| Company History and Operations |
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| EarthWear Clothiers was founded in Boise, Idaho,
by James Williams and Calvin Rogers in 1973 to make high-quality
clothing for outdoor sports, such as hiking, skiing, fly-fishing,
and whitewater kayaking. Over the years, the company's product
lines have grown to include casual clothing, accessories, shoes,
and soft luggage. EarthWear offers its products through three
retailing options: catalogs, retail outlets, and its website. |
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| The company strives to provide excellent, high-quality
products at reasonable prices. EarthWear has a commitment to
excellence in customer service and an unconditional guarantee.
The company is also conscious of its environmental responsibilities.
All company facilities are insulated, recycle, and conserve
power. The company continuously monitors the environmental
impact of its products. The company believes that many of its
customers share this concern for the environment. |
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| The company offers its products principally
through regular mailings of its monthly catalogs in the United
States, Europe, and Japan. EarthWear has ten U.S. outlet stores,
four in the U.K., two in Germany, and two in Japan. The company
also offers its products over the Internet (www.mhhe.com/earthwear).
During 2006, the Company expanded its global presence by launching
sites in France, Italy, Ireland, and several eastern European
countries. Currently, revenue from catalog sales, retail outlets,
and the website are 74 percent, 5 percent, and 21 percent,
respectively. Management expects that Internet sales will grow
significantly in the future, perhaps replacing catalogs as
the major source of sales. |
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| EarthWear was incorporated in Idaho in 1975 and became a
Delaware corporation in 1986 when it went public. |
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| Company Growth Strategy |
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| EarthWear’s growth strategy has three elements. First,
the company attempts to increase sales by expanding its customer
base and by increasing sales to existing customers through
improved product offerings. Second, the company seeks to
generate additional sales by targeted mailings of special
issues of its catalogs and by offering its products through
its website. Third, the company is pursuing additional opportunities
to expand its merchandising skills internationally. |
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| Catalogs and Sales Operations |
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| During 2006 the company mailed 12 issues of
its regular monthly catalog with an average of 75 pages per
issue from its U.S. operations. Worldwide, the company mailed
approximately 160 million full-price catalogs. EarthWear views
each catalog issue as a unique opportunity to communicate with
its customers. Products are described in visual and editorial
detail, and the company uses such techniques as background
stories and distinctive covers to stimulate the readers’ interest. |
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| Each issue of the regular catalog offers certain
basic product lines for men and women. The regular catalog
also offers seasonal merchandise. In addition, EarthWear mails
two end-of-season clearance catalogs. The company mails its
catalogs to prospective customers who are identified based
on lists of magazine subscribers and lists of households meeting
certain demographic criteria. In addition, the company identifies
prospective new customers through its national advertising
campaign. |
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| In 1991 the company introduced its first business
specialty catalog, which offered its products to groups and
companies for corporate incentive programs. EarthWear’s
embroidery capabilities allow for the design and monogram of
unique logos or emblems for groups and companies. In 2006 the
company mailed five issues of its corporate sales catalogs. |
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| The international business segment includes operations in
Japan, Germany, and the United Kingdom, and various Internet
sites. Catalogs mailed in those countries are written in
the local languages and denominated in local currencies.
In the spring of 2006, EarthWear launched local websites
in each of these countries in their respective languages
and currencies. |
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| Customer Database |
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| A principal factor in the company’s success
has been the development of its own list of active customers.
At the end of 2006 the company’s mailing list consisted
of about 21.1 million persons, approximately 7 million of whom
were viewed as customers because they had made at least one
purchase from the company within the last 24 months. The company
routinely updates and refines the database before mailing catalogs
to monitor customer interest as reflected in criteria such
as the regency, frequency, dollar amount, and product type
of purchases. |
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| EarthWear believes that its customer database
has desirable demographic characteristics and is well suited
to the products offered in the company’s catalogs. A
survey conducted by the company in the United States during
2005 indicated that approximately 50 percent of its customers
were in the 35–54 age group and had median incomes of
$62,000. |
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| The company advertises nationally to build its reputation
and to attract new customers. In 2006 this advertising campaign
appeared in about 40 national magazines, as well as on five
national cable television networks. In addition, the company
advertises in approximately 75 national, regional, and local
publications in Canada, the United Kingdom, Germany, and
Japan. EarthWear also advertises on a number of Internet
search engines and websites. |
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| Product Development |
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| EarthWear concentrates on clothing and other
products that are aimed at customers interested in outdoor
activities. The company products are styled and quality crafted
to meet the changing tastes of the company’s customers
rather than to mimic the changing fads of the fashion world.
At the same time, the company seeks to maintain customer interest
by developing new products, improving existing core products,
and reinforcing its value positioning. |
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| The company continues to incorporate innovations
in fabric, construction, and detail that add value and excitement
and differentiate EarthWear from the competition. In order
to ensure that products are manufactured to the company’s
quality standards at reasonable prices, product managers, designers,
and quality assurance specialists develop the company’s
own products. |
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| EarthWear deals directly with its suppliers and seeks to
avoid intermediaries. All goods are produced by independent
manufacturers except for most of its soft luggage, which
is assembled at the company’s facilities. During 2006
the company purchased merchandise from approximately 300
domestic and foreign manufacturers. One manufacturer and
one intermediary accounted for about 14 and 29 percent of
the company’s received merchandise, respectively, in
2006. In 2006 about 80 percent of the company’s merchandise
was imported, mainly from Asia, Central America, Mexico,
and Central America. The company will continue to take advantage
of worldwide sourcing without sacrificing customer service
or quality standards. |
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| Order Entry, Fulfillment, and Delivery |
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| EarthWear has toll-free telephone numbers that
customers can call 24 hours a day, seven days a week (except
Christmas Day) to place orders or to request a catalog. Approximately
90 percent of catalog orders are placed by telephone. Telephone
calls are answered by the company’s well-trained sales
representatives, who utilize online computer terminals to enter
customer orders and to retrieve information about product characteristics
and availability. The company’s three U.S. telephone
centers are located in Boise, Idaho; Reston, Virginia; and
Canton, Ohio. International telephone centers are located in
London, England; Tokyo, Japan; and Mannheim, Germany. |
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| The company’s order entry and fulfillment
system permits shipment of in-stock orders on the following
day, but orders requiring monogramming or inseaming typically
require one or two extra days. The company’s sales representatives
enter orders into an online order entry and inventory control
system. Customers using the company’s Internet site see
color photos of the products, their availability, and prices.
When ordering a product over the Internet, the customer completes
a computer screen that requests information on product code,
size, color, and so on. When the customer finishes shopping
for products, he or she enters delivery and credit card information
into a computer-based form. EarthWear provides assurance through
CPA WebTrustSM that the website has been evaluated and tested
to meet WebTrustSM principles and criteria. This assurance
service is provided by the company’s independent auditors,
Willis & Adams, LLP. |
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| Orders are generally shipped by United Parcel Service (UPS)
at various tiered rates that depend on the total dollar value
of each customer’s order. Other expedited delivery
services are available at additional charge. Domestically,
the company utilizes two-day UPS service at standard rates,
enhancing its customer service. Comparable services are offered
in international markets. |
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| Merchandise Liquidation |
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| Liquidations (sales of overstock and end-of-season merchandise
at reduced prices) were approximately 12 percent, 11 percent,
and 8 percent of net sales in 2006, 2005, and 2004, respectively.
Most liquidation sales were made through catalogs and other
print media. The balance was sold principally through the
company’s outlet retail stores. |
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| Competition |
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| The company’s principal competitors are
retail stores, including specialty shops, department stores,
and other catalog companies. Direct competitors include Eddie
Bauer, Land’s End, L. L. Bean, Patagonia, and Timberland.
The company may also face increased competition from other
retailers as the number of television shopping channels and
the variety of merchandise offered over the Internet increase.
The apparel retail business in general is intensely competitive.
EarthWear competes principally on the basis of merchandise
value (quality and price), its established customer list, and
customer service, including fast order fulfillment and its
unqualified guarantee. |
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| Trademarks |
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| The company uses the trademarks of "EarthWear" and "EWC" on
products and catalogs. |
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| Seasonality of Business |
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| The company’s business is highly seasonal.
Historically, a disproportionate amount of the company’s
net sales and most of its profits have been realized during
the fourth quarter. If the company’s sales were materially
different from seasonal norms during the fourth quarter, the
company’s annual operating results could be materially
affected. Accordingly, results for the individual quarters
do not necessarily indicate results to be expected for the
entire year. In 2006, 37 percent of the company’s total
revenue came in the fourth quarter. |
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| Employees |
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| The company believes that its skilled and dedicated
workforce is one of its key resources. Employees are not covered
by collective bargaining agreements, and the company considers
its employee relations to be excellent. As a result of the
highly seasonal nature of the company’s business, the
size of the company’s workforce varies, ranging from
approximately 3,500 to 5,300 individuals in 2006. During the
peak winter season of 2006, approximately 2,700 of the company’s
5,300 employees were temporary employees. |
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| Executive Officers of the Company |
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| James G. Williams, 65, is chairman of the board
and former chief executive officer. Mr. Williams was one of
the two original founders of EarthWear. He stepped down as
chief executive officer in December 1999. |
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| Calvin J. Rogers, 57, is president and chief
executive officer of the company. Mr. Rogers was one of the
two original founders of the company. He assumed his present
position in December 1999. |
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| Dominique DeSantiago, 56, is executive vice
president and chief operating officer. Mr. DeSantiago joined
the company as chief operating officer in June 1991. He was
promoted to vice president in October 1994. Mr. DeSantiago
was previously employed by Eddie Bauer in various capacities. |
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| Linda S. McDaniel, 45, is senior vice president
of sales. She joined the company in July 1996. Ms. McDaniel
served as divisional vice president, merchandising, with Patagonia
between 1986 and 1990. Ms. McDaniel was the president and chief
executive officer for Mountain Goat Sports from 1990 until
1996. She has been serving as a director of the company since
November 1997. |
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| James C. ("JC") Watts, 45, is senior
vice president and chief financial officer. Mr. Watts joined
the company in May 1996, assuming his current position. He
was previously employed by Federated Department Stores. |
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| Mary Ellen Tornesello, 47, is senior vice president of
operations. Ms. Tornesello joined the company in 1994 as
operations manager. She served as vice president of operations
from 1995 until 1997, at which time she assumed her present
position. |
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| Market Information |
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| The common stock of the company is listed and
traded on NASDAQ under the symbol EWCC. The high and low prices
of the company’s common stock for 2006 were $52.50 and
$21.75 per share. The closing price of the company’s
stock on December 31, 2006, was $40.25 per share. |
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| Shareholders |
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| As of December 31, 2006, the number of shareholders
of record of common stock of the company was 2,120. This number
excludes shareholders whose stock is held in nominee or street
name by brokers. |
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| Independent Auditors |
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| The company has been audited by Willis & Adams since
incorporation in 1975. |
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