Columbia Sportswear Co (COLM) 2006 Q2 法說會逐字稿

Good afternoon, my name is April and will be your conference operator today.

At this time, I would like to welcome everyone to the Columbia Sportswear second quarter '06 financial results conference call.

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

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

Thank you.

I would now like to turn the call over to David Kiser, Director of Investor Relations, please go ahead, sir.

Thank you, April.

Good afternoon, and welcome to Columbia Sportswear second quarter 2006 financial results conference call.

With me are Gertrude Boyle, Columbia's Chairwoman, Tim Boyle, Columbia's CEO, Pat Anderson, Columbia's COO, Bryan Timm, Columbia's Chief Financial Officer and Peter Bragdon, Columbia's General Council.

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

You should have received a copy of the earnings release by now, but if not you can access a copy on our company website at www.columbia.com In light of regulation, [inaudible], we encourage you to ask as many questions during the call as you feel are necessary to understand the Company's business.

As a courtesy to all participants and consistent with prior quarters, we request that you limit your initial follow-up with one or two additional questions to allow all parties the opportunity to ask questions.

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

Before we begin, 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 operation.

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

Many of these risks and uncertainties are described in Columbia's quarterly report on Form 10-Q for the quarter ending March 31, 2006.

Forward-looking statements in this conference call are based on our current expectations and beliefs.

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 any expectation.

Thank you, Gert.

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

Tim?

Thanks, David.

Welcome everyone and thank you for joining us.

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

Q2 2006 net sales increased 13.6%year-over-year to 211.6 million driven by strong international growth and the continued development of our sportswear and footwear product categories.

Excluding changes in currency exchange rates, consolidated net sales increased by 13.5% in the second quarter.

Net income for the second quarter was 4.8 million, compared to 6.3 million in the comparable period.

Diluted earnings per share for the second quarter of 2006 were $0.13.

Net of $0.05 per diluted shares of stock based compensation expense compared to $0.16 last year.

Let's turn our attention to some recent updates on our company.

Management Changes: We're excited to welcome an experienced industry veteran to the senior ranks of Columbia Sportswear.

Last month we announced that Mick McCormick has accepted the position of Vice President Sales, where he will be responsible for U.S.A apparel, footwear, equipment, and accessory sales for the Columbia, Sorel and Montrail brands.

Mick will join our executive team early next month.

Mick has a unique wholesale and retail sales management and marketing background in the sports industry.

Most recently he was the chief marketing officer of Golf Galaxy where he was responsible for marketing, advertising, PGA services, and eCommerce functions for the golf specialty retailer.

Prior to his retail experience, Mick was also EVP global sales at Callaway Golf and has held various sales management positions at Nike.

We believe his strong background in performance driven sales management will have a positive impact on our USA sales organizations, and we will leverage his marketing and retail skills to help build our brands.

Bob Mason, our prior senior VP of sales and merchandising has decided to transition into retirement following a 30-year career in the outdoor industry and 17 years here at Columbia.

Mick will assume Bob's sales management functions for the Columbia brand and sales management responsibilities for Sorel and Montrail.

Pacific Trail and Montrail Integration: We're pleased with the integration progress of Montrail and Pacific Trail, two authentic outdoor brands we acquired in the first quarter.

Montrail's order management system has been integrated with Columbia's and manufacturing and distribution system in the U.S. and Europe are anticipated to be fully combined by year end.

Montrail's sales and product line management personnel are now on-site in our Portland headquarters.

Pacific Trail's sales orders and production systems are now being managed by Columbia's order management system and operations team and distribution systems are expected to be fully integrated by year end.

Pacific Trail has a rich 60 year outdoor industry heritage with several authentic outdoor brands.

We acquired the Pacific Trail brands in an expedited bankruptcy auction in March and the near term level of complexity is high.

However we believe there's significant long-term opportunity for the brand.

Current and perspective key retailers are excited about the potential the Pacific Trail brand offers under Columbia' stewardship, and we believe that through this acquisition we can more fully address distribution channels that have been previously underserved by Columbia.

Montrail also offers exciting opportunities.

Montrail is a premium outdoor footwear brand with an excellent reputation for technical high-end trail running and hiking products.

Sell through of key styles in the spring 2006 Montrail line has been solid, and our sales team sees strong opportunities to continue to develop distribution in outdoor specialty, specialty running, and sporting goods chains.

Mountain Hardwear: Mountain Hardware sales were 10.9 million during the second quarter , a 26.4% increase over last year, driven by strength in sportswear and equipment sales to the specialty distribution channel.

Mountain Hardwear is solidifying its innovative and technical position as the premium outdoor brand in the specialty channel as the competition becomes more broadly distributed.

While still early in the order-taking season, retailers are receiving the spring '07 product line very well despite wet weather impacts on current seasoned sell through.

Mountain Hardwear anticipates continued strength in sportswear as the team continues to innovate with new construction technologies and fabrics and redesign performance apparel collections.

Mountain Hardwear's technical and competitive strengths will drive expansion in this channel domestically and internationally.

Sorel: Sorel sales were 2.5 million verses 2.6 million last year.

Consistent with the brand identity, the Sorel team remains focused on re-establishing the brand as a dominant cold weather footwear resource focussed on fall season product development.

The second quarter is not meaningful to Sorel as the division has not developed a spring product line.

We're pleased with the progress of our acquisitions and the multiple distribution channels and customers we can serve with the portfolio of outdoor brands we own.

We will leverage our merchandising, sourcing, distribution, and capital to develop the global strength of these brands.

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

Bryan?

Thanks, Tim, and good afternoon everyone.

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

It's important to note that the second quarter as or most volatile quarter as wind down our spring shipping and start our fall business.

And changes in operating results may be amplified as it is our lowest volume quarter.

Net sales for the second quarter were 211.6 million, an increase of 13.6% over the 186.2 million of net sales for the same period last year.

Growth and consolidated net sales was driven primarily by international and domestic strength in our sportswear and footwear product categories and the development of our new equipment product lines.

Excluded change in currency exchange rates, consolidated net sales increased 13.5% in the second quarter.

Our consolidated gross margins for the second quarter of 2006 were 38.5% compared to 39.5% for the second quarter of 2005.

As discussed previously, gross margins decreased due to a number of factors, including increased competition, recording Montrail inventory at fair value and purchase accounting, costs associated with certain international and promotional campaigns, stock based compensation expense and a greater mix of international distributor shipments at lower margins.

However, gross margins were approximately 150 basis points better than forecast due primarily to better than expected sportswear margins and closeout margins for outerwear and sportswear.

The Company's SG&A expenses increased by 16.6% or 11 million on an absolute basis to 77.1 million for the second quarter of 2006 verses 66.1 million for the comparable period in 2005.

As a percentage of net sales, SG&A was 36.4% compared to 35.5% in the prior year quarter.

Spending expenses decreased as we managed to a lower operating spend.

Operating expenses increased primarily due to increased personnel-related costs, including stock based compensation expense of 2.7 million.

Depreciation amortization was approximately flat year-over-year at 5.6 million.

Net licensing income was 1.1 million compared to .9 million last year.

And net interest income increased to 1.9 million from 1.3 million last year.

Given the higher interest rates environment coupled with decreased interest expense rutting from lower debt levels.

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

We reported net income of 4.8 million or $0.13 per share net of $0.05 per share of stock based compensation expense for the second quarter of 2006, verses net income of 6.3 million or $0.16 per share for the second quarter of 2005 based on a diluted share count of 37 million and 39.3 million respectively.

I'll quickly touch on key items on the balance sheet and again I'll be comparing June 30, 2006 to June 30, 2005 balances.

The balance sheet remains very strong with cash and short-term investments totaling 173.8 million verses 242.9 million at the same time last year.

Consolidated accounts receivable at June 30, 2006 were essentially unchanged at 165.4 million compared to 165.3 million last year.

This level of receivables verses the incremental sales growth in the quarter is a result of earlier sequencing of shipments during the quarter, which allowed for many of the April and May sales to be collected in the quarter.

Consolidated DSOs decreased to 70 days from 80 days at June 30, 2005.

Consolidated inventories were 272.2 million compared to 215.9 million a year ago, a 26.1% increase.

The increase is largely due to earlier receipts of fall 2006 inventory for anticipated fall season growth acquired Montrail inventory and increased levels of core and replenishment inventory.

We remain very comfortable with our current global inventory position.

Capital expenditures were 21.6 million during the second quarter, the majority of which to increase our distribution capacity.

We're currently retro fitting 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 up to approximately 12 million in 2007.

During the second quarter, we repurchased approximately 1.5 million shares at an aggregate purchase price of 73.7 million.

We have repurchased a total of approximately 6 million shares in an aggregate purchase price of 284.3 million of the 400 million authorized since the inception of the program.

That covers the financials for the second quarter of 2006.

I will reiterate that from a balance sheet perspective, we've been very pleased with the way the second quarter was managed.

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

Now let's turn our attention to financial guidance.

Given the results we've reported today, we're in a position to give guidance for the third quarter and update everyone on our guidance for the full year 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 quarterly report on Form 10-Q for the quarter ended March 31, 2006, and which were expressed by Gert in her opening comments.

Based on our current outlook, we anticipate Q3 2006 consolidated revenue growth to be 11-12% when compared to the same period last year.

And are anticipated Q3 gross margin contraction of approximately 300 basis points, placing us at approximately 43% of estimated sales.

This contraction is a result of many factors, including increased competition, lower margin, Pacific Trail shipments, recording any acquired Montrail inventory at fair value and purchase accounting, a slight volume shift and expected spring closeouts at lower margins.

Costs associated with certain international promotional campaigns and stock based compensation expense.

Our current SG&A target for Q3 2006 as a percentage of estimated sales is approximately 24%.

This target includes stock option expense of approximately 2.3 million in the third quarter.

At present, we are modeling the Company's quarterly and full-year effective tax rate at 34.5% and we are using 37 million shares for purposes of Q3 and full-year EPS calculations.

We anticipate net licensing income of approximately 1.3 million and net interest income of 1 million for Q3 2006.

This analysis implies net income decline of approximately 12% over the third quarter of 2005.

Please recall that we recorded a net tax benefit of 5.6 million or $0.14 per diluted share in the third quarter of 2005 resulting from the favorable conclusion of various income tax audits of several tax years.

Turn our attention to the full-year 2006, we expect consolidated revenue growth of approximately 11% for the full-year 2006 when compared to 2005 revenue.

And we anticipate net income decline of approximately 9% for the full-year 2006.

Factored into this guidance is approximately 180 basis points of gross margin contraction due to the current competitive environment, recording acquired Montrail inventory at fair value and purchase accounting, lower margin Pacific Trail shipment and many other items including additional costs associated with certain international marketing campaigns, estimated EU and dumping duties and stock-based compensation.

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

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

Excluding approximately 7.3 million of after tax stock based compensation or $0.20 per diluted share, our estimated net income decline for 2006 would approximate 3.5% on a comparative basis, using 37 million diluted share counts.

We anticipate net licensing income of approximately 5 million and net interest income of approximately 6 million for the year.

Again, please understand that this information 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 March 31, 2006.

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

Tim?

Thanks, Bryan.

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

Outerwear: 43.2 million verses 40 million last year an 8% increase.

Shipments of noninsulated shells and soft shells continue to drive growth in outerwear in the second quarter.

Outerwear shipments were strong in other international, Europe and Canadian markets.

Sportswear: 112.2 million verses 102.4 million, in Q2, '05 a 9.6% increase.

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

International sportswear growth in Europe, other international in Canada led global sales for the category.

Footwear: 43.2 million verses 34.3 million an increase of 25.9%.

Second quarter shipments of spring sandals and is trail shoes were healthy.

We also continued closeout shipments of 2005 cold weather footwear styles at reduced margins.

Footwear shipments were strongest in the U.S. and international distributors during the second quarter.

Accessories: 6 million verses 6.8 million.

Equipment: 7 million compared to 2.7 million an increase of 159.3%.

Second quarter domestic and international shipments of Mountain Hardwear successful tent, pack and sleeping systems programs were healthy.

In sales of Columbia pack backs and day packs also increased globally as we have taken the license for Columbia branded equipment products in-house.

As Bryan mentioned in his remarks, it's important to remember that the second quarter is our smallest revenue quarter of the year and changes in shipments in any one product category, channel or geography may be excessively pronounced and may not be indicative of future results.

Geographic sales: Let me give you some additional geographic sales commentary for the second quarter with comparisons to the same period '05.

USA: Sales of 118.9 million compared to 110.3 million a 7.8% increase for the quarter.

Footwear shipments drove domestic sales growth in the second quarter.

Continued demand for water and casual sandals and trail products drove growth.

We also continue to close out 2005 cold weather boots at reduced margins in the quarter.

We're pleased with the progress of our new footwear team.

Sourcing and operations are strengthening and our product line management teams are improving footwear products.

We expect continued product improvements in our spring 2000 line but the new team will have more significant impact on the fall 2007 product line and beyond.

U.S.

Sportswear shipments increased modestly in the quarter driven by knits and woven tops.

Outerwear sales in the second quarter were down due primarily to an anticipated shift in timing of shipments in the third quarter.

U.S. apparel sell through rates have been very good this spring and footwear sell through have been solid.

While east coast weather was wet and damp early, sell through improved significantly in the east as the season progressed and sell through rates in the southern tier states have been very good.

Retail inventory levels of apparel and footwear appear to be generally healthy.

Early indications from buyers are that the spring 2007 line is generally being well-received particularly in sportswear and footwear.

Turning our attention to fall outerwear shipments in the back half of this year, as we discussed this quarter, we have embarked on some key initiatives to strengthen our core U.S. outerwear offering over the last couple of years.

These initiatives include creating outstanding products that provide retailers and consumers with exceptional value.

Clearly segmenting our offerings by distribution channel and continuing to strengthen the core Columbia brand.

These initiatives positively impacted domestic Columbia outerwear backlog for fall 2006.

U.S. fall orders for titanium and interchange outerwear products were particularly healthy.

And we expect to see solid growth in outerwear shipments to key customers in the specialty channel for fall '06 which we believe will continue to strengthen the core Columbia brand.

We believe our acquisition of Pacific Trail clearly provides us with another tool to segment our outerwear offerings and distribution channels underserved by our other brands.

Competition continues to be fierce in this category.

As we discussed last quarter, in an attempt to reinvigorate U.S. outerwear, we became aggressive in pricing, negatively impacting our outerwear margins for the fall 2006 season.

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

For fall '07, we will have a more targeted outerwear offering which is designed to enhance outerwear gross margins.

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

Canada: Sales of 12.5 million verses 9.7 million an increase of 28.9% for the second quarter or an increase of 17.5% excluding changes in currency exchange rates.

Apparel shipments rebounded nicely in Canada following soft sales in the comparable period of 2005 due to a shift from second to first quarter last year.

Knits and woven tops, pants and shorts and insulated parkas and shells all shipped strong this year and margins improved significantly.

Retail sell through of apparel products has been solid this spring and early indications for the spring 2007 apparel line have been very good.

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

Europe: Second quarter sales of 29.1 million verses 25.4 million for the same period last year, an increase of 14.6% or 17.3% excluding changes in currency exchange rates.

Sportswear and outerwear shipments drove sales growth in Europe with softness in European footwear.

Shipments of woven tops, pants, shorts, and shells, and insulated parkas drove top line growth.

A late cold weather spike extended well into Q2, benefiting retail sell through of weather-dependent fall merchandise.

Improving retailers fall season outerwear and fullweather footwear inventory positions, however, spring 2006 sell through has been disappointing due primarily to the long winter and the slow start of spring.

Retail feedback on our spring '07 apparel and footwear line has generally been positive, however it's still early in the order taking season.

Our new sales team in Germany and the UK are now in place and with strong leadership and we believe we have taken the right steps to grow our business in these key markets.

I continue to believe that Europe is a very important growth opportunity and is evidenced by our continued investment and distribution, product merchandising and sales management we're committed to growing the market presence of our brands in the region.

Other International, which consists of the collective geographic regions of Japan and Korea where we sell direct, and other international markets worldwide where we sell through distributed relationships, recorded second quarter sales of 51.1 million verses 40.8 million for the same period of '05 an increase of 25.2% or 25.7% excluding changes in currency exchange rates.

International distributors, a component of other international recorded sales of 31.4 million compared to 23.9 million in the second quarter of '05 a 31.4% increase.

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

Second quarter shipments in international distributor markets were very strong in all key product categories, due in part to a shift in timing of shipments from Q3.

Footwear shipments in the trail and hiking categories and sportswear shipments of knits and woven tops drove growth in the quarter.

We continue to see very strong growth in Russia and Hong Kong China during the second quarter.

Competition is strong in these markets and I'm impressed with the work our distributors are doing to manage our brands and I believe that we have position the Company for solid long-term growth in China and Russia.

Japan: A component of other international recorded second quarter sales of 9.9 million compared to 9.3 million an increase of 6.5% or 14% excluding changes in currency exchange rates.

Footwear and outerwear shipments were solid in Japan during the second quarter offset by softness in sportswear as our new management team continues to make solid improvement in the recovering Japanese economic environment.

Unusually cold and rainy weather during the second quarter has hampered sell through rates in Japan, and while the general economic conditions have improved, the current retail environment has been soft in the second quarter.

We're pleased with the progress our new management team is making in the Japanese market and we're optimistic about the prospects for growth in Japan as the economic conditions in that market continue to improve.

In closing, overall we showed solid performance against expectations in the second quarter.

And we have reason to be optimistic about the global opportunities of our brands.

The acceptance of our brands and products are expanding domestically and internationally and while our markets are competitive, we believe we are positioning ourselves to provide continued growth, strong returns on invested capital, and significant cash flows from operations.

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

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

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

Third we'll continue to develop our sportswear and footwear merchandising categories more completely and strengthen our core outerwear business.

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

And finally, yet importantly, we will continue to seek out attractive licensing opportunities as we attempt to leverage the Columbia Sportswear brands.

That concludes our report.

Thank you very much for listening, we'll be happy to field any questions.

Operator, can you please help us?

April, are you there?

Yes, sir. [OPERATOR INSTRUCTIONS]

The first question comes from the line of Bob Drbul with Lehman Brothers.

Hi, good afternoon, everyone.

Hi, Bob.

Just a couple of questions.

Maybe a little clarity.

On the gross margin for the quarter, can you give us a little bit, maybe like how much of the improvement verses the expectation came from better closeouts?

And then how much of the improvement verses expectation was in Sportswear? and can you maybe just elaborate a little bit more on the Sportswear better than expected margins?

I'm going to let Bryan handle that, Bob.

Sure, Bob.

I guess, in terms of the Q2 positives from the gross margin sign, I would say kind of split, maybe equally between the two in terms of better sportswear margins, again, these are raw margins on our shipments to Sportswear during the quarter.

And then the other half being, again the big positive just being that we shipped less closeouts and that would be both domestically as well as in certain international markets and these are spring closeouts that we anticipated shipping in Q2 that move out to Q3.

So that's in part why you're seeing a little bit of additional margin pressure in Q3.

Okay.

And Bryan, when you look at the total inventory level, can you give us an idea of how much remains on that, on the balance sheet of closeout inventory at the end of the second quarter?

In terms of the dollar number?

Yes, Bob, it's a pretty nominal amount.

Again because we don't have a great deal of fall 2006 closeout per se.

I mean a lot of these are for our expected reorders of business and what not.

So most of the closeout inventory that we currently have are spring-related items.

And I think those are very manageable levels, that again is kind of built into the guidance for Q3.

Most of those are expected to go in Q3 and not necessarily Q4 of this year.

Okay.

And just a question for Tim, on the performance in Europe this quarter, do you think that Europe has turned the corner for you as a company?

And should we expect a little bit of a better performance like this going forward?

Yes, I certainly think that we have all of the key markets strategically in place with great people.

And of course, being the way the Company books its business, the future quarters should be indicative and summed up in the guidance we gave you today.

But we expect that as we're selling spring '07 now and future backlog announcements so should show significant improvement.

Okay great.

Thank you very much.

Bob.

Your next question comes from the line of Edward Aaron with RBC Capital Markets.

Thanks, good afternoon.

Hi, Ed.

Couple questions.

So on the current quarter looks like you came in about $0.10 better than where you had expected to follow out at the start of the quarter.

I think you're bringing up the guidance by up to $0.04.

I'm trying to kind of reconcile what's not going to flow through to the full year, how much of the maybe up side this quarter came from, from a timing shift in earnings.

Right.

In terms of -- in terms of the $0.10, you're right we're probably close to that $0.10 mark in Q2 over what we projected.

Again, any time that we're giving guidance, we're taking whatever information we have currently and really forecasting that throughout the year.

Yes, we're giving probably close to about $0.04 of that back of the $0.10.

Again I would say that we have some continued pressure, as we talked about moving some of the closeouts from the spring, they didn't necessarily go away.

We're going to go ahead and ship those in Q3.

And then there's some continued margin pressure just from the competitive environment out there.

So again when we look at our order book right now for the back half of the year, we expect our gross margins are probably going to tick up, excuse me tick down a little bit past the 150 basis point contraction that we talked about last time, probably closer to about 180 basis points.

And that's part of why you're not seeing the full $0.10 for the full year.

Okay.

And then, Tim, I think you mentioned that in the U.S., anyways as far as the spring products go, sell through has been pretty good overall and generally speaking in that the retailers like the spring '07 products.

Do you have a sense on what the appetite for product is going to be?

Just, given kind of economic conditions and so forth?

Oh, I think, I think the appetite should be good.

We don't have any issues in my opinion at retail where we would expect as we may have in a winter season where it's very warm.

We don't have good sell throughs.

That's not the case this year.

We're expecting solid, solid performance and again, we'll have full backlog for you at the next conference call.

Okay.

Can you give us any color on the spring '07 footwear?

I know that's kind of Brad's(ph) kind of debuting his product and just kind of curious to get some anecdotes on what we should expect to see there.

Right.

Well the reception has been good, but again, remember just based on the length of time it takes to develop these products.

The bulk of the impact will be in fall '07.

But so far, the -- early indications you're pretty good.

Okay.

Thank you.

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

Hi, good afternoon.

Hi, Liz.

Can you give me an update on or give us an update on just what you're hearing sort of qualitatively from your retailers?

And as a related question, do you think that your footwear business benefited at all from some of Timberland's efforts to proactively cut back some of their business?

Thank you.

Certainly, well, in terms of the sort of business environment, I find that our retailers are pretty upbeat and that they're [inaudible] there's volumes and how things are progressing on their front on their businesses.

I frankly haven't heard much about the impact from any other competitors' activities in the marketplace.

Our -- we compete with a lot of great companies, but no company's activities have influenced any of the things we've seen so far this year and from a go forward basis from spring.

Okay.

And you're not really getting a sense from the retailers that they're ordering more conservatively or really making any change to their plans, based on all this worry that we all seem to have on the consumer.

Well, again, we don't have our full book yet, so it takes us some time and when we're in the middle of booking process like this to get to real clarity, but I certainly haven't heard from retailers that they're going to be changing their plans as it relates to our company.

Okay, thanks.

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

Thank you.

Hi, guys.

Hi, Jeff.

And, Gert, sorry about that.

Hi.

Thinking about the gross margin, at the year-end level, there's still a spread between sportswear, footwear, and outerwear?

Or have these come much closer together?

No there's definitely still a spread, Jeff.

Okay.

And as we sort of think through into next year, I mean, the more competitive environment is at the sporting goods chains, I assume, is that correct?

Well, we've had competitive pressures, obviously for many, many, in many areas, but yes, I would say, since the bulk of our business is sporting goods related, Yes.

Okay, is -- was the new product offerings and the fact that they were so diverse as you fine tune those, is that enough to offset competitive pressures?

If we think about going one year out?

Well, certainly when we talk about the impact of competition it probably can be centered in really two ways.

One is in an attempt to make our products as fresh and offer as many options as possible, we got too aggressive in terms of the size of the offering, and we spread out our business over too many styles.

So it had a positive impact on the volume, but didn't have a positive impact on gross margins.

Additionally, in our traditional areas of distribution, we were, in my opinion, a little too aggressive on our pricing structure.

And so, I think, now that we have the opportunity of hindsight, we can address both of those areas with focused product offerings and with more confidence in terms of how our structured pricing will be to improve the gross margin for next year.

But, how do you be less aggressive on pricing?

Well, pricing is a function of the products how -- how well they're designed and how well they're constructed.

Okay.

So I think we can do a better job of constructing our garments to contain value so that margin could be enhanced for us and still offer great margin for the retailers and great value for the customer, the retail consumer.

So I mean that's the plan and that's our goal and that's something that we're very focussed on for fall '07.

Okay, thank you.

Your next question comes from the line of Kate McShane with Citigroup.

Hi, everyone.

Hi, Kate.

Can you just update us if there's been any further conversations with Federated and the possibility of the Columbia brand being sold through that retailer now that they are getting closer to branding the Macy's retail chain nationally?

Well, we've had some business with Federated and many of the divisions for quite some time, and probably the best business had been in the Marshall Field division, and we've had conversations over the last several years with them, but we don't have anything to announce at this time.

Okay, thank you.

Your next question comes from the line of Robby Ohmes with Banc of America Securities.

Oh, thanks.

Hey, guys.

Actually a follow-up to Kate's question.

Are there any changes to your department store pricing strategy or your position on markdown money relative to say the sporting goods retailers or any other changes in distribution philosophy we should expect given the change bringing in Mick McCormick and the change to that whole organization?

Thanks.

Sure.

No changes are planned in the Company's selling terms.

I suppose the only change would be with the acquisition of Pacific Trail we think we have an opportunity now for segments of the marketplace that we haven't been able to, to serve with the Columbia brands.

So, we, we would expect that the corporation would have some business now in markets that we've previously underserved.

But regardless of those additional brands that we would bring to market, we're not going to change our philosophy on selling terms, those will remain the same.

Does Mick bring a different point of view on the types of doors you should be more aggressively trying to get into with the Columbia brand?

No, in fact, I don't want to say the opposite, but certainly Mick comes from a healthy sporting goods background.

His experience at department stores frankly is probably smaller than our company's from his prior role.

So we haven't talked specifically about that subject, frankly, in any of the times that we've talked, but I would expect that there'll be even more emphasis on sporting goods and sporting and distribution under -- with Mick.

Terrific, thanks a lot.

Your next question comes from the line of Elizabeth Montgomery with Cowen.

Hi, guys.

Hi.

Tim, I wondered, given the decline that we've seen in operating margins over the past couple of years, and the sense that the outerwear business is actually doing a little bit better than many of us have thought, despite the competitive challenges, have you given any thought to what you think might be a sustainable operating margin level going forward?

Or to revising your long-term targets for your revenue and earnings growth?

Well, my personal goals for the Company, as you know, are very high, so the expectations for me personally is that the Company's going to continue to be very, very aggressive with its top line and manage itself very efficiently.

Those haven't changed.

However, that having been said,our North American outerwear business is our most mature business, so our expectations are that we'll be able to get back closer to our historical margin structure in outerwear once we get ourselves reoriented.

But in terms of how the long-term impacts of our brand portfolio and the various kinds of products that we sell now, that's yet to be seen and again we really haven't given any guidance out past '06.

My personal goals for the Company are that we expand the business at very high levels and leverage.

So that's my expectations and I'm very disappointed when that doesn't happen.

Okay.

Thanks.

Your next question comes from the line of Sara Hansan with McAdams Wright Ragen.

Hi, everyone.

Hi, Sara.

On the spring product line, I know it's early on, but are you having to be aggressive at all on pricing here?

Well, we've actually raised some prices in our spring '07 line, and nobody, nobody's thrilled with that.

But frankly we're excited about our potential and the possibilities there.

So it's really an expansion if a few areas of the Company's offering, women's has expanded this year.

But it looks like our business is tracking along nicely.

And again, it's still early in the selling season, so it's a little bit tougher to give a lot of color on it other than we've given in the past.

But we will again have the full backlog report with lots of detail when we -- when we meet next quarter.

Okay.

And then, just a point of clarification, I just want the make sure that I heard you correctly, did you say you shipped some product to your international distributors -- you shipped some product earlier into Q2 from Q3?

No, this is Bryan.

No, actually our only comments really were around impacts to the gross margin line, and we previously forecasted shipping a little bit more of spring closeout merchandise in Q2, that will now be shipped in Q3.

Okay.

Really the only ship.

Great.

Thank you.

Your next question comes from the line of John Stanley Susquehanna Financial.

Good afternoon, folks.

Hey, John.

Tim, was the solid sales growth that you had in sportswear and footwear in the domestic market generated in the same retail channels that Columbia has traditionally serviced, or are you experiencing growth in some new channels or particular growth any one channel that you haven't had such strong growth in in the past?

No, John, thanks for the question.

We've had solid growth in really our traditional distribution.

I would say the only area where it's not really a different channel, but our regional department store business tends -- it continues to really show nice growth.

And probably that was one of the shining stars from our -- for this quarter is just how well we did there.

But the general merchandise and the big box sporting goods and so on are all pretty solid, as well?

Absolutely, very solid performance there.

Super.

Can you give us an update on what Columbia's doing in the European market in terms of either getting around or offsetting the tariff increases that you've been subjected to recently?

Certainly, but just as a backdrop, we've made management changes over the last really 18 months, both in Europe totally, but specifically in the German and UK markets.

And those have been real solid performers that we expect to really move forward in those markets specifically.

And then regarding the anti-dumping thing, I'm going to let Pat Anderson maybe be a little more specific about how we're handling that.

Currently we're operating under provisional anti-dumping measures.

And since then there's been two proposals to implement the definitive measures.

And both of those have actually been more favorable, but none of them have been yet implemented.

So it's really unclear to us at this point where we're going to end up.

And so we just continue to monitor the situation and evaluate and explore what the ultimate situation will be.

So really right now it's a moving target and, we'll wait and see what the final are.

If the provisional tariffs become permanent, what is your alternatives and what's the time frame for the alternatives?

Well, the definitive measures are set to be in place in October.

And again, there's several exceptions and several things we can do, but right now until we know really what the rules we're playing by are, it's going to be very tough to finalize what that is.

I think, we're expecting more favorable definition as we go forward.

It's only two months away.

So, okay.

The other question I had is for Bryan.

Bryan, can you give us an indication of whether the sportswear margins that you're currently getting, are they starting to approach those of outerwear, should we model it accordingly?

Well I want to, I mean, yes, is the short answer to your question.

I mean, our sportswear margins have been slightly increasing, I'd say that for several seasons, but I wouldn't, there's still a pretty good sized margin or gap between the outerwear margins and sportswear margins, so I guess for purposes, it's kind of modeling the Company, in forward out years I would continue to think that there would be probably close to about that 4 percentage point difference in terms of the margins between the two product categories.

Do you see it somewhere down the road closing that gap?

Well, as Tim mentioned -- as Tim mentioned earlier, I think that the part of the pricing competitiveness that we experienced in the fall order book was really something that wasn't just the competitive pressures, but really part of our own doing, as well as we kind of maybe over did the line, and I think as Tim mentioned, is we really trying to focus on the engineering and focus those energies into fewer styles to drive the same kind of results.

That's also going to be a better thing for our gross margins and totality.

So, I would say that we are encouraged as we look forward.

Yes, John, just a follow on that, we said that the sportswear business for us has been growing, it's a huge market catagory, but it's the easiest area for our customers to do private label business.

So sort of by its very nature it's difficult to get it as high a gross margin as we can get on outerwear.

Great.

Okay, thank you very much, appreciate it.

Your next question comes from the line of Jim Duffy with Thomas Weisel Partners.

Thank you, hello, everyone.

Hi, Jim.

Tim, can you provide a little more detail around how the Pacific Trail brand will be positioned within the portfolio?

Are there any channels currently served by Columbia where they may coexist or where Pacific Trail may serve as a replacement?

Certainly, well I would say, based on Pacific Trail's long time history, they've been in business for 60 years, right here in the Pacific northwest, so we've competed with them many years especially in the sporting goods channel.

And so, I would expect that over time the sporting goods distribution of the Pacific Trail brand will become somewhat less.

And, but, again, as the company -- as our company, Columbia, expanded its business in department stores that's where we really bumped heads fairly significantly with Pacific Trail.

And so I would expect in the department store channel and that would be especially at Penny's and Khol's.

The companies would continue to co-exist on a banding standpoint.

And as Pacific Trail over time has had a very large business with the clubs and with other value discount operations and value chains that that would be the primary area of emphasis for us with the PacificTrail brand.

So that's, that's the current plans.

Now, additionally with the purchase of Pacific Trail, we received a lot of other brands, many of them are famous in the northwest like, Roffe ski pants and Roffe ski wear was a brand that we acquired with that, also Moon Stone, which is a very high-end mountaineering brand, it had very little market -- very little sales over the last couple of years as it was owned by Pacific Trail.

But, again, the Roffe, Moon Stone and other brands that we acquire, Black Dot, we're still going to decide how exactly we want to use those things in various markets.

But I would say the primary emphasis for Pacific Trail is going to be in that value channel and that should give us an opportunity to play there where we haven't in the past.

And do you see an opportunity to evolve their sportswear line and maybe even add a footwear component to the business under the Pacific Trail brand name?

Right.

Well, certainly we think there's an opportunity with sportswear.

One of the key things we talk about a lot is on the sportswear business is scale, which we finally got now with the Columbia business, and so we can transfer, we think some of that scale to the Pacific Trail brand and be very competitive in some of those markets.

On the footwear side, I think there is an opportunity, there's currently a license that's been left for Pacific Trail footwear and that business is modest.

But we'll continue that through the balance of the license period and make a decision after that as to what we do with it.

But we think there's at least some business opportunities there in Pacific Trail footwear, as well.

Is it safe to presume that you've been able to use your sourcing infrastructure to deliver Pacific Trail's fall season this year?

Well, yes, we want to put an asterix next to that because, as you know it was an expedited banking procedure.

The brand we acquired it in March, which is very late in the sourcing season.

There was also, there was some issues with the factories in terms of its -- of their relationships with the former owner of the brand.

So it's -- it's not been easy, but we're making significant progress on delivering that.

And the expectation is that customers of the Pacific brand are going to have their merchandise well on hand by the time the season starts.

Okay.

Very good, thank you.

Again, if you would like to ask a question, please press star one on your telephone key pad.

Your next question comes from the line of Brad Craggy(ph) with Goldman Sachs.

Yes, hello, again on the acquisition front, sounds like integration efforts are proceeding smoothly.

Do you think you have your hands full with those purchases or will acquisitions be a significant part of your strategy going forward?

And then secondly, as you talk about the competitors and focusing your merchandise assortment a little bit better this year, are there any key things that you can point to for us that you're relying on to defend your market share a bit better?

Thank you.

Certainly.

Well, on the acquisition front, we really never discussed acquisitions being a key growth strategy for the Company.

However with the balance sheet we have and the expertise in several of these businesses, we think we can take on these projects and do them successfully -- integrate them successfully to make a stronger company.

That having been said, there's plenty of work to do in terms of the continuing -- finalizing the integration.

It's the -- there's plenty of work for us to do here at this time and that's where we're going to be focusing our time is on the further integration.

Regarding the competitive landscape, we want to make sure that in addition to expanding our footwear and apparel and sportswear businesses, that we really spend significant time on our outerwear business and regain that premium edge that we had.

And so those are, that's the area that we're primarily focusing on.

And I would say another area of very significant effort here is to leverage the Company's head to toe supplier edge.

So there's very few people in the footwear business, and frankly very few people in the outerwear sportswear business that have the kind of complete head to toe offerings that we do.

And so there's a very significant emphasis here on utilizing that competitive advantage and maximizing it.

And just to follow up.

When you talk about in the outerwear reestablishing the -- or enhancing the premium position, is that through additional focus on technical outerwear or pricing some how?

Can you just clarify that a little bit?

I would say it's a combination of technical products, as well as providing significant values.

So, value is in the eyes of the beholder, but what it generally means is competitive advantage against another like product.

So whether it's better technical features, better pricing, better color adaptation or better brand, all of those kinds of things play into that equation.

Thank you.

Your next question comes from the line of Erin Moloney with Merriman Curhan Ford.

Hi, good afternoon.

Hi, Erin.

Just a quick question on inventory, Bryan, I was hoping if you could break out at all kind of the increase what's coming from the addition of the Montrail inventory and then kind of verses the core and replenishment and the early receipts you brought in?

Right, I guess maybe kind of in order of magnitude, I would say the largest reason for the inventory build at 6/30 was really just the incremental fall business.

If you look -- go back to our backlog announcement at around 11-12% backlog increase that's a significant amount of business to prepare ourselves for this fall.

So that's the largest component.

I mentioned a timing shift.

If you'll recall last year at this time, I think, we've just brought in a lot of our products in readiness for this fall -- for the fall business.

So, there's definitely more goods on the water, more in work in process.

And again, just a lot more of our finished goods inventories ready for shipments to our customers.

And then finally, to your point on Montrail, Pac Trail, you know it's been an amalgamation of those two brands and definitely there is a, there's a component of inventory for both Montrail and Pac Trail that exists now that wasn't a year ago.

So those kind of being the primary drivers.

Okay.

Great.

And then just following up on Pacific Trail then.

Kind of when can we expect to see the first product lines under Pacific Trails under Columbia's ownership?

Next fall or?

This is Tim.

There'll be merchandise in stores now.

I think we've made some shipments already to retailers of Pacific Trail products.

So you'll see Pacific Trail products in stores, maybe today.

But we're -- we start selling, we begun starting to sell spring '07 Pacific Trail products, as we have our other brands, and then, of course next fall we've have a complete line up of great Pacific Trail products available for sale probably around November 1st when we start selling our Columbia merchandise as well.

Okay, great, thank you.

At this time, there are no further questions.

I would like to hand over the floor back to Mr. Kiser for closing remarks.

This is Tim.

So, I want to thank everyone for listening in, and we're looking forward to giving you a more full backlog information on our spring product sales at the next quarterly conference call.

Thank you very much.

This concludes today's conference call, you may now disconnect.