Timberland Gets the Boot from Investors

Shares of the footwear and apparel maker fell Wednesday after it lowered its profit outlook and announced store closures

Timberland (TBL), the maker of footwear and apparel "for consumers who value the outdoors and their time in it," continues to be out of fashion with shoppers and investors alike.

On Sept. 26, the Stratham (N.H.)-based company, which is known for its waterproof work boots, cut its outlook for the third quarter and full year given "softer market trends," planned store closures, and around $4 million in additional costs related to its recent voluntary recall of some Timberland PRO Direct Attach Steel Toe Series products due to a potential safety issue.

For the third quarter, Timberland sees revenue growth falling in the low teens and operating margins shrinking by around 600 basis points, due in part to the voluntary recall. That's below the company's forecast issued after its second quarter report in August of a low-single-digit percentage decline in revenue and 350 basis-points drop in operating margin, noted Standard & Poor's.

The company sees improvement in the fourth quarter, with relatively flat revenues and an operating margin decline in the range of 100 basis points excluding restructuring costs.

But for the full year, Timberland now forecasts revenue to fall about 5% from $1.57 billion in 2006, and operating margins to drop 400 to 450 basis points from year-ago levels (excluding restructuring costs).

Timberland also plans to close 40 of its larger stores in the United States, Europe and Asia and several underperforming U.S. outlet stores -- allowing it to focus more on smaller, footwear-focused stores. This will result in a $17 million charge, $7 million of which will be incurred in the third quarter. After those stores are shut, the company will still have 200 company-owned stores plus 550 shops operated by franchise partners and distributors, it said.

The shares lost 7.9% to $18.63 on Sept. 26 -- and are hovering near their 52-week low of $18.13. So far this year, Timberland's stock has tumbled 41%.

The trouble is, Timberland's core boots and kids' business is expected to continue to suffer, "as fashion has turned against it," said Esther Kwon, an analyst at Standard & Poor's Equity Research, in a recent stock report,

"We expect TBL to continue to struggle," Kwon said in a note on Sept. 26. She slashed her 2007 EPS estimate by $0.29 to $0.90 and her target price by $6 to $14. She kept her strong sell recommendation on the shares.

Kwon said in a recent report that her strong sell opinion on Timberland reflects the lack of prospects for a material improvement in profits until at least 2008. She noted that in April, Timberland delayed the release of its first quarter results to restate financials for 2001 through 2006 for foreign currency hedges. "While we regard TBL's cash reserves and its debt-free balance sheet as positives, we expect recent brand diversification efforts to take several years to alter TBL's total business," she wrote. (S&P, like BusinessWeek, is owned by McGraw-Hill (MHP).)

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