Columbia Sportswear Co (COLM) 2006 Q1 法說會逐字稿

Good afternoon, my name is Latricia, and I will be your conference operator.

At this time, I would like to welcome everyone to the Columbia Sportswear first quarter 2006 financial results conference call.

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

After the speakers' remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS]

Thank you.

Mr. Kiser, you may begin your conference.

Thank you Latricia.

Good afternoon, and welcome to Columbia Sportswear's first quarter 2006 financial results conference call.

With me are Gertrude 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, we will review the results of the first 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 not, then please phone Trudy Collins at (503)985-4000 and she will send one to you.

In laud 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, consistent with prior quarters, we request that you limit your initial follow up to one or two additional questions, to allow all parties to ask questions, we invite you to reenter the queue if you have additional follow up questions.

Before we begin, Gert 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 Annual Report on Form 10-K for the year ending December 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 change in our expectations.

Thank you Gert.

At this point, I'll hand the call over to Tim Boyle, who will provide an overview of significant results that occurred during the Company's first quarter 2006.

Tim?

Thanks, David.

Welcome, everyone, and thank you for joining us.

Let's begin with review of some highlights from the press announcement, Q1 2006 net sales increased 5.9% year-over-year, to 260.2 million, excluding changes in currency exchange rates, consolidated net sales increased by 7.7% in the first quarter.

Net income for the first quarter was 19.5 million, and 8.5% year-over-year decrease.

Stock based compensation expense was 3.4 million in the quarter.

Diluted earnings per share for the first quarter 2006 were $0.52, unchanged year-over-year.

Updates: Fall backlog, turning first to the backlog numbers reported in press release today, as of March 31, 2006, consolidated fall and spring backlog increased 11.9% to 848.9 million, compared to consolidated backlog of 758.9 million at March 31, 2005.

Of this total, fall product backlog at March 31, 2006 was 720.7 million, an 11.6% increase when compared to fall product backlog of 645.6 million from the prior year.

Excluding future orders from acquired companies, consolidated backlog increased 8.1%, and fall product backlog increased 7.6%.

By product category, sportswear orders for fall products were strong, particularly in the U.S., driving overall backlog growth.

Order patterns for fall outerwear were encouraging early in the order taking season, however, we did not grow organically as much as we anticipated, our orders increased low-single digits globally, excluding acquisitions, driven by a modest recovery of U.S. outerwear orders.

Global fall Footwear orders also increased low single digits on an organic basis, hampered by warm winter weather conditions in key cold weather markets for footwear.

Geographically, total U.S. fall orders increased low-double digits, excluding acquisitions, driven by healthy increases in sportswear bookings, and a modest rebound in U.S. outerwear orders.

Europe and Canada bookings were essentially flat, and other international bookings increased ahead of the corporate average, led by growth in Japan.

Fall product backlog increased 8.7% organically, excluding changes in currency exchange rates.

Pacific Trail, on March 29, we announced the acquisition of Pacific Trail Group of brands for 20.4 million cash, plus the assumption of certain liabilities.

Following the acquisition, We sold Pacific Trail Dockers brand licenses for $1.7 million.

Pacific Trail has a rich 60 year outdoor industry heritage.

The Pacific Trail business includes the Pacific Trail® outerwear and sportswear brand.

The Towne® outerwear and rainwear brand, the Pac Tec® high-performance outerwear, the Black Dot® Clothing snowboard apparel brand, the Moonstone® mountain equipment brand, and several other brands.

We will focus in the near term on the Pacific Trail brand opportunity.

As a reminder, we acquired the Pacific Trail assets including an unsettled fall season order book, in an expedited bankruptcy auction.

We did not acquire a [growing] concern, which creates some near term challenges.

However, the brands provide us with significant long term opportunities.

We are particularly enthusiastic about the growth opportunity to leverage our design and capital strengths, to expand the growth opportunity in distribution channels that we have not yet developed.

Our plans are to distribute Pacific Trail products through an in-house sales organization, primarily to a limited number of potential customers Columbia currently does not sell.

We anticipate leverage in Columbia's existing infrastructure, for the production and distribution of Pac Trail outerwear.

We carefully reviewed Pacific Trail's fall order book, and anticipate sales of approximately $20 million in 2006.

We expect the acquisition to be slightly dilutive to 2006 earnings.

Montrail: During the first quarter, we also acquired Montrail, a premium outdoor footwear brand, with an excellent reputation for technical, high performance trail running and hiking products.

The integration is proceeding as planned.

Key product line management and sales positions are in place, and we anticipate systems and distribution center integration by the end of this year.

The transaction was slightly dilutive to Columbia's first quarter earnings, due to the unfavorable impact of recording the Montrail inventory at fair value in purchase accounting.

We continue to expect the acquisition to be slightly dilutive to 2006 earnings.

Mountain Hardwear were 16.1 million during the first quarter, a 36.4% increase over last year.

Shipment of Mountain Hardwear spring sportswear and outerwear collections were very strong in the first quarter.

Fall 2006 bookings were also strong, with healthy increases in the domestic specialty channel, and in international markets.

Mountain Hardwear outerwear orders were healthy in international markets, and sportswear bookings were strong globally, as the brand increases its global awareness.

Plans are to keep Mountain Hardwear keenly focused on designing and marketing innovative technical high end products to the specialty dealer channel.

We believe Mountain Hardwear's technical and competitive strengths, will give them an opportunity to expand their business in the specialty dealer channel, domestically and internationally.

Sorel.

Sorel sales were 3.1 million versus 4.9 million last year, the decrease was primarily due to unseasonably warm weather conditions in North America during January.

All orders for Sorel products increased moderately, driven by growth in Europe, Japan, and distributor markets.

Orders for cold weather Sorel footwear in North America were soft due to the warm weather conditions.

The Sorel team remains focused on re-establishing the brand as a dominant cold weather resource.

Licensing.

Net licensing income was 1 million, compared to 700,000 last year, with solid first quarter sales of Columbia camping gear, hosiery, bicycle, eyewear, and insulated coolers.

Through licensing, we were able to generate highly profitable revenue, and extend the global awareness of our brands.

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

Thanks, Tim, and good afternoon everyone.

I will begin with a brief review of first 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 first quarter were 260.2 million, an increase of 5.9%, over the 245.7 million of net sales for the same period last year.

Growth in consolidated net sales was driven primarily by domestic Columbia and Mountain Hardware sportswear sales, and Montrail footwear sales.

Excluding changes in currency exchange rates, consolidated net sales increased 7.7% in the first quarter.

Our Consolidated gross margins for the first quarter of 2006 were 42.9%, compared to 43.6% for the first quarter of 2005.

Domestically, gross margins increased driven by better margins on fall close-out product sales, offset in part by the unfavorable impact of recording the Montrail inventory at fair value in purchase accounting.

European margins contracted due to competition, foreign currency hedge rates, and certain costs associated with international promotional campaigns.

The Company's SG&A expenses increased by 10.4%, or 8 million on an absolute basis, to 84.8 million for the first quarter of 2006, versus 76.8 million for the comparable period in 2005.

As a percentage of sales, SG&A was 32.6% compared to 31.3% in the prior year quarter.

Some expenses decreased as we lowered advertising spend to historical levels, operating expenses increased, primarily due to increased personnel related costs, including stock based compensation expense of 3.1 million.

Depreciation and amortization totaled 5.7 million for the first quarter of 2006, compared to 5.6 million in the same period of the prior year.

Net licensing income was 1 million, compared to 0.7 million last year, and net interest income increased to 1.9 million, from 1.4 million last year.

Due to the higher interest rate environment ,and increased capitalized interest, partially offset by additional interest expense.

Our effective tax rate was 34.5%, which is consistent with our first quarter 2005 effective tax rate.

We reported net income of 19.5 million, or $0.52 per share, net of $0.06 per share of stock based compensation expense for the first quarter of 2006, versus net income of 21.3 million, or $0.52 per share for the first quarter of 2005.

Based on a diluted share count of 37.3 million, and 40.7 million respectively.

I'll quickly touch on key items on the balance sheet, and again, I'll be comparing March 31, 2006 balances to March 31, 2005 balances.

The balance sheet remains very strong, with cash and short term investments totaling 239 million, versus 338.3 million at the same time last year.

Consolidated accounts receivable at March 31, 2006 were 219 million, compared to 229.4 million last year.

A 4.5% decrease which was driven by strong cash collections in the quarter.

Consolidated inventories were 194.6 million, compared to 164.8 million a year ago, an 18.1% increase.

The increase is largely attributed to higher levels of fall '06 inventory for anticipated fall season growth, acquired Montrail inventory, and increased levels of core and replenishment inventory.

We remain very comfortable with the current global inventory position.

Capital expenditures were 15.6 million during the first quarter, the majority of which to increase distribution capacity, we are currently retrofitting end of life equipment and systems at our Portland distribution center, and are expanding distribution capacity to support our expected growth in European markets.

We are modeling CapEx of approximately 60 million this year, consisting of approximately 15 million in maintenance CapEx, and 45 million for the Portland and European distribution projects.

We currently expect that these distribution projects will be placed in service early next year, and will generate incremental depreciation expense of approximately $11 million in 2007.

During the first quarter, we repurchased approximately 35,000 shares, at an aggregate purchase price of 1.7 million.

We have repurchased a total of approximately 4.5 million shares, at an aggregate purchase price of 210.6 million, of the 400 million authorized since the inception of the program.

That covers the financials for the first quarter of 2006.

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

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

Now let's turn our attention to financial guidance.

Given our results, and the fall backlog we reported today, we are in a position to give guidance for the second quarter and for the full year 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 Annual Report on Form 10-K for the year ended December 31, 2005, and which were expressed by Gert in her opening comments.

Additionally, it is important to recall that the second quarter is our most volatile quarter, as we wind down our spring shipping, and start our fall business, and variances can be amplified as it is our lowest volume quarter.

Based on our current outlook, we anticipate Q2 2006 consolidated revenue growth to be 10 to 12% when compared to the same period last year.

And are anticipating Q2 gross margin contraction of approximately 250 basis points at approximately 37% of estimated sales.

This contraction is a result of many factors, including increased competition, recording acquired Montrail inventory at fair value in purchase accounting, weaker foreign currency hedge rates, increased international close-out product sales, costs associated with certain international promotional campaigns, stock based compensation expense, the lower margin Pacific Trail shipments, and finally, a greater mix of international distributor shipments at lower margins.

Our current SG&A target for Q2 2006 is as a percentage of estimated sales is 37.3% to 37.5%.

This target includes stock option expense of approximately 3 million in the second quarter.

At present, we are modeling the Company's quarterly and full year effective tax rates at 34.5%, and we are using 37 million shares for purposes of Q2 and full year EPS calculations.

We anticipate net licensing income of approximately 1 million, and net interest income of 1.5 million for Q2 2006.

This analysis implies net income of approximately 1 million for the second quarter of 2006, versus 6.3 million in 2005.

Turning our attention to the full year 2006, considering the fall backlog we reported today, we expect consolidated revenue growth of approximately 10% for the full year 2006, when compared to 2005 revenue.

And we anticipate net income decline of approximately 10% for the full year 2006.

Factored into this guidance is approximately 150 basis points of gross margin contraction, due to the higher, the current competitive environment, weaker foreign currency hedge rates, recording acquired Montrail inventory at fair value in purchase accounting, the lower margin Pacific Trail shipments, and additional costs associated with certain international promotional campaigns.

Additionally, we plan SG&A expansion of approximately 60 basis points, or 28.5% of estimated net sales in 2006.

This increase is entirely due to the stock based compensation expense.

Excluding expensing of stock options, our estimated net income decline for 2006 would approximate 4% on a comparative basis.

Using an estimated weighted average diluted share count of 37 million shares for 2006, we expect slight EPS growth over 2005.

Please recall that our estimated effective tax rate has increased approximately 3 points to 34.5%, which is expected to result in an approximate $0.15 reduction in EPS, we anticipate net licensing income of approximately 5 million, and net interest income of approximately 6 million for the year.

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

Please consult the Company's Annual Report on Form 10-K for the period ended December 31, 2005.

On that, I'll hand the call back to Tim who will give us geographically and categorically, our business environment.

Tim?

Thanks Bryan.

I'll begin with a review of the first quarter 2006 consolidated categorical sales results with comparisons to the first quarter of '05.

Outerwear, 55.2 million versus 51.2 million last year, a 7.8% increase.

Shipments of non-insulated shells and soft shells growth in the category, outerwear shipments in Europe led global sales during the first quarter.

Sportswear. 141.8 million versus 132.2 million in Q1 of '05, a 7.3% increase.

Shipments of knits and woven tops, sweaters and pants, growth in the quarter.

Domestic sportswear growth led global sales in the category.

Footwear. 50.7 million versus 49.8 million, an increase of 1.8%.

First quarter shipments of spring sandals and trail shoes were healthy, offset by weakness in cold weather footwear styles, due to warm winter weather in North America.

Footwear shipments were strongest in Europe during the first quarter.

Accessories, 7.3 million versus 9.1 million, equipment, 5.2 million, compared to 3.4 million.

Geographical sales, let me give you some additional geographic commentary for the first quarter with comparison to the same period in '05.

U.S.A.

Sales of 144.4 million compared to 136.3 million, a 5.9% increase for the quarter.

Continued strong demand for our spring sportswear products drove domestic sales growth during the quarter.

Shipments of spring wovens and knit tops, sweaters, and pants were very strong.

U.S. spring sportswear shipments continue to be the primary driver of first quarter sales growth.

Outerwear sales in the first quarter were flat, due primarily to the substantial amount of low margin fall outerwear clothes and product shipped in the comparative period in 2005.

Footwear sales were flat domestically, but our trail and sandal categories continue to show growth despite very difficult comparisons.

Warm weather conditions in January hampered close-outs of cold weather footwear products.

General retail conditions in the U.S. have been fair this spring, sell through rates of sandals and spring sportswear has generally been good, particularly in the Southern tier states, however, it is still very early in the season to get a good indication on overall spring sell through rates.

Turn our attention to fall orders in the U.S., sportswear bookings for fall 2006 were very strong.

As retail and consumer acceptance of our sportswear products continues to expand.

We are very pleased with the continued strength of our U.S. sportswear business.

Organic U.S. fall footwear bookings as of March 31 were soft, warm weather conditions negatively impacted orders for fall season cold weather footwear styles.

For both the Columbia and Sorel brands.

In addition, our new footwear leadership has not yet influenced our less weather sensitive footwear products.

Organic U.S.

Fall outerwear orders rebounded modestly, increasing at about the organic corporate average.

Order patterns for fall outerwear were particularly encouraging early in the oder taking season, however, we did not grow organically as much as we had hoped.

We have embarked on some key initiatives to strengthen our U.S. core outerwear offering over the last several years.

These initiatives include creating outstanding products that provide retailers and consumers with exceptional value, clearly segmenting our offerings by distribution channels, and continuing to strengthen the core Columbia brand.

These initiatives positively effected domestic Columbia outerwear backlog for fall '06.

U.S. fall orders for Titanium and Interchange products were particularly healthy, and we saw solid growth in outerwear orders from key customers in the specialty channel, which we believe will continue to strengthen the core outerwear Columbia brand.

We believe our acquisition of Pacific Trail provided us with another tool to clearly segment our outerwear offerings for customers we currently do not sell.

Competition continues to be fierce in the category, in an attempt to re-invigorate U.W. outerwear, we became aggressive in pricing, negatively affecting our outerwear margins for fall 2006 season.

In order to compete with emerging brands, we offered an extension of styles in our fall '06 outerwear product lines, which generated growth but did not provide economies of scale in sourcing.

For Fall 2007, we will have a more targeted offering which is designed to enhance outerwear gross margins.

Now that we have concluded our primary Fall booking seasons, the Company has completed its analysis to determine the appropriate unsold inventory level to carry into the Fall 2006 season.

Based on our analysis of a variety of factors, including channel inventories, economic environment, financial health of our customers, and the retail environment generally.

We believe it's prudent and necessary to produce a lower unsold inventory position than we have for the past two fall seasons.

Overall, maintaining and growing our outerwear market position the U.S. is a key focus, and we will continue to leverage the strength of our brands into the larger sportswear and footwear market opportunities.

Canada: Sales of 26.4 million versus 25.9 million, an increase of 1.9% for the first quarter, or a decrease of 5.4% excluding changes in currency exchange rates.

First quarter sportswear sales were healthy in Canada, and sell through rates of key retailers have been very good, particularly in our women's sportswear line.

Outerwear sell through has also been solid.

Excluding changes in currency exchange rates, Fall bookings in Canada were down slightly, with softness in outerwear products, offset by sportswear growth.

Warm winter weather in the region negatively influenced footwear bookings.

Current retail environment in Canada is solid, and we are maintaining strong relationships with key retailers in the region.

Europe: First quarter sales of 48 million versus 46.6 million for the same period last year, an increase of 3%, or 13.7% excluding changes in currency exchange rates.

Outerwear shipments for Columbia and Mountain Hardwear drove first quarter sales growth in Europe.

Excluding changes in currency exchange rate, footwear also posted double digit sales growth in the quarter.

A late cold weather spike benefited retail sell through of weather dependent fall merchandise, improving retailers fall season, outerwear and footwear inventory positions.

The late winter conditions have delayed sell through of spring footwear and sportswear products, but it is still early in the spring season.

Fall orders in Europe were disappointing, essentially flat year-over-year.

Outerwear bookings were soft, offset by growth in sportswear and footwear.

A key customers decision to increase their private label program, significantly reduced outerwear and footwear orders at that key retailer, which primarily drove weakness in the fall backlog.

We were also in transition with our new sales team in Germany during the fall order taking season, which affected our orders.

We believe we've taken the right steps to grow our business there.

Despite these challenges, European orders increased in most regions, with Italy, Ireland, Switzerland, and the Nordic countries, and other regions showing strong improvement in fall order growth.

Turning our attention to macro footwear issues in Europe, as many of you are aware, the European Community has imposed provisional anti-dumping duties on leather footwear sourced from China and Vietnam.

Columbia is continuing to work with industry groups to challenge the dumping allegations, and to exempt certain types of leather hiking footwear from the anti-dumping provisions.

These anti-dumping duties could effect a significant amount of our leather footwear in Europe.

Longer term, our sourcing managers will continue to seek global sourcing strategies that will benefit all countries of destination, if the anti-dumping duties become definitive.

We anticipate approximately 1 million of additional duty exposure if the provisional rates become definitive.

I continue to believe that Europe is a very important growth opportunity among international markets, and we are committed to growing the market presence of our brands in the region.

Other international, which consists of the collective regions of Japan and Korea where we sell direct, and other international markets worldwide where we sell through distributor relationships, reported first quarter sales of 41.4 million, versus 36.9 million for the same period of '05, an increase of 12.2%, or 15.8% excluding changes in currency exchange rates.

International distributors, a component of other international recorded sales of 20.2 million, compared to 19.1 million in the first quarter of '05, a 5.8% increase.

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

We continue to see growth in the key Hong Kong, China and Russian markets during the first quarter.

I'm impressed with the work our distributors are doing to manage our brands in these emerging markets, and I believe we are positioned in the Company for solid, long term growth in China and Russia.

We also continue to see healthy growth in many other distributor markets globally.

Fall 2006 orders indicate that shipments in international distributor markets will continue to be healthy this coming fall season.

Japan, a component of other international recorded first quarter sales of 12.4 million compared to 10.4 million, an increase of 19.2%, or approximately 34.9%, excluding changes in currency exchange rates.

Sportswear shipments were solid in Japan during the first quarter as our new management team continues to make solid improvement in the recovering Japanese economic environment.

Footwear and commitment sales were also healthy.

Late season cold weather delayed sell through of spring products, but sell through rates improved as the quarter progressed.

Fall orders in Japan were very strong, particularly in the outerwear category, we are growing with key customers in the region and opening new distribution at a department store, sports specialty, specialty footwear, and other channels, driving fall season order growth in the region.

We are optimistic about the prospects for growth in Japan, as the economic conditions in that market continue to improve.

Overall, we showed solid performance against expectations in the first quarter, and sell through rates at retail appear to be good in most parts of the world.

While satisfied with our first quarter financial results, we recognize that challenges lay ahead, and we must continue to maintain the strength of our brands as we execute our growth strategies.

Our markets are very competitive currently.

The projected performance of our key European and footwear growth initiatives, and our continued projected gross margin contraction is disappointing.

While we have made changing to address challenging including developing and acquiring a full compliment of brands, to address multiple distribution channels, these initiatives are still developing, and have not yet gained significant traction.

We will focus on diligent expense management, while we execute these strategies, to assure strategic deployment of our capital.

We will develop compelling products that provide retailers and consumers with exceptional value, which is at the core of our business.

Going forward, we are committed to growing the business through our key growth strategies that we so frequently articulate.

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

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

Third, we will continue to develop the merchandise 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 businesses.

Finally, we will continue to seek out attractive licensing opportunities, as we attempt to leverage the Columbia sportswear brands, that concludes our report.

Thank you for listening.

We would be happy to field any questions.

Operator, could you please help us?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Bob Drbul with Lehman Brothers.

Hi.

Good afternoon.

Hey Bob.

Tim, the first question is on the outerwear business, can you talk a little bit about the competitive environment, you know, versus like the category itself and sort of where you see things shaking out from that perspective, competitive pressures, et cetera?

Certainly, as we have articulated in the past, out biggest competitor is private label, and we continue to see, depending on the customer increased private label penetration, additionally, we have growing branded competitors that are entering the space, and becoming more target, in targeting ourselves more perhaps than other brands, so competitive pressures on the product brand are more specifically noted this year as opposed to last.

We still believe the outerwear business is a strong business, although it is weather dependent, and you know, it can have its challenges regarding the weather.

And the second question, you were pretty busy with the M&A front this quarter.

When you look at the cash balance that you are sitting on today, can you just talk about your position, the Board's position on the use of cash versus, for M&A versus the buy-back?

Certainly, well, I think we've shown the Company has a propensity in the past to acquire shares when we believe it's appropriate, and so buying our own shares certainly is much less risk than acquiring companies.

At the same time, when we see opportunities like Pacific Trail, which is famous brand name in our space, that allows us to have growth opportunities in other channels, and Montrail, which is a high end footwear business, that we believe can help us in many ways on our own, Columbia brand of business, we are quick to move on both those parts.

Okay.

Great, thank you.

Next question comes from Kate McShane with Citigroup.

Hi, everyone.

I have just two quick questions.

Do you think your backlog numbers were impacted at all by tighter inventory management at retail?

And if so, did you say that you are taking speculative inventory down, and if you are, is that going to impact retailers when they want to order your product more at once rather than now?

You know, I'm sorry I couldn't hear the first question.

I'm sorry, is that better?

Yes.

I was wondering if you thought backlogs were impacted by tighter inventory management control?

That we are starting to see more of at retail.

Certainly, retailers in North America had very solid selling in December.

Weather was great, and the consumers seem to be very attracted to cold weather products.

Unfortunately, the month following that, January, they had poor weather, and so even though they had solid sell-throughs of the product, they are reminded that the inventories of winter, weather sensitive products can be volatile from a valuation standpoint.

So I think they probably were conservative in terms of their ordering patterns on the backlog, certainly they were from us after the first part of January.

That having been said, our analysis on their inventory positions, while we believe that they are slightly lower in inventory than they were last year at season end, there's still hesitancy to acquire lots of inventory early on, and frankly, it allows us to be a little, slightly more conservative on our speculative inventory position, we want to make sure that we have hungry retailers, so if there is a sharp demand increase during Fall '06, and the weather is highly conducive, we will be able to fulfill some orders, but probably not fully fulfill them.

Okay.

And then my final question is about Pacific Trail, it seems that it's going to be dragging your gross margins down a bit, how long do you expect that to take place?

We expect the gross margins in Pacific Trail will more than likely be longer term, smaller than the Columbia margins, however, the business model we intend to use in selling that product, will also result in lower costs, so we believe the operating margins long term on the Pacific Trail business will be equal to or better than the Columbia business.

As it relates to '06, the company had a quick response to the bankruptcy filing and sale by the Federal Bankruptcy Judge.

We're lucky to be in a position of a strong balance sheet, and with a supportive Board, and we could act quickly on the asset.

The asset came with, actually a reasonably large order book, which we have cautiously pared down to those specifically items we believe we can fulfill for customers, that we want to have long term with the brand.

So again, as we mentioned in the script, it's a little bit order book for Pacific Trail for Fall '06 is a little undetermined yet, but long term, we believe it will be a very enormously profitable acquisition for the Company.

Okay.

Thank you.

Thanks.

Your next question comes from the line of Liz Dunn with Prudential.

Hi, good afternoon.

Just a few questions.

First, how much purchase, how much should we look for from purchase accounting adjustments for Montrail, and it sounds like from your commentary, that there aren't purchase accounting adjustments for Pacific Trail.

Then my second question is sort of bigger picture on the margins, we've been in a position of margins declining here for a couple of years, when do you see margins turning, or at least stabilizing for your business, and then finally, just to follow up on your commentary relative to the speculative inventory, are you saying that your analysis of the competitive environment and how retailers have ordered, suggests that inventories may be a little bit high, and is that leading to your decision not to take a higher speculative inventory position?

Thanks.

This is Bryan.

Let me take the first one, and I'll let Tim take the other two.

In terms of I guess the Montrail adjustments that we had to make, we are really just marking up the inventory to market value in purchase accounting, so that I believe, was close to 20, 30 bips, something like that, for the quarter on our gross margin, as we sold those products through after marking them up.

To your point, no, there wasn't any mark to market adjustment on the Pacific Trail, as we didn't buy their inventory, simply that was buying an auction property out of bankruptcy, and taking on the order book.

So I'll let Tim take the second two.

We've had an opportunity regarding the margins, especially on outerwear to thoroughly investigate results for '06, and we believe that we've got significant opportunity to begin increasing our gross margins in outerwear.

We took the gloves off this year as it relates to competition, and we were aggressive in building significant quantities of style counts, not significant inventory, but significant style offerings, and we found significant success in some of those, and others we did not, so we think that we found the opportunity for us to get back to a focused selection of products, which will offer margin expansion in 2007.

Then as it relates to your speculative inventory question, we really do a fairly thorough analysis of our customers, their order patterns, their purchase patterns, to the extent we know that from other brands, and where we believe we have strength, and we focused our purchases and our speculative position in those areas, and we believe through a number of factors, that we've taken the appropriate levels of inventory.

Now, it's reduced from prior periods, I would say not dramatically, but there is a reduction in our speculative position from prior periods, because of a number of factors.

Less than 5%, or sort of in-line with your prior historical?

I would say closer to in-line to our prior periods, but lower than the last two years.

Thanks, good luck.

Your next question comes from the line of Sam Poser with Mosaic Research.

Good afternoon.

Do you feel, hold on one second.

What is the overlap in product between the United States and international in the apparel?

It's fairly significant from a product category standpoint, but there are some differences in the product categories, mostly color.

Have you, do you attempt to bring that, do you shift them one way or the other, to see if there's acceptance, and if so, have you had success doing that?

There has not been, no, there hasn't been as much offering of European products to North American customers, and North American products to European customers, with the exception we have a global line that I would say the direct overlap is in the 60 to 70% range.

Occasionally, we have a customer pick a product out of one of the other lines, but not significantly.

One of the lines I'd seen was in the apparel was the Urban Adventure line, that is somewhat meaningful in Europe, and I wondered if there's any thought to bring that here?

We've shown that to some customers and that's been some interest, but we don't believe it's significant enough to offer it fully for the rest of our customer base.

With the Pacific Trail acquisition, can you talk about the position, the positioning of that brand and some detail please?

Certainly.

The customer overlap between Columbia and Pacific Trail was almost 100%, but there were some very significant customers tat Columbia did not sell, and that would include the clubs, and some large retail operations including Sears, and other large companies, the Bay is an example, and we believe that the brand has significant resonance across customer channels, but most interestingly, to Columbia in those areas where we don't currently have a business, so the opportunity we believe is in that, in those primary markets for the Company's products.

Is that something you are going to grow with those other accounts, and then wean that away from the accounts that Columbia is currently selling, or have both of those accounts?

I think we will try to maintain the business in most of the areas that we currently have the Pacific Trail business.

The focus from a sales and product direction standpoint, will be on those customers that currently don't carry Columbia, but certainly we will try to maintain the business that the company has in other significant Columbia shared customers.

And then the status on the progress you are making on footwear, a little soft this spring, and the future, sounds a little light, can you talk about the progress that's being made thereby Brad, and the timetable for being on full swing?

The first season, the first season that Brad and his team will have significant impact will be Spring '07, and Fall '07, he will have complete control on that.

We have added some significant talent to our sourcing operations.

We just added a significant senior sourcing gentleman, from other, who has had experience in other large companies to the Company's team, and we are expecting that together, Brad and [Joel Etterly], who joined the Company will have a great solid beginning on the Company's future in footwear, but we expect as Brad's thumbprint goes on the product collection for Spring '07, that we will see significant improvement.

Ed Aaron with RBC Capital Markets.

Thanks, good afternoon.

Couple of questions for you.

You mentioned the one account in Europe that was, I guess, shifting away from your products.

Can you give us a sense of order of magnitude how much that affected your European backlog number?

I think it was in the neighborhood of 5%, or something like that.

Okay.

Is there anything else you'd kind of highlight in Europe about sort of the environment and whether, what's helping or hurting demand for your outerwear product over there?

We talked about our German turnover in our German team, we made changes prior to the season in Germany, where we did almost a complete restructuring in that group.

The market there is not spectacular, but we thought that we would have larger opportunities there than ultimately proved out.

But I think those northern markets are where the opportunities for the Company is in some significance, and we just have not had kind of solid traction we need there.

We also made changes in our team in the U.K., and we expect that that will also, again, produce solid results soon.

Okay.

On the first quarter itself, I have a decent understanding of what some of the positives and some of the negatives were on the quarter from your press release, but the numbers overall came in a bit better than you were expecting at least in your guidance, could you help me understand where the real variance versus your expectations came on the quarter?

Certainly.

I'm going to ask Bryan to speak to that.

If I walk down the P&L, I would start with sales, sales definitely came in a bit higher than what we planned on, so that's certainly one contributing factor.

Margin came in, you know, a little bit less than has year, and pretty much in-line.

I know that first, when we first guided for the first quarter, there was probably a little bit of confusion around why the margin would be down, and not up a little bit more than last year, I think that did come in along with the purchase accounting adjustments we had, a bit down from last year, so that wasn't a positive.

On the positive side, most of it was more on the SG&A line, some of that from decreased spending.

I think as we look at this entire year, we are really looking at the P&L, specifically the fixed costs in the business and trying to make sure we manage those effectively.

Part of that is started in the first quarter, and that will carry out through the rest of the year.

If I look at the full year guidance, if you adjust the option expensing, it looks to be over the balance of the year about flatish with what you did over the same period last year.

The backlog is obviously up nicely, and last year for all intents and purposes was a pretty tough year, I know you're becoming a little more aggressive on the outerwear side, but with the backlog numbers and kind of the difficult 2005 year, that you would be able to grow earnings on top of that base, are you just being conservative, or is the price discounting on the outerwear really that significant?

I guess if I started off, I would start off by referring back to the acquisitions that we made, certainly, maybe I didn't answer the question a little more broadly before, but certainly, we will have some pressure on our gross margin with those two businesses.

We had to mark to market the Montrail inventory that we purchased, and even though we didn't have to mark to market the inventory with the Pacific Trail business, as Tim referred to earlier, we are projecting a little bit of contracted gross margins from that piece of the business, than what we enjoy with Columbia, so that will definitely pressure us a bit as we look toward the back half of this year.

SG&A expenses, albeit we have got some plans to really curb some of the fixed costs and whatnot, we still only had close to that 5 to 6% growth last year in the top line, and unfortunately, had a pretty good sized incremental fixed cost added to the income statement in '05 that we have to grow out of in 2006.

Finally, again, the tax rate last year, because of some one-time events in Q3 that were favorable, pushed us down to about the 31.5% range, where this year we are at 34%, that alone is about $0.15 to the full year EPS.

I see.

Okay.

I think all those factors and like you said, stock based compensation certainly put this year at a disadvantage.

Sure, okay.

Thanks.

We request that you limit your initial follow-up to one or two additional questions.

Your next question comes from the line of Jeff Edelman with UBS.

Thank you.

Tim or Bryan, I'm still confused about outerwear margins in the back half of the year.

Tim, you made a comment about the business becoming more competitive and you had to match some, bring some prices down because of some of the private brands.

But then you also said that you were styling, improved the styling, and was it shorter runs that negatively impacted margins?

And then you had some product that didn't work?

What is really going to change the year after?

Good question.

So again, to reiterate this year.

We wanted to take the gloves off and be as competitive as we could price-wise, we also offered a quite broad range of product styles, in order to make sure we hadn't missed anything, which spread our volumes over several styles, as opposed to having it more constrained and more higher margin for the Company on the production end of it.

So for what is changing for next year is a more concise product offering in those areas that are going to work, and significant engineering of those styles to improve the gross margin.

But you'll have to put the gloves back on, or you're going to keep them off?

I mean, if you took a more competitive stance on a fairly wide range of products, that's got to be a permanent lower margin, or can you restyle around those?

We think we can keep the pricing very close to where it's been for '06, and with these engineering enhancements, we think we can get gross margin back to close to approximately the levels that we have had several years ago, by just focusing the product development areas, and the engineering of the product more concisely.

Then, on the outerwear, can you talk about the special promotional programs in Europe?

That you referred to as impacting margin?

Yes, that's a function of our promotional event that we did with the folks at Nissan.

We have an ongoing promotional event throughout all of the countries of Europe and Russia, and several other eastern European countries, in connection with a Nissan Columbia product, which has significant advertising behind it around their car and our products, but it's more, it's a higher expense level than we would otherwise have gone and expended.

Okay.

Thank you.

Thanks.

Next question comes from John Shanley with Susquehanna Financial.

Tim, can you give us an idea of the approximate percentage of your European footwear that is now likely to be impacted by the new EU tariff that's gone into effect?

Pat has been working on that specifically for the company, I'm going to ask him to answer that.

The question was the percentage of outerwear that --

-- as a percentage of your SKUs going of footwear going into Europe that would be impacted by that.

Currently, it's a high percentage, probably 85 to 90% of the product going in there, it would have some effect on that.

Yes, that's high.

And Tim mentioned there was some discussion about possibly getting an adjustment.

It's been put into effect, is there any time horizon in fiscal '06, that you could see an adjustment Patrick?

We are looking at all the products.

There's still some ambiguity around a lot of our products, what qualifies for exemption, under staff exemption, or [inaudible], things hike that, so we are going through that.

There's some mitigation from the timing of the product going in there, and then again, we've got an initiative for all our product, to diversify the production into other countries, so with would also benefit in the future with that.

Right now, we are looking at that million dollars that Tim talked about.

Million dollars, a million U.S. dollars?

Yes.

And again, John, that's for for the fall piece of the business.

I understand.

And that's baked in the guidance we gave you today.

Super.

Tim, I don't want to beat up the outerwear thing, but I'm still trying to get to the better understanding, can you give us some parameters in terms of the magnitude of the negative outerwear product margins that you may be faced with?

Is this due to just lower price points or is it due to a shift into taking goods on, away from your normal formula of future orders, where you may be doing it more on a speculative basis?

We did not change any of our formula regarding the base business, so we asked for orders in advance, and we received those from customers.

Same basic selling terms as we've used in the past.

The issue really was around being quite competitive on pricing, and also offering too broad a collection of apparel in outerwear.

I understood that.

Is the pressure more pronounced in certain channels like big box sporting goods, or general merchandise, or is one channel really standing out as closing your problems right now in terms of product margins?

I think it's across the board, and again, because functionally, it was more an internal issue regarding our offering size.

I would say that with the more function of issues which we have the ability to control.

But it will take until the Fall '07 selling season before you get out from under this?

Is that a fair assessment?

We will be working diligently on those areas throughout the year, but we baked in the guidance that we believe will happen this year in the current guidance we've given you.

Great.

Got it, thanks.

Appreciate it.

Next question comes from Jim Duffy, Thomas Weisel Partners.

Sorry to do this, but I'm going to ask a question along the outerwear lines as well.

Just to make sure that I'm clear, will you be targeting the same general retail price points where you have historically been positioned, or have you brought price points down, or is it a function that you'v invested more value in the products for the same price?

We will be going after the same targeted price points that we have historically, we've not moved down price points.

We have offered significant featured editions in the garments, but we have not engineered those features as well as we can.

I understand.

Okay.

I'm clear, thank you very much.

Thanks, Jim.

Next question comes from Jennifer Black, Jennifer Black & Associates.

Good afternoon.

I have a question.

Just I guess what's going through my mind is how, how are you going to make yourself a brand that people want to buy?

What's going to make you special in the customer's eyes?

I know what makes you guys great, but how is the customer going to know, and how are you going to differentiate in this competitive retail environment?

We are basically going to be doing many of the same things that we've been doing, which is continued focus on the value portion of the product line, differentiating ourselves from others by the methods we use to market the product, and continue to focus on our product development resources creatively.

We consider our Fall outerwear line to be significantly superior to prior lines.

And had good acceptance from retailers and consumers on that product line, it's a function of us not following through on the engineering portion of the product as much as we should have, so we think there's significant opportunity still throughout the United States and the world, where we have continued to grow.

People recognize the differentiated value of the Company's products.

Do you think it's more on the utilitarian side, or a combination of aesthetics?

Do you know what I'm asking?

I think I'm getting it.

My guess, I would point to the sportswear products, most, in that the sportswear products that the Company sells are the least differentiated from competitors, and most reliant on brand strength, and that's where we've grown the most, and we've had very significant traction in product categories that are very brand reliant, and so we think there's a significant amount of demand for the Company's products out there, consumers have historically purchased lots of Columbia products, and been very happy with them, so there are issues we need to continue to manage and improve, but in areas where consumers have lots of choices, like sportswear, they have been choosing our brand, they like it.

Great.

That's helpful.

I'll be out to see everything.

Look forward to it.

Thanks.

Follow up question from Liz Dunn with Prudential.

I'm sorry, my question has been answered.

Thank you.

Next question comes from Steven Martin, Slater Capital Management.

Hi, guys, with all the confusion about tax rate and shares outstanding, in terms of the guidance, could you possibly give us what you would expect the pretax income or operating income to be for the full year?

On sort of an apples-to-apples basis without tax rate, share count, and anything else?

I think we've intended to do that in some of our prepared remarks, we mentioned on net income line it would be, you know, we would project to be off around 10%, X the stock based compensation, believe we said it would be down around 4, and as you said, shares, the share repurchases that we've done at least historically, and given the 37 million shares outstanding, puts us to slight EPS growth for the year.

So my guess --

But when you say slight EPS -- I'm sorry.

Go ahead.

I was going to say if you put the tax rate piece on top of that, you are expanding even further than that, and I believe I mentioned $0.15.

When you say slight EPS growth to last year, what number are you assuming for last year?

The 3.39?

I believe it was 3.36.

Okay.

All right, thank you very much.

Next question comes from John Rouleau with Wachovia Securities.

Tim, with everything you've done in the outerwear side, lower some prices, expanding the assortment, and given that December was pretty good, did backlog more or less come in more or less where you hoped it would come in?

What are your thoughts where backlog kind of trended, given all the work and changes you've made here.

I personally was disappointed in the backlog, I expected higher, and I feel a portion of it was due to the weather we had in January, it wasn't conducive.

I know you entered the season all fired up, and things were improving, your orders were coming a little earlier, so it sound like it tailed off toward the end of the season.

Yes, that's true.

And then kind of looking at what you are saying now in terms of altering the, you know, altering the make up a little bit, in terms of style and maybe shrinking the assortment, and concentrating on gross margin a little bit.

Is that a shift in strategy based on the fact that maybe backlog didn't come in the way you hoped it would this year?

So you are back to doing something a little different, or how should we kind of look at that?

I think you could look at it as going back to basics really.

In a year, last year when we came sort of a poor backlog, disappointing backlog and wanting to really make lots and lots of changes to insure that the product side of the business was the best it could be, we really, we got too enthusiastic about our product lines, and had too many products to offer.

When you look at the backlog or the bookings.

Did the basing book stronger than some stuff that is bit more forward, or had a little more details to it?

Or was it just hit or miss based on the style side?

We had solid growth in some of those new categories of merchandise that we offered, including the casual business, et cetera, but we had solid growth in our Interchange business, which is right down the middle of our business model.

We just had items over, the offering was too broad.

And then I apologize if you addressed this already, I hopped on a little late, as far as the sportswear is concerned, you have grown that business aggressively, you know, there seems to be an increasing amount of competition kind of in sportswear, somewhat similar to what we've seen in outerwear the has few years.

Can you address the competitive markets in sportswear, and perhaps changes you are making on the design side of the sportswear?

The Sportswear business has been leading the growth for the Company, and we believe we have solid performance there, and solid acceptance as a brand.

The market size in the U.S. alone is around $35 billion, so we are really a tiny player in that, so there's lots and lots of embedded competition, but we seem to be growing in that area quite nicely, and would expect that to continue, just based on the market size, we can continue to grow there.

It's not as targeted as the outerwear business.

I would agree with that.

It seems that some of these outerwear outdoor brands starting to creep into sportswear as well, but with some success on the outerwear side, and naturally looking for some categories that they can grow, so I was wondering if you were seeing any change at the competitive environment.

Doesn't sound like that is the case.

It's has not been as targeted as the outerwear.

Next question comes from Jeffrey Edelman with UBS.

Tim or Bryan, could you quantify the amount of dilution from the two acquisitions this year?

I'm going to ask Bryan to take that one.

Most dilution is really coming at the margin line, I guess I think we mentioned we are probably close to 150 basis points at least projected in terms of our gross margin for the full year.

I would probably say close to 40 basis points of that is really, and it could even be a little bit more than that, probably coming from both the Montrail and Pacific Trail acquisitions, so I hope that helps.

Thank you.

Yes, it does.

At this time, there are no further questions, are there any closing remarks?

Thank you very much for listening in, and we look forward to talking to you again in July.

Thank you for participating in today's conference call.

You may now disconnect.