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Tuesday, December 29, 1998

Timberland Co.
Phone: 603-772-9500
Website: http://www.timberland.com
Price (12/28/98): $36 1/16


Looking at the rocky course traversed by Timberland (NYSE: TBL) this year, one has to wonder if the "brown shoe" craze that took the swoosh out of Nike (NYSE: NKE) in 1997 has run its course. Or are investors just expecting the warm weather to stomp on Timberland's holiday cheer?

Timberland plunged from a May high of $87 3/4 per share as reports of weak retail sell-through have begun to surface. In mid-November, BT Alex. Brown, one of only two brokerages following the shoe maker, downgraded the stock from "buy" to "market performer." Since then, shoe retailers such as The Finish Line (Nasdaq: FINL) have reported quarterly declines in the hiking category even as basketball sneakers have scored gains.

Some industry analysts even reported that the brownies have grown stale. TheStreet.com quoted a recent report from John Shanley of JW Genesis Capital Markets saying that "orders are being canceled for brands such as Timberland and Rockport."

Third quarter results announced October 15 showed revenues stepping ahead at a modest 6.2% pace to $292 million. Domestic sales edged higher by just 0.8% as nearly all the increase resulted from a 20.3% jump in international sales.

While footwear unit sales hiked 18.2%, a tiered pricing strategy plus an increased emphasis on kids shoes caused average selling prices to trip 8.8%. Timberland still recorded higher gross margins and lower interest payments, boosting EPS by 17% to $2.47.

That was two cents shy of estimates, but still strong enough to feed a recovery from the lows induced by recession fears and the market's collapse. Indeed, comparable domestic store sales rose a strong 11.7%. But as the warm weather persisted nationwide into the prime winter selling season, Timberland shareholders headed for the hills yet again.


Timberland designs, markets, and distributes footwear, notably outdoor shoes, for men, women, and children. Footwear accounts for about 75% of sales. The rest comes from apparel and accessories, including rugged outerwear, sweaters, shirts, pants, and shorts -- all for men or children. The company pulled out of the women's apparel biz, but could reenter at some point.

Last year, the U.S. accounted for 72% of sales, but the European market has been growing more quickly. While the Timberland brand is positioned for the "aspirational" (or mainstream) market in the U.S., it carries higher prices and a premium image in Europe.

Timberland operates more than 30 specialty retail stores, including a remodeled Madison Avenue store in New York City. It also operates more than 43 factory outlet stores for discontinued products. Combined, these retail outlets accounted for 23% of FY97 sales.

The company has increasingly moved production not just overseas but to contract manufacturers. It made just 28% of its footwear in 1997, down from 40% in 1995. All of its apparel and accessories, excluding licensed products, are made outside the U.S.

Collectively, the Swartz family, including Chairman Sidney Swartz and his son, new CEO Jeffrey Swartz, own 35% of the Class A stock and nearly all the supervoting Class B.


Income Statement
12-month sales: $838.6 million
12-month income: $55.9 million
12-month EPS: $4.72
Profit margins: 6.7%
Market Cap: $424.1 million
Enterprise Value: $504.8 million

Balance Sheet
Cash: $19.3 million
Current Assets: $410.6 million
Current Liabilities: $124.7 million
Long-Term Debt: $100 million

Price-to-earnings: 7.6
Price-to-sales: 0.5
EV-to-sales: 0.6


A year ago, Timberland seemed rugged enough to hike to new highs. And it did. The company renovated its New York store, hauling in bricks from an old textile mill and adding a waterfall for fun. Better yet, its order backlog stood at $186 million, up from $129 million in December 1996.

As the company strengthened its supply chain management, inventory turns rose from 1.9 in 1995 to 2.9 in 1997. Days sales outstanding dropped from 49 to 29 over the same period. As a result, cash was flowing in like never before, allowing Timberland to pay down debt.

For the most part, these attractive numbers have held up so far. The real damage of late appears related to a possible fashion shift away from outdoor shoes and the lingering warm weather this fall, which is sure to hurt Q4 apparel margins.


Checking the analysts' estimate of $4.90 a share for FY98 and $5.66 a share for FY99, you have to figure the numbers are stale or the market is overreacting. Or perhaps both. Something's simply amiss when you see a nicely profitable consumer company with sales approaching a billion dollars trading for just 6 times forward earnings.

On October 15, with the stock around $29, the company announced plans to repurchase up to a million shares (8.5% of the total), partly to offset employee stock options. With year-end tax-loss selling and fear of weak holiday sales pushing Timberland lower, it will be interesting to see how aggressively management has been buying those shares.

Taking a tour through an Atlanta store a couple of days before Christmas, the 33% markdowns on apparel were everywhere -- in sharp contrast to Abercrombie & Fitch (NYSE: ANF), which carried some very similar apparel at full price. That alone suggests how much brand building Timberland has yet to do.

Still, the stock appears to more than discount an ugly fourth quarter. The real question is whether the all-important teen and young adult segments have really moved away from brown shoes. If not, the stock could be a long-term bargain.

� Louis Corrigan

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