The Timberland Company today reported second quarter net income of $6.3 million and diluted earnings per share (EPS) of $0.09, compared with second quarter 2004 net income of $7.9 million and diluted EPS of $0.11.
Second quarter revenue increased 4.4% to a record $240.3 million, driven by gains in international markets which offset moderate declines in the U.S. International results (+14.9% or +10.8% in constant dollars) were driven by strong constant dollar sales gains in Europe and Asia. U.S. revenues declined 2.5%, as anticipated decreases in footwear sales offset double-digit gains in Timberland® apparel. Overall revenue growth benefited from favorable foreign exchange rate changes – which added $3.7 million (or 1.6%) to second quarter 2005 revenue.
Second quarter results were supported by global gains in footwear and apparel and accessories. Global footwear revenues expanded 2.4% to $177.6 million, driven by growth in outdoor performance, kids', Timberland PRO® series and men's casual footwear. Global apparel and accessories revenue grew 9.0% to $59.6 million, reflecting gains in U.S. and international markets.
Revenue growth was balanced by channel. Global wholesale revenue expanded 4.4% to $168.8 million. Worldwide consumer direct revenue also expanded 4.4% to $71.5 million, supported by a 0.7% increase in global retail comparable store sales.
Operating profit for the quarter decreased 30.4% to $8.4 million. Moderate gross profit gains were offset by higher growth in operating expenses, in part reflecting investments in international retail infrastructure and global organizational capability over the past year. Operating margin decreased 170 basis points to 3.5%, impacted by higher levels of off-price sales and product mix impacts in the Company's U.S. business. For the quarter, foreign exchange rate changes contributed approximately $0.5 million to operating profit. EPS for the quarter decreased $0.02 to $0.09. Despite anticipated pressure on second quarter results, Timberland delivered record profit levels for the first half of 2005 – with operating profits up 18% and diluted EPS up 31% versus the prior-year period.
During the quarter, the Company continued to support its share repurchase program, buying back 1.0 million shares at a total cost of $37.2 million. The Company currently has 2.6 million shares remaining under its existing share repurchase program, which was increased in conjunction with its 2-for-1 stock split on May 2, 2005.
Timberland ended the quarter with $189.8 million in cash and no debt outstanding. Timberland's strong recent earnings growth and disciplined approach to asset management supported an increase in annual return on capital from 31.0% to 32.3%. Timberland's inventory at the end of the second quarter of 2005 was $216.5 million, 26.6% higher than at the end of the 2004 second quarter. As previously disclosed, second quarter 2005 reflected the Company's conversion to new sourcing arrangements with independent suppliers, resulting in an earlier transfer of title for certain third party shipments. The Company estimates that second quarter 2004 inventory and accounts payable balances would have increased by approximately $32.8 million, or 6.3% and 21.5%, respectively, if similar arrangements had been in place last year.
For the balance of the year, the Company continues to target low to mid single-digit revenue growth and is anticipating relatively flat operating profits in its base business. It expects that the third quarter will be the more challenging quarter from a profit perspective, driven by expected pressure on U.S. sales and gross margins that will likely yield an overall decline in Timberland's third quarter gross margin in the range of 100 basis points. These base business financial objectives exclude restructuring costs related to the previously announced consolidation of manufacturing operations in the Dominican Republic and related closure of Timberland's manufacturing facility in Puerto Rico. As previously disclosed, Timberland estimates that one-time pre-tax restructuring costs related to its closure of its Puerto Rico manufacturing facility will be in the range of $2.5 million in the third quarter and $3.0 million in the fourth quarter.
Jeffrey B. Swartz, Timberland's President and Chief Executive Officer, stated, “Timberland's second quarter results capped a solid start to 2005 – reflected in record first half revenues and profits. These gains were driven by continued global expansion of our brand franchise, reflecting successful efforts to develop our brand portfolio through an enhanced focus on consumer segment development.”
“We are pleased with our progress to date and believe we are on track towards delivering strong full year financial gains. We will continue to leverage strategies focused on delivering innovative and purposeful products, expanding Timberland's global presence and executing with distinction to capture the full potential we see for the Timberland® brand. In addition, we plan to extend our brand building and operational capabilities to capture growth opportunities related to new brand growth platforms, such as Timberland Boot Company and Mion(TM), to enable us to expand our potential as an enterprise.”
Note that comments made by the Company and Mr. Swartz are Timberland's performance targets, based on current expectations. These comments are forward-looking, and actual results may differ materially.
As previously announced, Timberland will be hosting a conference call to discuss second quarter results today at 8:25 AM Eastern Time. Interested parties may listen to this call through the investor relations section of the Company's website, www.timberland.com, or by calling (617) 614-4907 and providing access code number 79043932. Replays of this conference call will be available through the investor relations section of the Company's website.
