day, we have a Company that sells many, many different kinds of products across many categories.

And we're not relying strictly on the outerwear category for -- for our growth.

Right.

So in the -- in the back half of the year, in North American outerwear, is the expectation that at this point the weather problems are behind you, or -- is weather going to also contribute to the situation in North American outerwear in the third and the fourth quarter?

There will be a lot of champagne corks here if it's cold first day after Labor Day here.

I mean past weather problems.

I'm sorry.

Inventory that might have built up because of weather in the past and so on and so forth.

Yes, no --

And other related problems because of ordering because of weather last year or something like that.

No.

The Company's inventories are very clean, as we said earlier.

We were diligent about cleaning our inventories in the first half of the year.

We think we have the appropriate level of inventories today, and we believe that our customers have -- have an appetite, you know, based on an average weather year. .

Okay.

And the last thing, what's your appetite for the share repurchase going forward if the stock doesn't shoot up, based on these levels.

Well, we've -- we've obviously been, you know, fairly forthcoming in -- in terms of what our -- what our actions have been, and -- on the share repurchase front.

And, you know, I guess investors should extrapolate that into the future in terms of how we would treat opportunities in the future.

Okay, thank you.

Thanks.

Your next question comes from Jamelah Leddy, McAdams Wright Ragen.

Thank you, most of my questions have been answered.

Did I want to ask about expectations for hiring Brad into footwear, and I know he doesn't start until October.

I'm wondering if you could tell us about the time frame that we should expect to see some changes as a result of hiring.

And I would assume that it would take maybe a year or more for there to be some significant product changes.

But perhaps there's, as you've answered in the previous question about getting into the footwear specialty partners and stores, maybe more of an immediate impact on that front.

Or if there's any color that you can add to that, that would be helpful?

Sure.

Well, as you know, the -- I mean, frankly the search for a really talented VP for footwear was a significant one for the Company.

And we really wanted to make sure that we had the absolute right person, which we think we do for sure with Brad.

You know, Brad's got a quite varied background from merchandising direction and -- and he has some background specifically in -- in sourcing and making special makeups products where he was very effective at Nike.

And I think that just his overview on our whole business will be -- will be quite impactful almost immediately.

And, you know, I think it's probably too aggressive to assume that he'd have a product impact quickly.

But certainly we just expect that the leadership that he'll bring will be -- will be felt, you know, right away.

And -- and so we have very high expectations.

And, you know, for me personally, I -- I've -- I've been very clear about how important I believe footwear will be to the Company's future.

And I'm convinced that Brad's going to be the guy to bring us to there.

Okay.

Thank you.

Now with the addition of Brad and recently Paul Gills and Mark Koppes, are there other vacancies that you have in sort of that upper management level, or -- does there really sort of fill you out?

No, I -- everybody here's looking around the room.

But I think we're in great shape.

Not to diminish any of the people here that have worked so hard to make the Company go forward and, you know, frankly our results are, you know, to be envied by almost any apparel Company.

And we have very high expectations for our Company's not only financial results but also growth, and, you know, we just want more people that can help us to get us there.

And we think we've got a great team here.

And these two guys are going to be significant additions.

Okay, thank you very much.

Your next question comes from Sam Poser, Mosaic Research.

Good afternoon.

Hey, Sam.

Hi.

Tim, could you discuss the segment -- the evolution of your segmentation strategy and as well as -- I overheard -- I heard you speak a few weeks ago, and you were talking about yourselves not as a fashion brand, but at the same time you just said it's really important for the styling of the product.

And the competition of private label.

What are you doing with the brand, the segmentation and so on to offset the competition of all that -- of that private label?

Well, at the end of the day, it really gets down to the merchandise that we're making.

And that's where we obviously spend a tremendous amount of time.

And effort.

But as it relates to segmentation, we have a clear segmentation policy this we spend a lot of time on.

And delineating that to our customers is a -- is an ongoing effort and yields fruit every time we -- we talk about it.

But basically it's -- it's making sure that we have merchandise that's appropriate for the specialty chain.

Whether it's through Mountain Hardware or through the Company's -- the Columbia Titanium product.

You know, at the -- at the very premiere part of the business.

And it's also competing in department stores and -- and sporting goods stores and -- and other operations with the Company's specific lines that are designed for those products, which would be XCO or our core products.

So it's an ongoing effort to continue to delineate the product.

And then, of course, our Sorel business tends to cross almost every product category.

But when we talk about not being a fashion brand, we really consider ourselves to be an outdoor active brand that's, you know, provides performance and protection for people who are active outdoors.

But at the same time, we have to have -- we have to be color appropriate.

We have to have the right merchandise for each season and the correct colors.

But we don't have to be the fashion leaders that -- that are directing trends and making -- making the latest teen poll.

So our business is really much more stable, we believe, and -- and solid business based on those things that we just delineated.

Just a followup.

Are you as far the -- the private label being competition, what are you -- what have you changed to -- with your product mix going forward?

Mostly on the sportswear and outerwear side, you know, so the customer knows it's Columbia and it's -- it's beyond the label, you know, to go beyond the label to remove yourself from that competition.

Well, it's -- you know, at the end of the day, our competition against private label really has to be an analysis by the retailer that the risks of -- the risks of private label are outweighed by the gross margin generation that the Company -- that the Company's products can provide.

And generally, we've been winning that.

So there's fluctuations in every customer in terms of some customers increasing their private label dependence.

Others reducing it.

And so at the end of the day, it has to be about the brand, about our performance from a service levels, meaning distribution centers function well, the sourcing operations function well, and those things in combination with a great brand, at the end of the day win against the enhanced gross margin that a retailer can get by doing private label.

And generally, we win.

That's how we built our business over time, is really against the private label competitors.

Thank you very much.

Your next question comes from Margaret Mager of Goldman Sachs.

Hi, Tim.

I just wanted to ask you about one of the comments in your press release about consolidation of retail.

Okay.

And how it's impacting your business.

I -- I guess it's pretty obvious the Dick's/Galyan's merger and the Sports Authority/Gart merger.

Is there anything beyond that that you would call out in terms of consolidation effects on your business?

Have you seen some of the regional players that maybe, you know, aren't as visible to us in the investment community, closing stores or anything of that nature?

No.

I think we just wanted to point out that it's happening.

Certainly there's been a lot of publicity around the Belk acquisition of the profits division of Sachs.

And you know, there's speculation on -- on other stores that may be in play.

We just wanted to point it out that, you know, some are opportunities, frankly.

Yes.

Has there been anything that you would note in your customer profiles, you know, that -- that has changed like, you know, maybe one -- one way to get at it is the percent of business in your, you know, top five customers today, versus five years ago?

How -- how dramatically different is it?

Well, probably the single biggest change in -- in that top five grouping -- I think five years ago we did not sell to Kohl's.

We might have just begun selling to Kohl's.

They're a customer that would have entered the our five.

And frankly, the Sports Authority/Gart combination -- they've always been an important customer, but they're a larger customer now.

And of course the consolidation with Dick's and Galyan's --

I don't know if you look at that way.

Would you say it doubled the percent you do with the top five people -- ?

I don't think so.

I don't think our change has been dramatic in terms of percent of business in the top five.

I don't think it's been significantly different.

You remember, we have some growing international customers of some scale, and those have also, you know, spread the business over -- over that sort of top 10, 20 customers.

Okay, then.

Well, maybe I should be more specific and say let's focus on the US.

Because I know -- I'm going way back now, dating myself.

Tim, when you went public, you had a very broad list of customers, and, you know, it was one of the strengths of the Company, I think, that it was well diversified.

So just trying to understand like how -- beside the obvious changes, has there been much -- much else, or do you still have a really extensive list of customers?

Well, we still consider ourselves to be very broadly distributed.

We have a lot of customers.

And really, I would argue with you.

We can't really discount the international component because, you know, that's been a focus to continue to grow the business outside the US just to make sure that we aren't concentrating our entire business on a few customers.

We still don't have a 10% customer.

So I -- I think we have a very broad grouping of customers, and, you know, the focus on department stores has been paying, frankly, big dividends.

And some of those guys are moving into the larger areas of the customers' base, as well.

And it's also helped us in our sportswear business.

You know, the companies had great business over the years in outerwear with sporting goods customers, but the opportunity for sportswear and sporting goods distribution is not as large as it is in department stores.

So it's really a change in the Company's mix to be more broadly from a categorical, geographically and customer-type base than it really was when we were -- first went public.

Did you -- thank you.

Did you change -- change your outlook for the third quarter because you did better in the second quarter?

Just a little different than what -- what we were building.

No, I don't think we've given guidance necessarily on Q3 versus Q4.

I think it was just sort of implied versus our Q2 guidance and guidance for the full year.

So -- so no.

I don't think Q3 has improved.

Not improved.

I was wondering if you pulled forward into 2Q out of Q3, if Q3 was actually -- your guidance is lower than what we had in our model.

But obviously your Q2 was better.

So just wondering if there's -- ?

Right.

I think we commented that there's -- probably the biggest driver there is the international distributor business.

And we do have -- we do have, you know, a lot of open orders to ship from kind of mid June to -- to mid July.

So yes, there was probably a little bit of spillover that those orders that could have gone the first week of July.

May have also spilled into the second quarter, but it's not a significant amount.

Okay.

I know your full year is unchanged.

So okay, thanks, Tim, all of you Tims.

You bet.

Thanks, Margaret.

Your next question comes from Paul Hudson, Rumpus Capital.

Hi, guys, maybe I missed this.

But could you provide some additional color on the SG&A line item?

It seems -- seems like you guys did a pretty good job controlling that.

I want to get more color there.

Sure, I'm going to let Bryan speak.

Do you have specific questions -- ?

I can be a little repetitive in terms of some of the things that happened.

Again, I don't want to be -- I don't want to overembellish some of the control aspects.

I think there's certainly a piece of it that is things that we can control and we've done so in the second quarter and will continue to do so for the -- for the ensuing year.

But -- but also some of those were a matter of mix.

I think I commented that, you know, personnel costs, we can't in some cases defer some of those hires that otherwise didn't have the right kind of ROI's.

We can also lower some of our operating costs.

We -- we had lower variable expenses.

I know that sounds a little odd.

But, you know, when you ship a lot of the closeout merchandise, there aren't the commissions that go -- you know, also follow that.

On those closeout sales.

You know, the international distributor, again, Q2 was a very small quarter in terms of its volume.

So when you grow handsomely in your international distributor business, it kind of halfed the direct margins on your gross margin line with virtually no SG&A costs, it does distort things in terms of the percentage of SG&A as a percentage of sales.

So really those are the main drivers.

Again, personnel, some of those variable costs which include commissions and the mix geographically are probably the main drivers.

Okay.

Good.

As I think about kind of the back half of the year and into '06, I mean, should I -- should I expect the kind of SG&A performance going forward like as a run rate type of thing?

At the -- like a similar type of savings?

Let me -- again, I would take, you know, the back half of the year.

We believe that we're going to continue or we will continue to -- to manage diligently our operating costs.

So, you know, whether you can do a run rate, I mean, obviously our business is seasonal.

But the fixed costs piece, you know, we're going to add to that, you know, sparingly.

But I'll -- obviously we understand that next year is -- is really one of top line.

So we can't -- we really can't cut our nose to spite our face on the operating costs.

So we'll do what's prudent and -- you know, how that looks out into '06, I think, is just a little early to tell.

Okay.

Thank you.

Your next question -- you have a followup from Virginia Genereux, Merrill Lynch.

Sorry.

I don't want to keep everybody too late.

But Tim, while we've got you, let me ask you on the footwear side.

I think it's tough to -- I don't think there are a lot of examples of -- of the best managed companies developing a footwear business sort of organically internally, and it sounds like you hired a great guy.

But why -- it seems like sort of really hot or successful footwear brand get started kind of organically someplace, and -- you know, you either -- you either -- most likely you buy that business if you've been trying to develop -- develop it for a few years on your own.

Why -- why wouldn't you pursue footwear acquisitions more aggressively?

Well, I'd be happy to arm wrestle you about whether or not they can be grown organically.

There's one down the street from us in Portland that's grown nicely organically.

Yes, I'd point to New Balance, another company that's done, you know, that's very large and almost exclusively footwear, close to $2 billion organically.

So --

I recognize that.

I'm sorry to cut off.

My point is those guys had something going early that caught on big.

You know what I mean?

No, I --

I feel like you guys have been talking about this for a number of years and you've had good success, but you haven't hit on the jungle moc or whatever.

No.

I understand.

Absolutely.

And you know, certainly we can have that argument and a the end of the day, you may be right.

But absent proving to ourselves that we can't grow this business organically, that would be certainly my preference.

Frankly, there are plenty of brands out there that say they have started from one idea and grown, but in today's environment, I believe that based on our brand strength and on the relationships and the service levels that we have given our customers that our best opportunity is with Columbia.

But we've got the balance sheet that can provide us with -- you know, with -- with the ability to acquire a business.

If we -- if we prove to ourselves that we think we can't get there.

But I -- my preference and -- and what I believe is absolutely doable is to grow this business organically based on the key word system that we have.

Okay.

Thank you for that.

You bet.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions.

Mr. Boyle, are there any closing remarks?

I just want to thank everyone for listening in.

We'll talk to you again in October.

Appreciate your standing by.

This concludes today's call.

You may now disconnect.