Columbia Sportswear Company
Q4 2008 Earnings Call Transcript

Published: 30 Jan 2009

[Operator:]

Good afternoon. My name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2008 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions)

[Ron Parham:]

Thank you, Rachel. Good afternoon and thanks for joining us on today’s call. Earlier this afternoon we issued an earnings release and financial schedules covering the results of our fourth quarter and full year 2008 and also guidance on our expectations for the first quarter of 2009. The press release and financial schedules are available on the investor relations portion of our website at www.columbia.com. With me today to discuss the results and answer your questions are Columbia’s Chairman, Gert Boyle, President and CEO, Tim Boyle, Vice President of Finance and Chief Financial Officer Tom Cusick, Executive Vice President and Chief Operating Officer Bryan Timm, and Vice President and General Counsel Peter Bragdon. Before we begin, our Chairman Gert Boyle has an important reminder.

[Gertrude Boyle:]

Good afternoon. I’d like 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 these risks and uncertainties are described in Columbia’s quarterly report on Form 10-K for the year ending December 31, 2007 and filed 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 to conform the forward-looking statements to actual results or changes in our expectations.

[Ron Parham:]

Thank you, Gert, and Tim will take over from here.

[Timothy Boyle:]

Thanks, Ron. Welcome everyone and thank you for joining us this afternoon. We were pleased with our fourth quarter results which came in slightly better on an operating basis than the guidance we gave back in October. The winter weather that arrived in key markets in December helped to stimulate demand for outerwear, cold weather footwear, and accessories. Combined with gross margins that were better than we anticipated, our operating results, excluding impairment charges, were $0.15 per share above the midpoint of our October guidance. Before going into detail on Q4 results, I want to take a look back at 2008 which was a year of investment for Columbia. We used our fortress balance sheet and strong cash flow to begin investing in several strategic growth initiatives. Virtually all of our incremental $45 million SG&A spend during 2008 was focused on the two strategies we articulated at the beginning of the year

[Thomas B. Cusick:]

Thank you, Tim, and good afternoon everyone. Fourth quarter net sales decreased 6% to $354.9 million with changes in foreign currency exchange rates contributing 3 percentage points of that decrease. Looking at Q4 2008 net sales on a regional basis compared with Q4 2007, US sales declined 3% to $205 million as a low double digit percentage decline and wholesale sales was partially offset by a significant increase in retail sales primarily due to the opening of 15 new outlet stores during the year. As planned, we finished the year with 28 US outlet stores. EMEA sales declined 21% to $59.9 million including a 3% drag from foreign currency exchange rates. Net sales in our Europe direct sales business declined by more than one-third, reflecting the misaligned assortments and market positioning in the region that we’ve mentioned in previous calls. We expect spring 2009 to continue to be challenging for us in that region. Our EMEA distributor business showed strong double digit growth consistent with advance orders scheduled for delivery during the fourth quarter. Net sales in Canada declined 12% including a 14% currency headwind. Net sales in our LAAP region increased 6%. Strong double digit growth in our Japan subsidiary was aided by a mid-teen percentage benefit from currencies. Conversely, our Korean subsidiary reported a double digit decline in net sales due to currency headwinds in excess of 30%. On a constant dollar basis, net sales increased in both Japan and Korea. Net sales to our LAAP distributors contributed mid teens growth. Looking at fourth quarter net sales by product category compared with Q4 2007, outdoor net sales declined $10.5 million or 6% in the fourth quarter with lower Columbia and Pacific Trail brand sales partially offset by an increase in Mountain Hardware brand sales. Sportswear net sales declined $9.4 million or 8% due to lower Columbia and Mountain Hardware brand sales. Footwear and accessories and equipment were down approximately 1% and 6% respectively. From a brand perspective, the 6% decline in fourth quarter net sales can be primarily isolated to the Columbia brand which was down $24.4 million or 7%, partially offset by a $3 million or 15% increase from Sorrell and 1% growth from Mountain Hardware. Gross margins decreased by 10 basis points in the fourth quarter, primarily due to geographic mix, the unfavorable effect of foreign currency exchange rates, partially offset by a reduced mix of closeout sales and a higher proportion of our own retail sales compared with last year’s fourth quarter. SG&A expense increased10% to $114.4 million representing 32.2% of fourth quarter net sales compared to 27.6% in last year’s fourth quarter. This increase in SG&A was in line with our previously communicated plans to increase our investment marketing and to fund our retail stores expansion plan to drive consumer demand for our brands. In the separate category for impairment of acquired and intangible assets, we incurred a $24.7 million pre-tax charge or approximately 46% per diluted share after tax for the write down of acquired intangible assets related to the Pacific Trail and Montrail brands predominantly goodwill and trademarks. $16.1 million related to the Pacific Trail brand and $8.6 million to the Montrail brand. These brands have not achieved our sales and profitability objectives and the deterioration in the macroeconomic environment and the resulting impact on consumer demand had decreased the probability of realizing these objectives in the near future. Going forward, we remain committed to marketing and distributing Montrail brand footwear for the outdoor specialty, running specialty, and sporting goods channels, while the Pacific Trail brand will become a licensing model in 2009. Operating income for the fourth quarter was $12.4 million including the $24.7 million impairment charge, 3.5% of net sales compared to $15.1% of net sales last year. Turning to income taxes, we recorded a $5 million tax benefit in the fourth quarter due to increased foreign tax credits and the favorable conclusion of a European tax examination for which the combined effect contributed approximately $0.22 per diluted share to the quarter. Income tax expense for the fourth quarter of 2007 was $12.9 million, equating to a 22% tax rate and included a $0.14 per diluted share benefit resulting from the favorable conclusion of certain European tax examinations. Net income for the fourth quarter of 2008 was $18.6 million or $0.55 per diluted share compared to $45.7 million or $1.26 per diluted share for the fourth quarter of 2007. For full year 2008, our gross margins expanded by 30 basis points to 43.1% and were up in all product categories. Gross margin expansion was the result of a lower volume of closeout product sales, some increased average selling prices, partially offset by the negative effect of geographic mix and changes in foreign currency exchange rates. SG&A expense increased 430 basis points to 32.7% of sales as planned for 2008 primarily as a result of our direct to consumer retail expansion plan and incremental marketing investments. Operating income for full year 2008 was $118.7 million or 9% of sales, including the impairment charge, as compared to $199.1 million or 14.7% of sales in 2007. The full year 2008 effective tax rate was 24.7% compared with 30.6% for 2007. The decrease in our tax rate rippled primarily from generating a higher proportion of our income from jurisdictions with lower overall tax rates, increased foreign tax credits, and the favorable conclusion of a European tax examination. Net income for full year 2008 was ?$95 million or $2.74 per diluted share including the $0.46 per diluted share impairment charge as compared to $144.5 million or $3.96 per diluted share last year. Turning to the balance sheet and comparing December 31, 2008 balances to December 31, 2007, the balance sheet remains very strong with cash and short term investments totaling $253.1 million versus $273.5 million at the same time last year. Consolidated accounts receivable was essentially flat at $299.6 million compared to $300.5 million last year. As would be expected in this environment, our accounts receivable portfolio was slightly more raised at December 31, 2008 as compared to the same time last year. In addition, we have increased our allowance for doubtful accounts to approximately 3% of accounts receivable. We are actively managing our credit risk and to date we have not had any material write offs. Consolidated inventories decreased 4% to $256.3 million compared to $265.9 million last year. We expect inventory levels to decline on a comparative year-over-year basis throughout 2009; however, we are carrying excess levels of Fall 2008 inventory in the US which will negatively impact gross margins in the first quarter of 2009. This is primarily the result of order cancellations for Fall 2008 stemming from poor macroeconomic conditions and reduced consumer demand. Capital expenditures were $15 million for the fourth quarter and $48 million for the year, consisting of approximately $13 million in maintenance CapEx and $35 million in CapEx related to retail expansion and other capacity initiatives. Depreciation and amortization expense for the quarter was $7.9 million and $31.2 million for the year. For full year 2008 we generated approximately $145 million in cash flow from operations, spent approximately $48 million in capital, paid $22 million in dividends, and repurchased approximately $84 million in Columbia stock. Since the beginning of the program in 2004, we have repurchased a total of approximately 8.7 million shares or $400 million in Columbia stock and have $100 million available under the current authorization. Today we announced that Columbia’s Board of Directors approved a first quarter dividend of $0.16 per share. Now let’s turn our attention to financial guidance. Please keep in mind that this information is forward-looking in nature and is therefore subject to certain risk factors. The worldwide economic environment is creating a high degree of uncertainty around consumer demand and other factors that affect our business, significantly limiting our visibility. Based on our previously reported spring backlog and our current view of retail activity, we currently expect Q1 2009 consolidated net sales to decline approximately 10% to 12% compared with the first quarter of 2008 which includes approximately 4 percentage points of negative foreign currency impact and we estimate EPS to be in the range of $0.04 to $0.08 per diluted share compared with $0.56 in last year’ first quarter. This model anticipates approximately 8 points of first quarter operating margin contraction, consisting of approximately 4 points of gross margin contraction and 5 points of SG&A expansion, partially offset by increased licensing income. The gross margin decline is largely a result of higher close out sale of excess inventory at significantly lower gross margins, most of which have already been booked. In addition, we expect continued weak consumer demand and a more promotional retail environment to be partially offset by favorable hedged currency rates. The SG&A increase in absolute dollars is primarily from the company’s retail expansion investments and consists of the incremental run rate expenses of stores opened in 2008 combined with the start up and pre-opening costs of new retail stores and our e-commerce operation. We are still early in our process of taking orders for the Fall 2009 season so consistent with our prior practice we will wait to comment on the factors that we believe will influence full year 2009 sales and profitability until our first quarter conference call in April when we’ve substantially completed our fall bookings. I will hand the call back to Tim for his closing comments.

[Timothy Boyle:]

Thanks, Tom. Prior to encountering these unprecedented economic headwinds, Columbia Sportswear has enjoyed 10 years of steady growth with $350 million in 1997 to over $1.3 billion today. Despite very real near term economic challenges, we believe that we are just beginning to tap the potential of our brands in large categories like outdoor footwear and in large markets like Europe and Asia. Our innovative products offer consumers superior performance at great value. We believe this positioning will help us build momentum when the economy improves. The current economic environment has made top line visibility very limited, making it more important than ever for us to look closely and critically at all areas of our business for efficiencies. We remain committed to using our fortress balance sheet and strong cash flow to pursue the growth opportunities we have articulated while removing and reducing operating costs wherever possible. Operator, could you please help us with Q&A.

[Operator:]

(Operator Instructions) Your first question comes from Bob Drbul of Barclays Capital.

[Robert Drbul:]

Tim, the question that I have for you on the outlook for 2009, you talked about making these judgments with a reduced 2009 sales outlook. Can you just... how much of your order book for the Fall of 2009 is completed, and can you give us any sort of parameters about how to think about 2009 in aggregate?

[Timothy Boyle:]

As you know, we’ve really been disciplined about talking about the balance of the second through fourth quarters of ’09 after we have a higher degree of visibility. We do have some orders and I would say that they’re probably consistent with the rate which we received orders in the past. We don’t have anything particular that we want to talk about as it relates to that book, however, when we look at the overall consumer demand, the impact of continued layoff announcements and just the general malaise within the economy, we feel it would be imprudent to be ebullient about 2009 from a top line basis, so we’re just being very cautious and we believe we’ll have a lot more to talk about at the next conference call.

[Robert Drbul:]

Okay, and just some questions from the advertising, can you give us the 2008 total advertising expense in terms of a percentage of sales, and can you elaborate a little bit more on sort of how to think about that from an expense perspective on a percentage of sales or any targets or ways to think about that as we look to our 2009?

[Timothy Boyle:]

Sure, I’m going to ask Tom to give the specifics on ’08 but let me tell you about ’09. We believe that because of the nature of the competitive environment or marketing resources, advertising costs, etc., or ’09, just based on the economy, that with a reduced marketing budget we’ll be able to nearly get the same amount of gross impressions that we had in ’08, and that’s certainly our plan, is to just be much more efficient and make a smaller ad budget, give us about the same general impact, but I’ll ask Tom to elaborate on the ’08 number.

[Thomas B. Cusick:]

Our advertising expense as a percent of sales was up a little over 120 basis points from 2007.

[Robert Drbul:]

Then on the inventory side, have you had significant cancellations Tim, are there... How should we think about really what’s happening right now at retail and how it played out the last few weeks or last few months and where you are for inventory.

[Timothy Boyle:]

We believe that the inventory levels that we’ve got for spring are appropriate and although they may be, depending on what happens to the balance of this season, may be slightly elevated, but the bulk of the inventory issues that we’re talking about were ’08, inventory levels for fall. We had a cancellation which would in a normal year not be that significant but this is a year obviously of unusual proportions. So we have some extra inventory. We haven’t actually shipped that merchandise but we have a home for it and it’s basically a combination of our own outlet stores, stores that Columbia typically sells to, our regular customers, and then the value channel as well. While we’re waiting for the next question I want to make sure that I covered one issue that you may have seen on the other 8-K that we filed this afternoon where we disclosed change in control provision that our Board approved last week. Before anybody reads anything dramatic into that, I just wanted to make sure that they understood that it was not done in anticipation of any transaction and in fact was first brought up with our Board in discussions early last year. As you know, these type of provisions are very common for public companies of our size and we found it increasingly important to have in place as we continue to try to recruit top industry talent. I just also want to point out that Gert and I are not participants in this plan and I hope that puts into proper perspective any questions anyone might have on that topic and now we’ll take the next question.

[Operator:]

Your next question comes from Reed Anderson from D. A. Davidson.

[Reed Anderson:]

I guess first question on gross margins. The first quarter you take a big hit because to clear the inventory but is it reasonable to assume we should see a snap back in 2Q? I now you want to give a guidance or [inaudible] but is that a reasonable assumption that we should give back to something more normalized as we move outside of Q1?

[Timothy Boyle:]

We’re going to try to be real disciplined about our future guidance. These times are quite difficult and we believe that we’re better approaching it is really just talking about Q1. I hope you understand.

[Reed Anderson:]

I understand. That’s fine. Thinking about just sale and trends and that sort of thing, I’m just curious, if you look at your kind of core channels of distribution, whether it be department stores or sporting goods stores or whatever, any meaningful differentiation there in terms of whether it’s cancels or sell through, anything that’s notable by channel for you guys?

[Timothy Boyle:]

It’s not really.. We’ve seen variable reports with exceptional sell throughs and some with less sell, but it’s not isolated to any particular channel. In fact, even geographies are a little bit more difficult to analyze, so it’s a time when we have a significant amount of variability in the business.

[Reed Anderson:]

Just a couple more. On Sorrell, the performance there was fairly decent. Was that largely, would you attribute that to weather or is there other stuff going on there that would have attributed that?

[Timothy Boyle:]

I think surely the weather was helpful, not only for Sorrell but also the Columbia cold weather footwear business that we have. We see a significant level of interest in Sorrell with the new positioning that we have put in place where we have a higher emphasis on women’s footwear than we’ve had in the past and I think if we could look to anything in terms of historical impact of Sorrell, it’s been the solid performance of the classic styles, the Caribou etc., that gave the additional boost on the women’s footwear that Sorrell’s been producing for 2008 and into the future.

[Reed Anderson:]

Just curious, the taking Pacific Trail to basically a license model, is the cost saved there from not having to have the infrastructure? Is that meaningful or is it just nominal?

[Timothy Boyle:]

I would say it’s nominal. That’s been a channel that we had hoped to learn quickly and be a significant player in but it’s taken us quite a long time to get that. We feel that’s the appropriate approach on Pacific Trail.

[Operator:]

Your next question comes from Mitch Kummetz of Robert Baird.

[Mitch Kummetz:]

I’ve got a number of questions. First of all, just in terms of the fourth quarter that you reported, a little messy in terms of the impairment charge and some tax items, but Tim, I think you said early on in your prepared remarks you came in $0.15 above the midpoint of your guidance. I’m assuming that’s a pro-forma number that if I do the math correctly gets me to around $0.80. Is that the pro-forma number that you guys are reporting here?

[Timothy Boyle:]

Mitch, that’s a combination of both the sales and the expanded gross margin relative to the midpoint of guidance

[Mitch Kummetz:]

Then on the inventory, how much of the total is excess? Do you expect to flush all that excess over the course of the first quarter and what is your inventory target for the end of Q1? How much do you expect it to be down on a percentage basis from last year, Q1?

[Timothy Boyle:]

I’m not sure that we’ve calculated that with any specificity. Primarily not because of the revenue number that we expect, but more when we take possession on the shipment side of the inventory, so we’ve seen obviously as factories have less to do over there, we’ve got more timely shipments, even some advance shipments from time to time, so we don’t really know with specificity what our receipts are going to be.

[Mitch Kummetz:]

Okay, but can you say how much was excess at the end of Q4 and whether or not you expect to flush the majority if not all of that over the course of the first quarter?

[Timothy Boyle:]

Our expectation is that this significant amount of inventory is going to be shipped in Q1 at lower margins as we said unless the impact on the earnings that we’ve got planned for Q1. Our goal is as we said to make sure that we’re going to reduce our inventory levels every quarter for ‘09.

[Mitch Kummetz:]

Then question on the advertising, I think in response to Bob’s question earlier, Tom, you had said that advertising expenses up around 120 basis points from last year, but could you provide a little co next to that? What was the percentage for the year or maybe last year so we can kind of calculate that?

[Thomas B. Cusick:]

We’ve historically not gotten into that level of granularity to I’d prefer not to.

[Mitch Kummetz:]

Can you maybe answer it this way – your SG&A was up around $45 million in absolute dollars from ’07 to ’08. How much of that increase was advertising?

[Thomas B. Cusick:]

Roughly a third.

[Mitch Kummetz:]

Quickly on the margins, starting with the first quarter here that you guys are providing some guidance for. FX impact there, FX has been good to you guys based on your hedging. I assume that at some point that’s likely to turn as some of the hedge rates that I would imagine would be at less favorable rates going over the course of ’09. Do you still expect FX to have a positive impact on gross margin the first quarter? When might that turn negative if you expect it to turn negative?

[Timothy Boyle:]

It could potentially, it depends on what region you’re talking about, given the swift change in the Canadian dollar dating back to the month of September. There’s certainly some pressure there for the year but as it relates to Europe and Japan, there may be some pressure there in the back half.

[Mitch Kummetz:]

You mentioned in the press release and in your comments that you’ve made adjustments to your marketing and advertising budget for ’09. Is that already effective in Q1 or is there some lag there just based on having already planned things in advance?

[Timothy Boyle:]

Q1 spend is pretty much booked and baked so the impact will be primarily in the back half of the year or in the latter three quarters.

[Mitch Kummetz:]

Couple last items. Tim, when you think about your performance over the course of the fourth quarter, particularly on the outerwear business, how do you judge that relative to the environment? Do you feel like you outperform the competition? Did you pick up market share? How do you kind of gauge that?

[Timothy Boyle:]

I think when we look at our retailers sell through, we have much more visibility today than we’ve ever had, we’re kind of proud of the way we perform and in fact we could even be complimented, but frankly there was a combination of just significant uncertainty among our customers in terms of their own health and plans as well as our concerns about customers that want to be on the right focus as it relates to extending credit for those folks, so when we look at the sell through information that we have, we’re actually quite pleased with our performance, so the fourth quarter was a very unusual period and one that I hope we don’t have to go through again for quite some time.

[Mitch Kummetz:]

A relative outperformance is good to hear. Then last question, you guys mentioned that on the spring backlog there’s been some order cancellation. Are you also seeing that retailers are asking to have delivery dates pushed out to where maybe there’s some shipments moving from the first quarter potentially into the second quarter?

[Timothy Boyle:]

Actually Mitch, when we talk about order cancellations, they were primarily fourth quarter merchandise, fall merchandise cancelled in fourth quarter. It wasn’t spring. Actually today our experience in cancellations is quite benign.

[Operator:]

Your next question comes from Jim Duffy of Thomas Weisel.

[Jim Duffy:]

During fourth quarter the weather was favorable but the holiday shopping was very back end weighted. At what point during the quarter did you start to see cancellations? Was it really in December or did they start to come even earlier than that?

[Timothy Boyle:]

I don’t have the data in front of me but I’m guessing that we had cancellations all through the quarter and I think probably more heavily weighted than the late November, early December time frame, but frankly those cancels would have been more benign just based on inventory that had already been shipped, so I would say it’s [radibly] over the quarter but I don’t have that information right at my fingertips.

[Jim Duffy:]

I’m hung up with one thing. Looking at reported revenue levels which came in kind of ahead of where you got it to and then inventory levels where there’s some access, what’s the dynamic or the product flow that kind of explains how sales came in better but you have a lot of excess inventory?

[Timothy Boyle:]

We had merchandise that we’re shipping directly from factories to customers around the world that are distributors that occurred in Q4 as it typically does and frankly we just have more cancellations than we expected in Q4 resulting in excess inventory but we’ve been, as we discussed, talk a lot about our focus on reducing inventory levels and actually have hoped to have a small inventory level at the end of Q4 then we actually ended up with.

[Jim Duffy:]

Then you mentioned with regards to spring orders, cancellations have been relatively benign, but is it too early in the season to really know what the impact there are on cancelled orders might be?

[Timothy Boyle:]

Yes.

[Jim Duffy:]

Help us understand that – at what point can a retailer cancel an order and not feel some sort of penalty from that?

[Timothy Boyle:]

You've got to look at it in a couple ways. One might be retailer cancelling an order because he doesn’t want the merchandise, another may be deteriorating economic conditions which may preclude us from shipping the order, so there’s a few different things there. Our typical policy is to require retailers to give us 45 days advance cancel but in this period, frankly, we’ve seen cancels inside that.

[Jim Duffy:]

Kind of looking at fall sell through at retail. On a relative basis as you look out to Fall ’09 orders, would you expect to see more strength in the outerwear or the sportswear just based on performance at retail?

[Timothy Boyle:]

Frankly I would see our biggest strength in our accessory and winter boot product categories as well as outerwear but again we want to be real cautious enough to talk about the future without a significant degree of visibility.

[Operator:]

Your next question comes from Howard Tubin of RBC Capital Markets.

[Howard Tubin:]

Just looking at the modern price department store channel and the real extreme weakness we’re seeing there. Would you consider selling Columbia into maybe some new channels you haven’t distributed into historically?

[Timothy Boyle:]

Such as?

[Howard Tubin:]

Such as maybe the warehouse clubs, something like that.

[Timothy Boyle:]

The margin models in those clubs make it very difficult for the rest of our distribution to be excited about competing at those levels, so we have not thought about that.

[Operator:]

Your next question comes from Chris Svezia of Susquehanna Financial.

[Chris Svezia:]

I have a couple questions here. I guess first, Tim, just for clarification here, not that I’m beating a dead horse on the inventory, but just when you guys look at the composition of the inventory, any color you can add between when you look at outerwear and sportswear and footwear? Is it across the board or is it more heavily weighed on the outerwear and on the sportswear piece of the business? Any color around that, where that inventory is from a product perspective?

[Timothy Boyle:]

Sure. Now we’re talking about the Fall ‘08 inventory excess that we are liquidating in Q1, and that I would say is primarily sportswear although there is a little bit of outerwear there.

[Chris Svezia:]

Then just switching to something, on the SG&A, and given obviously the growth initiatives that you had in 2008 and as you look to 2009 and you kind of obviously are looking to make some consolidation here, obviously look at the marketing spend and I know recently you had an announcement in terms of cutting some overhead, were there any other areas where you see some opportunities, if you can maybe just talk to them and how are you going to balance between continuing to make brand develop investments while trying to offset the reduction in incremental overhead? How are you balancing that in this environment?

[Timothy Boyle:]

As we said, everything is on the table in terms of a review for viability for growth for the business, so we’re looking at every single line item. As it relates specifically to the marketing category, we’re seeing significant softness in the pricing models of the typical vehicles of what we would use to market our products i.e. television, magazines, etc., and those markets are allowing us to have a reduced marketing budget and still end up with about the same gross impressions so we’re basically looking at every line item on the statement and we’re pushing on our vendors as well to make sure that we’ve got the appropriate pricing from a cost of goods sold basis but there are some opportunities for us to maintain our position brand strength for less investment.

[Chris Svezia:]

But it seems like the incremental pressure might be there as you at least go through the first half of ’09 as you obviously anniversary [inaudible] and some of the initiatives that you had put n place and obviously abate somewhat as you go through the second half of ’09? Is that a fair generalization?

[Timothy Boyle:]

I want to make sure I answer the question accurately so could you repeat it, I’m sorry.

[Chris Svezia:]

Sure. I guess what I’m saying is as we look at 2009, and we look at sort of the first half, is it fair just to assume that the sort of SG&A pressure is incrementally more apparent there, just anniversarying the store growth and unit growth from a year ago relative to the second half.

[Timothy Boyle:]

Again, I just want to make sure that we really talk with some significant specificity about Q1 but I can’t tell you that we had many store openings last year in the latter part of the year so I don’t have the store opening schedule in front of me but again, we want to just try to avoid talking about anything other than first quarter.

[Chris Svezia:]

Okay, that’s fair enough, and while we’re on the subject here, just on the stores for 2009, I know you’re cutting back here on the concept stores, but any color on the outlets in terms of how many you expect to open again?

[Timothy Boyle:]

I believe Tom’s got that information.

[Thomas B. Cusick:]

Yes, we expect to open up to 15 outlets in the US during 2009.

[Chris Svezia:]

And that’s on a base of 28, correct?

[Thomas B. Cusick:]

Correct.

[Chris Svezia:]

And then the last thing here, in Europe, I guess you obviously saw the cancellations in the US piece of the business. Any color on Europe, whether or not you saw cancellations during the fourth quarter, and just a general update there, and obviously you showed some key product here in November. It seems like... any thoughts about potentially starting to see some incremental turn or is it going to kind of follow along the lines the same way in terms of how the US business is unfolding?

[Timothy Boyle:]

As it relates to cancels, we did receive some cancels in Europe as well for Fall ’08 but we want to be real careful to talk with more specificity about Q1, but the expectation has been for a long period of time that Europe will be a very significant part of our business in the future and the investments that we’re making there both in personnel and in marketing are much more significant than the pace of volume growth, so we have significant expectation for Europe and we’re hoping that in April we can talk a lot about the growth there, but right now we just want to avoid that.

[Chris Svezia:]

Lastly, Tom, the tax rate for 2009, is that 24... how should we look at the tax rate there?

[Thomas B. Cusick:]

The year’s a bit early to call, just given we don’t know where that income is going to be located geographically, but for internal planning purposes, we’re currently planning 32%.

[Operator:]

Your next question comes from Sam Poser from Sterne Agee.

[Sam Poser:]

Good afternoon. Just a quick question. What does your Russian business look like these days? You handle [inaudible] as a distributor there and I heard there might be some issues with that distributor.

[Timothy Boyle:]

We do use the distributor there, we just had a very successful business. We’ve got a market share of some significance there and a great brand awareness there. We’ve been rivaling some of the best names in sporting goods. Our Russian customers do strong financially. They had a structured bond deal which had a call provision early in the fourth quarter I believe which they were able to pay the bond holders in full and as I understand it, so we’ve got what we consider to be the strongest distributor in Russia handling our products and we’re happy with the performance to date. We’re close to the customer and we expect that they are going to be solid for quite some time.

[Sam Poser:]

Do you then consider the economic woes there?

[Timothy Boyle:]

Yes and it’ll be relative to others. Again, [inaudible] we really don’t want to talk about anything past first quarter but we don’t expect that Russia is going to be immune from the issues around the world.

[Sam Poser:]

Have you changed the way you work with your retail partners? In the past you’ve pretty much set the prices and then let them buy what they want but left them to make their decisions. Are you working with them in any different manner these days?

[Timothy Boyle:]

I want to make sure I answer the question appropriately, so we have a slightly increased amount of auto replenishment business with some of our larger customers but other than that we’re still on an advance ordering system or future system.

[Sam Poser:]

How about like markdown support, that kind of thing. Do you have any margin agreements in place now because in the past you really haven’t done that.

[Timothy Boyle:]

No, we do not have any.

[Operator:]

Your next question comes from Rick [Ludawic] of Levin Capital Strategies.

[Rick [Ludawic]:]

Just some specifics on some numbers here. I think you mentioned in your commentary that of the 400 basis point decline in gross margin expected in Q1, a bulk of that was associated with the excess inventory overhang which is about $0.20 a share so if I’m trying to look at really excluding the excess inventory, once you get through that, the real earnings would have been something like instead of $0.04 to $0.08, $0.25 to $0.30 or something like that. Does that sound right?

[Timothy Boyle:]

I don’t think that’s unreasonable.

[Rick [Ludawic]:]

So if I looked at it sort of the year-over-year earnings it’s down roughly by half and so is here any reason to believe that the earnings for the full year won’t be down by about half as well or is it the fact that you did some excess spending in the back half of last year that should enable you to do a little bit better than that in the back half of the year, just to try to frame the full year?

[Timothy Boyle:]

Given the limited visibility we’re dealing with right now, it’s too early to predict.

[Rick [Ludawic]:]

I guess I’m just trying to get a sense if present conditions persist on a going forward basis, assume nothing changes for the next four quarters, is there anything in the back half of the year that will enable you to actually not show earnings down 30% or 40% or 50%? Are there stuff that we can... assuming nothing else changes, are there things that we can identify that are going to create less of an earnings decline in the back half of the year and how much, can you sort of frame how big that might be?

[Timothy Boyle:]

Again, wanting to make sure that we really talk about those areas where we have some specific visibility, we want to narrow the conversation, but if you wanted to broaden it to talk about potential competitors going our business and creating a little bit of buy, there could be a whole host of things that could impact the business in many ways.

[Rick [Ludawic]:]

I understand. I know we’ve been asked that question a bunch of times so I appreciate the attempt to answer it.

[Operator:]

There are no further questions at this time.

[Timothy Boyle:]

Thank you all for listening in. We’ll talk to you with greater specificity about the balance of the year in April.

[Operator:]

This concludes today’s conference call. You may now disconnect.