Deckers Outdoor Corp (DECK) 2003 Q4 法說會逐字稿

Good morning, Ladies and Gentlemen.

Thank you for standing by.

Welcome to the Deckers Outdoor Corporation fourth quarter and fiscal 2003 year-end earnings release conference call. [OPERATOR INSTRUCTIONS].

I will now turn the conference over to Douglas Otto, Chairman and Chief Executive Officer.

Sir, please go ahead.

Before Doug begins, let me read the safe harbor language.

At the outset, we note that some of the information that we provide in the 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 that you a number of risks and uncertainties beyond our control could cause decker as actual results to differ materially from those we described on this call.

We explain the risks and uncertainties in the risk factor section in the annual report form 10K.

Among these risks are the fact that the 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 intends that all of its forward looking statements in this call will be protected by the safe harbor provisions of the Securities and 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'll turn the call over to Doug.

Thank you, Brendon.

With me is Scott Ash, our CFO.

Our strong fourth quarter performance with a great finish to a great year for our company.

Sales for the quarter increased 39% to a record fourth quarter $35.7 million and EPS increased 46% to 19 cents per diluted share.

For the year, sales increased 22% to a record $121 million, and EPS increased to 77 cents per diluted share.

I'm really proud of what we have accomplished during our first full year of owning Teva.

First, not only did our Teva sandals sell through well at retail but, we also successfully moved forward with our expansion of Teva into closed footwear which is helping us to diversify our offering and balance our seasonality.

Second, the explosive growth of Ugg left the inventories depleted and pent up demand, which contributed to the brand's sixth consecutive year of double-digit growth in its selection by footwear news as brand of the year.

We also made great progress in signing licenses for non-footwear products in both Teva and Ugg and in growing our newly acquired consumer direct business as well as in refocusing simple to better take advantage of our corporate strengths and market opportunities.

Finally, we generated stronger cash flow than expected which enabled us to prepay $4 million in sub debt in 2003, and another 3 million in January of 2004, as well as to re-purchase all $5.5 million of preferred stock.

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

Thank you, Doug.

Fourth quarter sales increased 39% to a record, 35.7 million versus fourth quarter 2002 sales, $25.8 million.

Sales of Teva increased 24% to 13.3 million compared to 10.7 million in 2002.

Simple sales were 1.7 million for the quarter versus 1.8 million last year, and Ugg sales increased 56% to 20.7 million in the fourth quarter compared to 13.3 million for the fourth quarter of last year.

International sales for all brands were 5.8 million in the fourth quarter versus 4 .4 million in the fourth quarter of 2002.

For all brands, our annual net sales were a record 121.1 million, up 22% from 99.1 million last year.

Sales of Teva year to date increased 18% to 76.5 million this year, compared to 65.1 million last year.

Simple sales aggregate is 7.7 million, versus 10.2 million last year, while Ugg sales increased 55% to approximately 36.9 million, versus 23.8 million last year.

International sales for all brands were 22.3 million for 2003, compared to 20.8 million for 2002.

And our domestic sales increased 26%, to 98.7 million, compared to 78.3 million last year.

For the year, our gross margin increased approximately 50 basis points to 42.4%, from 41.9%.

This increase is primarily due to the addition of our higher gross margin internet and catalog business, a favorable impact of the strong euro and lower overhead cost prepared partially offset by an increased intact of closeout sales.

In 2003, our annual SG&A expenses improved to 26.4% of sales compared to 35.3% in 2002.

The decrease in SG&A expenses as a percentage of sales was primarily due to the elimination of Teva royalty expenses and related Teva license cost amortization, the leveraging of operating costs, an increased sales volume, a reduction in marketing cost and lower bad debt expense.

These cost reductions were partially offset by increased operating expenses related to the newly acquired Internet and catalog retailing business.

We also restructured our international operations, which resulted in a reduced income tax rate to 34% in the fourth quarter of 2003, compared to 40% for the first nine months of 2003, resulting in a blended annual 2003 rate of 38.5%.

We believe this restructuring should yield an annual effective tax rate of approximately 36.5% in 2004.

Net earnings for the fourth quarter were 2.5 million or 19 per diluted share, compared to 1.4 million or 13 cents per diluted share in the fourth quarter last year.

Year to date, our net earrings were 9.2 million or 77 cents per diluted share compared to last year's earrings before accumulative effect change in accounting principles of 1.6 million or 17 cents per diluted share.

Turning now to our balance sheet, we continue to make improvements in our credit and collections area, where we were able to decrease our accounts receivable by 10% to 18.7 million at year end, compared to 20.9 million last year, this at a time when sales increased 22% during the same period.

During the year, our inventories increased 5% to 18 million at year end from 17.1 million a year ago, this includes an increase in Teva inventory in anticipation of the coming spring season, partially offset by a decrease in Ugg and simple inventory.

Throughout the year, we continued to improve the balance sheet by repaying a significant portion of a more costly financing in several stages.

First we repurchased all of the 5.5 million of convertible preferred stock before it had a chance to convert.

Second, during 2003, we repaid 4 million of the 16.75% subordinated notes.

And lastly, subsequent to year-end, we repaid an additional 3 million of the subordinated notes in January, 2004.

As a result of these repayments, during the first 14 months of the Teva acquisitions, we have now repaid 7 million or one-half of the original 14 million of subordinated notes while repurchasing all 5.5 million of the convertible suffered stock.

Thank you, Scott.

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

Teva sales for 2003 increased over 17%.

Both domestic and international sales grew.

Teva's spring '03 products sold through very well at retail and we ended the season with very little inventory.

Teva's fall product also retailed well as evidenced by our 59% increase in third quarter revenues and our 24% increase in fourth quarter revenues.

We are now shipping our spring '04 line, and most of our key retail partners in all distribution channels outdoors, 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 the core retailer, including Teva's largest customer, REI, and other accounts in Florida and Hawaii where the weather is broken.

At a recent outdoor retailer in WSA shoe trade shows, we have been showing our fall line, with its new closed shoe rugged outdoor footwear offerings, which includes our first hikers using Gore-Tex.

Response has been very good, and we're expecting solid growth in all distribution channels.

A little over a year ago, we announced that we had purchased the worldwide Teva assets from our license source.

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

Today we have been very pleased with the effect that the transaction has had on our business and 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 in marketing initiatives as we expand Teva into new footwear categories.

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

We are now addressing in the entire outdoor footwear market, a market that is over seven times the size of the sports sandal market.

We are also selectively licensing other non-foot wear products.

We have signed licenses for men's sportswear, headwear, eyewear and timepieces in the United States.

We're also looking to license bags and packs, socks and other apparel and accessory categories in both the US and international markets.

While some of this product 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 Canyon Sports, our premier event, the Teva mountain games at Vale will be held in June this year and includes Whitewater climbing, trail running and mountain biking events.

Fox sports net coverage of last year's Teva mountain games reached over 145 million homes.

The 2003 games received further exposure on CNN, OLN Adventure TV and a multitude of newspapers and magazines.

This year, we expect additional coverage, including network coverage by NBC.

We expect this combination of authenticity, great sport marketing and innovative and proprietary products to drive 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.

Ugg continues to outperform our expectations.

Fueled by editorial and celebrity exposure, Ugg experienced sales growth of almost 55% to a record $36.9 million in 2003, marking its sixth consecutive year of double-digit growth.

Retail sales through over the holidays, was very strong throughout the country, as Ugg was discovered by many people outside of California.

Sales continued to increase in established retail partners like Nordstrom and Sport Chalet as well as in newer ones like Neiman-Marcus and David Z's.

All categories, boots, slippers and casuals sold well and strong sell-through has continued since the holidays.

Neiman-Marcus featured Ugg in its spring catalog this month and sold out within four hours of its release.

The pent-up demand for Ugg has resulted in retailers placing larger orders earlier this year than in previous years.

While this is a great position to be in, we are offering certain styles on an allocation basis, so that we can better control the distribution and enhance the image of the brand.

We are also seeing demand for Ugg in Europe, Canada and other international markets, and expect international sales to grow dramatically over the next few years.

Our new handbag licensee debuted its fall collection at the WSA and magic shows this month.

The line is being received exceptionally well and bookings are strong.

We view this as a positive sign as we look to selectively license other non-footwear products, such as outerwear and cold weather accessories.

Over the next few years, we expect to continue to expand Ugg's product categories, its selling season and its geographic penetration as the leader in the luxury sheepskin market and foot wear news' brand of the year, Ugg is well on its way to becoming a global luxury lifestyle brand.

Although simple sales for 2003 were below that of the previous year, we are encouraged by the sell-through of our athletic and ShearLing (ph) product during last half of 2003, and by the reaction to our 2004 offerings.

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

During the next few months, you will see 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 the retail success and icon status of the old school sneaker and the original clog, by launching new versions of these classic simple styles.

Retailer excitement was very evident at recent trade shows where we debuted the new clog product for fall delivery.

Next, we are broadening simple sandal offerings.

This takes advantage of one of our core competencies and 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 sheep program, where we offer moderately priced ShearLing boots and slippers, distribution that we don't service with our Ugg brand.

We believe these products and distribution initiatives will give us the growth we want from simple.

Now let me discuss our guidance.

For the first quarter of 2004, we expect sales of 40 to $42 million and earnings per diluted share of 40 to 45 cents, which includes a 2 cent one-time expense for the $3 million prepayment at sub debt.

Furthermore, based on the strength and momentum of Ugg, the strong response to all three brands at recent trade shows, the restructuring of our international operations, and our continuing repayment of long term debt, we're increasing both our sales and earnings guidance for 2004.

We now expect sales for 2004 to be 153 to 162 million, up from our previous guidance of 133 to 140 million.

This includes Teva sales of 84 to 86 million, simple sales of 9 to 11 million, and Ugg sales of 60 to $65 million.

Based on 12.2 million average diluted common shares outstanding, we now expect 2004 earnings to be $1.25 to $1.35 per diluted share, up from our previous guidance of $1.02 to $1.06.

In summary, we are pleased about our performance in 2003, and expect solid momentum to continue throughout this year and into next year.

We own strong brands that are leaders in their 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.

+++q-&-a

Thank you, sir.

The floor is now open for questions. [OPERATOR INSTRUCTIONS] The first question is from Harris Hall of Wedbush Morgan Securities.

Congratulations guys, on a great quarter.

Thanks Harris.

Just a couple of questions.

Can you give me the number of pairs you sold and average selling price.

You normally give that.

For the quarter, we shipped 1,324,000 pair at an average wholesale price of 25.07.

OK.

And what were your Internet catalog sales?

For the year, for the year, it was 6.5 million.

For the quarter, it was 2.3 million.

That breaks down between Teva at 659,000, simple at 162,000, and Ugg at 1,461,000.

OK.

Where is the litigation charge you mentioned in your press release?

Is that offset to SG&A?

Or --

Yes.

The litigation charge was actually something in the year ago period.

It was in the fourth quarter of 2002.

OK.

It was actually a $290,000 pickup or increase in earnings, decrease in expenses that happened during that quarter because we settled that litigation during that quarter for, from better, better than we had initially planned.

So, where was the 2-cent gain in Q4 or 3?

What it is there's a differential.

There was a 2-cent charge in 2003.

Go ahead.

Yeah, there's a 2-cent charge in 2003 really related to the repayment of the sub debt.

Right.

As well as the charge related to or the EPS calculation related to the repurchase of the preferred stock where we had to pay a premium to mark that.

OK.

I got you.

And just the last thing you said, the preferred stock redemption charge I thought you said was going to be 4 cents and in the press release, it doesn't say it's 2 cents, but the 438 works out to be 4 cents per share, right?

I'll tell you that the calculation is pretty confusing.

OK.

We had initially thought it would be around 3.5, rounding to 4.

It came out just under 2.5, in reality.

And that's the 438 that you list, in your financials?

Right.

The 438 is what actually triggers it.

OK.

And then the foreign tax situation, you got quite a benefit from your tax rate.

Are your foreign sales up?

And what was the restructuring there?

Yeah.

We started the whole restructuring program back when we bought Teva in November of 2002.

And the general way that it works is when we bought Teva in the international rights and domestic rights.

We pushed the international rights off to our Hong Kong subsidiary where the tax rates are about 17% compared to the 40% here in the states.

So, to the extent that we have earnings in the Hong Kong subsidiary tax at 17% instead of 40%, now it brings down our tax rate.

As you can see next year we're projecting about a 36.5% rate.

Great, and then with the secondary, you guys are doing, should we assume no interest for 2004 or what's a good interest assumption for 2004, assuming that you are going to pay down the rest of the debt?

First of all, we definitely have interest in the first quarter.

And we'll have, we have had interest right up until the point that something happens as it does.

In addition to that, we're also going to have costs associated with just like we have had in the past and we pay down some of that sub debt, we have to incur costs and some penalties in the, basically if we, even if we pay down between now and November on the sub debt, we have to pay a 4% penalty on and then take roughly I think, it's roughly about 3 cents hit to P&L if we take the whole thing out, above and beyond the 2 cent hit that we already have related to stuff that we took down in January.

OK.

That is taking into account in our guidance.

Yes.

OK.

So, you think interest will be under 2 million for 2004?

Yeah.

It all depends on what happens with respect to the filing of the registration statements, but I mean, probably in the ballpark.

OK.

If all of the debt was paid off.

Second quarter.

All of the debt is paid off in the second quarter that's approximately what you are talking about.

Right.

Great.

Thanks so much.

Thank you.

Thank you.

Our next question is coming from Randy Scherago of First Albany Capital.

Congratulations, guys.

Coming from the recent magic show, the people that were in the booth at temple were really optimistic on Simple Sheep.

And could you address like how big simple sheep could be this year and also your perception of competition of people knocking off the Ugg brand?

You know, there is definitely a lot of knockoffs.

I think, somebody went around and counted 38 knockoffs or something like that at the WSA shoe show.

Two things that we're doing, one is with Ugg we have positioned it as obviously as the leader, and it's the luxury brand and the high-end everybody wants it.

We are actually allocating what we're giving to which territories and which accounts, and being very selective in that so that we keep the hunger going into future years.

With Simple, what we have done is there, there are distribution channels that we are not dealing with Ugg.

And that's where we are targeting Simple.

We have been getting a very good response.

We're looking at, we're really doing a couple of things.

Number one is we're going after certain stores that have not carried Ugg and won't carry Ugg.

And then we're also going after some of the departments in stores that do carry Ugg that have also carried second brand at a more moderate price and we think have been getting great response from it.

Of course, we're, you know, we're very good at sourcing sheep skin and producing the boots.

These will be produced on a line in the same factory that, in China that are producing some of our Ugg product.

Of course, we'll continue to produce product in Australia and New Zealand as we have in the Ugg line.

Also, the simple product is a swade out, a swade upper that's lined in fleece as opposed to twin-faced sheepskin that we use in Ugg.

And we, it's hard to say how big that market could be.

I'll tell you, it's easier to source the lining material than it is to source the twin-faced sheepskin.

And we have been told that our product looks hands down a lot better than any of the competition.

And we have gotten a lot of positive response.

I think over the next month and probably by the time we give the first quarter earnings announcement, we'll have gotten a lot of the paper in the computer, and I'll be able to give a little bit more visual on how big that can be for the year.

OK.

Then, one follow-up on simple.

Last year, your simple margins were somewhat depressed because of all of the closeouts with sort of the line cleaned up and also the introduction of sandals, which is a higher margin product.

Shouldn't simple have a nice rebound in margins this year?

We're planning the margins up for simple.

You're exactly right.

A lot of simple sales last year were closeouts.

And if we look at full price business, it was less than the 7.7 million that we sold.

So, we see less close-outs this year.

It's a lot tighter line.

We have got a lot of phenomenal response on the new clog.

In fact, we got word that Nordstrom is going to put that in their fall catalog.

So, a lot of exciting things happening there, so our full price business will grow substantially, as our closeout business in simple should diminish quite a bit which should lead us to much improved margins there.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS].

Our next question is coming from Kevin Greenberg (ph) of Metal Brook Capital.

It's Evan.

The K is silent.

How are you?

Pretty good, how are you?

Good, good.

You know what, my question was kind of answered when I asked you at the ICR conference if you would consider doing a secondary offering at these levels to pay down the debt, and I don't know if you, you're going to more than pay down the debt with the $36 million, I believe, isn't that correct?

There's about $20 million in debt?

Yes.

I think we outlined in the press release, there's about $27 million, including the senior debt.

OK.

So, this will more than retire that.

There's a going to be a little bit of extra cash from the deal.

Is that just to keep on the balance sheet and just have for expansion purposes, or are there any, I mean, I don't think you need any acquisitions.

Are there any, I guess you talked about some line extensions today.

Is that for the new line extensions that you're going to be doing?

Yeah.

As we said, in the press release and I got to tell you something that I'm a bit restricted by rule 135, which limits what I can say prior to the filing of the S-3 and, you know, we did feel it was important to disclose the S-3 prior to doing our earnings announcement, but rule 135, we basically said everything in that press release that we're allowed to say. s

All right.

I must say there that we plan to use it for general purposes to take advantage of the growth opportunities that we have outlined.

Tremendous.

Keep doing great work.

OK.

Thanks.

Gentlemen, there are no further questions.

I turn the floor back over to you for additional comments or closing remarks.

OK.

We listened.

Thank you, everybody for joining us.

We are really excited about what we did last year, and very enthused about this year, and our future prospects.

And look forward to talking to you again after first quarter.

Bye.