UPDATE 2-Timberland reports strong Q3; sees improved Q4 margins

* Q3 EPS $0.68 vs est $0.45, rev tops Street view

* Strong North America and footwear growth boost Q3

* Sees gross margins improving in Q4 vs Q3 and year ago

* Sees lower leather prices helping Q4

* Shares rise as much 29 pct (Recasts; adds conference call details, background, analysts' comments, updates share movement)

By Shradhha Sharma

BANGALORE, Oct 29 (Reuters) - Timberland Co's (TBL.N) third-quarter results outpaced market expectations, and the footwear maker forecast improved gross margins in the fourth quarter, sending its stock up as much as 29 percent. "We should see gross margins improve versus the third quarter and last year as we have less excess and obsolete inventory to eliminate," Chief Financial Officer Carrie Teffner said on a conference call with analysts.

Timberland said it has trimmed its inventory by 8 percent to $201.7 million from the year-ago quarter.

"Demand has definitely started to improve. I think they offered a conservative yet positive outlook," Wall Street Strategies analyst Brian Sozzi said. The company, known for its Earthkeepers, howies and Mountain Athletics brands, said it expects to benefit from lower input costs in the fourth quarter. [ID:nWNAB6731]

"We've seen highs and lows in terms of leather prices this year, we should start seeing the benefit of some of those lower leather prices coming through in terms of our cost of goods sold in the fourth quarter," CFO Teffner said.

BANKING ON EARTHKEEPERS

Timberland said it expects its eco-friendly Earthkeepers brand -- which includes footwear and apparel for men and women -- to form a bigger chunk of footwear and apparel sales in the fall of 2010.

The company has been aggressively promoting the brand, whose footwear uses "green rubber" obtained through a patented process that turns used automobile tires into rubber outsoles.

By fall 2010, the company expects Earthkeepers to make up for more than 10 percent of footwear sales and more than 50 percent of its apparel sales, Chief Executive Jeffrey Swartz said on the conference call.

"That's probably one of their highest margin opportunities, because it's probably one of their most innovative products based on how they produce it," analyst Sozzi said.

The brand's current $65 million in sales roughly form about 5 percent of total company sales and the latest announcement makes it very clear the direction in which Timberland is headed with its brands, Stifel Nicolaus analyst Thomas Shaw said.