Columbia Sportswear Co (COLM) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Columbia Sportswear third quarter 2005 financial results conference call. (OPERATOR INSTRUCTIONS).

Mr. Kiser, you may begin your conference.

Good afternoon and welcome to Columbia Sportswear's third quarter 2005 conference call.

With me are Tim Boyle, Columbia's President and CEO, Bryan Timm, Columbia's CFO, and Peter Bragdon, Columbia's General Counsel.

Gert Boyle, Columbia's Chairwoman, is in Minneapolis at a fund-raising event for Special Olympics.

Continuing our standard practice during this call 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 have received a copy of the earnings release by now, but if you have not, then please phone Trudy Collins here at Columbia at 503-985-4310 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, please 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.

I would like to remind you that this conference call will contain forward-looking statements regarding Columbia's business opportunities 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 period ended June 30, 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 to forward-looking statements to actual results or to changes in our expectations.

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

Thanks, David.

Welcome everyone, and thank you for joining us.

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

Q3 2005 net sales for the Company decreased 1.4% to 409.8 million compared to 415.8 million for the same quarter last year.

Excluding changes in currency exchange rates, consolidated sales decreased 2.8%.

During the quarter we successfully concluded several income tax audits in various jurisdictions and tax years, which resulted in a non-recurring $5.6 million decrease in accrued income taxes.

Net income for the third quarter was 66.5 million, a 3.1% year over year decrease.

Diluted earnings per share for the quarter came in at $1.74 compared to $1.68 for the third quarter of 2004.

Updates.

Spring backlog.

Spring backlog at September 30, 2005 was 359.3 million, an increase of 5.8% over last year.

Excluding changes in currency exchange rates, spring backlog increased 5.9%.

Consolidated backlog, which includes all global orders, increased .5% to 588.8 million.

Geographically, spring orders increased in all key markets with growth in the international markets driving spring orders.

Domestic spring orders increased slightly, following two consecutive years of very strong U.S. spring growth.

As reviewed by product category, sportswear continues to be the primary driver of spring order growth.

Outerwear orders were also up.

The biggest disappointment in the spring orderbook was our footwear backlog in the U.S. and Europe.

While timing of orders has marginally impacted footwear orders, the primary impact has been increasing competition.

Our footwear chain, led by our new VP of Footwear, Brad Gephardt, is focused on developing a world-class footwear organization that we believe will drive growth in future seasons.

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.

As always, you should be aware that there are a number of factors that could cause our future sales to differ from reported future order backlog, including order cancellations, reorders, and fluctuations in foreign currency rates.

Licensing.

Net licensing income decreased 25% to 1.2 million in the third quarter, due primarily to our decision not to renew our bag and pack license, and to sell that product category directly.

Today we license our brands in 14 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 are generally pleased with the progress being made with our brands.

Sorel.

For the third quarter Sorel sales were 18.6 million, a 5.1% decrease compared to last year, and due primarily to a shift in timing of some shipments in the fourth quarter.

We continue to expect healthy growth from the Sorel brand for the year.

Our Sorel team is committed to re-establishing Sorel as a dominant cold weather footwear resource in North American markets, and expanding distribution in other international cold weather markets.

Mountain Hardware.

Mountain Hardware sales were 23.8 million during the quarter, a 30.1% 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 would like to hand the call over to Bryan Timm, our CFO, who will review third quarter financial results and will discuss the financial guidance we reported today.

Good afternoon everyone.

I will 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 409.8 million, a decrease of 1.4% as compared to the 415.8 million of net sales for the same period last year.

As expected, the decrease was due primarily to the weakness in outerwear shipments, offset by strong gains in sportswear.

Excluding changes in currency exchange rates, consolidated net sales decreased 2.8% in the third quarter.

Our consolidated gross margins for the third quarter of 2005 contracted by 120 basis points to 46% when compared to 47.2% during the third quarter of 2004.

This contraction was primarily the result of a sales mix shift between product categories, as well as intraproduct mix shift within the outerwear product category, and increased inbound air freight costs resulting from isolated late outerwear deliveries.

For the third quarter the Company's SG&A increased by 5.2% or 4.8 million on an absolute basis to 97.5 million or 23.8% of sales for the third quarter of 2005, versus 92.7 million or 22.3% of sales for the comparable period in 2004.

Selling expenses decreased due to the lower-level of sales in the quarter.

Operating expenses increased, primarily due to the additional personnel related costs and additional depreciation in operating costs associated with our Kentucky distribution center.

Depreciation and amortization totaled 5.8 million for the third quarter of 2005 compared to 4.2 million in the same period of the prior year.

Net licensing income decreased .4 million or 25% to 1.2 million for the third quarter of 2005, primarily due to our decision to sell bags and packs directly for the spring 2006 season, and allowing our licensing agreement for bags to lapse.

Net interest income for the third quarter was flat year-over-year at 1 million.

Our effective tax rate was 28.6% as compared to 35% in the third quarter of 2004, due primarily to the favorable conclusion of various income tax audits of several tax years, resulting in a net tax benefit of 5.6 million during the third quarter of 2005.

We reported net income of 66.5 million or $1.74 per diluted share for the third quarter of 2005, versus net income of 68.6 million or $1.68 per diluted share in the third quarter of 2004, based on a diluted share count of 38.1 million and 40.9 million, respectively.

I will quickly touch on key items in the balance sheet.

And again I will be comparing September 30, 2005 balances to September 30, 2004 balances.

The balance sheet remains very strong with cash equivalents and short-term investments totaling 148.3 million versus 127.8 million at the same time last year.

It should be noted that we intend to repatriate approximately 140 million from our foreign subsidiaries during the fourth quarter of this year as part of the American Jobs Creation Act, as well as our foreign earnings from high tax jurisdictions.

Consolidated accounts receivable at September 30, 2005 was 365.1 million compared to 374.7 million a year ago, and consistent with the decrease in quarterly sales and increased cash collections during the quarter.

Consolidated inventories were 223 million compared to 194.4 million a year ago, a 14.7% increase.

This increase is primarily due to the timing of current fall inventory receipts, and a higher level of core replenishment inventory on hand at September 30, 2005.

Capital expenditures were 12.3 million during the third quarter, the majority of which were to increase our distribution capacities.

We are modeling CapEx of approximately 48 million in 2005, consisting of approximately 15 million in maintenance CapEx and 33 million in distribution projects.

The current timeline for completion of these projects is 2007, and therefore no related depreciation expense is expected in fiscal year 2006.

We now expect approximately 23 million in depreciation and amortization in 2005.

The Board of Directors has authorized a repurchase of up to an additional 200 million of Columbia common stock, in addition to the 35.9 million that remains available for repurchase pursuant to previous authorizations.

We have repurchased 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 third quarter of 2005.

Now let's turn our attention to financial guidance.

Given the result that we have reported today, we are in a position to update everyone on our guidance for the balance of 2005 and for the first quarter of 2006.

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, 2005.

Based on our current outlook, we currently anticipate Q4 2005 consolidated revenue increase of approximately 1% compared to the same period last year.

And are anticipating Q4 gross margin contraction of approximately 170 basis points, placing us between 42.7% to 42.9% of estimated sales.

As we have discussed previously, this contraction is primarily the result of the sales product mix shift to footwear and sportswear, which currently have lower gross margin than outerwear.

In addition, we anticipate lower gross margins on some outerwear products due to price concessions resulting from isolated supply chain issues and corresponding late outerwear deliveries.

Our current SG&A target for Q4 2005 as a percentage of estimated sales, is 27.5% to 27.7%, an increase of approximately 270 basis points as compared to Q4 2004.

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

At present we are modeling the Company's fourth quarter income tax at 33.8%, and full year effective tax rate at 31.3%.

We're using 38.4 million shares and 39.2 million shares for purposes of Q4 and full year EPS calculations, respectively.

This analysis implies a decrease in Q4 net income in the range of 18 to 21% when compared to the fourth quarter of 2004.

For the full year 2005 we reaffirm our prior guidance and continue to expect consoldated revenue growth of approximately 5% when compared to 2004 revenue.

And we anticipate net income decline of approximately 9 to 10% for the full year.

Turning our attention to the first quarter of 2006, based in part on the reported spring backlog, we currently anticipate Q1 2006 consolidated revenue growth to be approximately 4% when compared to the same period last year.

And are anticipating Q1 gross margin to be flat when compared to the same period last year at approximately 43.6% of estimated sales.

Our current SG&A target as a percentage of estimated sales for Q1 2006 is approximately 34.2%.

This target includes stock option expense of approximately 3.4 million for the quarter.

The Company's 2006 effective tax rate is modeled to be at 33%.

And we're using 38 million shares for purposes of Q1 EPS calculation.

This analysis implies Q1 2006 net income decline of approximately 17% when compared to the first quarter of 2005.

Excluding the expensing of stock options in the first quarter, our estimated net income decline would approximate 7% on a comparative basis.

Please note that at our 2005 year-end conference call we will still be taking orders of our fall 2006 season, and will not have 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 2006 guidance at our first quarter conference call in April when we will have completed our fall 2006 order taking season.

Again, please understand that the guidance 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, 2005.

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

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

Outerwear, 201.4 million versus 224.4 million last year, a decrease of 10.2%.

As expected from the order backlog we reported last spring, we experienced significant weakness in the third quarter U.S. outerwear shipments, and to a lesser degree in Europe.

Sportswear, 125.7 million, versus 108.4 million, an increase of 16%.

Sportswear growth in the third quarter was driven by very robust sales in the U.S. and across all genders.

Footwear, 63.8 million versus 62.7 million, an increase of 1.8%.

Footwear growth in international markets offset weakness in U.S. footwear shipments in the third quarter.

As mentioned earlier, a portion of this impact can be attributed to the shift in timing of some Sorel orders to the fourth quarter.

Accessories, 17.1 million versus 18.6 million.

Equipment, 1.8 million versus 1.7 million last year.

Geographical sales.

Let me give you some basic background and additional sales commentary here in the U.S. and internationally.

USA.

Sales of 244.9 million versus 264.4 million, a decrease of 7.4%.

U.S. sportswear shipments were strong in the third quarter, and sell-through of broadly distributed value oriented fleece products in men's, women's, and youth has been healthy.

As expected from the fall orderbook reported last April, third quarter U.S. outerwear sales were down significantly.

We continue to see weakness in the youth category, but shipments of adult outerwear styles were also down in the third quarter.

Shipments of weather sensitive footwear and accessories were also soft in the third quarter.

Turning our attention to spring bookings.

Overall U.S. spring orders increased slightly, led by continued growth in the sportswear category.

Spring footwear orders were flat following three years of very strong U.S. spring footwear growth.

While the competitive environment for footwear continues to be very intense, we are making investments in the product category from a design, merchandising and physical distribution standpoint that position us for growth in this category in the long term.

Canada.

Sales of 52.6 million versus 49.5 million, an increase of 6.3%, and down 3% excluding changes in currency exchange rates.

Canadian shipments increased in all product categories, with particular strength in footwear sales.

Sportswear sell-through has generally been healthy.

It is still too early to get a good read on weather sensitive outerwear and footwear.

Overall spring orders were healthy in Canada, with particular strength in spring sportswear products.

In general, the current retail climate in Canada remains steady for sporting goods retailers.

And we're well-positioned with strong and growing relationships with key customers in the region.

Europe.

Sales of 62.1 million versus 58.8 million for the same period last year, an increase of 5.6% or 4.7%, excluding changes in currency exchange rates.

Fall footwear product shipments were very strong in the third quarter, continuing to drive our European growth.

However, shipments of outerwear products were weak in the region.

We're making progress in the United Kingdom, and continue to see strength in Spain but Germany, Austria and the Netherlands continue to be challenging markets influenced by generally poor economic environments.

Our new European management team is focused on improving performance in all markets in Europe, and has made sales management changes in the German and Austrian markets, and in the Netherlands to improve performance in these key markets.

Sell-through of sportswear and lighter weight outerwear products has generally been healthy, but weather has been unseasonably warm early this fall.

Spring bookings in Europe increased, but not to historical levels.

Apparel orders were healthy, but European footwear orders slowed considerably.

Overall our relationship 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.

Other international.

Sales of 50.2 million versus 41.3 million for the same period last year, an increase of 16.5% or 15% excluding changes in currency exchange rates.

International distributors, which comprised the largest component of other international, reported sales of 31.8 compared to 28.6 million in the third quarter of last year, an increase of 11.2%.

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

We continue to see very strong growth across multiple international distributor markets, particularly with our Mountain Hardware brand during the third quarter.

We're 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.

Sales of outerwear to our distributors continue to be very strong.

And spring orders indicate that shipments in international distributor markets will be -- will continue to be healthy in this coming spring season.

Japan, a component of other international, recorded sales 11.5 million, compared to 9.7 million in the comparable period last year, an 18.6% increase or 19.5%, excluding changes in currency exchange rates.

We're pleased with our progress in Japan.

Sales increased in all product categories in the quarter, with particular strength in footwear.

Spring footwear orders are also strong, indicating continued momentum in that category.

Our relationship with key customers in that region positions us for growth as the Japanese economy continues to strengthen.

Overall the third quarter results came in as expected.

While disappointed with our spring orderbook results, we believe we're taking the necessary steps to improve our performance long term.

The addition of Brad Gephardt will strengthen our footwear operation and design teams.

And we're strengthening our European sales and management organizations under the direction of Paul Gills in the key markets where we have underperformed.

We remain committed to building a business for the long-term success.

In closing, going forward our business strategy remains steady.

And we will continue to focus our attention on growing the business through our key growth strategies.

To reiterate, first we will continue to enhance the channel productivity of our existing customers to 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 merchandise categories of sportswear and footwear.

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

Last, but not least, we will continue to seek out favorable licensing opportunity as we leverage the strength of our brand.

That concludes our report.

Thank you very much for listening.

We would be happy to field any questions.

Operator, would you please help us with that?

(OPERATOR INSTRUCTIONS).

Bob Drbul.

Tim, a couple of questions.

First for you, when you look at the performance of the footwear business with your new Vice President of Footwear in place now, when can we expect to start to see an improvement on the footwear side in the numbers?

His first season of direct design input will be spring '07.

But he has now just been on the job for a couple of weeks.

He is analyzing our fall '06 offering, as we speak.

And I would expect that we will be able to see some efficiencies based in his analysis of the business in '06.

From a topline perspective, I would expect a real delta will be spring '07, but I would expect some improvement in the matrix there -- the control matrix, just based on his review of the way we do business and the improvements that I think he will find early on.

A question for Bryan.

When you look at where you ended the cash balance this quarter, what is the expectation for your year-end cash balance?

And how should we think about that as we look into the fourth quarter and into next year?

In terms of -- I guess if I rolled the clocks forward and to year end I would say that from a working capital standpoint, I think inventory levels may be up just a slight bit at year-end, with potentially accounts receivables being down a bit.

Overall I would expect our cash balance to be roughly around that 300 million mark.

Again, as we mentioned in our prepared remarks, we plan on bringing back about $140 million that is currently offshore, and bring that back for obviously flexible use here domestically.

One final question.

In the outerwear business, when you look at the gross margin that you had this year -- this quarter as well as you look into the fourth quarter with the guidance that you gave us, how much of that is going to be clearance type goods or off-price type goods in the mix?

It is a blend of multiple kinds of product mix, including some accommodations we have to make due to a few late deliveries, as we mentioned in our conference call script.

It is really undetermined now.

It is such a huge bunch of product that we're looking at and various kinds of analyses just -- I guess I would suffice us to say it is all baked into the guidance that we've given.

Virginia Genereux.

I guess my question, guys, is the isolated supply chain issues that you referenced.

You have typically been so good on the supply chain side.

Could you elaborate on that?

And maybe Brian or Tim call out exactly how much gross margin pressure was specifically related to that?

And then more broadly could you comment on your sort of cost outlook kind of heading into '06?

Are you seeing higher raw materials prices impact your margins?

I will take a crack at the costing and the issues surrounding the isolated failures in supply chain quickly.

And then I will let Bryan maybe speak to the margin.

First let me tackle costs.

We are seeing costs on most of the merchandise -- most of the synthetic merchandise that we manufacture -- not all of it is synthetic, but on the synthetic merchandise increasing as a result of oil price and additional transportation costs.

We're expecting that in the short-term that those prices will be stronger.

The costs will be stronger in Asia.

Of course it all really has to settle out with the demand side.

We don't know what that is going to lead to.

But we are seeing costs generally elevated I would say a small percentage.

As it relates to the supply chain, we're committed to being very high-quality suppliers to our trade.

And so as it relates to the failures in our supply chain, those are mostly around late deliveries from a few isolated factories.

It was not by any means a significant amount of inventory, but it is impactful.

We have to fly this stuff in.

It is just expensive at this time.

So it was mainly around failures in one mill, and a few factories that we had.

Some of it was due to the mill failures and some of it was due to our lateness on ordering in a few pieces for our customers.

But again the additional costs were incurred because we wanted to make sure we were a high-quality supplier before we flew a bunch of merchandise in.

I'm going to let Bryan speak to the margin issue.

On Q3 gross margins, we were off about 120 basis points from prior third quarter.

And maybe more importantly, maybe about 60 basis points off of where we -- kind of the guidance we provided at the head of the quarter.

That 60 basis points is pretty much still a factor of the additional air freight, the inbound air freight that we had to really get this inventory in-house, so that as Tim said, we could execute on customer deliveries.

That is one thing that we don't want to stumble on is really making sure that we're a good source for our retailers.

It is about the 60 basis points I would say off of the guidance was the air freight issue.

Is that a new mill you guys are using, or why was that do you think a problem this quarter?

Tim mentioned maybe you didn't order some raw materials in time.

Anything different going on in your supply chain that caused that do you think?

No, I think this was fairly isolated.

Just a failure in a mill that we have been using.

My second question is, Tim, your commentary about increasing competition in footwear on the I guess brown shoe side, could you elaborate on that a little bit more?

What do you mean when you say you're seeing --?

Certainly.

We are seeing additional pricing pressure from competitors who are typically at the higher echelons of the business coming down into our space on certain select price points, which we hadn't seen in the past.

That, I guess, I would characterize it as more price competition.

Jeff Edelman.

Could you give us some sense as to what the fall shipments were if we sort of back into what was packed away in the spring season for fall?

I want to make sure I answer the question.

You're talking about what our retailers held?

Yes, right.

For the most part, our retailers didn't carry much over.

There was some of that, but for the most part our larger retailers would liquidate merchandise.

And I think for the most part those guys -- again, most of our retailers liquidate in season or at the tail end of the last season, call it February, March.

Those that did carry anything over for all intents and purposes, that stuff is gone now.

I want to make sure I answered your question.

I think --.

I was under the impression that there was a fair amount of product that you had liquidated to your customers in the first quarter that was packed away for fall.

I see.

In other words, it is merchandise that we sold last spring --.

Which was fall '04 products, which instead of destroying the market they kind of packed away for this fall.

Understood.

I think for the most part that stuff has been liquidated.

It has.

Yes.

That is my understanding.

Secondly, Tim, tax rate for the new year, you said 33 for the first quarter, could we just assume that?

Bryan will give you that one.

Yes, the 33% is our best estimate for our year 2006 rate.

So yes, that is what we will use for planning purposes for Q1.

And then finally, Tim, with the new management in Europe, are you seeing -- there's a payoff a little further out are they starting to make inroads?

Yes, we are starting to see the inroads already.

And I really believe that we have really got a top-notch team there that is going to be very impactful.

We are seeing results already, but they're not anywhere near what we're likely to see in the next several seasons.

John Shanley.

I would like to ask about the inventory build.

It was up 14.7% quarter over quarter, while the sales were down 1% and the forward orders are down 5%.

Can you give us a little clarity in terms of what that inventory consists of?

Is it primarily the U.S. footwear that you have been experiencing a problem, or is there inventory build in the other two merchandise categories as well?

I would like to have Bryan maybe speak specifically to those.

He's got the stuff at his fingertips.

I think as we mentioned in our prepared remarks, we definitely had some supply chain issues.

And those supply chain issues necessitated us to really have some air freight to get these products in here to the U.S. so that we could really deliver and execute for our customers.

Obviously getting that in -- as of 9/30 our inventory levels appear a bit high.

But really I would focus more on that as a timing shift.

I think in the past we would bring a lot of our inventory in in October, would which would ultimately ship out to our customers ratably over the fourth quarter.

And we brought a significant amount of that product and have it on our balance sheet at 9/30.

Another thing I mentioned in our prepared remarks was just the higher planned level of what I would call core replenishment type items.

You can imagine going into the spring season we have a fair amount of our bottoms, tops, and other kinds of core items that we have on hand for our customers for kind of in season business.

So I would say those two factors combined were the primary drivers for our inventory increase.

Are you saying that you've got an inventory position at the end of the quarter of about $250 million?

How much of that is actually spoken for with orders in hand that that you have from your retail accounts?

Again, most of this inventory that is on our balance sheet at 9/30 is fall related inventory.

I guess if you took the backlog that we had, that we announced as part of our earnings release, it would pretty much put fall at around 230 million.

You’d add to that our retail business, the spring shipments that go out in Q4, our Asian business that is also retail, both in Korea and in parts of Japan, and that would get you pretty close to around the $300 million range, which is roughly around the guidance that we have for Q4.

We're not likely to expect a big hit in terms of higher SG&A as you try to promote that product out, or lower gross margin as you try to off load it at lower price points?

Yes, again, the SG&A would be neutral, but in terms of the margin, again, what we know right now that is all baked into the guidance that we have provided today.

And obviously a little bit of weather in our favor wouldn't hurt either.

On the comments about the U.S. footwear business in terms of competitive environment, is that specific retail channels that you're experiencing more competitive pressure?

And can you be more specific in answer to Virginia's question about what was the brand?

Was it Timberland or was it somebody else that came into your space that you hadn't experienced before?

We always try to make sure we're speaking about the Company and less about the competition as we go -- speaking with investors.

Yes, there were other names -- branded competitors that moved on to our space from a price position that we hadn't seen in the past.

And as we have discussed in the past prior to being able to attract Brad Gephardt to the Company, we feel that our product development process hasn't kept pace with other competitors that we have in our dealer space.

To really optimize our opportunities with footwear, as we have said many times, we have to up the ante on our creative group and just provide better product.

As Brad directs his team, we know that will happen.

And it will be less of an issue in my opinion in the future.

Any comments on the channel?

Is it the outdoor guys?

Is it the family footwear folks, or who seems to be heaviest in terms of promotional activity?

I would say it is fairly across the board.

Really the only bright spot on footwear frankly geographically was in Japan, where we have added some folks there.

And we're looking at significant growth in our footwear business in spring there.

But the balance of the globe was not up to what we expect.

You must have had an opportunity to do some pre aligning with your outerwear business for fall '06 with some of your key accounts like Kohl's and Dick's and TSA.

Any reaction in terms of how they liked the line coming forward vs. what they may have thought about the line for fall '04 -- or '05 rather?

Comparison to fall '05 where we had received criticism, we definitely worked diligently to get ourselves focused on those areas.

And the initial reviews have frankly been very encouraging.

We would obviously want to withhold any kind of guidance from that point.

But I think that we have definitely worked diligently on the issues that our dealers have put forward to us, and I expect that we will have high results from that.

That's good to hear.

And then, Bryan, just two quick housekeeping.

Did I understand you -- just doing the math you bought back 1.2 million shares in the quarter?

Can you tell us how much that cost?

Actually, we didn't repurchase any shares during the third quarter.

All of our purchases to date were done in Q1 and Q2.

So no shares bought back in the third quarter.

Okay, fine.

And then the tax rate of 28% versus the 34% guidance that we had previously used, that resulted in a pretty substantial improvement in EPS.

And I am just ballparking at about $0.14 to $0.145 or so.

Are there any likelihood that we will see similar types of tax advantages in the fourth quarter?

No, actually if you look at the tax benefit, and you're right, it is around $0.14.

That was really the conclusion of several tax audits of several tax years.

I think it was 1998 through 2003.

The resulting tax benefit was basically taking part of that tax contingency back through income as appropriate.

And I wouldn't suggest further tax benefits in Q4.

The only thing I would say, kind of looking out into next year, as we will continue to see some benefit from just an income outside the U.S. and taxed at a lower rate.

That will more on a yearly basis tend to put a little downward pressure on our overall effective tax rate.

Any of those likely to hit in the fourth quarter?

Again, no, our best estimate for this year is the numbers we provided, and no further benefit in Q4.

Jim Duffy.

A question with regards to kind of the tone of the retailers themselves.

Have you seen them take a more cautious stance with their inventories?

Have they backed off of any of their orders?

Have you seen any cancellations?

We get cancels every day.

We get reorders every day.

But in general I would say that retailers going into '05 were more cautious than they had been in prior periods.

I think that cautious approach is --.

Yes, that is somewhat consistent with what we're hearing across -- heard from all of the brands.

And then some specific discussion with regards to channels.

Can you speak to some of the channels where you see the most opportunity for improvement?

And in particular, comment on your dialogue with the department stores?

Certainly.

In terms of deltas, improved deltas for the Company, we see obviously the department store channel has got significant opportunity for us.

We've got a number of successes and a significant amount of opportunity in that channel.

So I would expect that over time that our biggest successes will come in those areas.

And Jim, I'm sorry I have forgotten the second part of your question.

Your current dialogue with the department stores, and how you're progressing towards trying to secure more selling space there, etc.

It has been going well.

We have fairly significant growth with a number of regional department store operations, and continuing ongoing discussions with some of the national chains, but nothing to report there.

In terms of the regional department stores, where the brand has been embraced and our highly touted fixturings systems.

I don't want to say collection, but collective nature of putting the merchandise together has been very successful.

And we expect that in those areas where the brand is embraced like that we will continue to see solid growth.

And you're optimistic about the opportunity with European department stores as well?

Does that continue to be the case?

Any progress update there?

Yes, I would say in the case of the European department stores, and we really look at those much more like specialty stores.

As an example, in a Carstare (ph) department store you can actually buy a pair of skis, or climbing equipment, where that is not possible within any U.S. department store.

The same would be true of Ocordi West (ph) or any of the other big department store operations.

We're growing in those businesses typically.

And we expect that over time those will be solid contributors.

But in the near-term our focus in Europe will be on the sporting goods channel where we sort of more naturally fit.

Liz Dunn.

My first question relates to the inventory, and I know this is kind of circling around this, but when I listened you talk about core replenishment, how does that differ from what you have presented to us in the past as speculative inventory?

Is it that you have a higher spec position right now, or how should we think about that?

No, those two inventory types are very different.

The speculative position is a seasonal wager that the Company makes on -- really in the outerwear category.

And that is made in March and April of the year prior to the winter season.

Our core replenishment business would really refer to the men's bottoms business that we do so significantly in part of our sportswear business, the Roc pant and the GPS pant and other kinds of men's pants.

It would also apply to some of the core sporting goods items that the Company is famous for like our Bonehead shirt, which would be more sportswear merchandise related.

As the Company has grown its sportswear business, retailers have come to rely on the fact that we will have some of them on inventory for them to fill in on those core items.

That is the difference between those two.

And just over time there has been some additional creep in the amount of inventory we have in that core replenishment category of merchandise.

It is a small percentage of the total inventory, a small percentage of the total sales.

And then as we think about this $0.14 from tax benefit, you're coming out in the same place for the year, including this benefit.

I know sales it looks like you're on track to meet previous expectations, but did your prior guidance anticipate a tax benefit when you guided us to 8 to 12% -- oh, gosh, was it decline in EPS for the back half, or have things worsened on the margin picture?

I'm going to let Bryan speak to that question specifically.

I guess to start off, did we expect the tax benefit in Q3, absolutely not.

It just so happens that the conclusion of these audits happened in Q3, and that is where we need to take the corresponding tax benefit.

You're right with respect to where we have come out for the full year, obviously in Q3 we had a little bit greater sales number where we guided.

Obviously that is an expense of Q4.

I would say that you are absolutely correct in the gross margin has deteriorated with respect to our guidance for Q4.

Most of that coming from, again, some of these -- the product mix issue that we continually talk about, some of these supply chain issues that Tim has elaborated on, and price concessions, as well as just moving through the projected off pricing closeouts.

So we have lowered our expectation for gross margin in Q4, and therefore end up in around the same place.

I think our previous guidance was somewhere close to that 8 to 12% range.

And we're coming in right now about 9 to 10 for the full year.

And then I guess my final follow-up -- though I might be taking liberties to call this a follow-up -- is for Tim.

In terms of strategy, where do you see yourself right now?

Because I think a lot of us are concerned about the maturity in the domestic business, at least in -- and you are producing a lot of free cash flow.

Are you going to get more aggressive in terms of acquiring?

Or in a consolidating industry where do you see yourself?

And how do you see yourself strategically positioning for the next five years or so?

My personal expectations for the business are not only that the Company will continue to grow at a high level, but that the Company will be highly profitable and leveraged.

I'm always disappointed when this high bar isn't hit.

And again, we have delineated the categorical strategies that we're going to approach to get the business growing and back on track.

And I'm convinced that those will ultimately be the right approach for the business, and over the long-term will provide very significant returns for shareholders.

On the acquisition front, I think today we feel that our Company's shares are an opportunity for us to acquire at a very advantageous return for our shareholders.

That would be our first and foremost focus.

However, the Company has the ability to use its cash in other ways, and we always are mindful of that as well.

Ed Aaron.

Just one quick question.

I apologize if you have already spoken to this.

But the Q1 guidance that you gave, it sounds like you're looking for margins to be down on I think it was 4% sales growth.

If I recall from this year Q1 was kind of a tough quarter because of the closeouts from last fall.

Why would you expect margins to be down on top of that?

Actually I think the guidance that we provided were to be about flat on the gross margin line, at right around 43.6.

You're right, in Q1 of this year, and I think as John alluded to earlier, we did have some off-price selling that was kind of a carryover from our fall 2004 product that certainly hurt our margins in Q1 of 2005.

I guess there is a couple of unknowns.

I think basically from our standpoint currency being probably one of the biggest unknowns at this point in time -- and where those rates go.

Certainly the rates in terms of where we saw spring 2005 to spring 2006 there has been a deteriorating euro.

The Canadian dollar has improved, which offset some of that in part.

But currency is probably the biggest unknown that will put some pressure on our gross margins.

The other thing is really we have some unknown weather conditions yet here in Q4 that may or may not impact Q1 with some off-price selling.

John Rouleau.

A couple of questions.

In the past you have kind of cited both weather and competition as being two major factors impacting the outerwear business.

And somewhat suggested that weather has been the bigger of the two.

I am wondering if that has changed at all -- your feelings have changed at all given some of your comments on the increased competition in the footwear side and whatnot?

I just thought maybe you could update us on that.

Certainly.

I still contend that weather is the biggest single impact on our outerwear business.

And for that matter our cold weather footwear business as well.

That having been said, our biggest competitors globally is still are customers' private-label merchandise.

That is where we have to be mindful that from a standpoint of competing for open to buy dollars that is where we have to slug it out.

But I would still contend that weather is much more impactful than other forms of competition.

Weather has kind of straightened out recently, but we had a warm early part to the season.

Is that impactful?

Is it too early?

How does that play into the outlook?

It really has to be looked at globally.

The Company is now -- 40% of its business is outside the U.S.

We have to look at many different kinds of geographies to know the real impact.

And we consider it to be a strength in that we're going to get cold somewhere and have solid sell-throughs and great performance in some parts of the world.

And that really allows us to be -- to reduce the risk to a certain extent of a weather disaster in one particular geography.

But we're still waiting.

It has snowed in Pittsburgh, so we're excited about that.

And then finally, I am just wondering on the outerwear side specifically, I understand the spec inventory side, and I know there is replenishment associated with the sportswear side of the business.

But how much replenishment, if any, is there in the outerwear side?

Has the majority of this stuff shipped and booked, and now you are waiting for it to sell-through?

And how much sales are replenishment dependent, if you will, kind of going forward?

Other than a few very small pieces of rainwear, for all intents and purposes we do not have a replenishment outerwear business.

We report rainwear in our outerwear category, but it is a tiny amount.

At this time there are no further questions.

Do you have any closing remarks, Mr. Kiser?

No, we do not.

Tim?

Thank you very much for listening in.

And we're looking forward to updating you at around the end of January at our year-end conference call.

Thank you very much.

This concludes today's conference call.

You may now disconnect.