Columbia Sportswear Co (COLM) 2006 Q3 法說會逐字稿

Good afternoon.

My name is Phyllis, and I will be your conference facilitator today.

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

[OPERATOR INSTRUCTIONS]

Thank you.

Mr. Kiser, you may begin your conference.

Thank you, Phyllis.

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

With me are Tim Boyle, Columbia's President and CEO;

Bryan Timm, Columbia's CFO;

Pat Anderson, COO, and Peter Bragdon, Columbia's General Counsel.

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

You should have received a copy of the earnings release by now, but if you have not you can access a copy on our company website.

In light of Regulation FD, we encourage you to ask as many questions during the call as you feel are necessary to understand the Company's business.

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

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

Before we begin, Gert has a comment to make.

Thank you.

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 period ending June 30, 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 a change in our expectations.

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 third quarter 2006.

Thanks David.

Welcome, everyone, and thanks for joining us.

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

Q3 2006 net sales for the company increased 10.8% to $454.1 million, a third quarter record, compared to $409.8 million for the same quarter last year.

Excluding changes in currency exchange rates, consolidated sales increased by 9.1%.

Net income for the third quarter was $60.3 million, a 9.3% year-over-year decrease.

Diluted earnings per share for the third quarter were $1.67, net of $0.04 per share of stock-based compensation expense compared to $1.74 for the third quarter of '05.

As you'll recall, we recorded a tax benefit of $5.6 million or $0.14 per diluted share in the third quarter of '05 resulting from the favorable conclusion of various income tax audits.

Updates, spring backlog.

We're pleased to report that our global spring backlog increased a strong 15.4% to $414.5 million at September 30th, '06.

Excluding changes in currency exchange rates, spring backlog increased 14.1%.

Consolidated backlog, which includes global fall orders, increased 17.8% to $693.9 million.

Excluding the acquired backlog from Montrail and Pacific Trail, organic spring backlog increased a very solid 12.7% and organic consolidated backlog increased 14.9%.

Geographically, spring orders increased in all key markets with very strong apparel growth in the US and in international distributor markets.

As reviewed by product category, sportswear orders were exceptionally strong globally, driving overall spring growth.

Outdoor orders were also healthy.

Footwear orders, including our new Montrail brand, increased less than the corporate average.

On an organic basis, excluding Montrail, global spring footwear backlog decreased slightly.

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

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

Dividend initiation.

Today, we also announced that Columbia's Board of Directors has approved the initiation of a quarterly dividend of $0.14 per share payable on November 30th, 2006 to shareholders of record on November 16, 2006.

Columbia has a strong balance sheet and minuscule long-term debt.

We have demonstrated from our historical results that we have the ability to return value to our shareholders in multiple ways through investment and organic growth, through opportunistic acquisitions, and through share repurchases.

We believe our business provides significant free cash flow to continue to invest in our growth strategies, while also paying a dividend to our shareholders.

The initiation of this dividend underscores our commitment to deploy our resources strategically to return value to our shareholders.

Pacific Trail and Montrail integration.

We are pleased to report that the integration of order management, manufacturing and distribution systems in the US and Europe for both Montrail and Pacific Trail are proceeding as planned.

The systems and operations integration for both acquisitions are planned for completion by yearend.

Pacific Trail, acquired in an expedited bankruptcy court auction in March '06, has a rich 60-year outdoor industry heritage.

Pacific Trail's sales were $13.5 million in the third quarter.

We're pleased to report that despite the near term levels of the complexity of the Pacific Trail's order book presented of acquisition, we have successfully delivered the majority of Pacific Trail's orders this fall season.

We believe there are significant long-term opportunities for the brand and we believe that through this acquisition, we can more fully address distribution channels that have been previously underserved by Columbia.

Montrail, a premium outdoor footwear brand with an excellent reputation for technical, high performance trail running and hiking products, recorded sales of $3.6 million in the third quarter.

Montrail provides exciting opportunities for Columbia.

We understand the unique value positioning and integrity of the Montrail brand and are committed to providing technically advanced leading-edge footwear to hardcore outdoor enthusiasts.

We're pleased with the strength of the Montrail team that has now relocated to our Portland headquarters, which has added a significant level of footwear product line management and design expertise to Columbia's footwear organization.

Overall, we are pleased with the integration progress and the opportunities these two acquisitions offer Columbia.

Sorel.

For the third quarter, Sorel sales were $21 million, a 12.9% increase compared to last year.

The Sorel team is successfully reestablishing the cold weather authenticity of the brand while expanding its winter offerings to include late fall and early spring cold weather footwear products.

Distribution in cold weather markets outside of North America is also expanding.

Sorel has historically had a healthy women's business and the team is enhancing its focus on developing fashionable cold weather footwear products for female consumers while retaining the warm and dry hallmarks that the brand represents.

Footwear management changes.

Early this month, we announced that Brad Gebhard, formerly VP Footwear, had left Columbia to pursue other career opportunities.

Mick McCormick, VP Sales, will assume the responsibilities of overseeing our Footwear organization on a transitional basis.

Mick has 15 years of experience in sales and product management at large footwear wholesalers and retailers including Nike, Callaway Golf and Golf Galaxy.

As I've said on many occasions, I believe footwear provides a significant long-term growth opportunity for the company.

We hope to be able to fulfill this important management position swiftly and have retained a search firm to assist us with this process.

Our strategic vision on footwear has not changed.

We will continue to focus our resources on fortifying our strong cold weather market position, developing our water and sandal offerings, and expanding our trail and hiking products.

We will also address the casual footwear opportunity to leverage the strength of our apparel offerings.

Columbia, Sorel and Montrail provide three authentic outdoor brands upon which we can execute these strategies.

Pat Anderson will continue to direct a strong footwear development team to execute our footwear sourcing and product delivery initiatives.

We have a strong team of footwear product line managers, designers, developers and operations personnel that have been working on the Sorel, Montrail and Columbia footwear lines.

The Sorel management team will direct product line management for cold weather footwear, water and sandals, and casual lifestyle for both the Columbia and Sorel brands.

Our Montrail management team will oversee product line management for our Montrail and Columbia hiking and trail products.

We've also designated a creative director who will manage design efforts for all three brands.

Under Mick's stewardship, we have also strengthened our US sales management teams for both footwear and apparel.

We've aligned sales management with product merchandising and have added new national sales managers for footwear, women's apparel and men's apparel.

All three national sales managers have strong backgrounds leading successful sales organizations for large footwear and apparel companies.

We believe that we have the team and structure in place to keep executing our plans, and progress is being made while we continue the process of identifying a new VP of footwear.

Mountain Hardware.

Mountain Hardware sales were $25.8 million during the quarter, an 8.4% increase year-over-year.

Mountain Hardware's third quarter sales growth was driven by increased shipments in international distributor markets, Europe and Korea as the division expands in international distribution.

Mountain Hardware's gross margins also increased during the quarter due primarily to improved sourcing and sustained average selling prices, increased international distributor margins and reduced closeout sales at higher margin.

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

Bryan?

Thank you, Tim, and good afternoon, everyone.

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

Net sales for the third quarter were $454.1 million, an increase of 10.8% which is compared to the $409.8 million of net sales for the same period last year.

Growth in consolidated net sales was driven primarily by sportswear and outerwear in the US, and to a lesser degree, sportswear in Europe and outerwear in the international distributor markets.

Excluding changes in currency exchange rates, consolidated net sales increased 9.1% in the third quarter.

Our consolidated gross margins for the third quarter of 2006 contracted by 230 basis points to 43.7% when compared to 46% during the third quarter of 2005.

As discussed previously, this contraction was primarily the result of fall 2006 product line inefficiencies and increased competition, increased volume of spring close-out product sales, lower margin acquired Pacific Trail and Montrail businesses and various other less significant items, including European anti-dumping duties.

Consolidated gross margins were better than the third quarter projections as a result of better than expected US sportswear, Pacific Trail and Mountain Hardware apparel gross margins.

For the third quarter, the Company's SG&A increased by 11.1% or $10.8 million on an absolute basis to $108.3 million or 23.8% of sales for the third quarter of 2006 versus $97.5 million or 23.8% of sales for the comparable period in '05.

Depreciation and amortization totaled $5.6 million for the third quarter of 2006 compared to $5.8 million in the same period of the prior year.

Net licensing income was $1.2 million, and net interest income was $0.9 million for the third quarter of 2006, both essentially flat year-over-year.

Our effective tax rate was 34.5%, which is consistent with our third quarter 2005 effective tax rate after adjusting for the nonrecurring tax benefits recognized during that quarter.

As you may recall, our third quarter 2005 effective tax rate was reduced to 28.6% as a result of a $5.6 million tax benefit or $0.14 per diluted share relative to the successful conclusion of various income tax audits.

We reported net income of $60.3 million or $1.67 per diluted share for the third quarter of 2006, net of $0.04 per share of stock-based compensation expense versus net income of $66.5 million or $1.74 per diluted share for the third quarter of 2005, based on a diluted share count of 36.1 million and 38.1 million respectively.

I'll quickly touch on key items in the balance sheet.

And again, I'll be comparing September 30, 2006, balances to September 30, 2005.

The balance sheet remains very strong with cash equivalents and short-term investments totaling $70.6 million versus $148.3 million at the same time last year.

Consolidated accounts receivable at September 30, 2006, were $374.5 million compared to $361.9 million a year ago, a 3.5% increase.

This level of receivables versus the incremental sales growth in the quarter is a result of improved timing of shipments during the quarter, which allowed for many July and August sales to be collected in the quarter.

Accordingly, our consolidated DSO decreased to 74 days from 80 days at September 30, 2005.

Consolidated inventories, were $272.1 million compared to $223 million a year ago, a 22% increase.

This year-over-year increase is largely attributable to finished goods inventory on hand to fulfill our organic fall order book and to a lesser degree, the resumption of double-digit spring growth now planned with our current order book.

We are also carrying additional inventory to support our newly acquired Montrail and Pacific Trail brands and additional Mountain Hardware finished goods to support international growth.

Capital expenditures were $6.3 million during the third quarter, the majority of which were to increase our distribution capacities.

We are currently retrofitting end-of-life equipment and systems at our Portland distribution center and are expanding distribution capacity in Cambrai, France, to support our European business.

We are now modeling CapEx of approximately $55 million this year, consisting of approximately $15 million in maintenance CapEx and $40 million for the Portland and European distribution projects.

And we have discussed previously, we expect the 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 third quarter, we did not repurchase any shares under our board authorized $400 million share repurchase program.

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

As we announced today, our board of directors has authorized the initiation of a quarterly cash dividend.

Dividends provide another method of returning capital to shareholders.

And we currently believe that a $0.14 per share dividend is sustainable in light of our current strategic plans and future estimated free cash flow.

That covers the financials for the third quarter of 2006.

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

Given the results we reported today, we're in a position to update everyone on our guidance for the balance of 2006 and for the first quarter of 2007.

Please keep in mind that this information is forward-looking in nature and is therefore subject to certain risk factors, many of which are described in our 10-Q for the period ended June 30, 2006.

Based on our current outlook, we anticipate Q4 2006 consolidated revenue increase of approximately 14% compared to the same period last year and are anticipating Q4 gross margin contraction of approximately 150 basis points, placing us between 41.2% to 41.4% of estimated sales.

As we've discussed previously, this contraction is a result of many factors including fall 2006 product line inefficiencies and increased competition, lower margin acquired Pacific Trail and Montrail businesses and various other less significant items.

Our current SG&A target for Q4 2006 as a percentage of estimated sales is 26.9% to 27.1%, an increase of approximately 90 basis points as compared to Q4 2005.

This target includes approximately $1.1 million in after-tax stock-based compensation in the fourth quarter and assumes additional marketing efforts to stimulate consumer demand for our products.

At present, we are modeling the Company's quarterly and full-year effective tax rates at 34.5%.

I'm using 36.3 million shares for purposes of Q4 and 36.6 million shares for full-year EPS calculations.

We anticipate net licensing income of approximately $1.6 million and net interest income of $0.2 million for Q4 2006.

This analysis implies a decrease in Q4 net income in the range of 4% to 7% when compared to the fourth quarter of 2005.

For the full-year 2006, we continue to expect consolidated revenue growth of approximately 11% and we now anticipate net income decline between 8% and 9%.

Factored into this guidance is approximately 160 basis points of gross margin contraction due to fall 2006 product line inefficiencies and increased competition, lower margin acquired Pacific Trail and Montrail businesses and many other items, including the EU anti-dumping duties, additional costs associated with certain international promotional campaigns and stock-based compensation.

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

This increase is almost entirely due to stock-based compensation expense.

Excluding approximately $6.6 million of after-tax stock-based compensation or $0.18 per diluted share, our estimated net income decline for 2006 is expected to be between 3% and 4% on a comparative basis using a $36.6 million diluted share count.

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

Turning our attention to the first quarter of 2007, based in part on the reported spring backlog, we currently anticipate Q1 2007 consolidated revenue growth of approximately 11% when compared to the first quarter of 2006 and EPS of approximately $0.55 to $0.58 per diluted share.

This model anticipates slight operating margin expansion consisting of approximately 30 basis points of gross margin expansion and 20 basis points of SG&A expansion related to the major distribution capacity projects discussed previously.

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

Tim?

Thanks, Brian.

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

Outerwear: $217.8 million versus $201.4 million last year, an 8.1% increase.

US shipments of Pacific Trail outerwear drove growth in the category during this quarter.

Sportswear. $146.6 million versus $125.7 million, an increase of 16.6%.

Sportswear sales increased globally with domestic shipments driving growth in the category.

Footwear -- $69.4 million versus $63.8 million, an increase of 8.8%.

Footwear growth was driven by Montrail and domestic cold weather Sorel styles.

Accessories $15.8 million versus $17.1 million.

Equipment -- $4.5 million compared to $1.8 million last year.

Geographical sales -- let me give you some basic background and additional sales commentary here in the US and internationally.

USA -- sales of $276.3 million versus $244.9 million, an increase of 12.8%.

US sportswear shipments were strong in the third quarter and sell-through of fleece sweaters, knits, woven tops and bottoms has been healthy.

Third quarter US outerwear shipments increased, driven primarily by Pacific Trail.

Organic US outerwear shipments also increased in the third quarter, and there was a shift in timing of US Columbia outerwear into the fourth quarter.

Early fall season outerwear sell-through rates are encouraging.

US footwear sales were solid in the quarter, driven by growth in Montrail and Sorel.

Turning our attention to spring bookings, overall US spring orders were strong, led by exceptional growth in the sportswear category.

US sportswear growth of the Columbia brand was a primary driver of global spring order growth.

US spring outerwear orders also increased.

Overall, we're very pleased by the strength in our spring apparel orders.

Spring footwear orders declined domestically in the Columbia brand, but increased overall with the acquisition of Montrail.

Looking forward to the fall of 2007 order-taking season, as we have discussed at length, we offered an expanded line of our styles in our fall '06 outerwear product line, which generated growth in fall '06 orders, but did not provide economies of scale in sourcing and negatively impacted gross margins.

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

We will begin showing our fall 2007 product line to key customers in the next few weeks.

Overall, maintaining and growing our outerwear market position in the US 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 $53.6 million versus $52.6 million, an increase of 1.9% and down 5.7%, excluding changes in currency exchange rates.

The timing of shipments in Canada shifted from third quarter to second quarter, which resulted in a decrease in third quarter sales, excluding changes in currency exchange rates.

Sportswear sell-through rates have been healthy in Canada this fall season and while it's early, sell-through of weather-sensitive outerwear and footwear also appears to be good.

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

Spring footwear orders were essentially flat.

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

Europe, sales of $66.4 million versus $62.1 million for the same period last year, an increase of 6.9% or 2.3% excluding changes in currency exchange rates.

Fall sportswear product shipments were healthier in the third quarter driving European growth.

Outerwear and footwear sales also increased but at a slower pace.

Unseasonably warm weather this fall has negatively impacted fall '06 sell-through rates but it's still early in the fall season.

European spring bookings increased slightly driven by solid growth in sportswear orders and offset by weakness in European footwear orders.

As we discussed in our first quarter conference call, a key customer in Europe has decided to increase their private label program, which continued to negatively impact our European spring orders.

As in the US, we will have a more targeted outerwear offering for fall '07 which is designed to be more efficient and enhance outerwear gross margins in Europe.

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

Other international, sales, of $57.8 million versus $50.2 million for the same period last year, an increase of 15.1% , or 14.9% excluding changes in currency exchange rates.

International distributors which comprised the largest component of other international reported sales of $35.9 million, compared to $31.8 million, in the third quarter of last year a 12.9% increase.

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

We continue to see strong growth in international distributor markets even though we had a shift in shipments from the third to second quarter of this year.

Shipments of Columbia and Mountain Hardware outerwear and Sorel footwear were strong in the quarter.

Spring back log in international distributor markets was exceptional, driven by very strong orders in Russia and Hong Kong-China.

Spring backlog substantially increased in all product categories with particular strength in sportswear.

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

Japan, a component of other international recorded sales of $12.9 million compared to $11.5 million in the comparable period last year, a 12.2% increase, or 18.5% excluding changes in currency exchange rates.

We're pleased with our progress in Japan.

Sales increased in all key product categories in the quarter with particular strength in footwear and outerwear.

Spring outerwear and footwear orders were also strong in Japan indicating continued momentum in these categories.

We are pleased with the progress of our new Japanese management team is making and we're optimistic about the strengths, excuse me, about the prospects for growth as the economic conditions in Japan continue to strengthen.

Overall, we showed solid performance against expectations in the third quarter and have reason to be optimistic about the global opportunities of our brand.

Our businesses are financially sound and generate strong returns and cash flows enabling us to invest in our growth initiatives and to return capital to our shareholders through opportunistic share re-purchase and now also through quarterly dividends.

In closing, going forward, our business strategy remains steady, and we will continue to focus our attention on growing the business through our key growth strategies.

As a management team, we are very focused on reversing the decline in the company's operating margin and improving returns on invested capital in 2007 and beyond as we execute our key growth strategies.

To reiterate, first, we will continue to enhance our channel productivities of our existing customers through effective point of purchase marketing activities.

Second, we will continue to leverage our brands internationally.

Third, we will continue to develop the sportswear and footwear merchandise categories and strengthen our core outerwear business.

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

Finally, we will continue to seek out favorable licensing opportunities as we leverage the strength of our brands.

One final note, Gert contemplates selling up to 100,000 shares of Columbia stock over the next year, or approximately 1.9% of her stock ownership for personal reasons.

This is the first time she has ever sold Columbia stock.

Following these sales, she will continue to own in excess of 5 million shares, or more than 14% of Columbia's outstanding shares.

She's deeply committed to the long-term success of Columbia Sportswear.

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

That concludes our report.

Thank you for listening.

Operator, we would be happy to field any questions.

[OPERATOR INSTRUCTIONS]

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

Good afternoon.

Hey, Bob.

The first question, do you think you could elaborate a little bit more, the gross margin came in a little bit better than expected.

I guess can you just talk about really what drove that versus what your expectations were going into the quarter?

Certainly, Bob, I'll ask Bryan to speak to direct on that.

Yes, Bob, I mean going into this quarter, I think, we commented that we expected probably close to about 300 basis of gross margin contraction.

As it -- it's actually turned out, about 230.

That's 70 basis points better.

It was probably a combination of the Montrail-Pac Trail margins that we guided off in Q3 came in a little bit better than expected.

I think we previously commented on our Mountain Hardware margins and what we wanted to do in terms of adding some sourcing efficiencies and helping their cost structures.

We're able to do that a little bit with the Mountain Hardware fall goods and then also just our overall raw sportswear margins came in a little bit higher than what we originally projected.

Handsoff to the apparel team, as we really saw some pretty good margins for this fall, fall sportswear.

Okay.

Great.

And on the footwear business, I guess, Tim, can you elaborate a little bit in terms of when it was all said and done, the spring domestic footwear backlog was down.

What ended up happening within that business for it to be down like this?

Well, the footwear business, for spring was actually just down slightly in the US, on the Columbia brand when you add in the Montrail brand, it's up slightly.

We just did not have the kind of products available for sale that our retailers were looking for to give us the kind of growth that we wanted.

We had a solid offering and performed well at retail and filled in nicely on those slots that the company, you know, is responsible for.

In the mix our retailers have for us, but we didn't have the kind of exciting product that would have given us a significant growth.

Okay.

Great.

Thank you very much.

Thanks, Bob.

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

Thank you.

Good afternoon.

Jeff.

Jeffrey Edelman In you inventory numbers and backlog numbers if we try to look at those for the fourth quarter, how much of the inventory are you kind of holding back in anticipation of additional business and to what degree can you pull any deliveries in from first quarter should there be increased demand?

Well, I will let Bryan speak specifically.

But you know, basically the inventory of winter merchandise is available for customers as they require it and it's really going to driven off the weather patterns that are experienced in north America and in Europe as we go forward.

So just in summary, the guidance we've given you contemplates the liquidation plan, which would be -- what opportunities we believe are on an average weather year for both geographies and any products that we moved forward from Q1 would very likely be spring products as is contemplated in the guidance, but I'll let Bryan maybe summarize, if I missed anything there.

Yes.

I don't have a lot to add to that, Tim.

But I would say if you tried to breakout our inventory by major components, the vast majority is just fall inventory.

As you may recall, in fall of 2005, our backlog was off close to 2.8%.

This year, we saw resumption in our fall outerwear business, and I think it was about 12.7.

And so obviously, we are carrying a lot more inventory to support that increase in our fall business.

And to a lesser extent, we have also commented that we finally have some double digit spring growth.

We hadn't had that the year prior.

I think we were a little under 6%.

And so we are also carrying some raw materials and some work in process associated with our spring business.

And then also, just you will also recall, we do have a little bit of replenishment in core business that we just continue to have goods on hand for, as you say, Jeff, a little bit of that [at once] purchases from some of our customers.

Okay.

Then just quickly on sportswear.

The fact that you ended up with some higher margins, do you feel as if the designs and market positioning is enabling you to get a higher margin.

So ultimately you can narrow the spread between sportswear and outerwear, or was this just a unique phenomena?

Well, I think as we continue to grow the sportswear business, and it becomes more important, we-- and higher volumes.

We can incrementally add margin, but again, we've always said that sportswear is really at the end of the day the most reliant on the brand of any product category that we offer.

It's not to say that our products aren't spectacular, but it's the easiest category for our customers to make in private label.

So it's the most reliant on brand strength.

So as the brand continues to strengthen and volumes continue to increase with our department store strategy and our major customer strategy on sportswear, we're getting economies of scale and can incrementally add to gross margin there, but I wouldn't expect that there would ever be the kinds of margin opportunities in that category that we have with outerwear.

Okay.

Thank you.

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

Hi.

Good afternoon.

I just have two quick questions kind of in the same vein with Mountain Hardware and Sport?

Hello, Kate.

Hello, can you hear me.

Operator, I think we have a problem.

One moment.

Again, your next question comes from the line of Kate McShane.

Hi.

Can you hear me now?

Yes.

Kate, we've got you.

Good.

Okay.

My question is on Mountain Hardware and sportswear growth, with those two categories is it floor space that's increasing, that's driving that stronger growth, or is it a combination of additional floor space and opening in more doors, driving that growth domestically?

Yes.

It's different for each category.

So for Mountain Hardware, we've had some additional door growth, but it's really been really just expansion in existing customers for Mountain Hardware, but there has been some additional door growth there.

In the case of the sportswear business overall, it's generally just increased penetration in our regular doors.

Okay.

Thank you very much.

Your next question comes from the line of [Sara McAdams] with McAdams Wright and Ragen.

Last I talked you.

You guys were in the process of putting together some purchase orders for your material for next year.

And I'm just wondering if you are seeing any flow-through in terms of commodity cost declines.

Well, we -- we haven't really put much product into works as of yet.

I might just ask Pat to speak specifically to the fall costing.

Yes.

Currently, we're really not seeing any decline in our raw material costs based on the decrease in the commodities.

I think potentially when those stabilize, we might, but at this point, no, we haven't seen any significant declines.

Okay.

And then my second question, I just want to make sure I heard you correctly, did you say there was a slight shift of fall outerwear shipments into the fourth quarter, out of the third quarter?

Yes.

We talked about the Columbia US brand business shifting slightly from third to fourth quarter.

Okay.

Thank you.

You bet.

Your next question comes from the line of Virginia Genereux with Merrill Lynch.

Thank you, all.

Tim, you said that looking to fall '07, you're going to sort of reduce-- do a more targeted outerwear offering to enhance the gross margin.

What indications do you have coming out of fall '06, or in fall '06, that you can --that you can sort of narrow the SKUs effectively and maintain the growth rate in the US outerwear business?

Okay.

With the advantage of perfect hindsight for fall '06, we really realized that the offering was broad and frankly, overbroad.

And so we took our business and spread it out over too many styles and many of the styles that we offered were not highly differentiated from one another.

So a real thorough sort of gut wrenching review of the products that we offer really showed that we had the opportunity to constrain the growth and still have a very compelling product offering.

So, we've been at this for quite some time and we're disappointed with our performance in '06, but in reality, it was - when you look at it from that kind of vantage point, you really realize that we made life much more complex for ourselves than was needed, and we think we've got the right products and the right quantity of products.

Okay.

That's helpful.

And then sort of following on that, I think you guys have said, you expect to improve operating margins that you believe this year is sort of a trough in margins and you're going to improve margins, operating margins in '07.

Can you and Bryan talk about a few of the drivers of that?

And as part of that Bryan did I hear you say, D&A would be up 12 million year-over-year?

Yes.

I think we commented a couple of different times that the projects that we have currently in play, assuming they start the first part of next year in terms of put into use and depreciating, that will be incremental, $12 million to D&A.

I hear you, but that's-- you know, you had $24 million in D&A last year.

If there's going to be a 50% increase from another $40 million, from another $40 million in CapEx, you're going to depreciate it in a year?

Yes.

Our CapEx this year is another $55 million in total CapEx.

Again, two major projects that we've talked about for the last three quarters.

Okay.

I'm sorry.

And then on to Tim, I'm sorry, following on that, if you -- if that's included in SG&A?

Well, you know, so here's how we've looked at the business.

It's our expectation that growth in gross margin for the company is going to have to come from number one, more compelling, more efficient product offerings.

We haven't had any one of our customers volunteer to give us more money for our products.

So we realize that if we're going to increase our gross margin, it's going to have to come in really in those two ways.

More compelling product and a more efficient product offering.

And moving down the financial statement, it's all about controlling our expenses and managing the business to provide a higher operating margin.

So we believe that we have taken significant steps inside the company and in areas that we can control to provide the results that would make '06 a trough year.

So that's the plan.

We've been able to make strides toward that and we just hope that as we continue to sell our products for fall '07 , that we'll be rewarded by our customers for a better offering than we've had in the past.

That's great.

Well, sounds like you're on track.

Thank you.

Thanks, Virginia.

Your next question comes from the line of Robert Samuels with JP Morgan.

Hi, good afternoon.

Good afternoon.

Just following up on the last question, can you update us on what you think might be a sustainable, longer-term operating margin might be?

And then if you can just elaborate a little bit more on some of the potentially, some of the potential new doors that you may enter next year, that would be great.

Thanks.

Certainly.

Well, you know, the company's been very fortunate to have achieved operating margins, north of 20%, but I don't think that those are the kinds of sustainable operating margin that can be attained.

We believe that we think we have the opportunity with our brands and with efficient operations to exceed the average of our peers and to, on occasion, be in those lofty areas where we have shown we can be in the past.

But in terms of sustainable, long-term margins, we really haven't talked about a specific target other than we expect, as a management team, to provide higher than average margins in return for our shareholders.

We haven't done that this year and we intend to return to those levels.

In terms of specific doors that we're going to be entering that we haven't been in before, frankly, those are going to be mostly under the Pacific Trail brand in areas where the company has been not able to offer products under the brands that existed before.

But we're hoping that with the Pacific Trail brand, this will allow us an opportunity to provide products to value-oriented customers that we haven't been able to do business with in the past with Columbia.

So that's our plan in terms of door growth, and we'll have, of course, more information for you as we report our fall back log later in year.

Your next question comes from the line of [Sam Poser] with FTN Midwest.

Hello?

Hi, Sam.

Hello, Sam.

Can you hear me?

I can.

All right, good.

Sorry about that.

That's all right.

You know, it was a good quarter.

Couple of questions.

What is going on with the anti-dump?

What do you see going on with the anti-dumping laws in Europe right now, regulations and how is that affecting the business?

Going forward, because that's sort of been in flux lately.

It has been, I am going to let Pat Anderson handle that question.

Well, I can speak from the sourcing side.

Currently, we expect that to affect about half of our European production, which is about - we estimate about a million and a half dollars, or, yes, million and a half dollars for next year's business.

But and going forward for Columbia, you know, we currently produce virtually all of our footwear in China and Vietnam with all of the European production coming out of Vietnam which has the lower of the two duty rates.

Going forward, we'll be real cautious in our approach in moving that business out of there just based solely on anti-dumping given we have the very strong factory relationships there.

But you know, as always, we seek new sourcing opportunities that make economic sense for us and you know, in the future that could involve some alternative countries of origin.

Okay, very good.

And then when are you guys going to look to go - I mean you're making progress with the accessories, sportswear and the whole thing put together.

With the titanium line and the other brands, what are you looking to go fully head to toe, I mean, and have that sort of set up within your distribution at full effect?

Sam, I think right now we have what we consider to be very strong offerings head to toe.

I mean, obviously, our footwear products can improve and that's the area that needs to be shored up.

But we still have a very strong footwear business almost globally and so we consider that we got the body covered.

We need to work on the things below the ankle at this point.

What about like with Titanium sportswear and maybe even Mountain Hardware boots?

I mean, just for thoughts.

Well, yes, Titanium Sportswear actually has become a fairly significantly portion of our existing sportswear business.

We had Titanium sportswear last several seasons and it continues to be a big part of our offering and just enhancing.

Mountain Hardware footwear is definitely going to be a backburner opportunity for us.

We need to get the Columbia footwear well in hand and on track before we attack anything else.

What was the growth of titanium sportswear and so on help offset some of that private label issues that are going on out there right now?

Well, you know, we think our Titanium products are more appropriately aimed at a higher maybe non-private label competitor, maybe other branded competitors and the Columbia brand is really the area where we see most competition from private label.

Thanks very much.

Good quarter.

Thanks, Sam.

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

Hi, good afternoon.

Hi, Liz.

Congratulations on the beat.

Thank you.

I wanted to ask about, you know, just philosophically, how should we think about paying a dividend in light of what you have said, I think in the past about you know, your growth rate and where you see the company and I guess what I'm trying to get at is I think you've said in the past that you know, while you still believe you're a high teen growth company, it doesn't make sense to pay a dividend.

Is this any sort of philosophical change on your part, Tim, in the growth, you think, is kind of there at Columbia?

No.

I mean my personal goals for the company are -- I have been very focused on high teens.

I get disappointed whenever we don't have significant growth at that level or exceeding it.

But in terms of analyzing our business strategically over a period of time, we just felt that these cash flows were going to be sufficient and it was a prudent time to institute a dividend to give us another vehicle to efficiently and effectively return cash to our shareholders and just to increase the returns.

So, we believe that the growth levels that we've talked about at length are attainable, and that this additional opportunity for us to return value to shareholders existed.

So we just felt it was the appropriate time to do so.

We consider ourselves a growth company.

We have lofty goals and have, as you know, made significant investments in infrastructure, both with distribution centers and people and marketing to help us make those growth goals attainable, but we just think another vehicle is opportune at this time.

Yes.

I think it certainly makes sense, and I think your shareholders are happy for it.

When we look at the growth for Q1, both top line and EPS, obviously, it looks like we're seeing a little bit more on the top line than bottom line.

How should we think about that and really, the full year in 2007 relative to, you know, your needs to continue to be competitive on pricing.

And I understand that some of these new count issues may result in some improved margin, but what about the need to continue to be competitive and I think you said last quarter, you know, take the gloves off to, you know to drive sales.

Is that still a factor?

Well, certainly, you know, competition globally in this business is fierce and we expect it to continue.

There's nothing that we can do about the competitors that we deal with.

It's really more about what we can do as a company to provide products efficiently and really compete well against the people that we know about and continue to try and invade our space.

But I did want to make sure that Brian maybe just confirmed the issue regarding Q1 guidance.

Unless I misheard you.

I wanted to make sure that he got a chance to just reiterate what we're talking about.

Yes.

As it relates to Q1 because we're not really giving any guidance past then, and we have commented that we do expect just slight operating margin improvement.

Again, 30, you know, probably close to 30 basis points of that coming from the gross margin line offset in part by about 20 basis points through the SG&A expansion.

Again, with the top-line that we plan in Q1 of around 11%, we're actually able to or projected to leverage the business model despite having, you know, those capital projects as we talked about coming online the first part of next year.

Okay.

Sorry.

I must have missed that.

Thank you.

All right.

Thanks, Liz.

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

Thank you and good afternoon, folks.

Hi, Don.

Tim, can you give us a comparison in the margins you're attaining in outerwear in the third quarter of this year versus where you had been in the third quarter of last year, and maybe some idea of margin enhancements that you're anticipating for spring '07 versus spring '06?

Certainly.

Well, I think our margins on the outerwear category were probably slightly depressed from the quarter prior, the year's quarter prior.

We haven't really talked much about the specifics of that, but I think we characterize it as being a slight decline.

Again, looking forward on spring business, the expectation is just increased volumes and the advantages of the scale in most of these product categories is really what's driving our gross margin expansion, and we're not saying it's going to be very significant, but we think that there is opportunity in Q1 as we view it today for gross margin enhancement, and again, as I said earlier it's in the sportswear category, it's really going to be incremental in terms of how we go forward

I guess the real thing is whether you can ratchet it up in the back half of the year for outerwear when that's the more important product category for you, but it's good to see that there is some improvement anticipated in the spring as well.

The second question I have is on the sportswear.

Can you give us some indication of what US retail channels of distribution are really driving your sportswear product category, had significant growth in the third quarter and the expectation is it's going to continue to grow pretty rapidly.

Where are you getting that increased revenue from?

Well, in third quarter, I think this is going to be true, definitely in the first quarter it was really quite across the Board.

That's where we're seeing the enhancement in really all of our customer base.

You know, we've had extensive focus on the department store channel as it relates to sportswear and we've seen rewarding businesses there.

Obviously, we're disappointed with our level of growth in footwear.

Both in the quarter just ended, quarter-three and in our future view.

We don't think we're capturing the opportunity there that exists for the company and the brand.

But, again, when we look at the growth drivers, it's been primarily through channels that the company has just continued to expand in, and then of course, we're just thrilled with our international distributor business, which has been very strong throughout the year and going forward into Q1

Great.

And back in the U.S. retail channels, are the margins substantially different in dealing with department stores than they are with your traditional big box sporting goods or general merchandise channels?

No.

The company has a very even margin return really across almost every product -- almost every type of distributor.

So really all of our customers provide about the same margin.

Great.

That's good to hear.

Last question I have is do you anticipate any continuing the footwear styling pricing and marketing direction that Brad Gebhard had started to implement in the footwear category?

Do you think as a new person comes on board as a permanent replacement that there may be some change in direction for the footwear category?

No, you know, we really believe that the Company has significant opportunities, if we can execute a differentiated appearance and styling on the products that really fit our five keywords; the outdoor, active, authentic, American, value, proposition, it's something that resonates really across all of our customer bases.

And we just need to give them a differentiated product that provides that.

So we're looking for somebody who can continue to provide an environment of creativity for our team to operate in.

Are you pretty well satisfied with the merchandise mix that you have coming into the marketplace for spring '07, for example, in footwear?

Absolutely.

I think our customers didn't buy stuff that wasn't appropriate.

It's just that we didn't have enough merchandise for them to continue to give us the lift that we wanted.

Okay.

Good enough.

Thanks a lot.

I appreciate it.

Thanks, John.

Your next question comes from the line of Margaret Mager with Goldman Sachs.

Hey, Tim.

I just wanted to ask you about your goal for a more targeted US outerwear line for fall '07, and that it would be a key focus for growth.

Can you just talk a little bit more about what you're doing?

Sure.

Well, as you know, the Company offers a wide selection of products in outerwear.

I mean that's really the base of our historical business.

And when we faced competition, we really, I believe, overdid our offering to make sure that we covered all opportunities, and that was a mistake.

And in an area of inefficiency, that cost us not only in gross margin, but in operating costs, just to try and provide all of that kind of product.

So when we reviewed, as I said earlier, the successes that the Company had in fall '06 and where consumers expect to find product from the Company, we realized that we've really gone overboard in terms of our total assortment.

So a more focused view of the market and a more focused view of what our opportunities were yielded a product line, which is smaller, and, again, more targeted and will allow us to make the products more efficiently all the way through the system.

So again, we have a high degree of confidence in our offering.

We've reviewed it with customers hereto for.

And at the end of the day, they're going to have to tell us when they place their orders and that will happen over the next several weeks, months.

And the expectation is that we will be more efficient and better.

And then as far as like how do you grow your US outerwear business next year, what's the -- it is just a function of better product or is there something else?

Well, it's better product, it's more targeted to areas that we know we missed or that we know that we could have done better with a different offering.

We believe we've taken steps to rectify those errors, and then we've given ourselves the opportunity, frankly, with a smaller line to be more efficient in its production and to generate better gross margins for the Company

Okay.

Yes.

I thought you were talking more about topline growth than just, you know, profitability.

But the US outerwear...

I frankly think it's going to yield us both, you know, plus the addition of the Pacific Trail brand now that allows us an opportunity to work with distribution that we haven't in the past worked with.

And so I'm fairly excited about the opportunity

Okay.

Hey, Bryan, could you just take your '06 guidance and tell me what that is in on an EPS basis?

Yes, I think, we continue to see the topline around 11% I think on an EPS.

It probably comes in right around that kind of 27 -- $3.27 to $3.29

Okay.

And I think last quarter you were around $3.22, if I am correct?

That's correct.

Okay.

That's helpful.

Thank you

Thanks, Margaret.

[Operator Instructions]

Your next question comes from the line of Virginia Genereux with Merrill Lynch.

So, Tim, I'm sorry, did you say why the US there were later outerwear shipments in the US business?

Did you say it was outerwear?

Why some of that got pushed into December?

I think, you know, customer demand -- there was no specific reason.

You know, it would have been customer demand moving the products out for delivery later.

But it's probably -- it's a little too early then to get a read on how sort of this fall bodes for next fall?

Is that right for you?

Well, I would agree.

Although, I can tell you that the weather has been very conducive to sales of the winter products so far.

I mean...

In the Midwest.

When it's snowing in the World Series, we like that.

Right.

And did you -- how much excess -- I'm sorry, Tim.

Did you guys sort of stock this year, the Q4, the outerwear excess relative to...

Okay.

So you mean the speculative buy?

Speculative buy, I'm sorry.

I think that we said and David will probably correct me, if I misstated here.

But I think we stated that it was smaller than the prior year, but maybe slightly increased from our historical average or on the historical average in that range.

Right.

Okay.

Maybe a little ahead of five.

And then Bryan, I'm sorry, you said D&A was what this quarter?

And when do you expect to see the ramp related to these expenditures?

Yes.

I think D&A this quarter was 5.6 million, and I would expect to see the ramp on D&A.

Again, we -- it's a little -- you know, we're still a couple months out in terms of really placing these two major projects into service.

But assuming that we put these into service, the first part of next year, I would see the ramp up in D&A in Q1 of '07.

All right.

And Tim, lastly, I'm sorry.

On share repurchase, you did not buy back stock this quarter.

You guys are just looking at the share price being opportunistic.

I mean -- or you said we're going to initiate a dividend.

How should we think about that going forward?

Well, we did not purchase any shares.

We look at the share price in terms of repurchasing on an opportunistic basis and we felt that we needed the ability to have another vehicle to return value to shareholders.

Thus the initiation of the dividend.

Thank you.

Thanks, Virginia.

Your next question comes from the line of [Julie Brian] with Jennifer Black.

Hi, Bryan.

Just a quick question on the stock based compensation.

Is there any reason to think that it should change away from about $0.05 per share in the coming quarters as we look out?

Well, I hesitate to really comment too much past Q1 of 2007.

I guess, you know, because it has ramped down a little bit this year by quarter.

I think the stock base comp in Q1 was around $0.06 decreasing to $0.05 in Q2 and $0.04 here in Q3, and I would expect probably a similar amount in Q4.

As it relates to Q1, I would probably, you know, probably take that same $0.04 number in Q1 and then past that, I guess we will have to get back to you as we give full year 2007 guidance.

Great.

Thanks so much.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

Operator, thank you.

Yes, I just want to thank everyone for listening in.

We'll talk to you at the end of January when we discuss the final year-end results and we look forward to talking to you at that time.

Thank you.

This concludes today's conference.

You may now disconnect.