Deckers Outdoor Corp (DECK) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Deckers Outdoor Corporation Second Quarter Fiscal 2003 Earnings and 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 difficulty hearing the conference, please press star zero for operator assistance at any time. I would like to remind you, to everyone that is on this conference is being recorded and will--I will now turn this conference over to Douglas Otto, Chairman and Chief Executive Officer. Please go ahead.

Before Doug begins, let me just say that, at the outset that we note that some of the information we provide in that call will be forward-looking statements, within the meaning of the Securities Laws. These statements concern Deckers' expectations and objectives for the future operations.

We caution you that a number of risks and uncertainties beyond our control could cause Deckers' actual results to differ materially from those we describe in this call. We've explained some of these risks and uncertainties in the risk factors section of our annual report on Form 10-K and in other documents we filled with the SEC Among the risks are general economic, to the weather and to the choices of our customers to carry (technical difficulty) Deckers intends forward-looking statements in this call will be protected by the Safe Harbor Provision of the Securities Exchange Act of 1934. Deckers' is not obligated to update its forward-looking statements to reflect the impact of future events. With that out of the way, I'd like to turn the call over to Doug.

Thank you Brendon. And thank you all for joining us. With me is Scott Ash, our CFO.

We're happy to announce that our sales for second quarter 2003 were $24.3m up 9% from last year's $22.4m. Earnings for the quarter were 17 cents per diluted share, which includes 3 cents from a favorable ruling in our European Anti-dumping case. This 17 cents represents an increase 143% versus 7% last year and above the first call since consensus estimate of 10 cents. It is important to note that we earned 17 cents on 11.6 million shares versus 9.7 million shares last year. 1.5 million of the 1.9 million share increase relates to the issuance of the preferred stock used by Teva. We expect to buy back all of the preferred stock within the next couple of years before it can be converted into common stock and are discussing repurchasing at least some of it this year. For this reason I think our net income performance may be a better indication of the strength of our business during the quarter.

Net income increased more than three fold to approximately $2m compared to $642,000.00 a year ago. There're two other points I'd like to highlight before I turn the microphone over to Scott. The first, is that based on our better than expected profitability during the quarter we made a $2m early repayment of the $14m Peninsula-Sub debt. We currently expect to make additional prepayments prior to the due date.

The second point I'd like to emphasize is that the nature of our business is changing. As a result, the second half of the year is becoming a more meaningful contributor to our yearly results. Ugg continues to grow and is becoming a major portion of our fourth quarter's revenue, but also of our third quarter's. Teva is doing more Fall Clothes Toe Shoe business and more Teva customers are carrying our basic Sport Sandal models year round. To support these seasonality balancing initiative we are bringing in Ugg and Teva Fall products earlier this year and carrying more inventory than we have in the past as we enter third quarter.

While our simple inventory is lower this year than last, the front-loading of Ugg and Teva inventories in order to meet our customer's demands has increased our total inventory at the end of second quarter. We expect the second quarter trend to continue going forward but we expect year-end inventories to be comparable to last year's level. Scott will discuss the financials in more details then I'll give you an updated outlook for our brand.

Second quarter sales increased to $24.3m versus second quarter 2002 sales of $22.4m, for the quarter sales at Teva increased 15% to $22.4m in 2003 compared to $19.5m in 2002, simple sales were $1.5m for the second quarter versus $2.6m last year. Our Ugg sales were approximately $400,000 in the second quarter compared to approximately $300,000 for the second quarter of last year. And our International sales for all brands were $3m in the second quarter versus $1.3m in the second quarter of 2002. Year-to-date our consolidated sales were $60.4m up 9% from $55.6m last year. Sales of Teva year-to-date were $54.1m this year compared to $48.7m last year.

Simple sales aggregated $4.3m versus $6.2m last year, while Ugg sales were approximately $2m versus $716,000 last year. Our international sales for all brands were $13.6m for the first 6 months of 2003 versus $13.9m for the first 6 months of 2002. Year-to-date our domestic sales increased 12% to $46.8m compared to $41.7m last year. Gross margin for the current quarter increased to 48.6% compared to 45.0% in the second quarter of last year primarily due the favorable impact of the strength of the euro in the European market, a high gross margin internet and catalog sales and reduced impact close out sales compared to that of the year ago period. Our SG&A expense for the quarter was $7.2m or 29.4% of sales compared to $9.0m or 40.1% of sales in the second quarter of 2002.

The decrease in selling general and administrative expenses was due to a variety of factors including the favorable impact of the recent Teva acquisition, which eliminated $1.3m of total royalties and $0.2m of total license cost amortization. In addition, our SG&A expenses decreased as a result of the favorable resolution of the anti dumping duties matter, which I'll discuss in a minute as well as the lower bad debt expense partially offset by higher sales commission on the increased sales levels, increased marketing expenditures and the addition of the cost of newly acquired internet and catalogue retailing business.

We are pleased to report that the two contingent liabilities that we had at year-end were both fully resolved during the quarters. First of all we received a favorable final ruling in our appeal against European anti-dumping duties, which were levied in 1997. The final ruling stated that Deckers does not have to pay any of the $500,000 of potential anti-dumping duties being sought by European customs. As a result during the second quarter we reversed the previously established $500,000 accrual. On an after tax basis, this contributed $300,000 to net earnings or 3 cents per diluted shares for the second quarter.

In addition, our long standing dispute with a former European distributor was also fully resolved during the quarter, when we settled this case out of court paying the distributor approximately $200,000 as full and final settlement. This settlement amount approximated the previously recorded accrual for this matter and as a result had virtually no impact on the second quarter earnings. As of June 30, both matters are now completely resolved.

Another positive development during the second quarter was our $2.0m early repayment of a portion of our peninsular subordinated debt, which was otherwise not due until 2008. in connection with the repayment we incurred a $100,000 pre-payment fee and recorded an additional $100,000 charge to write-off a pro rata share of the previously capitalized loan cost. These aggregate costs of $200,000 are included in interest expense for the second quarter of 2003.

By replacing this debt with a lower interest-sharing advance on our line of credit we expect we will eliminate approximately $200,000 to $250,000 of interest cost over each of the next five years. Net earnings for the second quarter were $2,006,000 or 17 cents per diluted share, including approximately 3 cents per share related to the favorable resolution of the anti-dumping duties matter. This compares to $642,000 or 7 cents per diluted share in the second quarter last year.

The 17 cents per share is up 143% from the 7 cents per share for the second quarter of 2002.

Year to date, our net earnings were $6.2m or 54 cents per diluted shares compared to last year's earnings before cumulative effect changed the accounting principles of $2.8m or 29 cents per diluted share.

Turning now to our balance sheet, at June 30 2003 we were able to decrease our accounts receivable balance by 9% compared to that at June 30 2002 at a time when sales were increasing by 9% during the quarters then ended. And as Doug mentioned at the outset, our inventories increased 37% since June 30 2002 reflecting an increase for Ugg of $4.7m an increase for Teva of $2.3m and a decrease for Simple of $0.8m. Lastly during the quarter we pre-paid approximately $3.9m of debt including the $2m re-payment of the subordinated debt I discussed before. Scott

I'll now talk about each of our brands, how there doing and what our future expectations are. Teva sales for second quarter increased 15% with both international and domestic growing. The Teva 5 pretty rugged, stratum, cross tear and hurricane sports sandals, have all done well through out the seasons as have our mush and mulany thongs. While our sandal business remains strong in growing, we are also experiencing success in some of our new clothes, but the Gamma Amphibious (ph) shoes has done well this spring. We've just begun to deliver the Erobi and other fall styles, and initial sell through has been encouraging. We're also getting great reaction to some of our Spring 04 models, such as the updated Quest like hiker, with our patented rapture technology, and the new Romero trail runner. This is helping to drive our expansion into the rugged clothes, total foot ware category.

Now that we own the Teva brand, we able to take a longer term approach to our product development in marketing as we expand into new foot ware category. We currently expect closed toe footwear to represent up to 15% of our 2003 Teva business. Our target for the next few years is to grow that percentage to 30% as we continue to launch innovative new products and to use our proprietary technology in not only sports sandals, but also light hikers, trail runners and amphibious and casual footwear. We're now addressing the entire rugged outdoor foot ware market, a market that is six times the size of the sports sandal market. We also expect to selectively license other non-footwear products such as apparel and accessories, bags and packs, headwear and eyewear. While some of this product will be ready for 2004, most is planned for introduction in 2005 and later.

To support this expansion, we've continued to focus our marketing efforts in only white water and Canyon sports. Our premiere event that Teva mountain games at Vail was in June this year, and included white water, climbing, trail running and other events. Fox sports net coverage of the Teva mountain games, reached over 145 million homes. Games received further exposure on CNN, OLN Adventure TV, and in the multitude of newspapers and magazines.

We expect this combination of authenticity, great sports marketing and innovative and proprietary products to drive Teva's growth over the next few years. Teva is a leading performance brand in the outdoor market, and we're excited about our prospects, as we move forward with our mission to be the brand of choice for the new outdoor athletes. We continue to monitor Simples performance, and although Simple did not meet its sales or brand contribution targets for the quarter, we're encouraged by the reaction to Simples fall line, of athletically inspired styles and we expect growth in the second half of the year. We're also encouraged by the initial response to Simple spring 2004 mine, which includes a new sandal offering, and a moderately priced Simple growth collection aimed at a younger team demographic. We believe these initiatives will give us the growth we want for Simple. Ugg continues to out perform our expectations 2002 sales increased over 24%, giving us 5 consecutive years of double-digit growth, for sales increases of over 20% in each of the last three years. This momentum carried into the first half of this year, we're continuing editorial and celebrity exposure, help Ugg achieve a 182% increase in year-to-date sales. Reaction to our fall winner 2003 line has been great, in our extended casual offering, has not only helped us expand geographically, but has also helped Ugg become a core third quarter as well as fourth quarter brands. Even in this environment, where retailers are carrying less inventory in ordering closer in season we have received stronger pre-season orders than last year, and our current backlog is larger than it was at this time last year. As the leader in the luxury sheepskin market, we expect 2003 to be another great year of strong sales growth and expanded profitability for our Ugg brand.

Now let me discuss our guidance. Based on our strong second quarter performance, the positive reaction to both Teva's and Simple's fall line, the continuing momentum of Ugg, and the early positive response to Teva's spring '04 line, we're increasing our guidance for 2003. We now expect sales for 2003 to be $104 to $108m and EPS to be approximately 57- 59 cents per diluted share, up from our previous guidance of 50 cents to 53 cents. We expect third quarter 2000 to be $19m to $20m, with a loss of 4 cents to 5 cents per diluted share. We now expect Teva sales for 2003 to be $70 to $72m, Simple sales to be $9m to $10m and Ugg sales to be $25m to $26m.

In summary we have strong brands that are leaders in their niche category that are doing well in this challenging retail environment. We're pleased about our performance for the first half of 2003, and expect solid momentum to continue throughout the rest of the year. Thank you for your support and we'd now be happy to answer any questions you may have.

Thank you, the floor is now open for question. If you have a question or a comment, please press the number 1 followed by 4 on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do ask that while posing your question, to please pick up your handset to provide optimum sound quality. Once again that's 1 followed by 4 on your touch-tone phone at this time. One moment while we poll for questions.

Once again that's 1 followed by 4 on your touch-tone phone at this time to ask a question.

Our first question is coming from Mitch Comets of A&D Davidson. Please go ahead with your question.

Yea, thank you. Congratulations guys. Few quick questions, first of all on the Teva business, you mentioned was up 15%, up internationally as well as domestically. So we've been hear from a lot of people that C&O category I soft for the Spring/Summer season due to weather. How did you guys manage to generate an increase, and how much of that was just, was sandals versus open toe are you taking market share, or are you adding accounts, what was the driver there?

You're right, weather was a factor in second quarter. We noticed especially in the northeast and in some of the eastern area. What we found and experienced is that we did get sandal increases and that our sell-troughs at retail were better than other competitors that they had in our category, and consequently we were able that reorder business what there was. I would say that sandals were still the main driver for our first half of the year business although the Gamma shoes did quite well as did the Proton and our Amphibious (ph). As well as we did some of the trail, still our drivers at the first half of the year is sandals, and I think that with our tech rep group out there and just how we've been working in product and marketing and working closely with retail partners we were just able to get a larger share of the sandal market this year.

And what are your thoughts on the amounts of sandal inventory that's at retail right now is there too much and if so is that going to create sort of a negative overhang flowing into next year.

From the talking that we have with our main retail partners, there in particular with our product very clean. There aren't any inventory issues out there. The one area that I will make exception is Singapore, Hong Kong, Taiwan where SARS kind of backed up that inventory we'll see a little bit of impact in our fourth quarter deliveries to our Asians but that I'll be made up by the fact that---- whether it's topped in second quarter in July its been really warm and people have blown through sandals and this has happened not only here domestically but also in Europe. Our distributors in Europe are clamoring amongst each other trying to get a hold of some inventory. So it terms of our brand in particular, inventories are very clean. Again we are in performance sports sandals more male dominated than female dominated and consequently in our area we out perform inventories are clean and the way that people are spring lined for next year we are very encouraged

Okay sound great and then lastly you mentioned the Simple grow introduction. What's the intended distribution of that business? Is it the same as your Simple line likes Nordstrom and accounts like or are you looking to bring it into additional retailers?

We'd like to see that, tackle that kind of team demographic where we haven't been strong, being a Southern California surf guy I look at the independent Surf shops as being of core-indicator and still you know Brass Plums (ph) in Nordstrom as opposed to where Teva were in the women's and men's department we'll continue to do that but we look at being over the next few years to develop in that younger if you want to talk about the Journey Pack Suns those kinds of accounts.

Do you expect to get a test from those accounts when you launch the business?

We are working on that I would say it's still real early in that and because that has not, we don't have as close a relationship let do with Nordstrom or IRI or regards or somebody like that, that we do with Teva. We work a little bit later but we aren't on that, Simple is not on that as I call it the mud tab list like Teva and Ugg are and so it consequently gets worse a little bit later in the season, we are meeting with all those people at WFJ as we approach that which takes place next week

Right Okay. Well great, thanks a lot guys.

Thanks Mitch.

Our next question is coming Randon Jones, of Dallas Field Hembrick. Please go ahead with your question.

Hey and congratulations guys on your quarter.

Hey thanks

Curious can you give any further insight on your plans for debt and paying it down? Based on your projections what we could perhaps look forward too over the next six months and then into 2004?

Actually I can’t give you too much on that. I will tell you that the board discusses it on a quarterly basis, and we look at our cash flow. We're ahead of our plan right now, that's why we paid down 2 million dollars of debt. At the last board conversation we had, we said we would look next at probably buying some of the preferred stock down. From a cash stand point, paying with the pre-payment penalty that we have on the sub-debt at least for the first year or two. We can pay down the preferred or we can buy back the proffered or pay down the sub-debt, and cash wise it makes just about the same amount of sense. The preferred tends to increase our earnings per share more, because it takes away that delutive impact. So, I thin the approach we have taken, is that kind of split the baby approach and we're kind of going back and fourth. We'll pay down some of the subjects and we'll buy back some of the preferred stock. Our goal is to buy back all of the preferred stock before it can convert into common stock and, take advantage of pre-paying sub-debt, I will tell you that it's a 5% pre-payment penalty this year, 4% next year, with the exception of a $2m payment that we can make starting in December, so we will consider that.

Okay, thanks so much Doug. Congratulations again you guys.

Great, thank you.

Our next question is coming from Harry Hall Hall of Redbush Morgan.

Hey you guys congratulations on a great quarter.

Thank You.

Just a few questions, just following up on his question on capital structure. Can you give us a sense of how the free cash flow is going to be for the year? What you expect cash flow from operations, capital expenditure, D&A?

Sure, as far as the free cash flow goes, we should be in the neighborhood of about, say $6m of income plus the ---if you add back the CapEx, the direct CapEx, its probably in the neighborhood of $700,000. Our depreciation would be about $1.5m, put all that stuff together.

Okay and the second $100,000 interest charge could you just explain that one more time I'm not sure I caught that.

There were two components. One of them was the five percent pre payment penalty

Right I got that.

The second one was that the outset of the whole deal, we incurred about $1m of loan costs upfront. This was you know fees to the investment bankers and legal cost accounting everything that kind of went in to getting the debt.

Okay.

The $1m gets amortized over the term of the debt. Because we taped down $2m of the $14m, we rolled off 2/14th of the unamortized costs during the quarter.

Okay and I'm looking at this right it looks like your international sales were like over 100% form last year in the quarter, can you talk about that?

I can tell you a piece of that is really a shift that it could be between first quarter and second quarter and year up. You know if you looked at the quarter when European was down and the Earopean shift in second quarter this year as opposed to first quarter.

Okay so it shift form Q1 to Q2.

Right. I mean overall year to date where we had $13.9m last year and $13.6m this year in international sales. And with that Europe, Asian softer.

Okay and then lastly on the last call that you know, if it wasn't meeting expectations you'll look about selling the brands or doing something else. It sounds like you guys are little more upbeat on its prospects even though it's still under performing. Can you elaborate on that?

Yeah, we're still speaking to our plan. I think as I mentioned last time we'd take a look at it probably about the time that we're doing our third quarter announcements. By then we will be seeing where we stand really in terms of backlog for spring. We have seen how (inaudible) been for fall and that's kind of where we're looking at it. So we're still monitoring a closely---I will tell you that we have sold through with Simple where its been placed. But second quarter being as tough as it was where as Teva was able to get re-orders with the open to buy that opened up. Simple was unable to do that and there was less products on the market.

I will tell you that the fall product even though we've just started shipping it we are already getting reorders on the sugar in particular. And we're very encouraged by the reaction we're getting form our existing accounts as well as new distributions that we're looking at as we show the spring '04 lines and we've been out showing it now for about two to three weeks.

You'd said before that the order files were too small on it. How much more improvement would you need to see to get to that kind of minimum fortify level and I guess you know same point can you give me a sense of how much of a drag on earnings the brand is?

It's pretty much a wash it's not a contributor or a dragger, it helps pay for some overheads right now. We feel we need a brand of $15m, before it starts being a decent contributor to the profitability of the company. Right now its kind of a dab, you know if we unloaded it, it would---we would need to make some changes in some of the overheads that it covers. But it's not really a drag on anything. The key drag is that distraction you know if we don't get it going its utilizing our resources as a distraction and it would be a lot easier to put that focus into tell--- I'd say that's the big thing, which is you know the intangible.

Okay great thanks a lot.

Thank you.

One again if you do have a question please press the number one followed by four one your touch tone phone at this time. Our next question is coming from Andy Harvest (ph) of Yellman Capital.

Hi congratulations on a good quarter. I was wondering if you but if you separated the sandals from closed toe, how much you did in closed toe, and I guess we'd call it as a percentage of type of brand?

Actually, I don't really have those numbers at my fingertips. I expect by the next quarter's announcement I'll be able to have that more. I will tell you though that in the first half of the year, by far over 90% of our business is sandals. Where we expect to see the closed foot wear become a more important part is our third quarter business, our fourth quarter business, as well as we will continue to have good Spring products. So, again we're still looking at up to 15% by the end of the year this year. Our target is 30% of our sales over the next few years.

Okay. Also (indiscernible), have you guys gone further on licensing front? And, I guess other products(indiscernible)?

We are talking with people. It's not our policy to disclose anything until we have definitive agreements, but I will tell you that we are aggressively pursuing that with numerous different companies. But again we are being very selective, whoever we issue licenses, need to understand the brand, where we position, remember we're a premium performance brand, and we don't juts want to throw something out there and slap the Teva name on it. We pride ourselves on our innovation, our proprietary technologies, the performance attributes of our product, and we want to make sure that whatever line we come pout with is consistent with that. Therefore we expect some 2004 releases in some product categories, but the bulk of it will be 2005.

Okay. And just a final question, how sustainable are these gross margins that you did this quarter?

This quarter I think with the Euro added-Scott (indiscernible) Scott-

The Euro was about a point of it. But the Internet and tabloid and business is very, very strong in the second quarter, and much stronger than it is if you the whole as the total. Well I'd say we expect to see our margins up this year versus last year. I would not expect any thing along the magnitude of what we saw in the second quarter.

And I think too you have to understand the third quarter and fourth quarter, the drivers there are closed footwear and Teva. In the fourth quarter there's a lot of distributor orders internationally, as well as-that was a big driver in Q3 and Q4. And, all of those have lower gross margins than our sandals do, and those are our highest gross margining items, and as Scott says, with the amount internet business that's done in the second quarter that picks that up as well as the Euro health this year.

Okay, and just my last question. Did you enter any new countries this quarter? And are you targeting any new countries for distribution?

We did not-nothing significant. Again most of our growth internationally was in Europe, and again we're a little softer in Asia. I will tell you that we are currently discussing an arrangement for distribution in China, although we haven't finalized it yet.

Okay. Well I guess-great quarter and congratulations.

Okay, thank you.

Our next question is coming from Harry Hall Hall of Redbush Morgan.

Thank you guys, just a couple more questions. In the past you've broken out what your Internet and catalog sales were? What was that for the quarter?

It was a 1.528 million for the quarter that includes a Teva of 1.309 million, Simple of 124, and Ugg of 95.

And, what was your number of pairs of shoes in your ASP?

Just a second. The average selling price for the quarter was $20.59 that compares to $20.44 in the second quarter of last year. And number of pairs was 1,092,000.

Okay, great thanks a lot.

There seems to be no further question at this time.

Well, great. Well, listen, thank you everyone, we look forward to our next earnings call that call that will take place in October, and thanks again for your support.

This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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