That Squish in Timberland

Footwear firm Timberland's (NYSE: TBL  ) ubiquitous waterproof boot may be taking on some agua. The firm has a solid track record of growth and generating cash flow, but has fallen on hard times of late because U.S. consumers are apparently eschewing its boots and accessories for less bulky and hipper alternatives. Did recent results confirm this trend, and might it continue indefinitely?

For the second quarter, sales fell 5.7%. The weakness was attributed to struggles in Timberland's U.S. boot and children's sales categories. International shoe sales were up a couple of percentage points, while the entire apparel and accessories business grew sales 20% and helped stem weak footwear trends. But this was not enough to prevent an earnings loss that was blamed on lower boot sales, restructuring costs, business expansion expenses, and returns and clearance sales.

For the full year, Timberland's management expects "flat to low single-digit revenue growth" and an earnings drop of 25%, as it works to build a solid boot brand throughout the world. But are the current struggles short-term? And are recent efforts geared toward driving long-term shareholder value?

Management does have some credibility, judging by its track record. Sales growth hasn't been overly high, coming in at about 7.5% annually over the past few years, but the company has been able to leverage that into 10.8% earnings growth per year. Lately, sales growth has been hard to come by, and it's unclear as to when negative trends will reverse themselves, but management does appear intent on ensuring that Timberland's status as a premium brand stays intact. So how does cash flow generation look?

Again, the track record looks good. Timberland's net income has been close to free cash flow, so the price-to-earnings ratio listed is a good proxy for the price-to-free cash flow multiple. A current P/E multiple of 11 implies a free cash flow yield, or just the reverse of price to free cash flow, of about 9.1%. That's a compellingly low number. However, projections for the year ending in December call for a multiple closer to 14 because nearer-term growth trends are proving difficult. In fact, operating cash flow and subsequent free cash flow have fallen for a couple of years now. Back to a longer-term perspective.

Timberland appears to be one of the premier footwear companies, including industry titan Nike (NYSE: NKE  ) and the smaller but equally impressive K-Swiss (Nasdaq: KSWS  ) . Its strengths include strong sales trends and higher profit margins (thanks to significant brand recognition in a market with fickle consumer tastes), impressive cash flow with subsequent high returns on capital, and minimal debt levels.

Overall, the market isn't enthused about Timberland's stock. But the stock price appears to already be discounted for the prospect of lackluster performance in the near future. As a result, the shares could be worth nibbling, just in case the strong track record of profitable growth and generating cash flow does hold up. It's not certain when or if an improvement will take place, but the penalty for making a wrong bet doesn't appear that harsh right now.

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Fool contributor Ryan Fuhrmann is long shares of Nike, but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email Ryan with feedback or to discuss any companies mentioned further.


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