Deckers Outdoor Corp (DECK) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation Fourth Quarter and Fiscal 2002 Year-Ending Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded.

And we’ll now turn the conference over to Douglas Otto, Chairman and Chief Executive Officer. Please go ahead.

Before Doug begins, I’d like to read the Safe Harbor language. Certain statements made in this news release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those contemplated by such statements. Such factors are discussed in detail in Deckers Outdoor Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. I would now like to turn the call over to Doug Otto.

Thank you, [Brendan][ph]. With me is Scott Ash, our CFO.

Our strong fourth quarter performance was a great finish to a very important year for our company. Sales for the quarter increased 23 percent to a record $25.8m, and earnings per share increased 160 percent to $0.13 per diluted share. For the year, sales increased 8 percent to $99.1m, and earnings per share, excluding Yeti litigation and goodwill impairment costs, increased 17 percent to $0.35 per diluted share.

We accomplished a lot during this past year. Here are some of the most noteworthy achievements:

First, we simultaneously increased our domestic sales in all three brands – Teva, Simple and Ugg.

Second, we successfully moved forward with our expansion of Teva into closed footwear, which is helping us to diversify our offerings and balance our seasonality within that brand.

Third, Ugg, by expanding nationally, achieved double-digit sales growth for the fifth consecutive year.

And, finally, and probably most importantly, we acquired Teva, our flagship brand, which we expect to be accretive to earnings per share, to add $1m to our 2003 earnings and to unlock numerous growth opportunities for the Company.

Scott will now discuss financial details. Then I’ll give you an updated outlook for our brands and our growth opportunities.

For the fourth quarter, our sales increased 23 percent to a fourth quarter record of $25.8m. This compares to $20.9m last year. For the quarter, our Teva sales increased 42 percent to $10.7m, compared to $7.6m last year. Ugg sales increased 13 percent to $13.3m, compared to $11.8m a year ago. And Simple sales were $1.8m for the quarter, versus $1.6m last year. International sales for all brands were $4.4m, compared to $2.7m in the fourth quarter of 2001.

Year to date, our consolidated sales were $99.1m, versus $91.5m last year. Sales of Teva for the year were $65.1m this year, compared to $61.2m last year. Ugg’s year-to-date sales increased 24 percent to a record $23.8m this year, compared to $19.2m last year, marking its fifth consecutive year of double-digit revenue growth.

Simple sales aggregated $10.2m, versus $10.9m last year.

And international sales for all brands were $20.8m this year, versus $21.1m last year, while domestic sales for the year increased 11 percent to approximately $78m.

For the year, our gross margin decreased slightly to 41.9 percent, from 42.2 percent, primarily due to an increased impact of closeout sales and reduced selling margins in the international market. This was partially offset by a reduction in inventory write-downs.

Our SG&A expenses for the year increased approximately $900,000 compared to 2001, a decrease as a percentage of sales to 35.3 percent, versus 37.2 percent last year. Increased expenses were primarily in the areas of marketing, personnel, and the costs related to this Company’s new computer system. These were partially offset by the elimination of goodwill amortization in accordance with FAS 142 and the reductions in royalty and other expenses resulting from the acquisition of Teva in the fourth quarter.

As previously reported in our first quarter earnings release, the Company implemented FAS 142 during the first quarter, resulting in a goodwill impairment charge of approximately $9m during the first quarter. Accordingly, our year-to-date numbers include this item.

The Company recorded litigation charges of $3.2m in 2002 and $2.2m in 2001 based on decisions in a Montana lawsuit. During the fourth quarter of 2002, the Company negotiated a final settlement of the suit for $4m, which was $290,000 less than previously expected, or $168,000 after taxes. As a result, the fourth quarter 2002 results include this $168,000, or $0.02 per diluted share, increase in earnings related to this settlement.

Overall, net income for the quarter was $1,363,000, or $0.13 per diluted share, versus net income of $506,000, or $0.05 per diluted share, for the fourth quarter of last year.

For the year, excluding the year-to-date litigation costs, the pro forma earnings before cumulative effect of accounting change were $3,459,000, or $0.35 per diluted share, compared to pro forma net earnings of $2,887,000, or $0.30 per diluted share, last year.

Including the litigation charges, net income before a cumulative effect of accounting change was $1,620,000, or $0.17 per diluted share, compared to net earnings of $1,626,000, or $0.17 per diluted share last year.

On the balance sheet, we were able to limit our accounts receivable to an increase of only 2 percent since last year despite a 23-percent increase in sales for the quarter. In addition, our inventory is down 7 percent since December 31, 2001, and at year-end, we had approximately $4m of cash and approximately $14m of borrowing availability under our revolving line of credit.

Thanks, Scott.

I’ll now talk about each of our brands, how they’re doing, and what our future expectations are.

Teva sales for 2002 increased 6.3 percent, ending with a fourth quarter increase of over 41 percent. Both domestic and international sales grew. Teva’s spring ’02 products sold through very well at retail, and we ended the season with very little inventory. Teva’s fall products also retailed well, even in the challenging environment the retailers experienced. The [Anadyne][ph] for men and the [Kenta][ph] for women were two of our better performers in this new category launch for Teva.

We are now shipping our spring 2003 line. Most of our key retail partners in all distribution channels – outdoor, sporting goods, department and shoe stores – are increasing both model and category offerings for Teva.

We’re already experiencing increased retail sales at many of our core retailers, including Teva’s largest customer, REI, as well as at accounts in Florida and Hawaii, where the weather has broken and it’s actually been warm. At our recent OR and WSA trade shows, we’ve been showing our fall line with this expanded closed-shoe rugged outdoor footwear offering. Response has been very good, and we’re expecting solid growth in all distribution channels.

A huge milestone for Teva occurred in November when we purchased the worldwide Teva assets from our then-licensor, Mark Thatcher. We expect this transaction to be accretive to earnings by eliminating our royalty expense and adding $1m to our 2003 net income, as well as to better position us to maximize the potential of the Teva brand.

We are now taking a longer-term approach to our product development and marketing as we expand into new footwear categories. Over the next few years, we will be launching innovative new products and using our proprietary technologies in not only sports sandals but also in light hikers, trail runners, amphibious and casual footwear. Now, instead of addressing a $355m sports sandal market, we’re addressing a $2.3b rugged outdoor footwear market. We also expect to selectively license other non-footwear products and to expand Teva’s retail catalog and website business that is growing and profitable and was part of the acquisition. Teva is the leading performance brand in the outdoor market, and this transaction enables us to move forward with our mission to be the brand of choice for the new outdoor athlete.

While Simple sales declined last year in the international market, they increased in the U.S., almost 33 percent in fourth quarter and 8 percent in the year. We believe this indicates that Simple is turning the corner and picking up momentum. Simple has become a solid brand in Nordstrom and its core independents and has experienced better sell-through this year than in previous years. We are encouraged by the reaction and initial bookings for our spring and fall 2003 line. We expect to see growth this year, particularly in the second half, as we begin to deliver some fresh, athletically inspired styles.

In 2004, we are expanding our sandal offering to take advantage of one of our core competencies and introducing [Simple Girl][ph], a moderately priced collection aimed at a younger teen demographic.

Ugg continues to outperform our expectations. Two thousand two (2002) sales increased over 24 percent. Even in the tough retail environment during the holiday season, Ugg experienced strong retail sell-through in all categories and throughout the country.

Ugg sales continued to increase in established accounts, like Nordstrom and Sports Chalet, as well as being offered in new places, like the Victoria’s Secret catalog, the Herrington catalog and Neiman Marcus.

Ugg’s editorial coverage and celebrity popularity also has continued to increase. The January 20, 2003 issue of Us Weekly includes a two-page article with the headline, “Hollywood [Booty][ph] Call – [Manlows][ph] Rule the Night, but by day, the A-list slips into Ugg.” Another article appeared in USA Today on Valentine’s Day. And last week, People.com, which was viewed by over seven million people, displayed a photo gallery of 13 of Hollywood’s top celebrities getting all booted up in Ugg boots. Exposure like this has helped Ugg grow from a regional brand to a national brand and to be a core holiday brand for many retailers.

As the leader in its niche category, Ugg has now achieved five consecutive years of double-digit growth, with sales in each of the last three years posting increases of well over 20 percent.

Now, let me discuss our guidance.

For the first quarter of 2003, we expect sales of $34-36m and earnings per diluted share of $0.28 to $0.30. Furthermore, based on the strength and momentum of Ugg and the strong response to our new Teva styles, we are increasing both our sales and earnings guidance for the entire year. We now expect 2003 sales to be $101-106m and earnings to be $0.41-0.46 per share. We expect 2003 Teva sales to be in the range of $67-69m, Simple sales to be $11-12m, and Ugg sales to be $23-25m.

In summary, we have three strong brands that are leaders in their niche category and that are gaining market share in this challenging retail environment. We are pleased about our performance in 2003 – excuse me, in 2002 – and expect solid momentum to continue into 2003.

Thank you for your support. We’d now be happy to answer any questions you may have.

Thank you. The floor is now open for questions. [Caller instructions.]

Thank you. Our first question is coming from [Rammel Diancio][ph] with [Ross Capital][ph].

Hi. Good morning, gentlemen. Nice quarter.

Thank you.

A quick question, Scott. I think in your prepared comments you referenced increased marketing expenditure as being one of the reasons to increase SG&A. Could you just talk about the magnitude of that perhaps, as well as what particular brand the increased marketing was really focused on?

Sure. The total for the year increase was about $1.4m in marketing costs, and it’s really across the board. It’s all three brands – Teva, Simple and Ugg.

Is there a particular area of focus you would look at for 2003?

In terms of the areas that the dollars are being spent?

Exactly.

I would say that the majority of the money goes into print advertising. In Teva, we also spend quite a bit in our sports marketing, where we put on the Vail Mountain Games in June, as well as support it with a group of what we call tech reps that are out there. We’ve got a partnership with VW now, where they’re helping us with Eurovans, as well as support on the Vail Mountain Games. We also spend quite a bit in what we call VSM, Vendor Support, and that would be where we would work with a particular account, whether it be REI, on either catalog or print or point of purchase, but basically it’s tailored to push product through their stores. We do that with quite a bit of our key accounts. Also do some regional media buys. It’s pretty much print.

If we go to Ugg and Simple, it’s the same, pretty much print. It would be the strong area. We also support a little bit of point of purchase. And, in particular with Ugg, there’s a lot of, I guess, publicity, and we put more into that PR aspect. In fact, I think there’s a party going on this week where we have -- a lot of the celebrities in Hollywood are actually painting Ugg, and then those will go on sale with the proceeds going to various charities. So we do a lot along that vein with Ugg.

Great. Thanks very much.

Thank you.

Thank you. Your next question is coming from [Mitch Connis][ph] with Wedbush Morgan Securities.

Thank you. Let me congratulate you guys on a great quarter.

I’d like to start out with Ugg. Obviously, that business was very strong in the fourth quarter, stronger than I was forecasting. I was hoping you could just elaborate a little bit on that strength.

And then in terms of your forecast for that business for ’03, you’re not looking for much of an increase. I was hoping you could explain why that might be. I would think that given the strength of the fourth quarter, you’d expect the bookings to be up substantially in that business.

Okay. First off, let me talk about fourth quarter this last year. And you are right; it was ahead of book. We expected -- we actually had some very strong business in December. All of our accounts increased. We were amazed at the amount of volume that Nordstrom did. They just continue to expand our Ugg business, as well as some of our new retailers that we plugged in did well as well. And it was across the board. We keep thinking Southern California’s saturated, but it keeps growing on us, and I can’t see how it can grow much further. But we do look at the rest of the U.S. as being quite a vehicle for growth for us.

As we look into this year, I guess – we’re currently showing the product. We’re getting great response. But it’s probably a little too early for us to actually get a read on the paper, which we’ll be getting that over the next couple of months, and by April/May, we’ll have a lot stronger indication of where third and fourth quarter will come in with Ugg. I will tell you that we are getting good indications to a lot of the new product that we’re showing at WSA, and I guess we just felt it was a little premature for us to go and give guidance to large increases. I mean we’ve increased between 24 and 26 percent for the last three years and just sort of looking at it in that respect.

Are you expecting to open up any significant accounts for Ugg in ’03?

We are selectively adding accounts. We expect to broaden our distribution within the existing accounts as we’ve introduced a few new styles that look like they won’t take any business away from existing styles. And I would say the predominant growth will be within our existing account base, although we are selectively adding some. And last year, we tested with a few that seemed to do well, so we expect growth there.

Okay. And the other area that caught me by surprise on the positive end, at least on the top line, was international, which was up substantially in the quarter. Can you go through quickly what was the strength there?

The strength there was Teva, and we start delivering Europe – in particular, Europe, but also Canada and Japan, in fourth quarter, and they take the bulk of their shipments in fourth quarter and in first quarter. And this year, in particular, Europe took quite a bit in fourth quarter and actually a little bit more than we’d anticipated and to get an early jump on their season.

Okay. I mean are those sales that are then coming out of your Q1 expectations, because you’re still expecting Q1 ’03 to be a good quarter as well?

Right. And we are still expecting Q1 to be a good quarter. Our international business has actually strengthened a bit since last year, and I think last year we’d commented that Japan, in particular, had had some problems. Japan, I’ve got to say, is fully working its way through those. We did come to terms with our German distributor in terms of being able to ship them, and we work with the credit side of it, which last year impacted our business in Germany. And we’ve got that squared around. We’ve also got a new distributor in the U.K., and we’ve added a couple of other distributors that have helped bring the business up, in particular, internationally.

Okay. And a couple last questions. On the gross margin line, that was a little softer than I was expecting. Is that a function of mix, or is it a function of higher percentage of closeouts than you were expecting? Could you kind of go through that?

Sure. Yeah, for the quarter, our gross margin decreased to 37.5 from 40.5, primarily due to [hand postings][ph], including inventory write-downs, increased impact to closeout sales, [indiscernible] our continuing efforts to try to convert our inventory to cash. We’ve tried to move this stuff out quicker. We had lower selling margins in the international markets, and we also had about a $260,000 charge from a factory for reimbursement of some tooling costs that hit us in the fourth quarter.

Okay. And one last thing. In terms of your expectations for Teva in ’03, the increase there, could you say, you know, how much of that increase you’re expecting from the new closed-toe product versus just continued growth in the sandal business?

I would say that what we’re looking for out of the closed footwear – let me put it this way. We would like to see eventually 30 percent of our business come from closed footwear. Last year, it was under 10 percent. We see that growing over time. The first half of the year, first and second quarter, it’s going to be predominantly sandals. Where I think we will start seeing the growth is, in particular, third quarter, where closed footwear means a lot more than sandals do. I will say we’re getting very good response to our -- what we call the Hydro series, which has an aquamarine deck, footwear offering, as well some real neat new amphibious models. And as we go into third quarter, we’re getting great response on a little shoe we have called the [Arabbi][ph], which is more in the casual rugged outdoor, and that will be introduced late second quarter into third quarter.

Okay. Thanks a lot.

Thank you, [Mitch][ph].

Thank you. Your next question is coming from [Jeff Cutshall][ph] with [Shuffala and Company][ph].

Hey, guys. Congratulations.

Thank you.

Mitch hit on most of my questions, but just a follow-up on the gross margins topic. Are all those issues pretty much out of the way then, or would you expect any of these issues to linger and, I guess, carry over into ’03?

And then, also, do you think you could you give us any kind of guidance as far as where you think the gross margin would fall for Q1 or for the year? It looks like, you know, it’s been kind of falling since 2000, I guess, each year, and just wondering where, you know, you think this would level out, I guess.

I think, first off, gross margin, we really pride ourselves in being one [and] the best in the industry here in gross margin. I will that, for instance, the tooling and some of the inventory markdowns are things that are over with, and we’re controlling a lot better our inventories. You can just by the sheer dollars there.

But I would say two factors that would tend to impact the gross margin would be increased international business, which we expect to increase over the next few years, which is at lower margins than our domestic business. The other thing I would expect is as we go into closed footwear, we don’t get quite the margin in Teva that we do get on sandals, so those would be things that would be on the down side.

Now, on the up side, we believe we have more up side that will take care of that, and that is, first off, when we acquired the Internet and catalog business from Teva, we get full retail on that. And if you look at that being $3-4m in sales and the fact that we get roughly a 75-percent [sell-in] margin as opposed to a 50-percent [sell-in] margin, that will add at least one to two basis points.

The other area that we see correcting itself is Simple, as it is starting to get to what I would say would be a minimum volume to where we’re actually able to sell through minimum quantities of each style we buy, that there’s less closeouts there, and that particular brand is one that helped bring our margin down this last year.

We do see, as we get our product mix in Ugg, we’ve been bringing the margin of Ugg up from when we bought at the mid-30s, to now it’s in the high’30s, even low 40s now, as we’ve brought in the product mix that’s made in the Orient, and that should continue. I mean there’s obviously pressures now just from the price of oil and price of leather and stuff like that that may increase that kind of pressure, but I think we’ve more than got it offset by the things going in the positive direction.

Okay. So you’re saying the net of all that would be margin expansion this year?

Yes.

Okay. Great. Thank you.

Thank you. [Caller instructions.]

Our next question is coming from [Harris Hall][ph] with Wedbush Morgan Securities.

Hey, you guys. Congratulations on the quarter. Just a question on your next quarter and your liquidity position. It seems that your first quarter’s a big quarter and your cash has come down a little bit. You said you had $14m on the revolver. Can you just elaborate on that a little bit, please?

Sure. As always, first quarter is our cash-usage period. We’re building our inventory, and we’re building our receivables. And then in the second quarter and in the third quarter, our inventory goes down, and we collect our receivables. We do have $14m of availability at the end of the year. I can tell you it does look pretty good for us right now. We’ve exceeded our expectations so far this year on cash flow, and we should see by third quarter having our line of credit paid down – paid off.

Okay, great. Thanks.

[Caller instructions.]

Gentlemen, we are showing no further questions in queue at this time.

Great. Well, listen, again, thank you, everyone. We look forward to giving you another good release here in a couple of months for first quarter. Thanks a lot.

Bye bye.

Thank you for your participation. This does conclude this morning’s teleconference. You may disconnect your lines at this time.