Deckers Outdoor Corp (DECK) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by.

Welcome to the Deckers Outdoor Corporation third quarter fiscal 2003 earnings release conference call.

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Following the presentation, we will conduct a question and answer session.

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I would like to remind everyone that this conference call is being recorded, and let me now turn the conference over to Douglas Otto, Chairman and Chief Executive Officer.

Please go ahead.

And before Dough begins, I'd just like to read the Safe Harbor language.

At the outset, we note that some of the information we provide in this call will be forward-looking statements within the meaning of the securities laws.

These statements concern Deckers' plans, expectations, and objectives for 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 on this call.

We have explained some of these risks and uncertainties in the risk factor section of our annual report on form 10-K and in other documents we file at the SEC.

Among these risks is the fact that our sales are highly sensitive to consumer preferences, to general economic conditions, to the weather, and to the choices of our customers to carry and promote our products.

Deckers intend that all of its forward-looking statements in this call will be protected by the Safe Harbor provisions of the Securities Exchange Act of 1934.

Deckers is not obligated to update its forward-looking statements to reflect the impact of future events.

Doug, please go ahead.

Thank you Brendon and thank you for joining us.

With me is Scott Ash, our CFO.

We are happy to announce that our sales for third quarter of 2003 were $24.9m, up 40% from last year's $17.7m, and well above our expectation.

This was due to a strong performance in Ugg, where sales grew 44% and Teva, where sales grew 59%.

Earnings for the quarter were $0.04 per diluted share.

This is the first profitable third quarter for the company since 1997 and represents a huge accomplishment for our team's efforts to expand our brand-selling seasons and balance our seasonality.

There are three points that I raised in our second quarter earnings announcement that I would like to reemphasize and further update before I turn the microphone over to Scott.

The first point is that $1.5m of the $12m average diluted common shares for third quarter relate the issue inside the preferred stock used to buy Teva.

We now plan to buyback all of the preferred stock in December of 2003 before it can be converted into common stock.

The second is that based upon better than expected profitability and cash flow, we made a $2m early repayment of the $14m peninsular sub-debt in June.

We now plan to repay another $2m in December of 2003.

Paying down the sub-debt early and repurchasing the preferred stock are top priorities for the company.

While we expect that December sub-debt prepayment and preferred stock repurchase to reduce our 2003 EPS by about $0.04, we expect them to add $0.12 to annual EPS in 2004 and each year thereafter.

The third point I would like to reemphasize is that the nature of our business is changing.

And as a result, that 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, not only of our fourth quarter's revenue, but also of our third quarter's.

In addition, Teva now has a fall closed toe shoe business and more Teva customers are carrying our basic sport sandal and after sport sandal models year around.

To support these seasonality balancing initiatives, we are bringing in Ugg and Teva product earlier this year and carrying more inventory than we have in the past this being the fourth quarter.

While our simple inventory has lowered this year than last, the front-loading of Ugg and Teva inventories in order to meet our customers demand has increased our total inventory at the end of third quarter just as it did at the end of the second quarter.

We expect the second and third quarter trend to continue going forward.

Based on our expected revenue increases for the first half of 2004, we are also planning our total year-end inventory up.

We expect simple year-end inventory to be down from last year, Ugg year-end inventory to be flat to down, and Teva year-end inventory to be up.

Scott will now discuss the financials and the impact of the sub-debt repayments and purchase of the prepared stock in more detail, then I'll give you an updated outlook for our brands.

Third quarter sales increased 40% to $24.9m vs. 3Q02 sales of $17.7m.

For the quarter, sales of Teva increased 59% to $9m in 2003 compared to $5.7m in 2002.

Simple sales were $1.8m for third quarter vs. $2.2m last year, and Ugg sales increased 44% to a record $14.1m in the third quarter, compared to $9.8m for the third quarter of last year.

Our international sales for all brands were $2.9m in the third quarter of 2003 vs. $2.5m in the third quarter of 2002.

Year-to-date, our consolidated sales were $85.3m, up 16% from $73.4m last year.

Sales of Teva year-to-date increased 16% to $63.2m this year compared to $54.4m last year.

Simple sales aggregated $6m vs. $8.4m last year, while Ugg sales increased 53% to approximately $16.2m versus $10.5m last year.

International sales for all brands were $16.5m for the first nine months of 2003 compared to $16.4m for the first nine months of 2002.

Year-to-date, our domestic sales increased 21% to $68.8m compared to $57m last year.

Our gross margins for the current quarter increased to 38.2% compared to 37.8% in the third quarter of last year, primarily due to the addition of the higher gross margin Internet and catalogue sales business and lower overhead cost per pair, partially offset by an increased impact of closed out sales and inventory write down.

Our SG&A expense for the quarter was $7.7m or 31% of sales compared to $7.5m or 42.2% of sales in the third quarter of 2002.

Decrease in Selling, General and Administrative Expenses as a percentage of sales was due to a variety of factors including our revenue growth, a decrease in bad debt expense, a continuing favorable impact of the Teva acquisition which eliminated approximately 246,000 of royalties and 234,000 of Teva license cost amortization as well as the company's ability to control our operating cost during a period of increase in sales.

Net earnings for the third quarter were $481,000 or $0.04 per diluted share compared to a net loss of $2.5m or negative $0.27 per diluted share in the third quarter last year.

Year-to-date, net earnings were $6.7m or $0.57 per diluted share compared to last year's earnings before cumulative effect of change in accounting principle of $257,000 or $0.03 per diluted share.

Turning now to our balance sheet, at September 30, 2003 the increase in accounts receivables since the third quarter of 2002 was limited to only 14% at a time when our sales increased by 40% during the quarter, and our inventories increased 24% since September 30th, 2002 reflecting increases for Ugg of $1.5m and for Teva of $3.4m in separation for sales in the upcoming quarters while we decreased our simply inventory by approximately 500,000.

Now, as Doug previously mentioned we plan to make some changes to our capital structure during the fourth quarter, which we expect will provide some significant benefits to our future earnings per share as well as our future [valency].

First of all, we currently intend to repurchase the entire 5.5m of outstanding convertible preferred stock in December of this year.

By doing so, we expect to eliminate from our diluted earnings per share calculation of a 1.5m of the existing 12m of diluted weighted average shares outstanding.

This 1.5m shares results in about 13% dilution today, which will be eliminated from our EPS calculation beginning in 2004.

By exercising our right to repurchase the preferred stock at its original purchase price plus a $425,000 premium, we will prevent the stock from becoming convertible at a price of 363, which is a fraction of our current market price. $425,000 premium to be paid to the holder is treated as a capital transaction and accordingly will have no impact on the company's net earnings for 2003.

However, in accordance with Generally Accepted Accounting Principles or GAAP, the premium is included in the calculation of earnings per common share and therefore, is expected to negatively impact the fourth quarter earnings per share by approximately $0.04 per share.

However, beginning in the first quarter of 2004, the benefit from the elimination of the dilution will begin to be realized.

In addition, in December we also expect to make another $2m early repayment of a portion of the outstanding subordinated debt, which is otherwise not due until 2008.

In connection with the repayment, we will not incur any prepayment fee, but well record $100,000 charge to write off a pro rata share of the related loan costs in the fourth quarter, going forward by replacing the higher interest bearing subordinated with lower interest bearing senior debt.

We expect to save approximately $200,000 to $250,000 of interest cost for each of the next five years beginning in 2004.

We intend to complete the subordinated debt repayment and the preferred stock repurchase transactions using a combination of our expected cash flows, borrowing availability under our line of credit, and a $3.5m increase in our senior-term debt.

In total, these transactions are expected to reduce our earnings per share in the fourth quarter of 2003 by approximately $0.04, but should provide an estimated $0.12 per share improvement in 2004 and each year thereafter based on the current number of shares of common stock outstanding.

Thank you Scott.

Now I'll talk about each of our brands, how they are doing and what our future expectations are.

Teva sales were up 59% for the quarter and are now more than double 2001's third quarter sales.

Both sandal and closed toe footwear sales contributed to the increase.

While sports sandal business continues to expand, our after sport and leisure sandals in our Nomadic and Sun and Moon collections have retailed well as have some of our closed shoe introductions like the Oraibi and the Nomadic collection.

Teva's product has sold through very well this year, especially in North America and Europe and there is minimal inventory in the marketplace.

We are currently booking our Spring 2004 line and this inventory surely is contributing to the optimism and strong orders that we are getting from our international distributors and our domestic retail partners.

In fact, most of our retail partners in all distribution channels Outdoors, Sporting Goods, Department and Shoe Stores are increasing both model and category offerings for Teva.

Last year, at this time, we announced that we had reached a definitive agreement to purchase the worldwide Teva assets from our licensor.

We also said that we expected the transaction to be accretive to our 2003 earnings and to offer us great growth opportunity.

To date, we've been very pleased with the effect that that transaction has had on our business.

The benefits have been greater than we expected.

Now that we own the Teva brand we are able to take a longer-term approach to our product development and marketing initiatives as we expand Teva into new footwear category.

Over the next few years, we'll be launching innovative new products and using proprietary technologies in not only sport sandals, but also in the leisure and after sport sandals, light hikers, trail runners, amphibious, and casual footwear.

We are now addressing the entire rugged outdoor footwear market, a market that is over six times the size of the sport sandal market.

We are also selectively licensing other non-footwear products.

Last month we announced that we had signed licenses for men's sportswear and headwear in the United States.

We are also looking to license bags and packs, Eyewear, Timepieces and other apparel and accessory categories in both the US and the international market.

While some of these products will be ready for 2004 release, most is planned for introduction in 2005 and later.

To support this expansion we have continued to focus our marketing efforts on owning Whitewater and cannon (ph) sports.

Our premier event of Teva Mountain Games at Vail was held in June this year and included whitewater, climbing, trail running, and mountain biking events.

Fox Sports Net coverage of the Teva Mountain Games reached over a 145 million homes.

The games received further exposure on CNN, OLN Adventure TV, and in a multitude of newspapers and magazines.

We expect this combination of authenticity, great sports marketing and innovative and proprietary products to derive Teva's growth over the next few years.

Teva is the leading performance brand in the outdoor market, and we are excited about our prospects as we move forward with our mission to be the brand of choice for the new outdoor athlete.

Although Simple sales for this year was below that of last year, we are encouraged by the sell through of our fall product in reaction to our spring line.

Over the last few months we have modified our Simple growth strategy to better take advantage of our corporate strength in market opportunity.

During the next few months you will us execute this strategy, which we feel confident will give us the growth we want from Simple.

Our strategy for Simple is first to build on its retail successes and capitalize on the icon status of its old school sneaker and original [Inaudible].

Next we are broadening Simple sandal offering for spring 2004.

This takes advantage of one of our core competencies and it is something we couldn't do prior to owning Teva.

It also opens up new distribution we may not reach with Teva.

Finally, we are expanding our Simple sheepskin special makeup program for fall of 2004 where we offer more moderately priced Sheepskin Footwear to customers that can't buy our Ugg brand.

We believe these product and distribution initiatives will give us the growth we want for Simple.

Ugg continues to outperform our expectations.

Fueled by editorial and celebrity exposure, Ugg experienced third quarter sales growth of 44% or $14.1m and is now considered a core brand by many retailers for the third quarter as well as fourth.

We are also building an unprecedented backlog of orders pre-booked for first quarter delivery and are pleased with our efforts to expand Ugg selling season.

Retail sell-through has been strong throughout the country and now, it's been discovered by many outside of California. [Inaudible] 0:21retailers, Tiptop Shoes, Harry's shoes, David Zee's (ph) are all reporting good increases in their Ugg business this year.

We are beginning to see demand for Ugg in Europe and in Canada and see international markets as a growth opportunity for Ugg.

Over the next few years, we expect to continue to expand Ugg's product category, selling season, and geographic penetration.

We also expect to selectively license non-footwear products such as outerwear and cold weather accessories.

As the leader in the luxury sheep-skin market, Ugg is well on it's way to achieving it's sixth consecutive year of double-digit growth and reaching the critical mass needed to become a global luxury life style brand.

Now, let me discuss our guidance.

Based on our strong third quarter performance, we expected continuing momentum of Ugg, our expectation that we can turn the positive response to Teva's and Simple's 2004 lines into increased sales and our expectation that we will repurchase all of the outstanding preferred stock and repay $2m of sub debt in December of this year.

We are increasing our guidance for 2003 and giving initial guidance for 2004.

We now expect sales for 2003 to be a $113m to $115m, up from our previous guidance of a $104m to $108m.

We expect Teva sales for 2003 to be $74m to $75m, Simple sales to be about $8m, and Ugg sales to be $31m to $32m.

We expect EPS for 2003 to be approximately $0.62 to $0.64 per diluted share after the fourth quarter one-time charge of $0.04 for the preferred stock repurchased and the $2m sub debt repayment.

This is up from our previous guidance of $0.57 to $0.59.

We expect fourth quarter 2003 sales to be $28m to $30m and earnings to be $0.06 to $0.08 per diluted share after the one-time $0.04 charge for the preferred stock repurchasing sub debt repayment.

Last year's fourth quarter earnings were $0.13 per diluted share and include a $0.02 in earnings from a non-recurring favorable court settlement and was based on 10.2 average diluted common shares versus this year's expected 11.8m.

We expect sales for 2004 to be a $126m to $132m including Teva sales of $82m to $84m, Simple sales of $9m to $11m and Ugg sales of $35m to $37m.

Based on $10.9m average diluted common shares outstanding, we expect 2004 earnings to be $0.92 to $0.96 per diluted share.

In summary, we are pleased about our performance so far this year and expect solid momentum to continue throughout the rest of the year and into next year.

We have strong brands that are leaders in the niche categories, and we are very encouraged about our prospects for 2004 and beyond.

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 questions.

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Our first question is coming from Harris Hall from Wedbush Morgan.

Please go ahead with your questions.

Congratulations you guys on a superb quarter.

Thank you.

Yes, just a couple of quick questions.

What the interest change, from here if you capital structured change?

What do you see FY04 interest coming out?

I think it will probably be somewhere in the $4m range as opposed to this year's and close to the $4.5.

Okay and then you talked about refinancing some of the high interest sub-debt with a term loan and line of credit?

Can you tell us where you see the end of fiscal '03, where you see the term loan and the line of credit?

The term loan would be somewhere around $7m.

We currently have close to $3.5 out on it right now, and our intention is to reset it back to seven.

Okay

And on the line of credit, I mean it's really going to be a function of collections or inventory and so on and so forth.

Somewhat probably between say 7 to 9, from around there.

And where is it now?

As of the end of the quarter it was about 5, I believe.

And then lastly, you didn't give the number of pairs sold, the average selling price.

Do you have that info with you?

Yes.

The average wholesale price from our wholesale business was $30.42 and that compares to last year's $31.46.

The number of pairs shipped in our wholesale business was 756,000 pairs versus last year's 563,000.

I'm sorry 756,000.

Yes 756,000.

Okay.

And last year it was 563, and then we also have the Internet catalog business now where they did about 26,000 pairs, that's roughly 5963.

Great.

The Internet catalog business continues to be pretty strong?

Yes, it continues to be a more important part of our business and it continues to contribute more to the bottom line.

Super, great.

Thanks so much.

All right, thanks Harris.

Thank you, our next question is coming from Grace Hophe from Acacia Capital, please go ahead with your question.

Hi, good morning.

Good morning.

Could you just -- I have two questions.

Could just spend a minute and discuss the gross margins, kind of a modest gross margin increase on that level of sales increase, could you just give us a little color on the close out in inventory write-down?

And then the second question is on the SG&A line, can you quantify the bad debt expense for both this year and last year, I guess I am trying to get at what the underlying growth in SG&A is, if you backout the bad debt as well as the Teva royalties?

Okay, I will tell you what, let me handle the gross margin question where you asked about the gross margin in third quarter and then Scott can handle the SG&A bad debt question.

Okay.

Third quarter, historically, for us, for Teva, is a closeout quarter for sandals and as well as we have the follow-on this year.

And it also has become a very strong quarter for us, for Ugg.

Ugg tends to have a lower gross margin than Teva does, as does the closed footwear in Teva has a lower gross margin than our sandals do normally.

In addition to that, what we have found this year in Ugg is that the product mix has the classic Ugg boot that we make in Australia and New Zealand has really taken off this year.

That's the one that we get a lot of exposure in People Magazine and the different celebrity publications.

And that has just really taken off this year and made up a higher percentage of our business than we actually thought it would.

And that's one other thing that kept the margin from raising more.

On the other side, we have had more sales contribution, obviously, from the Internet business and that tended to bring the margin up.

I will tell you though on what we've got from our closeouts, we did get a little bit better margin than we've had in previous years for Teva in particular.

Just following on that, that last question unto, when you gave your average unit for sell numbers, is that a result of the mix as well, that declined from 3146?

Yes, because we've got Teva, which increased to 59% made up a bigger portion of the business and Ugg increased 40%, still a strong increase, but with Teva increasing faster, wholesale price on Teva is a lot less than that on Ugg.

Okay, thanks.

And then, just an SG&A question?

On the SG&A, the bad debt this year, during the third quarter was about $0.5m lower than it was in the previous third quarter.

Could you give out an absolute dollar?

No, unfortunately, I don't have that handy here.

Okay.

But I do know that it was $0.5m lower.

And so, is there a way to get up the number, I guess I am trying to understand what the growth is in underlying SG&A.

If you take out the -- if you back out from both years the Teva royalty stream as well as the bad debt?

How much was royalty last year?

The royalties was about -- in rough terms $250,000 last year, which has gone now.

And then last year, we also had the amortization of Teva license cost, again about $250,000, which has gone now.

And then the bad debt, it's down $0.5m, it's actually -- I don't have the exact numbers, but the bad debt expense for this quarter actually is a little bit negative, because we actually collected things that we previously thought we were not going to collect.

Okay.

And it is just in general, our credit collections department is doing a fantastic job, as you can see, we saw the accounts receivable only went up 14% during the quarter, while our sales went up 40%.

I think they are really doing a fantastic job over there.

Okay.

Thanks so much.

Thank you.

As a reminder, if you do have a question or a comment, please press the number one followed by four on your touchtone phone at this time.

Please hold while we poll for questions.

Ladies and gentlemen, there appear to be no further questions in the queue at this time.

I would like to turn the floor back over to Douglas Otto for any closing remarks.

Thank you again everybody for joining us.

We look forward to giving our year-end announcement next February and thanks again for your support.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.