Columbia Sportswear Co (COLM) 2010 Q3 法說會逐字稿

Hello and welcome to the Columbia Sportswear third quarter 2010 earnings conference call.

As a reminder, all lines will be on listen-only mode and we will conduct a Q&A session following the Company's prepared remarks.

(Operator Instructions) At this time, I'd like to turn the call over to Mr.

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

Go ahead please.

Thanks, Amanda.

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

Earlier this afternoon, we announced our third quarter results, spring wholesale backlog, and updated financial outlook for the fourth quarter and full year 2010.

With me today to discuss those topics, and answer your questions, 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 Boyle is unable to join us today, because she is in Portland receiving the Statesman of the Year Award from the Oregon Business Association.

So, before we begin our prepared remarks, let me 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 these risks and uncertainties are described in Columbia's annual report on Form 10K, 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 these 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.

One last housekeeping note, I want to remind listeners about the new protocol we mentioned during our second quarter conference call, and have now adopted, beginning this quarter, in an effort to reserve more time on the call for your questions.

Shortly after the issuance of our earnings release today at 4 pm Eastern Time, we posted a detailed financial commentary by Senior Vice President and CFO, Tom Cusick, to our Investor Relations website at http://investor.columbia.com/results.cfm, and also furnished this commentary to the SEC on Form 8-K.

By allowing you to review those detailed comments and formulate your questions before the call, we've been able to significantly shorten our prepared remarks and move more quickly to your questions.

Now I'll turn the call over to Tim.

Thanks, Ron.

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

We are very pleased to report earlier today, that third quarter revenues surpassed $500 million for the first time in our history, increasing 16% over last year's third quarter.

We remain on pace for 2010 to be a year of record sales, totaling more than $1.4 billion.

We are very excited about the retail launch of our fall 2010 product line, which has been working its way into stores around the world.

The entire line features numerous innovations, wrapped in great styling to keep consumers warm, dry, and protected this winter.

The focal point of our integrated global marketing effort has been Omni-Heat, which we believe represents one of the most innovative technologies to hit the outdoor industries in decades.

Our sales, merchandising, and operations teams have done a tremendous job working closely with our key retail partners around the world, to get the product onto the selling floor, educate the retail sales staff, and make sure that fixtures and graphics are in place, to create maximum impact at point-of-sale, where most of purchase decisions are ultimately made.

Our Omni-Heat print and ad campaign launched in the October issues of leading outdoor lifestyle, travel, and fashion magazines around the world, and six Omni-Heat TV ads, have been running on many of the most popular Internet broadcast TV shows on fox.com, Hulu, CBS.com, CNN, ESPN, MSN, and similar major online properties in Europe, Russia, Canada, Japan, Korea, and China.

The Omni-Heat Freezer Tour has been working its way around the world providing consumers, retail staffs, and key media with the unique opportunity to feel the benefits of Omni-Heat inside an industrial freezer set to 20 degrees below zero.

So far, the Freezer Tour has appeared at US venues like the ESPN X-Games held in Los Angeles in July, the Chicago Air and Water Show in August, and the Albuquerque Balloon Festival in October.

In Europe, the Freezer Tour has visited Geneva, Berne, Lucerne, Salzburg, and Innsbruck, seven key cities in Canada, including Toronto, Calgary, Vancouver, and Ottawa, multiple stops in Eastern Europe, Hong Kong, and in China, with plans to visit many more key cities in the upcoming months.

Our key retail partners have devoted millions in co-op advertising dollars to their own Omni-Heat marketing executions, including mailers, catalogs, local print, television ads, and of course, their own websites, introducing consumers to the benefits of Omni-Heat.

After more than 18 months of preparation, it's very exciting for all of us here to see consumers beginning to respond to Omni-Heat, even though winter weather hasn't taken hold in most of our key markets, making it too early to gauge the success of those efforts.

We're committed to Omni-Heat as a long-term technology platform, and will be adding even more innovative technologies to the Omni-Heat family in fall 2011.

Increase in our projected 2010 net sales, and much of the pressure on 2010 operating margins, is the result of investments we have chosen to make to reclaim market share.

To shift our business toward more innovative and premium products, to drive consumer awareness of all of our major brands, particularly the Columbia brand, and to improve our business systems and processes.

We believe we are achieving many of our goals in the marketplace, and have therefore begun to invest more heavily in our infrastructure and systems.

To successfully secure market share and retail floor space for our fall 2010 innovations, we chose to expedite manufacturing and shipping in a capacity-constrained environment, which has had a particularly pronounced impact on our 2010 profitability.

In keeping with our promise to reserve more time for questions, that concludes my prepared remarks.

If you have not already done so, we urge you to review the detailed CFO financial commentary that we furnished earlier today on Form 8-K, and on the IR section of our website at www.investors.columbia.com.

And now I'd like to open up the call to questions.

Operator, could you help us with that?

Certainly.

At this time, we would like to open up the call for Q&A.

(Operator Instructions) Our first question comes from Robert Drbul's location.

Go ahead please

Actually, this is the Steven Gregory from Mandalay Research.

Couple questions, guys.

Good job on the quarter.

A few months ago in the Wall Street Journal, they were talking about how in 2001, companies in your type of industry are going to be looking really to drive more revenue online, and bring customers to their site to really enhance the shopping experience.

Could you provide some color on the call today, as to what is your e-commerce vision going forward, and how do you plan to take the company there?

Well Steven, this is Tim.

So, we launched just about a year ago, our e-com commercial business, where we are actually selling on our site now.

And the results have been very gratifying, but at the end of the day, the reason for us to have that e-com site, is to drive awareness of the brand, and to have purchase decisions being made by consumers, whether they buy from us or at our retailers -- for us to be top of the line.

So, as just of a point of information, our site traffic since we moved to a commercial commerce site from just a marketing site, our traffic has more than doubled, and as we look at the conversion rates, they are -- they approximate the industry average, which means something like, the high 90% of consumers that visit, learn about our products, and then go and buy them at one of our retailers.

But we are very, very pleased with our existing e-com business

Do you actually have revenue numbers that you can put forward -- the e-commerce site, do you break those down from total revenue?

You know, because we're primarily a wholesale business, we don't give the typical retailer metrics on any of the businesses.

But I can tell you we are very pleased with the results there

Okay.

And you said traffic has doubled, where would you like it to be in the next couple years?

I mean, obviously it's done tremendous, where would you like to be in terms of the next couple of years from now?

How much would like to be driving online?

And also, another thing, are you guys developing mobile applications to where someone can download a iPhone app or a Google Android app to be able -- launch the ability to go to your site?

So, yes we have multiple ways to reach our sites, including Facebook and other social media and apps.

And that's going to continue to be a big part of our business.

We hope that our site business will grow exponentially, and that's our expectation.

Thanks for the questions.

Thanks

Thank you.

Our next question actually comes from Robert Drbul's location.

Go ahead please.

Hi, good evening

Hey, Bob

How are you, Tim?

I guess, couple of questions on the stuff that is hitting right now, is the gross margin profile of the Omni-Heat product, is it coming in as expected?

Are you achieving sort of the merchandise margin rates that you anticipated as you enter the fall season?

And how are you thinking about it, sort of, into the fourth quarter?

And I guess the other way I'm trying to figure it out is, can you quantify the air freight costs in the gross margin line for us Tom?

Yes.

So Bob, let me just sort of give you a little color on what were seeing as it relates to sell-through today on Omni-Heat, which is really the key technology driver for the sales force for this year.

Our goal was to give ourselves more gross margin, and to give our retailers more gross margin.

And I think as it relates to those initiatives, we were successful.

We are seeing very gratifying sales results, even though the merchandise is just really hitting the floor, and where we have the highest visibility is on our own stores, where the Omni-Heat's performing multiple percentage points sell-through better than our non-Omni-Heat products.

So, we think this is the beginning of really great stuff for us.

Obviously, we're disappointed in the cost to get the merchandise here in a timely manner.

And I'm going to ask Tom to really speak to where we are on quantifying that.

Yes.

So Bob, so maybe I can set some additional context for the air freight tab this year.

We made a conscious decision back in April, to fill our fall 2010 demand in an effort to market -- to take market share on our exciting new innovations, that we believe will continue to drive the top line moving forward.

The result of this aggressive market share pursued has resulted in obviously higher air freight costs, both in unit volumes and in air freight rates.

Without the year-over-year freight rate increases alone, we would have leveraged our operating margin in the third quarter, and the full year.

In looking back, we absolutely believe it was the right decision to make -- to continue the momentum for our brands.

And Tom, so as you look sort of into the fourth quarter, and I guess even -- is this pressure based on what you're doing for spring and bringing the stuff in early?

Is it expected to become alleviated at some point here?

What's the ongoing pressure that we should expect here?

Yes, so -- there's a normal amount of air freight in our operating model generally speaking.

However, it's more of a fall issue than a spring issue .

And it's most pronounced in the third quarter.

So, as we look at the fourth quarter, we will have definitely some margin pressure as a result of air freight.

But as we look into spring 2010, at least as it relates to spring 2009, we are not anticipating really much margin compression at all from air

Got it, okay.

And just had a question on the inventory.

Have you had any significant cancellations?

And I think you laid out on the inventory in the commentary, that you provided earlier, around a build for inventory for the outlets.

Can you maybe just comment on the buckets on the inventory as you look forward?

Like replenishment, how much is going to be replenishment?

How much is going to be for the stores, and how much will you pull forward?

Is there any way to think about that?

Yes, so a couple of answers there.

As it relates to cancel rates, as least as based on where we are, season-to-date through the fourth quarter here, our cancel rates are actually down a little bit.

And when we look at the season taken as a whole, we would expect cancel rates to be generally comparable, maybe slightly higher, but not dramatically higher than last year.

As it relates to inventory in the makeup, as we approach year-end, the vast majority of the increase in inventory that we expect as of year-end, will be purely a timing shift.

We received our spring 2010 inventory last year, generally later than normal.

And this year, we expect to receive spring 2011 inventory timely, which makes a little bit of a difficult call year-over-year.

And then as it relates to replenishment, we had abnormally low levels of replenishment exiting 2009.

And we've brought those back to normal levels.

So, that will also be a little bit of a cost difference year-over-year.

And then we will carry over a bit more inventory, from fall 2010 into 2011 for retail, than we did on a relative basis last year.

Got it.

Thank you very much.

Thanks, Bob.

Thank you.

Our next question comes from Kate McShane with Citigroup.

Go ahead please.

Hi everyone.

With the expedited shipping, just to be clear, I mean how much of it is a result of meeting the demand for your product?

And is there any expedited shipping because of anything that's going on with the capacity of the boats?

Yes.

This is Bryan, Kate.

I guess just maybe a quick history in terms of kind of how this came upon us.

We typically set capacities for a lot of our fall business, kind of call it, for the fall 2010 business, we would have done that kind of the summer months of 2009 through fall.

Those capacities that we set would have been on a smaller estimate of ultimate, the fall demand that we had.

So, as we continue through the ordering cycle with our accounts, basically on a January time frame, it became where we had to basically, to hit floor sets for our customers, that early demand, we needed to air freight.

And we basically decided on the amount of units that we would fly in, to make sure that we could hit those floor sets for our customers.

As Tom mentioned earlier, the part we didn't know about, hit us kind of in the later summer months, where a lot of the air carriers basically increased their rates.

And when you take that, coupled with the mix of footwear, which also our footwear business is growing more this year, that definitely kind of ultimately led to a much increased freight.

The ocean-side of it, I would say that 2009 was an abnormally low ocean freight rate year, as most of the carriers really were quite aggressive in their pricing.

Obviously in 2010, that turned back the other direction, and the ocean freight rates also increased.

Okay, that's really helpful.

Thanks, Bryan.

My other question is on your disclosure about more investment during the quarter, and more investment in the fourth quarter to secure market share and infrastructure investments, etc.

Is this something that you had been contemplating in the beginning of the year, and that's why it wasn't in your guidance originally?

Or what has changed from what you were thinking when you last talked to us back in July, to what you're disclosing today?

So, yes Kate, let me just -- the air freight issue, we contemplate some air freight.

We had no idea that the rates were going to be as dramatically increased as they were.

As it relates to the comments regarding infrastructure, and other questions you might have, I'm going to ask Tom to speak to those.

Yes, Kate this is Tom.

As it relates to the infrastructure investments, I believe we have been talking about those actually since the April time frame.

So, in terms of areas of spend, there's really been no change.

We continue to invest in the IT infrastructure and business systems, as we alluded to.

And as the year has carried on, those investments have been more back-end weighted in the year than front-end.

So, those are driving some of the SG&A increase in absolute dollar terms in Q3 and Q4.

Okay.

Just as a follow-up to that, so I do realize that you guys have been talking about investing in your infrastructure.

So, is there something incremental -- I mean, you did say it's more back-half loaded, but is there something incremental that's changed that?

And then also, is there something incremental in terms of what you did with securing some floor space on marketing etc?

As it relates to the SG&A spend, and specifically marketing, I think we've communicated that we were going to increase our marketing spend by roughly 25 basis points from 5.25 to 5.5 for the year, so that's stayed consistent.

As it relates to the incremental SG&A implied in our outlook, from now as compared to July, the revenue numbers up, in rough terms, roughly $25 million.

So, there's some incremental variable costs associated with that incremental revenue.

In addition, our currency assumptions have changed, given further strengthening with both the Euro and the Yen.

And that's actually driven close to half that SG&A increase.

And then, there some other compensation and non-recurring costs that weren't contemplated in July, that are now included in the outlook.

So, those are the three major components, currency, variable costs, and these non-recurring costs that we anticipate incurring in the fourth quarter.

Okay great.

Thanks so much.

Thank you.

Our next question is from Eric Tracy with Friedman Billings Ramsey.

Go ahead please

Good afternoon.

If I could, I know you're not giving explicit guidance for next year, but is there any way, given product cost inflation is such a big topic these days, to maybe sort of speak to what you're seeing now, sort of the exposure from a raw materials perspective, cotton in particular?

Maybe how we should think about your buying patterns, their labor freight as well, sort of incrementally beyond the air freight this year?

How we think about next year.

And then the ability to offset with pricing?

Clearly, Omni-Heat should support higher levels, but just trying to get a sense of that dynamic as we think about next year

Sure.

This is Bryan.

So, on the raw materials side, I know there is a lot of talk about cotton prices currently.

So, just to kind of give you some context about cotton fabrics for us.

I would say that the dollars we spend on cotton fabrics, as a percentage of our total cost of goods sold, is probably in the low single digit.

So, not necessarily a particularly large driver, given the variety of products that we make.

From a labor perspective, I think we've mentioned before, that about two-thirds of our production are out of Vietnam and China.

Those two countries have probably seen the largest labor increases as of late.

So, certainly from a labor perspective that is giving us cost increases.

With respect to freight, we typically renegotiate our ocean, as well as potentially air freight rates, in about the May time frame.

So, I really can't comment on what the freight rates may do for full-year 2011.

To the extent that we can build in a lot of these increases into our selling prices ultimately, obviously it's a bit early to talk about fall 2011, as we're currently in to a week of our sales meeting here over the course of the next several weeks.

So, we'll be just going to market here and finalizing pricing in the next little bit.

Okay, thank you.

That's really helpful.

And then just in terms of the labor cost component again?

Obviously, the two-thirds in Vietnam and China, is there a level of flexibility to sort of move the sourcing next year, or how should we think about that?

Sure.

Again I think in a typical environment, I would say that it's much -- we have a lot more flexibility than we probably have currently.

Obviously, there is limited capacities in Asia.

And therefore, we pretty much are sticking with our traditional factory groups that we work with, as well as trying to secure new capacities.

So, I think really using that as an opportunity for flexibility, it's probably a little bit muted now from where they would have otherwise been in a typical environment.

Okay.

And then, Eric this is Tom, as it relates to the currency for 2011, we are anticipating some slight headwinds in the first half of the year for spring, and some slight tailwinds in the back half.

But generally, currency should be fairly neutral to the model in 2011.

Okay.

And then, Tom, you mentioned just in terms of the cancellation rates, I think I heard you say, the expectation may be an uptick at a little bit on a relative business year-over-year.

I'm wondering a little bit sort of what the assumption is on that given, I imagine, really decent sell-through on the Omni-Heat?

So, I mentioned that season to date we're actually ahead of last year, but the weather has not been our friend over the course of the past month.

So, that would be a cause for some concern at this point.

Okay.

And then lastly, housekeeping real quick, tax rate, Tom, for the balance of the year?

So, we are planning for the full year a 26% tax rate.

Okay and I'm sorry, so if I can follow one last -- in terms of the investments you talked about behind marketing and in infrastructure, IT, happening kind of Q3, Q4.

Is there any way to communicate that, and it's probably too early, but how we should think about that next year as well, maybe first half of the year?

I would say we're early stage in the ERP implementation.

We're just beginning blueprinting here in a few weeks.

So, we would expect those costs to continue through 2011.

Okay, all right.

Thanks, guys.

Thank you.

(Operator Instructions) Our next question comes from Michelle Tan's location with Goldman Sachs.

Go ahead please

Great, thanks.

Hey, guys.

I wanted to start maybe talking about the spring backlog, the 12.

Omni-Heat was obviously a big win for you in the fall with the retailers.

Just curious if there were any kind of key things that really resonated in spring, or whether it was just more broad-based across a spring buy?

Yes, Michelle, this is Tim.

So, we keep reiterating the uniqueness about Omni-Heat, and the fact that it's visible.

And the two key -- actually the three key focuses for us for spring 2011, spring 2012, wait where am I?

Spring 2011, sorry.

Our insect blocker, our new waterproof breathable membrane, Omni-Dry, and of course reiterating our business strength in our Omni-Shield -- sorry, Omni-Shade focus on sun protection.

So, none of those are visible, and none of those really had any specific impact on business, although the business to grow in virtually every area of the business, geographically and brand.

So, we had a great lift.

We think a lot of that has to do with the quality reflection of Omni-Heat as it relates to residual impacts from fall 2010.

And our expectation is quite high for the balance of the year in terms of our future bookings.

Okay, great.

And just to follow-up on the whole sell-through question and the cancellation question for fall.

I mean, what are you hearing from the retailers?

Are they getting more nervous about the kind of levels of sell-through and weather?

Or is it is more that you are anticipating a change in how they are feeling as we move further into the season?

Well, first of all the sell-through on Omni-Heat has been -- I mean I don't want to oversell this, but it has been better than gratifying.

So, where we have complete visibility, i.e.

our own stores, it's been spectacular.

But we just don't know in a period of economic uncertainty, and weather uncertainty, we are unclear as to how our retailers will react.

We have almost no -- we have almost no carryover of Omni-Heat planned.

We plan to sell that out, and it looks like that will in fact occur.

So, the initiative has been well-received, it's selling well in retail.

And that's going to be great.

It's just sort of the overall macro environment and how that's going to impact us from economic and weather conditions.

Perfect got it.

And then my last one was, if you look at the performance of your markets outside the US, and look at some of the variability and the results in the backlog, do you think that the variations by market are primarily macro-driven, or when you look at markets like Canada, do you think there's more operational changes that need to be made there and kind of update us on where you are?

I believe that the teams we have in place today, globally, are the right people, and that we are making steps to right the business everywhere.

We're well along in those processes.

We haven't been able to demonstrate that in a sales number yet in some markets.

Although our expectation is that we will soon be able to demonstrate the fact that we've fixed a lot of those businesses and move forward.

So, I'm actually very encouraged, and as I said, we are here in Central Oregon with -- we have almost 700 people globally, looking at our fall 2011 products in advance of our selling season.

And there's never been more excitement, at least that I know of, in looking forward.

So, we're excited here.

Perfect.

Thanks guys, good luck.

Thanks.

Thank you.

Our next question is from Mitch Kummetz with RW Baird.

Go ahead please.

Yes, thank you.

Just a few questions.

First, on the cancellation rates again, there's an expectation that creeps up over the balance of the year.

Is that because you're starting to see some of your retail customers getting a little bit nervous with inventory levels, and so you're thinking that maybe at some point they're going to have to increase their promotions?

And is that why in the press release you're talking about some gross margin pressure from a higher proportion of closeouts in Q4?

Well, we don't see anything specific in the future, other than the weather that were looking at today, and have been for the last month.

Especially when it compares to last year's weather during the last 30 days, certainly in the US.

So, there's nothing specific were looking at.

And Mitch, this is Tom.

If things trend the way they have season-to-date, we'll be very comparable, to slightly down.

So, there's really nothing specifically we are pointing at, so I certainly don't want you all to over react to that statement.

Okay.

Let me ask you about the gross margin.

I mean gross margin was down 90 bits in the third quarter.

And you guys highlight the different puts and takes on the gross margin.

Could you quantify the impact of those different buckets, and maybe address how you expect those to play out in the fourth quarter?

Obviously you're expecting pressure from freight.

Can you quantify the impact of that in both Q4 and your outlook -- excuse me, Q3 and your outlook for Q4, and then maybe talk to some of the other impacts as well?

Yes, I don't want to get into too much detail on that, Mitch.

But I guess it would be fair to say, that had we incurred a comparable amount of air freight year-over-year, on a relative basis, we would have leveraged at the operating margin level in the third quarter.

Okay.

And then on the spring backlog, well first of all, going to fall, obviously it was up significantly for fall 2010.

I would imagine that some of that increase was just based on the Omni-Heat, you're getting a better sell-in to some of these outdoor specialty accounts.

And I'm wondering, Tim, you kind of talked about that, there is some piggy-back effect.

Is that what you're seeing, a lot of the increase for spring 2011, is that you've won some real estate back with some of these outdoor retailers, and now you're getting the benefit of that because of the Omni-Heat for fall?

Is that kind of what you were talking about?

Yes.

I mean, we really saw across the board, geographically, and across the channel, lift, and so where in the past we'd really struggled in some challenges -- some channels and some geographies, we really are going beyond that today.

Okay.

And then on your own retail business, did you guys say what the comp was for the quarter?

It sounds like the Omni-Heat hit those stores earlier, and you've had a good representation in your own stores.

Just wondering how much impact did that have on the comp in your stores, and if you saw your comps accelerate over the course of the quarter, as more of that product started to flow into your own stores?

Well as you know, Mitch, because we're not a retailer, we don't report those specific financial details about the retail business.

And really what we look at, is sort of the relative sales of Omni-Heat versus non-Omni-Heat.

And that is where we see significant uplift in the Omni-Heat, both in selling, and the anecdotal measurements that we get.

So, that's where we are seeing the excitement ,and that's how we can sort of compare ourselves, extrapolate it across the other channels that we sell through.

Okay.

That's helpful.

Thanks, good luck

Thanks.

Thank you.

Our next question is from Robbie Ohmes with Bank of America/Merrill Lynch.

Go ahead please

Thanks.

Good afternoon, guys.

I think a follow-up on some questions that were already asked.

I know you don't want to give guidance on 2011, but I think what we're all trying to understand -- I get that you have this one-time freight thing hitting, but you said you would lever the operating margin if that hadn't happened, and there's a lot of expense pressures that sound like one-time expense pressures.

So, in 2011, if you sort of just think about the rate of growth in SG&A dollars, and maybe, Tim, you could work into this, the costs related to the internalization of the sales force organization, and if those are significant, and if there's any leverage to come next year?

But I think we all are trying to understand, if you have another year where you grow revenues near 20%, could you get very significant operating margin leverage, or could there be a whole other layer of expenses coming in next year that we don't know about ?

Well Robbie, so for me personally, I find it disappointing and embarrassing to be reporting bigger revenue numbers, and not having leverage.

This is something that we've worked on diligently here .

And we don't take it lightly that we aren't performing even to the average of the industry.

We're very focused on leverage.

I can tell you that's a keen area of discussion among the management group, and as you might imagine, our Board.

So, my expectations personally, are that the business is going to be much healthier with, or without a better top line.

So, maybe Tom could maybe answer more

Yes.

Robbie, so a couple of things here.

We would expect to leverage the retail investments that we've made over the last couple of years in 2011, as well as the investment in internalizing our sales organizations in North America and Europe in 2011.

We plan to manage our freight costs down in the back half of 2011, and we are keenly focused on leveraging SG&A as well.

And can you quantify the sales organization impact?

Is that $10 million, or $20 million, what was sort of the dual costs you guys have been running this year?

I would say that it was -- it had a higher deleveraging effect in 2009 than it did 2010, and it will turn into a leveraged item in 2011 without getting more specific than that.

Great, thanks very much.

Sure.

Thank you.

Our next question is from Howard Tubin with RBC Capital Markets.

Go ahead please

Thanks, guys.

Can you, Tim, just give us maybe an update on your retail store strategy?

Maybe just remind us how many full line stores, and how many outlet stores you have now, and what your thoughts are for store openings or not in 2011?

Certainly.

Well, as you know the store openings focus for us, was one that we instituted in 2009, late 2008, and then finishing up in 2010.

And our goals for the future, would really be focused on efficient operation of those retail stores, and then maximizing our investments there.

Where I would see us making continued investments, would be in the areas of e-com, because of the high return, not only for ourselves, but also for our retail partners, where we can really explain the product in high detail, and hopefully have consumers go in their local communities and buy the merchandise there.

As it relates to the other part of your question, maybe I'll ask Tom to speak specifically on the numerical numbers of stores, etc.

Yes.

Howard, we will exit 2010 with 49 stores in the US, of which eight are branded, 10 stores in Europe, of which three are branded, and then two outlets in Canada.

And then as it relates to Japan and Korea, that's a different model, smaller footprints, combination of branded stores, outlets and shop-in-shops.

And we will exit 2010 with close to 100 stores in Japan, and 188 in Korea.

Not to mention the fact that we've got e-com businesses in the US for each of Columbia, Sorel, and Mountain Hardwear all online currently.

Yes, got it.

Thanks very much.

Thank you.

Our next question is from Christopher Svezia with Susquehanna Financial Group.

Go ahead please

Good afternoon everyone.

I just want to -- just a quick question, I think someone tried to ask this before, but I just want to see if I can get some color here.

Just on the gross margin for your outlook for the fourth quarter.

If there's any way, maybe Tom, you could maybe talk a little bit more specifically about how much -- I would assume you're seeing product margin improvement, I would assume mix is probably having some benefit ?

But then that's also by freight, and I would assume you're giving some opportunity for some markdown of product in the fourth quarter, in your own company owned stores?

So, I was just wondering if you could talk more specifically about what the range, from down 65, down 135, what that implies between those buckets if you

Yes.

So, the variance is really driven by the volume of our own retail, and our full price product sales, as compared to the portion that will be driven by the closeout or value channel.

So, there is some range of variance there, and that's really what's driving that.

And then the compression is -- the overall compression is really a function of some incremental air freight.

We will bring in our footwear product, is generally, comes in a little later than apparel, and it's -- we've aired some of that in late Q3, early Q4.

So, that's causing some compression in the margin, and Q4 for that air freight, and then currency is a headwind.

And then there's a little bit of compression driven by a higher volume of closeout sales anticipated, however, at a higher gross margin this year than last.

Okay, helpful.

And then as you go into the first quarter, I think answering an earlier question, it seems like that air freight component goes away for the most part?

Yes.

Falls off significantly from a sequential perspective ?

Definitely falls off significantly from a sequential perspective, and really, it normalizes in comparison to spring 2010.

Okay.

And then just on the international side for Europe, Middle East, and Africa, which the revenues were down, if you can give some reference data receipts of inventory, is that just, in a fact again, going back to a freight situation, you didn't get the product there soon enough?

And how should we think about that as we go to the fourth quarter?

Yes, so that was really a phenomenon for both Canada and Europe.

So, they were more heavily affected by later receipts of inventory than the other regions, and as a result, both of their fall backlogs were up.

And so, we would expect their back half revenue more heavily weighted toward the fourth quarter.

Okay .

Is really just a timing thing between Q3 and Q4

Okay.

And then the last question, on the Omni-Heat product, we walked around retail, and just kind of looked at the product as it came out October 10.

Some retailers were out there showcasing the product and having POP out there, some major chains were not, it might have just been store specific situations.

But I guess could you talk to, is there any sort of issues of getting timing -- of getting key product out there, or point-of-purchase displays out there?

And is that just a timing issue, or some retailers might not have been fully onboard with getting all the POP out there on a timely basis?

Just wondering maybe if you can talk about if you're seeing anything on your end as it pertains to that?

Certainly, without knowing specifically where you went, we certainly concentrated our in-store efforts on high-volume retail stores by each of our major retailers.

So we went to a C or D store for one of these guys, it might not have been as fully built-out in terms of a retail presence as the A stores.

But we spent a lot of time and effort with our field merchandising teams, and with the field merchandising teams that our own retailers have, to make sure we have the right stores covered in spades.

Okay.

It was in New Jersey, and it was Sports Authority and Dick's were the two retailers.

Yes, and I don't know which store you went to, but we spent a lot of time with both of those retailers getting their best stores looking great.

Okay, all right, best of luck.

Thanks.

Thanks.

(Operator Instructions) Our next question is from Ken Stumphauzer with Sterne Agee.

Go ahead please

Good afternoon, guys.

Just first, a clarification on the guidance you gave for the full-year.

That number does incorporate the tax benefit you realized this quarter, correct?

Correct.

Okay.

Secondly, as far as the backlog goes, I know that you're largely a backlog-driven company, but I'm curious if you have any perspective on whether perhaps there might be some pull forward of demand into that number, just because of retailers' concerns about supply chain issues?

You mean whether people might accelerate the delivery of the merchandise?

Accelerate the deliveries, or even perhaps be more willing to commit to backlog orders, versus depending on replenishment orders because of supply chain issues we've seen over the past 12 months.

Not specific to you guys, but across the industry.

I can only speak to us.

We would be thrilled if that happened.

I'm not anticipating it, but it is possible, I suppose.

Okay.

And then just secondly, nit-picking, but the payables growth, Tom, in the quarter, what was that related to?

Yes, we had more in-transit inventory and sheer later receipt of inventory in the quarter, caused that payable number to spike.

But that's virtually all inventory.

In addition, we paid duties at the time of shipment, not at the time of receipt, so you'll likely see that piece of the payable build over time.

And then one last thing relating to the ERP implementation.

I think you guys said that you're putting into place next year and historically, we've seen when companies implement ERP systems, they can run into operational issues.

So, I'm just curious how you guys are going to approach that, and what kind of safeguards you're going to put in place to prevent that from happening?

Well obviously, this is Bryan, obviously, these type of projects come with a certain amount of risk.

But I would say, as Tom mentioned earlier, we start blueprinting this quarter.

The blueprinting will be a global exercise, where we really set one platform to service the entire corporation in all regions.

I think from a risk management standpoint, certainly we have assembled a team that both have employees, as well as outside consultants, that will help us through this project.

Like I said, until we really complete the global blueprinting, I think the full scope and project plan will really kind of unveil itself after the conclusion of blueprint.

Okay, thanks guys.

Best of luck

Thank you

Thank you and there are currently no more questions

Well, thanks, everyone, for listening in.

We look forward to talking to you in January with the results of the final full year.

Thank you.

Ladies and gentlemen, this call has been concluded.