Columbia Sportswear Co (COLM) 2010 Q2 法說會逐字稿

Ladies and gentlemen, hello and welcome to the Columbia Sportswear second quarter financial results conference call.

Please note that all lines are on listen-only mode and there will be a question and answer session at the end of the call.

(Operator Instructions)

Now, to start off our conference, I'd like to welcome and turn the call over to Mr.

Ron Parham, Senior Director of Investor Relations and Corporate Communications.

Go ahead, please.

Thanks, Lisa.

Good afternoon, and thanks for joining us on today's call.

Earlier this afternoon we announced our second quarter results and our updated financial outlook for the third quarter and full-year 2010.

With me today on the call, our President and CEO, Tim Boyle; Senior Vice President of Finance, Chief Financial Officer and Treasurer, Tom Cusick; Executive Vice President and Chief Operating Officer, Bryan Timm; and Senior Vice President and General Counsel, Peter Bragdon.

Our Chairman, Gert Boyle is unable to join us today.

She sends her regrets, but she's undergoing a minor elective surgery, so that means that I get to remind everyone that this conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations.

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

Many of those risks and uncertainties are described in Colombia's Annual Report on Form 10-K for the year ended December 31, 2009, and subsequent filings with the SEC.

Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements after the date of this conference call.

Or to conform the forward-looking statements to actual results or to changes in our expectations.

Before I hand the call over to Tim, I want to point out an upcoming change to our conference call protocol that we plan to implement in October, when we announce our third quarter results and our Spring '11 backlog.

Immediately following the issuance of our earnings release at approximately 4 p.m.

Eastern Time, we will post a written commentary and analysis by Tom Cusick, Senior Vice President and Chief Financial Officer and Treasurer on our Investor Relations website at www.Columbia.com/results.cfm.

Analysts and Investors can then read the commentary before the start of our earnings conference call at 5 PM Eastern Time, and that will limit our prepared remarks to brief summary comments by Tim and Tom.

And then we will move more quickly into the Q&A portion of the call.

We think that this new approach will make it easier and more efficient for you and make the time spent on the call more productive for everyone.

Just one other quick reminder about the meeting for Analysts and Portfolio Managers that we'll be hosting on Wednesday, August 4th at 10 AM at the Outdoor Retailer Summer Market Trade Show in Salt Lake City, if you've not already RSVP'd, we ask that you please do so by July 28th.

If for some reason you did not receive an invitation but do plan to attend summer OR, or could make it to summer OR, please e-mail me at rparham@columbia.com and I'll make sure and get the information about the event to you.

We will also be webcasting that presentation.

So, with that, I'll turn the call over to Tim.

Thanks, Ron.

Welcome, everyone, and thank you for joining us this afternoon to discuss our second quarter results and our updated outlook for 2010.

I want to touch quickly on a couple of highlights from the second quarter, and then Tom will cover the financial results and our updated outlook for 2010 in more detail.

As a reminder, the second quarter is our smallest quarter of the year, typically accounting for approximately 15% of our annual net sales.

Our fixed operating costs are not absorbed as effectively as in other quarters, and we report the lowest operating earnings, or in this case a loss, of any quarter.

We expect to generate the majority of our annual sales and all of our expected annual profitability in the second half of the year.

Second quarter sales grew 24% following 10% sales growth in the first quarter, bringing us to a 16% sales growth through the first half of the year.

Q2 sales grew at a double-digit rate in every product category.

Our US wholesale business was the largest contributor to second quarter sales growth, up 20% over last year's Q2.

We were focused on executing the global launch of Omni-Heat, our innovative suite of warmth technologies, which is already beginning to appear in stores.

The launch will be supported by the largest and most integrated global marketing campaign in our 72 year history, with peak visibility occurring in early October when people in the northern hemisphere naturally start thinking about staying warm.

The campaign will feature creative online and print advertising, our first television ads in almost two years, and bold in-store graphics and fixture packages, combined with our retail partners own co-op advertising efforts in their local markets.

In addition, we will be holding a series of experiential consumer events in major cities across the country beginning next week at the Summer X Games in Los Angeles, and stretching into February at events like the Central Park Winter Jam in New York.

Many of these events will feature a travelling freezer allowing consumers to try on Omni-Heat apparel, footwear, gloves, and hats and experience the unique performance properties that Omni-Heat Reflective, Omni-Heat Thermal Insulation, and Omni-Heat Electric Technologies.

All of these marketing efforts are centered on creating awareness and driving consumer demand for Omni-Heat products this Fall and winter.

We remain encouraged by retailer reception to our fall line and are poised to execute the global marketing programs designed to create consumer demand, drive profitable sell through for our retail partners, and ultimately elevate each of our brands.

Now, I will hand the call off to Tom to review the financial results.

Thank you, Tim, and good afternoon, everyone.

I will begin with a brief overview of the income statement and balance sheet.

Please recall that Q2 is our lowest volume quarter of the year as we wind down our Spring shipments and begin Fall deliveries.

Regional net sales comparisons often produce large percentage variances due to the small base of comparison and because of shifts in the timing of shipments.

Overall, the second quarter came in better than our outlook we provided in April.

Driven largely by a stronger US wholesale business, which experienced higher than planned reorders and lower cancellations of Spring 2010 product.

Second quarter net sales increased 24% to $221.8 million.

With changes in foreign currency exchange rates contributing 2 percentage points of that increase.

A combination of increased demand and shifts in the timing of product shipments contributed to the sales growth for the quarter.

Looking at Q2, 2010, net sales on a regional basis compared with Q2, 2009.

US sales increased 27% to $123.7 million, driven by growth in the wholesale business, followed by the retail business and primarily concentrated in the Columbia brand.

US wholesale sales showed a low 20% increase driven by increased demand, as well as a shift in the timing of Spring 2010 product shipments.

US retail sales showed a low 50% increase.

There were nine more US based retail stores operating at the end of the second quarter as compared to the same period last year.

EMEA sales increased 15% to $38.6 million, including a 1 percentage point negative effect from foreign currency exchange rates.

Our EMEA distributor business increased to low 20% concentrated in the Columbia brand, and comprised primarily of an initial shipments of our Fall 2010 orders, and aided by improved macroeconomic conditions in Russia.

Net sales in our EMEA direct business showed a high single-digit percent increase, including a 3 percentage point negative effect from foreign currency exchange rates.

The net sales increase primarily consisted of Columbia brand net sales, followed by Mountain Hardware.

The net sales increase was predominantly due to a shift in timing of Spring shipments from the first quarter of 2010 to the second quarter.

Net sales in our LAAP region increased to 30% to $51.8 million, including a 9 percentage point benefit from foreign currency exchange rates.

Foreign currency exchange rates played a significant role in our Korean business, where low 50% growth was aided by a low 20 percentage point currency tailwind.

Japan net sales showed a high teens percent increase primarily concentrated in Columbia branded apparel, aided by 6 percentage point benefit from foreign currency exchange rates.

Net sales to our LAAP distributors experienced mid-20% growth due to the rescheduling of some orders for southern hemisphere distributors from the fourth quarter of 2009 to the second quarter of 2010.

This final step in rescheduling better aligns with the selling season for southern hemisphere customers that lag our product seasons by six months.

Net sales in Canada declined 3% to $7.7 million, including a 13 percentage point benefit from foreign currency exchange rates.

The decrease was primarily due to a shift in the timing of Spring shipments into the first quarter.

Looking at the second quarter net sales by product category, compared with Q2, 2009, sportswear net sales increased $23.5 million or 24%, mostly related to increased Columbia branded net sales in the US across both the wholesale and retail channels.

Outer wear net sales increased $8.3 million, or 24%, in the second quarter primarily driven by the Columbia brand in the US and LAAP regions.

Accessories and equipment net sales increased $5.5 million, or 45%, driven by the Hardware and Columbia brands in the US and LAAP regions.

While footwear net sales increased $5.3 million, or 16%, due to Columbia branded increases in every region except Canada.

From a brand perspective, the 24% increase in second quarter net sales was concentrated in the Columbia brand, which increased $37.4 million, or 23%.

Mountain Hardware net sales increased $5.1 million, or 39%, while the Sorel, Montrail, and Pacific Trail net sales were insignificant in the second quarter of each year.

Gross margins increased by 220 basis points to 43.7% in the second quarter, primarily due to higher relative volume of full priced product sales at higher gross margins and a higher volume of retail sales at higher gross margins through our expanded US base of retail stores, driven by lower and more targeted markdowns in our outlet channel.

SG&A expense increased 23% to $113.5 million, representing 51.1% of second quarter net sales, compared to 51.5% in last year's second quarter.

The increase in absolute dollar terms was due to an increase in global personnel costs including increased headcount, the reinstatement of personnel and benefit programs that were curtailed or postponed in 2009, and transitional costs associated with internalizing our sales organizations in North America and Europe.

Incremental expenses to support our expanded retail businesses, and a planned increase in advertising spend also contributed to the increase in the quarter.

The operating loss for the second quarter of 2010 was $14.7 million, or 6.6% of net sales, compared to an operating loss of $15.9 million, or 8.9% of net sales for the comparable quarter in 2009.

The income tax benefit for the second quarter of 2010 was $3.7 million according to a 26% tax rate, compared to a 35.5% tax rate for the second quarter 2009.

The net loss for the second quarter of 2010 was $10.6 million, or $0.31 per diluted share, compared to net loss of $9.9 million or $0.29 per diluted share for the second quarter of 2009.

Now, turning to the balance sheet and comparing June 30, 2010 amounts to June 30, 2009.

The balance sheet remains very strong with cash and short-term investments totaling $398.3 million, that's compared to $317.7 million at the same time last year.

Consolidated accounts receivable declined to $145.5 million, versus $146.8 million a year ago.

Accounts receivable decreased less than the 1% on a sales increase of 24% in the quarter, primarily due to higher retail sales, lower receivables from extended term close out sales, and improved payment terms with some customers.

Consolidated DSO decreased to 59 days from 74 days at June 30, 2009.

Write-offs for uncollectible accounts receivable were not significant for the second quarter of 2010 or 2009.

Consolidated inventories increased 6% to $310.5 million, compared to $293.4 million last year.

This growth was driven by the initial receipt of inventory to fulfill the previously announced 19% increase in our Fall backlog.

In the second quarter of 2010, we used approximately $3.5 million in cash for operations, spent $7.4 million on CapEx, and paid $6.1 million in dividends.

Depreciation and amortization expense for the quarter was $9.4 million, versus $8.5 million in last year's second quarter.

Today, we announced that Columbia's board of directors approved a third quarter dividend of $0.18 per share.

Now, let's turn our attention to the outlook for 2010.

Consistent with our April outlook, the dynamic nature of both retailer and consumer demand in the current economic environment limits our visibility and our ability to estimate future results.

Our business is highly seasonal, with the second half accounting for approximately two-thirds of our annual sales and all of our operating income.

All projections related to anticipated future results are forward-looking in nature, and are based on backlog and forecast, which may change, perhaps significantly.

We are raising our outlook for full-year 2010 revenues to increase approximately 14% to 16% from fiscal year 2009, based on a combination of factors, including a 19% increase in our Fall 2010 order backlog previously announced, effected incremental sales from our direct to consumer channel, and our first half 2010 actual results.

We expect full-year 2010 operating margin to be comparable to 2009 with gross margin expansion of approximately 75 basis points, offset by SG&A expansion of approximately 75 basis points.

The expected gross margin expansion for full-year 2010 is the result of a high relative volume of full price product sales in our wholesale business, a higher relative volume of direct to consumers sales at higher gross margins, favorable foreign currency hedge rates for Fall 2010, partially offset by increased costs to expedite production and delivery of fall orders.

Because we anticipate incurring to match our production to customer demand in a capacity constrained environment, underscores why we were engaged in significant investments in our business systems and processes to improve operational flexibility and performance across our supply chain.

As previously announced, the anticipated increase in full-year 2010 SG&A is comprised of the following major components.

The effect of a the Company's retail expansion initiatives, increased marketing investment to support the global launch of our Fall 2010 product line, increased headcount and reinstatement of personnel and benefit programs that were curtailed or postponed last year, expenses associated with various initiatives to improve our IT infrastructure, business processes, and out enterprise data and information management across the organization, and transitional costs associated with internalizing our sales organizations in North America and Europe.

Taken together, we expect all these investments to absorb our anticipated gross margin expansion in 2010, resulting in full year operating margin that approximates 2009 operation margin.

We are currently planning the full year 2010 income tax rate to be approximately 28%.

However, it could be higher or lower than that in each of the remaining quarters, based on the geographic mix of taxable income and specific events that may occur in each quarter.

We are currently planning approximately $40 million in capital spending during 2010, with approximately $12 million of that related to retail expansion, and approximately $28 million related to maintenance and infrastructure projects.

Looking specifically at Q3, we expect net sales to increase in the mid-teens percent range due to the increase in Fall order backlog reported in April, and incremental direct to consumer sales.

Q3, 2010 operating margin is expected to contract approximately 200 basis points from 2009.

This operating margin contraction is comprised of approximately 100 basis points of gross margin contraction, and 100 basis points of SG&A expansion.

The anticipated gross margin contraction is primarily driven by the incremental cost to expedite production and delivery of Fall orders.

Third quarter SG&A expansion is consistent with the factors contributing to the increase in full-year SG&A.

As we begin to experience the benefits of the investments that we have made in our product development and design functions, we are making additional investments in marketing to drive consumer demand.

We're also making investments in IT infrastructure and business process improvements to support long-term growth opportunities and help leverage our business model over the long-term.

That concludes my remarks.

I'll hand it back to Tim for some final comments.

Thanks, Tom.

We recognize that there are growing concerns about the strength of the economy and consumer spending.

But we also believe that consumers are drawn to real innovations whose benefits are easy to understand.

The proposition behind Omni-Heat is as simple as it is bold.

Omni-Heat represents a revolutionary advance intended to give consumers a reason to replace all of their winter footwear and apparel with the latest in warmth technology.

The revolution that we are attempting to achieve with Omni-Heat as a warmth technology, we intend to replicate in future seasons on each of the other benefits that are of greatest importance to outdoor consumers, keeping cool, keeping dry, and protected from harmful elements like UV rays and insects.

Our balance sheet remains very strong and provides us with the working capital flexibility we need to fuel substantial growth.

Thank you all for listening in and we would be happy to take questions.

(Operator Instructions)

Our first question comes from Michelle Tan.

Michelle, go ahead, please,

Great, thanks.

Hello.

I was wondering if you could just clarify something on the gross margin guidance for the full year up 75.

I think that is a little lower than you were guiding to before, and I was just wondering what the difference is since you've beat your gross margin plan for second quarter?

Hi, Michelle, this is Tom.

Most of the change from the prior outlook, going from 100 basis points to 75 basis points of expansion, the major component of change is the incremental air freight that we'll incur here in the third quarter to ensure timely delivery of product to customers.

Okay, great.

And then anyway we should be thinking about any kind of inflationary pressures starting to come into play, will you see that at all for Fall or is that really more Spring 2011, and any sense of magnitude?

Yes, really from our vantage point today, most of that inflationary pressure will be in 2011.

For most of 2010, the sourcing environment's been fairly favorable.

Okay, perfect.

And have you talked at all about the magnitude of what you could see in terms of cost pressure for Spring '11 yet?

No, Michelle, this is Tim.

We have not talked about that at all.

Our costs are fixed and our sales prices are fixed for Spring '11.

We're in the process of selling spring '11 now, but we have not talked about any results at all and really do not intend to until we get further into the year.

Okay, great.

Thanks so much for the color.

Good luck.

Thank you.

Our next question comes from Bob Drbul from Barclays Capital.

Hi.

Good afternoon.

Hi, Bob.

The first question that I have is when you guys look at the full year around the sales outlook, and then sort of the operating margin outlook, what sort of orders or reorders, the pre-orders that you have with your backlog, would you need to sort of get to a better operating margin performance versus where your plan is right now?

What sort of incremental sales or how would you think about it from that standpoint?

Bob, that is really a function of both geographic mix and channel mix.

We really have not put a number on that at this point.

Our outlook, as we see it, is really imbedded in our guidance.

Tom, on the different components that you talked about on the SG&A, can you talk about, specifically on the marketing side of it, whether a year-over-year increase, or a dollar increase, or a dollar plan that we should think about for the full year?

Just trying to understand exactly how aggressive you guys are going to be with the television, with the print, etc.

Sure, we are currently planning our marketing at roughly 5.5% of sales for the year, up from 5.25% a year ago.

So up about 25 basis points.

Okay.

Bob, just as an aside to that, typically our co-op funds are in the neighborhood of 40% of our total ad spend.

And for the first--really for the first time in a long time, we have been very focused on having our retailers in lockstep with us as it relates to the specific strategies that they are going to follow in their co-op.

We would expect that there would be a lot more emphasis on Omni-Heat because our retailers are going to be following our lead and focusing their efforts with their co-op funds on that initiative.

Great, thanks, Tim.

Just one final question, I think it's probably for Tim.

When you look at the economic environment, you look at your order book, the uncertainty that you guys note around some of the retailers.

Have you seen any--you talked about higher reorders in the second quarter already.

Have you seen any pull back from European customers our US customers at all around this launch?

No, it has been an exciting time, frankly, and one that has cost us a bit because as Tom mentioned in the air freight that we're going to be expending to get the merchandise here in a timely manner.

We have been very pleased.

But the floor sets are just now starting to hit the retailers.

We have photographs of a store in Munich with a floor set of Omni-Heat product, and we are expecting that there will be lots more of that stuff showing up now, but it's a lot of anticipation, and we are very excited.

Great.

Thank you very much.

Thanks.

The next question comes from Reed Anderson from D.A.

Davidson.

Go ahead, please.

Hi.

A couple questions.

First off, going to get back to the SG&A piece.

The quarter you just ended, and obviously revenues were better than we have been thinking, but the SG&A was--despite that was still lower than I would have anticipated.

I'm just wondering if we are ahead of the track here, in terms of SG&A spending despite the plan that's going to be up, or was there some timing shifts in there that might have impacted Q2 versus Q3 or something like that?

Sure, Reed.

There is a little bit of time shifting in there from the first half to the second half of around some of the project related SG&A spend.

But we believe we're still tracking to what is implied in our guidance here today.

So basically any that didn't hit in Q2 was probably baked into Q3 guidance more or less; is that fair?

That is correct.

Okay, good.

Then I am curious, you made some real good progress on footwear and still it's a small piece of your business, but can you comment, Tim or whoever, just curious on the thoughts there in terms of expanding or reinvigorated distribution there, really helping that whether it's more doors with existing customers or new customers?

Just some color on that would be very helpful.

Sure.

Just as a reminder, we've got really three major footwear brands, the Columbia brand, Sorel, and Montrail.

I will speak to each of those specifically.

As we announced, our fall backlog was up significantly in Columbia and Sorel specifically.

Talking about Columbia, it's the only brand that today has Omni-Heat technology, and of course, many of our retailers, as they're embracing the head-to-toe Omni-Heat strategy, wanted to make sure that they increased their business with Columbia footwear.

So we're now just in the process of shipping all the Columbia merchandise, but we're very excited about how that's happened, and the uptick from our traditional Columbia customers.

On Sorel, though it is a bit of a different story, in that the backlog growth there is enormously significant up north of 60% for Fall '10.

There we have an expanded type of distribution and quantity of distribution, as it relates to retailers where we are dealing with some fashion retailers, but also retailers that I have just recognized the strength of the Sorel brand and its specific import to the women's market.

Montrail, on the other hand, is primarily a Spring brand, so we are in the process of selling our Spring Montrail products right now for Spring '11 and the reception has been great; but again, we're going to try and talk about '11 further along in the year.

Makes sense.

That is very helpful.

Thank you.

Last question, probably for Tom.

Inventory up about what I would have expected in the Q2, given what you talked about with fulfillment and so forth and earlier orders.

If we get to the end of this year, inventory growth, is it still kind of flattish, or will we see inventories, do you think, up a little bit at the end of this year?

Good question, Reed.

We are expecting inventory to increase in the mid-teen range through the Fall months, and then as we approach year end it's going to be more of a function of the timing of receipt of Spring orders, or Spring inventory, based on a Spring backlog.

So it is in little bit early to predict, but I would say that when we look at year-end 2009 inventory, we have received our Spring 2010 inventory later than normal into 2010.

And we were fairly lean with our replenishment inventory stock at the end of 2009.

So it could be a little bit more of a challenging comp.

Yes.

That makes sense it would be up then.

So good.

Okay, that's very helpful.

Thank you.

Good luck.

Thanks.

(Operator Instructions)

Our next question comes from Claire Gallagher from Capstone Investments.

Great.

Thank you.

I have a question about the mid-teens revenue guidance that you provided for Q3.

How much is being driven by increased in the prices of merchandise, and how much is driven by actual units?

Yes.

It is a combination of both price and volume.

I think as we mentioned last quarter, we are anticipating in the back half for Fall, a low to mid single digit increase in ASP's.

Okay.

Great.

The Omni-Heat product, is it in your own retail stores now?

Is it being rolled out now, and if so, can you talk about the initial consumer reaction?

Yes.

I don't-- I think-- we are still between ten days and two weeks away from it landing in our stores.

So we are right on the edge and do not have any information for you yet.

Okay.

Is it being rolled out to different channels at different times, or is it all being rolled out kind in the same week?

No, it's not a specific week launch, but it is highly focused on early October from a promotional standpoint when we are going to be having the biggest heavy-up in our marketing.

So some categories of merchandise are going to be a little earlier.

The hunting is a little earlier, and some customers are requesting slightly earlier delivery.

But it is across the board and will be in total with our Fall merchandise.

Okay.

Great.

Thank you.

Thank you.

The next question comes from Eric Tracy from FBR Capital.

Good afternoon.

If I could follow-up on the incremental cost to support the launch and higher demand, is it specifically just air freight?

Are there other sort of sourcing inefficiencies or something at work?

And is it just sort of a Q3 event and something we shouldn't expect to replicate going forward?

Or if there is incremental demand, you might bear some of those costs going forward as well.

Well, no.

The primary increase, and in fact, almost exclusively, is the cost to expedite the merchandise to get it here.

Again, it is complex and is spread across multiple quarters, so the outlook we have given you today is our best view of what the results will be for Fall '10.

Eric, this is Tom.

I would say the majority of that-- those expediting costs will be incurred in the third quarter, as that product will land and then immediately be shipped to customers.

Okay.

So it is more of a launch specific type incremental cost as opposed to just servicing the higher level of overall topline growth?

I would say is a function-- there's multiple components to it, from later demand, earlier receipts of inventory from customers, limited capacity in Asia.

There's multiple components to this.

So there is really not one thing we can point to.

Okay.

And then maybe just-- I know you do not want to get too specific as we look to FY '11, but you sort of mentioned directionally incurring some of the inflationary pressures on input costs, be it raw materials, freight labor, that probably start to come through in Spring.

Are you able to just sort of talk to the levers to sort of offset, and maybe even more specifically the pricing power you feel like you may have in the channel?

I know it's a lower volume in the first half and more sportswear driven, but perhaps the pricing power that you might have to offset?

Certainly.

This is Tim.

And again, I just want to have the caveat that we really are not talking at all about '11; however, it has been discussed at length by companies in many kinds of industries, the pressure is on input prices.

I just want to make sure that everyone understands as it relates specifically to Columbia, that the price input pressures from China, which some companies have pointed to specifically, really is not as much of an impact for Columbia.

Over the last several years, China has represented in the range of one-third of our volume.

We source from about 12 different countries, and that is really a function of our international business.

So as it relates to being competitive when we are selling in the EU or in Argentina or Canada or wherever in the world we might be selling merchandise, we have to rely on a very diverse-- a broad set of trading partners for these various markets that we import to.

So while we have not talked at all about '11, we certainly see the kinds of pressures that will be present on input.

We believe we have increased our ability to price our merchandise appropriately; and again, we believe that this broad sourcing base will help us.

Okay.

Fair enough.

I appreciate it, guys.

Thank you.

The next question comes from Kate McShane from Citi Investment Research.

Thank you.

I have two questions today.

The first one is how flexible are you to chase inventory for the Omni-Heat products specifically?

And have you seen any response from your competitors to this Omni-Heat product?

Or have you seen any increase in advertising as a result of your launch from your competitors?

No, Kate, we really have not seen anything of note.

So, our commitment to Omni-Heat has really-- it has been concluded as relates to what we have available to sell for Fall '10.

So when we are sold out, we're going to be celebrating and be thrilled with our results.

And I might remind you the Omni-Heat Reflective is a proprietary product.

We have got patent applications in for that product, and we have actually had some patents issue on that.

So, our expectation is that as that becomes a much more important part of our Fall business, that we're going to have additional pricing power and some protection against competitors.

But nothing to report other than that.

Okay.

Thank you.

The next question comes from Andrew Burns from Stifel Nicolaus.

Good afternoon.

Could you give us some color on owned retail in terms of what it represents as a percent of total sales?

I'm sorry, did you say owned retail?

Yes, as a percent of total sales, has it surpassed 10%?

We've generally not commented on any of our specific metrics around our retail businesses.

It is a minority of the total makeup of the business.

Although we do have Company owned retail in each of the major geographies that we operate in, the US, Canada, Europe, Japan, and Korea.

Okay.

And then a follow-up from a previous question.

Could you give us some detail on the expanded distribution for Sorel in terms of maybe new doors?

Is it more US versus outside US?

And also going forward what is the opportunity after this season to continue expanding distribution for the brand?

Thank you.

Certainly.

Well, the expanded distribution has been, from a dollar standpoint, been larger in the US and Canada.

But probably from a numeric standpoint, in terms of newer-- more customers, it's probably been larger in Europe in terms of the customers opened.

So I can talk to you maybe about companies like Nordstrom and The Tannery, which would be really trendsetting, as well as-- just the kinds of customers that you want to have.

And then in Canada, companies like Holt Renfrew have been big supporters of the brand.

Bergdorf Goodman in New York, was for a number of seasons one of our biggest customers, has now been replaced in terms of its size by other larger customers.

There is a multiple of these boutique-type customers.

There's more to be opened, but frankly, the bulk of our growth in these doors has been more or less a test.

And the expectation is that this will become a much larger business for us.

Great.

Thank you.

Our next question comes from Chris Svezia from Susquehanna International Group.

Hi.

This is Tom Haggerty in for Chris.

Just two quick questions.

On a gross margin side, you guys, most of the pressure's coming in on the third quarter, which kind of implies a pretty decent expansion into fourth quarter.

I was wondering if you could kind of give some color on what is driving that.

And also what you're seeing for the back half in terms of currency?

There is lots of puts and takes this quarter, I wanted to see what you have built into your guidance on that?

Thanks.

Sure.

As it relates to the fourth quarter, most of the gross margin expansion is comprised of two components.

One is a higher relative volume of retail in the quarter, as well as a currency.

For most of Fall, currency is a tailwind for us in the back half of the year.

And that's from your hedging, I assume?

Correct.

Thanks.

Then as it relates to the currency effect on the P&L in the second half, we are expecting about 1% to 2% negative effect on the top line, and a couple of cents unfavorable effect on the bottom line in the second half of the year.

Okay, great.

So nothing too much.

Thanks a lot guys, good luck.

Thank you.

The next question comes from Sam Poser from Sterne Agee.

Good afternoon, everyone.

This is actually Ken Stumphauzer on for Sam Poser.

I was just wondering if you could actually talk about the FX hedges?

Kind of the mechanics behind it, when they should be rolling off, and whether you guys are exposed to transactional exposure, perhaps in 2011?

Sure, Ken this is Tom.

So we-- our hedging generally lags 12 months to the selling season.

So, we are, from a majority standpoint, hedged for Spring 2011.

And we have just begun hedging as we begin to set prices for Fall 2011.

So it is about a twelve month lag effect.

Okay.

And then, as far as the retail component of the business, you guys did a significant amount of expansion if I recall correctly early in the year last year.

When do you start lapping the significant retail store openings?

By and large I would say the first quarter of 2011.

So, for example, this year we will open four new stores, three of which have been opened, two branded stores and one outlet; and we've got one more outlet planned for October.

And those are all in the US and we have no current plans in Canada or Europe for new stores this year.

So we should be through most of the major expansion efforts in this current year.

Okay.

I might just add, we're going to be opening a Mountain Hardware--launching a Mountain Hardware e-com this summer.

Okay.

And then just one last question, I guess related to the retail component of things.

To me, it appears like the sales volatility, at least relative to guidance, has significantly increased over the past 18 months, and I was just wondering if you guys can comment.

Do you think that's retail, is that just kind of the general economic uncertainty?

Is it conservatism on your part?

What is playing into the big delta's we've seen there?

I would say, I'm not sure I completely understand the question, but I would say that over the last 18 months, retail has been a bigger component of the total business than it has historically, including our retail businesses in Japan and Korea.

Those regions have grown generally faster than North America and Europe.

Does that get at your question?

I guess what I'm getting at, is that it seems like you guys have significantly exceeded guidance on top line over the past 18 months, more so in the past.

I was just wondering if there is something structurally different in the business that would be causing that, or if it's just broader economic uncertainty, or if it's conservatism on your part?

Yes, I think there is a couple components there.

One would be the retail side of the business, I would say, is a bit less predictable than the wholesale side of the business.

So that has been a component, and contributed to the upside this quarter.

In addition, I would say that our cancellation rates in our wholesale business for Spring '10 versus spring '09, have been significantly decreased, which has also contributed to the upside we have experienced this quarter.

Okay, that is very helpful.

Thank you, guys.

Best of luck.

Thank you.

(Operator Instructions)

Our next question comes from Matt Dhane from Tieton Capital Management.

Thank you.

I was curious, what drove the retail historic to be greater than expectations this last quarter?

I'm sorry, I don't understand-- what were the components to improve our retail business?

What drove the-- I sense that the retail stores turned in a better sales result than was expected.

Okay.

No, I understand.

I guess the primary driver would be an improved economic outlook from what we saw early in the year when we were providing an outlook to investors.

Secondarily, our retail team just continues to improve their abilities to manage the business.

We had better in-stocks and just a better operating environment for our own retail stores.

I guess the last piece would be the-- we did not have an e-com business last year, and that is an important part of our promotional and our retail business.

That's helpful.

Thank you.

There are currently no questions in queue.

Thank you very much for listening in.

We look forward to talking to you at our next conference call when we will be reporting our Spring backlog.

Thanks.

Thank you, ladies and gentlemen.

This conference has concluded.