Columbia Sportswear Company (COLM) Q4 2007 Earnings Report, Transcript and Summary

Good afternoon, my name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Columbia Sportswear Fourth Quarter '07 Financial Results 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] Thank you. Mr. Parham, you may begin your conference.

All right. Thank you Christine. Good afternoon and thanks for joining us today. With me here today are Columbia's Chairman, Gert Boyle; President and CEO, Tim Boyle; CFO, Bryan Timm; Chief Operating Officer, Pat Anderson and General Counsel, Peter Bragdon. We'll start today's call with management’s prepared remarks reviewing the results for the fourth quarter and full year 2007, and we'll also provide revenue and earnings guidance for the first quarter of 2008. And after that, we'll be happy to take your questions. Before we begin, Gert has an important remainder for our listeners.

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-Q for the quarter ending September 30, 2007. 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 the change in our expectations.

Thank you Gert. Just one housekeeping item before I turn the call over to Tim. I'd like to draw everyone's attention to the new geographical net sales reporting structure that we adopted this quarter to better reflect our international management and oversize structure. Net sales to international distributors that were previously grouped with Japan and Korea as part of other international has been regrouped into either the new Europe and Middle East, Africa or EMEA region or the new Latin America, Asia-Pacific or LAAP region, depending upon the geographic market in which each distributor operates. All of our comments today will be based on this new geographical reporting structure. For your convenience, we've recast quarterly geographical net sales information for fiscal years 2007, 2006 and 2005 on the schedule accompanying today's press release. That schedule is also available online as part of the fourth quarter press release posted at the company's Investor Relations website. I'll hand the call over to Tim.

Thanks Ron. Welcome everyone and thank you for joining us this afternoon. Let’s begin with a quick review of key financial results for the fourth quarter. Overall, from an operating standpoint, our fourth quarter came in largely as expected. Benefited from slightly higher net sales and gross margins together with good expense control. Q4 2007 net sales increased 4% to our fourth quarter record of $376.7 million, including changes in currency... including changes in foreign currency exchange rates have contributed three percentage points of consolidated net sales growth. Let me tell the quarter had started slowly as unseasonably warm weather lingered across many key US and European markets. Late November, December ushered in heavy snowfall across most of the key markets resulting in improved outerwear sell through. In our footwear channels, where some of the retailers had been sitting on fall '06 inventories heading into the fourth quarter of ‘07, we received reports of much healthier inventory levels by the end of December. Looking at fourth quarter results by region, US net sales decreased 1% in the quarter reflecting declines of 3% and 4% respectively in the Outerwear and Footwear segments, partially offset by 2% and 7% increases in sportswear and accessories and equipment respectively. In the US 3% growth by the Columbia brand and 11% growth by Mountain Hardwear were offset by a 2% decline in the Sorel footwear brand, a 42% decline in the Montrail brand and an 84% decline in Pacific Trail. Canada net sales increased 10% in the quarter with Columbia and Sorel brands each contributing about half the growth in net sales dollars. EMEA net sales grew 2% in the fourth quarter. The sportswear category increased 19% primarily from growth in the Columbia brand partially offset by 5% and 10% declines in footwear and accessories and equipment respectively. Overall the Columbia hardware brands each grew low single digits while Sorel declined 25%. Fourth quarter growth in the Columbia brand in EMEA came almost entirely from our sportswear category primarily due to the December shipments of spring '08 styles to our EMEA distributors. In our LAAP region, where we had established the Columbia and Mountain Hardwear brands, net sales were up strong double digits in both brands and in all product categories. Our Korea and Japan businesses as well as our LAAP distributors performed well across the board. Focusing on the Columbia brand, net sales grew 6% over the last year's fourth quarter with growth coming from each of our four geographic regions particularly LAAP. Increased Columbia outerwear sales were led by Japan and Korea partially offset by modest declines in the US and Canada. Every region contributed to Columbia's Sportswear net sales increases in the fourth quarter. Increased Columbia footwear net sales were driven by LAAP distributors, EMEA distributors, Japan and Canada partially offset by small declines in the US and EMEA direct. At this point, I'd like to hand the call over to Bryan Timm, our CFO who will review fourth quarter financial results in more detail and the revised financial guidance we reported today. Bryan?

Thanks Tim and good afternoon everyone. As Tim mentioned, fourth quarter net sales increased 4% to $376.7 million with changes in foreign currency exchange rates contributing three percentage points to that increase. Tim provided a break down of the sales by region and brand, so I will pick up where he left off and walk you down the rest of the income statement and key elements on the balance sheet. Gross margins increased 80 basis points in the fourth quarter, primarily due to favorable foreign currency exchange rates, improved gross margins from our retail stores, lower freight cost partially offset by increase close out sales of follow seven products. Selling and administrative expenses increased 8% to $104 million, which represented 27.6% of the fourth quarter sales compared to 26.7% in last year's fourth quarter. This increase was a result of planned increases in personnel costs and higher depreciation expense related to major distribution projects partially offset by reduced selling expense in the US. Operating income was up 3% to $56.8 million in the fourth quarter and resulted in operating margin of 15.1% similar to the 15.3% operating margin we reported in the last year's fourth quarter. The most significant variance from our previous guidance in the fourth quarter was the lower tax rate resulting primarily from favorable conclusion of certain European tax examinations which contributed $0.14 and the mix of international income and certain tax like changes which added $0.05 per diluted share to the fourth quarter. Net income for the fourth quarter was up 19% to $45.7 million. As a result, fourth quarter 2007 diluted earnings per share was $1.26, a fourth quarter record, compared to $1.06 in Q4 2006. For the full-year 2007, net sales were a record $1.36 billion, up 5% over 2006. From a brand perspective, the Columbia brand led the way with a 7% increase, followed by Mountain Hardware up 12% on a smaller base, offset by an 83% decline in our Pacific Trail brand again on a smaller base. Full-year net sales increased in all product categories led by Sportswear up 11%, footwear up 4%, equipment and accessories up 5% and hardware essentially flat with 2006. Full-year net sales also increased in each of our regions with the US up 2%, Canada up 5%, EMEA up 5%, and LAAP up 23%. We are very pleased with our operating leverage this year despite a top line growth of only 5%. 2007 operating margins expanded to 70 basis points to 14.7%. This increase was primarily due to improved gross margins, which benefited from modest increases in average selling prices on spring '07 products. Lower freight cost, favorable hedge currency rates partially offset by increased close out sales. We also controlled the majority of our costs holding SG&A flat as a percentage of net sales. 2007 net income increased 17% to $144.5 million or $3.96 per diluted share. I will quickly touch on key elements in the balance sheet comparing December 31, 2007 balances to the December 31, 2006 balances. The balance sheet remains very strong with cash and short-term investments totaling $273.5 million versus $220.1 million at the same time last year. Consolidated accounts receivable was $300.5 million compared to $285.9 million a year ago, a 5% increase, which was generally consistent with the sales increase in the quarter. Consolidated inventories were $265.9 million compared to $212.3 million a year ago, a 25% increase. This increase was due to planned increases in retail inventory to support our outlet store expansion plan, high levels of carryover, core, and replenishment inventory, and early spring inventory receipt to support our product marketing initiatives. Looking forward, we expect US inventories to stabilize at lower levels by mid-year. Capital expenditures were $14.2 million during the fourth quarter and just over $34 million for the full-year consisting of approximately $10 million in maintenance CapEx and $24 million in CapEx for other capacity and growth initiatives. Depreciation, amortization expense for the year was $30.3 million including $8.1 million in the fourth quarter. Please recall that approximately $8 million of incremental depreciation for the year was associated with the Portland and European distribution center projects. Today we announced that Columbia's Board of Directors approved a first quarter dividend of $0.16 per share. During the fourth quarter, we repurchased approximately 398,000 shares at an aggregate price of $14.5 million. Since the beginning of the program in 2004, we repurchased a total of 6.6 million shares or $316.1 million, leaving us approximately $83.9 million under the current authorization. Now let's turn our attention to financial guidance. Based on our previously reported spring backlog and our initial read on retail activity during January, we are revising our guidance for the first quarter of 2008 originally provided on October 25. Please keep in mind that this information is forward-looking in nature and is therefore subjected to certain risk factors. We currently expect Q1 2008 consolidated net sales to decline approximately 2% compared to the first quarter of 2007, and we estimate EPS to approximate $0.51 per diluted share compared to $0.71 in last year's first quarter. This model anticipates approximately 400 basis points of first quarter operating margin contraction consisting of approximately 450 basis points of SG&A expansion partially offset by approximately 50 basis points of gross margin expansion. The SG&A increase is primarily from incremental marketing and advertising, the company's retail expansion and depreciation related to our Portland distribution center retrofit that came online in April of 2007. The gross margin increase is anticipated to result from favorable hedge currency rates, regional sales mix and fewer closed out sales. We are still early in our process of taking orders for the fall 2008 season, so consistent with our prior practice, we will wait to provide full year 2008 guidance until our first quarter conference call in April when we substantially completed our fall bookings. I'll now hand the call back to Tim.

Thanks Bryan. In closing, overall 2007 was a successful year and one that we think set us up well to face what is shaping up to be a more challenging economic environment in the US and other key markets in 2008. With our strong balance sheet, we believe this environment provides opportunities for us to invest for future growth while some competitors may be financially constrained. As we continue to sell in fall 2008 products over the next couple of months, we expect a certain amount of cautiousness among retailers as they attempt to anticipate how consumers are going to behave in the midst of recession fears. Potentially offsetting that cautiousness to some extent, we've received very positive comments from retailers about the additional marketing support we plan to provide around our OMNI-SHADE and TECHLITE initiatives for Spring, and our Omni-Tech interchange and TECHLITE initiatives for fall, to enhance the Columbia brand and to drive consumer demand. The Columbia brand remains strong, particularly in the US, Canada and LAAP and we are preparing to launch what we believe are powerful integrated marketing efforts designed to drive retail sell through of our Spring '08 outerwear, sportswear, and footwear lines as the retail season gets underway in the next couple of weeks. Admittedly, we have some work to do with our Columbia brand in Europe. The issues we face there are reflected in the 16% decline in Columbia outerwear sales that we experienced in our European direct markets in 2007. Our Columbia brand Sportswear sales in those same markets increased nearly 14%. In contrast during 2007, our EMEA distributors recorded net sales increases of 18% in outerwear and 37% in sportswear. Clearly we need to do a better job driving demand in our [inaudible] markets by getting the right outerwear product on the shelves and re-communicating and demonstrating our performance proposition, to consumers and retailers. In addition to getting the product right in our Europe direct markets, we've also made changes in our European management team. Mick McCormick, VP of Sales is now directly responsible for Europe as a region and is working closely with Christian Finell, our New European GM who comes with 17 years of European management experience with Solomon. We've re-established a strong connection between our European and US product teams, so there will be far more direction and interaction in setting the align plans for those European markets. We expected to take the better part of 2008 for Christian and his team to implement the necessary changes to our product line, marketing and channel inventory management, and at least until the first half of 2009, for those changes to begin to show traction. We plan to incorporate our global go-to-market strategy in Europe to leverage the strength of our OMNI-SHADE and TECHLITE initiatives for Spring and Omni-tech interchange and TECHLITE initiatives for fall, and believe Europe remains a large and very important growth opportunity. We believe our... we believe our Sorel footwear offerings for fall ’08 were improved and the brand has found a heightened level of acceptance and cache [ph] among upscale retailers and consumers particularly in Europe and Asia. With clean retail inventories, we believe the brand is in good position as we anticipate the selling of the fall '08 line. Looking ahead to spring 2008, we are poised to launch a coordinated and targeted marketing advertising and public relations campaign globally that will educate consumers about Omni-Shade apparel and TECHLITE footwear. The print execution of this effort has already begun to appear in some sunbelt markets and are expected to generate significantly greater gross impressions than any previous Columbia campaign. Each successive seasons offering will be supported by an integrated marketing efforts that clearly communicate our performance proposition to retailers and consumers, create consumer demand and drive retail sell through and in turn enhance the profitability of our retail partners and Columbia. Of course as we sit here today, there are several economic unknowns. But we're going to stay focused on the things that we can control and do the things that we believe are necessary to continue to inspire consumers to seek out our brands for all their protective apparel and footwear needs. That's the essence of the strategic initiatives we introduced last year and that we are working to implement in 2008. We have strong brands supported by strong balance sheet and healthy customer relationships. Despite the challenging macro environment, we intend to leverage those strengths to drive consumer demand, enhance our brand equity and grow our market share. Thanks very much for listening in. We'll be happy to field any questions. Operator, can you help us with that? Question and Answer

[Operator Instructions]. And your first question is from Bob Drbul with Lehman Brothers.

Hi Tim.

Hi, Bob.

I guess the first question is, Bryan, on the inventories, can you put any numbers around the different buckets of the inventory levels?

Yes. Hopefully first and foremost, I hope the inventory... again we've been talking about this for the last couple of quarters in terms of a little bit of a build for a couple of different reasons. I guess the three primary buckets would really be as follows. Number one, we talked about our retail expansion plan. So, we do have a fair amount of inventory on the... on the books, in the house so to speak readying ourselves for some of the continued expansion in our retail outlets. Second of all, we talk a little bit about our core replenishment type inventory. I think we've mentioned it will have a fair amount of that on the books at year-end readying ourselves for spring. And then finally, just the early spring '08 receipt, again readying ourselves for the... for kind of a hard launch with Omni-Shade and Tech-Lite for both apparel and footwear, we've readied ourselves a little ahead of the curve in terms of bringing inventory early for those product launches.

So I guess, if I ask in a different way in terms of some numbers, Bryan. When you look at, I don't know, if you consider excess inventories or inventories that are going to be old or last year seasons or from cancellations, can you put a number on that as a percentage that we should be thinking about?

Well. I mean again, I know I understand what your question is with respect to how our fall inventories or any inventory that would have undue risk. Again, I think some of the fall inventory, as I mentioned, will be destined for our own retail outlets. Again as I look at our inventory pool at this time, again a lot... most of the products are actually Spring related products, they will allow that quarter the replenishment and gearing up for Spring or Spring book of business. So as you can tell by our Q4 activity, we did have some pretty good shipments of fall '07 close out activity in Q4. So, I don't want to say we are clean, but I think compared to the previous Q4, I would say we're relatively clean on fall inventory.

And then the... I guess the other question that I have for Tim. In terms of... I know the book is incomplete or the order period is incomplete. But when you look at the order book year-over-year sort of season to date versus where you were last year, how much of the... can you give us any early reads on the book?

Well, I think in terms of the USA, I feel comfortable that in footwear, our customers are quite clean and weather continues to help us and continue to clean that. In outerwear, I think we're at about the same position we were last year from a cleanliness standpoint on the Columbia brand. And overall I think retailers are probably a little cleaner. In Europe, the sell through has been only spotty body for our brand. Although I think overall probably the sell through for our retailers, they are probably in cleaner positions overall other than they were last year.

Okay. And then, I guess just a final question on the retail stores, the outlet stores; have the plans in terms of the number of the stores changed? And I guess are there any numbers in terms of the returns on the capital that you expect as you look at that business versus the current returns of the business and how you are thinking about that when you plan this out in '08 and going forward?

So, in terms of account that we plan for '08, no changes there. The plan is to be to continue to take advantage of opportunities primarily in the outlet environment. And we may even be able to accomplish opening up a few mono brands for full first line stores, I would say, probably in the less than five category in 2008. So, I think we're on plan there. The returns so far based on the financial metrics that we have established tend to encourage us that this strategy is going to be a positive one for the company. So we're excited about the management team that we've in place on retail. We are excited about the interest from consumers, and I believe over time this is going to be a solid positive for the company. We want investors to understand and of course our retailers to understand that we're not changing the model of the business. This is going to be a wholesale business and will continue to grow on a wholesale basis with the addition of these retail stores to help us to manage inventories and to show consumers the full breadth of our product.

Okay. Great, thank you very much. Good luck.

Your next question is from Jeff Edelman with UBS.

Thank you. Tim, a follow-up question on the retail stores. When will these be opening?

Jeff, we opened several this fall and we're going to be opening on the range of probably less than 20 during 2008 with the emphasis on Class A models to the extent we are ... Class A outlet models to the extent that we'll be able to get space, favorable space with favorable rates in those locations. And then the first-line stores, we are going to open in over the course of the next several years in major metropolitan markets where we think that these first-line stores can be accretive to the marketing plans of the company.

Okay, because we look at the build in inventory for new stores, it seems to me the inventory build is... it seems to be a lot further ahead than the store openings or is that a much smaller bucket?

Jeff, this is Bryan. I don't want to... again when I broke up earlier the three primary buckets for the inventory increase, I'd say, you know, a third of that ... a third of the overall consolidated inventory build is destined for our own retail and again as Tim mentioned, we did open up I think somewhere between 4, 5 outlets in around the fourth quarter of 2007. We do have plans in the first quarter, opened up couple more as well. This is the second quarter. So, some of the inventory build that we have will be destined for these new outlet centers. So, we feel that what we have destined for retail is in appropriate shape.

Okay. And then secondly could you address marketing costs for the year and you've always been pretty good at laying out your overhead in various buckets. Could you sort of now… you know, as we look at '08 how much of this is fixed, how much will be variable and how much of a step up will there be in marketing? So, we can make our own sales assumption to get some sense of positive and negative operating leverage?

Jeff, let me sort of take a cut at the overall plans for '08 as it relates to marketing and in the areas that we're going to concentrate on, and then I'll let Bryan may be put some color to the specifics. But I just want you to understand that for the whole year, obviously our topline is not determined yet, because our book is still open for fall and as well the marketing plans are not committed to as yet based on... and the fact that we don’t really know what our topline is going to be next year. But overall the spend for spring '08 will be a combination of in store presentation material to heighten the Omni-Tech and Tech-Lite strategies, that we've delineated this year and those are... so that is in store presence and including enhancements to our already existing fixturing systems in stores today. It's going to include billboard campaigns or outdoor campaigns, TV and print media. So, those will be the primary vehicles for marketing for the company as well as a very established PR campaign, which will be less costly and those will be primarily through the first and second quarter. For the back half of the year, we intend to focus on Omni-Tech, our waterproof/breathable proprietary product, Interchange and Tech-Lite in winter footwork products. And we'll have the same sorts of methods to promote those two... those three initiatives in the back half of the year. And that's going to be for our intensive purposes a North American phenomena as well as some European spend there. In terms of the particular financial metrics, let me just turn it over to Bryan in terms of how we're going to be determining them.

Hi, Jeff, [inaudible] Tim's comments, again without the fall book it’s premature to talk about advertising spend for the year and give you a little more color there. As it relates to Q1, there were a host of factors that really went into our SG&A increase of which none of those would necessarily be in the majority. Those items in order of magnitude would probably be the advertising, would be a little bit larger than some of our retail expansion and some of the upfront cost that we have associated with that business model. Depreciation from the Rivergate facility as well as some of the international growth that we have plus, just being a little bit of an easier comp over Q1 of 2007. So again it's not the majority of the SG&A increase, but certainly a larger part that we plan for Q1.

And just let me summarize. The goal is to have a very significant increase in our gross impressions for the whole year.

Okay. Well, are you targeting a certain percentage of sales or has that really been defined yet?

Not, really. No.

Okay. Fair enough and then the fixed component of the SG&A, how much should that go up?

I'm sorry. Could you repeat that?

The fixed component of SG&A or overhead, how much of that increased for the year?

Yeah, again Jeff that's a function of sales. So, I'd really like to hold on until April.

No, no fixed.

Somebody… again whether you want to call it a retail expansion plan, I don’t really look at that necessarily; at this point it's fixed. But, again until those are all sorted out, I'd like to wait until April to talk about specifics on the SG&A front.

Okay. Fair enough. Thank you.

Thanks Jeff.

Your next question is from Virginia Genereux with Merrill Lynch.

Thank you.

Hi Virginia.

Hi Tim. Maybe Tim and Bryan can you tell us a little bit about what went into the, what drove the decrease in revenue expectations for the first quarter, and how doesn't that back up on you on the inventory front, Bryan? And if you guys were thinking, you'd be up 4% in March and now you're down 2%. Is some of that deferred to June and I would assume you've seen some cancellations for the first quarter? Could you tell us exactly what went into that?

Sure. Let me start off. First just to answer the question on cancellations, we really haven't seen a significant spring cancellation at this point in time. It's been very modest as we would have otherwise projected. Is it related, yes I would say that our sales guidance in terms of the guidance that we're giving today versus what we delivered in October is definitely different. Couple of different portions I guess that could at least help explain that. Number one, our Q4 was probably somewhere close to around $4 million over the guidance we've provided for Q4. Most to that came from international distributor business that I'm sure most people remember that a lot of. We've a lot international distributors that ship in both June as well as in December that can spill over between quarter-to-quarter. We actually shipped those in Q4. So that was actually planned in Q1. There were also some shipments as we kind of look at the order book and when customers want their orders that spilled over from Q1 to Q2 as you mentioned. Obviously we're in a phase of a little bit of a different macro environment that we were three months ago. So, I would also say that we would have expected maybe some… a little bit more reorder percentage over the course of the last couple of months that really hasn't come to pass. So that has given us a little bit of conservative outlook as we look to Q1 now versus three months ago.

Okay. And Bryan, to that point you guys think you can clear, kind of going from you've opened four or five retail stores, you are adding a couple. You expect you can clear any excess inventory through those channels it sounds like.

Well that channel as well as the off-price channel, that way we had to clear some dust in the past as well. But again most of what we are talking about right now is spring, we actually had a pretty good object in our thought closeouts that we shift in Q4 relative to how those typically ship in our business.

Okay. Okay that's helpful. And then secondly if I may, Tim in the release you say, expanded retail initiative and increases in marketing and advertising may preclude us from achieving margin leverage in '08. That sort of sounds, it sounds to me… I mean may preclude us from achieving leverage. It sounds like you don't expect margins to come off materially. And if I look at the first quarter, I say, wow you guys are talking about 400 bips [ph] of pressure. What gets better in the back half if I may... if I can ask and maybe you can... maybe Pat, you can address sourcing costs and typically you are growing faster in the first part of the year. What sort of gets better from a margin perspective in the back half?

Well let me just give you an overall view of how I look at the business and then Nick, Brian and Pat will throw some color on those specific questions that you had. But in general, we believe that we will be able over the long term to grow the business. And frankly we had enormous emphasis in 2007 on operating leverage, and it was clear that we obtained those goals. But we believe now that the best course for the business is to make some investments outside our traditional investment area, which frankly has been in distribution facilities and in facilities to provide room for us to grow now to start investing in ways for the brand to expand either by visibility to consumers and outlet for first line stores or marketing efforts to expose the brand more broadly to consumers. So we don't know exactly based on the strength of the book for fall, what percent those initiatives are going to have as a percent of SG&A or percent of the total revenues of the company. But those are areas that the company is going to concentrate on. I believe our footwear business, even though it’s not growing as rapidly as I personally feel the opportunity is. I believe we've done a lot of clean up in terms of making that business better and more profitable. And I would expect that over time, the key product categories of footwear and the key geographies of Europe are going to be leading us as we get to be stronger and better. But as a relation to the back half of the year, maybe I will let Bryan talk a bit about the specifics there, to the extent we are talking about them.

Well again, just a couple of quick comments and maybe it’s more back to Jeff Edelman’s question earlier, but again a couple of different things that we mentioned last time, it really led us around that... the comment in terms [inaudible] from operating leverage this next year. One not knowing our top line of the business, two knowing that as Tim mentioned, we want to add significantly more impression than eyeballs to our brand. Part of that is going to be by increasing our advertising spend in 2008. The total magnitude of what that is going to be... you know again we will get more specific with folks in April, but at this point of time, I think it’s a little early to say exactly what that number is going to be, because I think we still have some flexibility there. The retail part of the expansion plan, again it's moving around on us a little bit at this point of time, and it is going to be a little bit of a drag on the overall operating margin of the company. As those businesses build up and we have upfront costs associated with some of those store openings. The traditional fixed cost base like depreciation and major capital expenditures, we don't have a lot of those for 2008 at this point. So, a lot of what we experienced in 2007, in terms of the additional depreciation from both projects, we really only have one quarter of depreciation from the Rivergate retrofit. I think that you know from a... from just an overall standpoint the guidance that we have given in Q1, the back half for the year may be a little bit different just because again the seasonality of the business and the fact that the volumes of the business aren’t as great as Q1 as well. So, I don't know if that helps with a little bit of color going back to Jeff's comments as well.

Yeah Bryan, I mean it does, I guess my take from what you're saying is, you don't really know yet, but that you aren’t thinking that... you aren’t thinking that margins are going to be down 400 basis points, you aren’t thinking that the first quarter is indicative of the year, right?

That is correct Virginia. You know I would not say that our business is linear and that you should expect that the 450 basis points of SG&A expansion, that we are mentioning today, it is something that should be expected for Q2 through Q4.

Okay. And then just as quick I may Bryan, the tax rate, can you tell us, what to think about there going forward and what the potential downside to that is, and then Pat, maybe if you can address sourcing, sorry to go on, but I think that's a very hard topic, and you guys have been so good at it, what you are seeing for the sort of spring and fall.

Sure, so first on the tax front. Again just to reiterate a little bit, we did have a discreet event in Q4 that really was a settlement of some European tax examinations that were underway. Upon that settlement, we incurred close to about $0.14 with a favorable benefit. Another piece of that that we pointed out was $0.05, and this was really just the mix of international income as well as some tax law changes. I would expect that some of that structurally will help us slightly for 2008. And at least if it relates to Q1 and the assumption we've made for our effective tax rate, we've assumed that to be 33% for '08.

Thank you.

Yes. And then from the sourcing side, yes, obviously we're seeing pressures on cost from our labor and currency exchange and global energy prices really through most of the regions. But we are fully costed for spring and fall '08. And I think that's reflected in the guidance. And we... now we continue to have a strong network of offices throughout Asia that has let us take advantage of lower cost regions and helped to manage the effects of rising prices, as prices grow generally throughout the globe. So, we think we're doing a good job of it. And we're definitely feeling it, but I think we're managing it pretty well.

Okay. So, Pat, I'm sorry. In inflection point, I mean there is talk of things going from low singles to... low single digit increases, I think you've historically said 5, so 10 to 15. Are you seeing like 5% to 10% lift in your FOB cost?

We're not seeing them that high at this point. Though we haven't been out backup for spring to finalize costing for spring '09 at this point. But that in some regions, there is talk of increases like that, but we've been able to minimize those regions.

Thank you.

Your next question is from John Shanley with Susquehanna.

Thank you. And good evening folks.

Hi John.

Bryan, I wonder if you could give us your long-term prognosis on the Montrail and Pacific Trail of business areas. Sales were down pretty dramatically, is this the business that you think has a future within the Columbia Organization or is it something that could be shattered sometime in the fiscal '08?

No. No we think both of those brands are quite strong and have significant opportunity overtime to contribute. I would say that in the case of Montrail, it’s a very small business we acquired and we've been rightsizing that business over the last year that we've owned it. And the opportunities we think they are quite strong. We have got a new team in place managing that business and the initial reads on the product that they are developing and selling today have been quite good. As it relates to Pacific Trail, we talked a lot about the factor that channel for the company is one that requires some education and learning and the sales volume drop was a functional really of the purchase. The inventory book that we purchased and then made and sold last year, which was the Pacific Trail company's merchandise, we didn't really design it, we just manufactured it. We're still learning the product category. We talked about the fact that it has been more challenging for us to learn that channel of distribution than we had thought. And we consider all the brands that we have acquired during that acquisition to be strong and the Montrail is a significant opportunity for the company.

Okay. Fair enough. Also Tim can you give us an insight in terms of whether the upcoming magic show is still as important in terms of getting a gauge on your fall business? Are you now doing more of your auto booking in the prelines than you may have done in the past?

Well, John we have basically decided to exit most of the large tradeshows and this is something we undertook over the last really 12 months. We have really focused our time and effort on our product showcases where we bring in our customers and show them products and marketing strategies in a close environment, where we can have their complete attention. Typically our order books [inaudible] our major customers at the times of magic and outdoor show and the footwear show. And so we took the money that we were expending at those very expensive trade shows and really put it to focusing on share of our customer's time and attention. [inaudible] focused on us as opposed to other brands.

The showcases would be similar to what we experienced when we were at your shop, and so the Dix guys going through your product line, is that what you are talking about?

Exactly. So, we got others planned in and hopefully we don't intend to do them annually, maybe every 18 months or something like that where we get our customers together and show them what we are doing.

So, you must have a pretty good idea then if you have done enough of these showcases or preline events, to have at least a pretty general idea in terms of how fall is lining up. Is there any way you can share some of that with us?

Well you know, as the business has gotten bigger geographically and more diversion of product standpoint, we end up really needing more time to be able to clearly articulate our backlog positions to investors since they're... they are really critical in terms of how the business gets valued. So we want to make sure that we don't whipsaw people and give guidance that's not accurate. So we want to make sure that we have the focus on highly accurate guidance; we really can’t do that at this time.

Okay. Bryan I got a quick question for you. The expected decline of 2% in sales for the first quarter. Can you help us focus in on a little bit better where that decline is coming from? Is it geographic, is it brand specific or maybe a little bit more color. I understand the... in terms of the operating profit contribution, in terms of new stores and marketing expenditures and so on. But sales is what I am really interested. Why are sales declining in the first quarter?

All right, well. Specific to region it's really, it's really in the US and from a brand perspective, it's predominantly the Columbia brand. So again it's I think going back to the previous guidance that we gave in October, I think we are projecting a modest low single digit kind of an uptick in our top line and again with a different environment in front of us now, with a little bit of extra shipping in Q4, the expense of Q1 and some of the retail. It means at this point of time I would say that it's, it's really US phenomenon and definitely in the Columbia brand.

Okay. And the 33% tax rate you gave us in fiscal '08. Can you give us a tax rate for first quarter as well?

I'm sorry. The first quarter...our projection right now for our effective tax rate that we've included in our guidance in Q1 is 33%.

33% for the quarter and for the full fiscal year?

Well again when we look at our tax rate, we are trying... we are trying to take full-year look at it to get the effective tax rate, and then we use that on a quarterly basis. So at this point, it would be 33% yes for the quarter and that would be our best guess for the year at this point.

Right, fair enough. Thanks a lot. I appreciate it.

[Operator Instructions]. And your next question is from [inaudible].

Good afternoon.

Hi Sam.

Quick question on the... just on the pricing to follow up. In the footwear space, as Virginia said, we have been hearing lots of price increases in. And your footwear business is a real developing business, are you as flexible there as you are in the other apparel businesses?

Yes. In footwear, we're pretty well costed for the fall ’08. And it will be a bit in the development process of spring '09 at this point. But we do have China and Vietnam and I see much of the pressure we're hearing more out of China. So, we do have some flexibility to go back and forth between, but yes, we are hearing the same things that you're hearing on over pricing.

Can you give us some kind of breakout of sourcing out of China versus other markets, in footwear and apparel?

In apparel, we are maybe in that 20% range and we are probably evenly split at this point between China and Vietnam.

The 20% of...

On the footwear side.

Only 20% of your... 20% of your footwear is made in China right now.

No I'm sorry, we are about 50-50 on footwear. But we have flexibility with our factory groups between the two countries of origin. And then apparel, we are in the low 20% on apparel for global production.

Okay. Thanks. All my other questions have been answered. Thank you.

Sure.

Your next question is from Howard Tubin with RBC Capital Markets. Howard Tubin – RBC Capital Markets: Hi guys, just give me the kind of the slowdown we're seeing in the overall retail environment. Have you thought about maybe not going full board with more advertising and marketing at least in the first half of 2008 and maybe postponing until maybe the environment gets a little bit better, when the customers are a little bit more willing to spend money. Is that… have you thought about that at all?

Well, we've looked at our spend randomly across the various quarters and we believe that in order to support initiatives that we have in place for spring of Omni-Shade and Tech-Lite, we really need to hit those things hard and we believe that we can be impactful in terms of traffic and demand at our customers at our wholesale customers locations.

Got it. Okay. Thanks a lot.

Thanks.

Your next question is from Sara Hasan with McAdams Wright Ragen. Sara Hasan – McAdams Wright Ragen: Hi everyone.

Hi Sara. Sara Hasan – McAdams Wright Ragen: In October, you had mentioned that the Omni-Shade and Tech-Lite were going to soft launch in Florida and Texas in January, and I'm just wondering, is there any early read on how it's going, has it been well received. I think weather might also be a factor here?

Well, I know specifically in footwear in Florida, we have had some very encouraging results, but it's quite small by comparison of the total shipments. So, we're reluctant to pop the champagne corks here. It is early, but it has certainly been among the best sell troughs we have had on a weekly basis for some time certainly in spring products. [inaudible] we're getting our first reads from really our... some of our catalogue customers, and I just spoke today to one of our sales teams and it looks like, I guess, we should say we are very encouraged by the results so far, but they are small samplings, but they are encouraging. Sara Hasan – McAdams Wright Ragen: Great, thank you.

Thanks.

Your next question is from Brad Cragin with Goldman Sachs.

Yes, hello. Can you provide a little bit more detail around some of the actions you are taking in Europe and with Mcneil over there? How is your view of that market change. Then can you just provide an update on the progress you are making there?

Certainly. Well, I guess I would say that I'm even more convinced of the size and scope of the opportunity for the company in the direct markets of the EU that we currently serve. I would say the primary changes are really into the category of marketing and product. So, again as it relates to product, we become much more integrated with our global team headed by the folks here in Portland to confirm that the products that we are choosing for European line are in sync with what we know to be true about consumer’s demands in the outdoor space here in the US and the rest of the globe. And that is an area where we... we just frankly didn't perform very well in terms of linking the company strengths and the product offerings well enough. Secondarily, I would say is in marketing. And our European team had focused its marketing dollars on areas that just didn't have the high return. We had a lot of athlete endorsements in Europe, but just didn't have the kind of resonance to our consumer that direct appeals the magazine ads, Internet or billboards have to the consumers that we know so well here in the US. So, even though we won’t increase our marketing spend in Europe '08 over '07, we think we are going to have a much more focused and much more responsive activities. So, I would say those are the two primary categories where change has occurred. We also have a significant manager in Christian Finell who has got a lot of experience in pan-European management and we think that plus the addition of David Kiser who most of you know from our IR days here at Columbia are really going to be important for the company. They have the stability and connection to the US and so we are encouraged.

Thanks. And when will that realigned product be sorted, is that for spring '09?

I think we started with spring '08, and there has been an additional adoption for fall '08 and really the complete integration I would say will be spring '09.

Okay, thank you.

Thanks.

[Operator Instructions] And there are no further questions at this time. Mr. Parham, you may proceed with any closing comments.

All right, we would to like to thank everyone for joining us today and we look forward to continuing the conversation in the months ahead. Have a good evening.

This concludes today conference, you may now disconnect.