Deckers Outdoor Corp (DECK) 2004 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 2004 earnings release conference call. (OPERATOR INSTRUCTIONS).

I would like to remind you everyone that this conference is being recorded.

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

Please go ahead, sir.

Before Doug begins let me just 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 Factors section of our annual report on Form 10-K and in other documents we file with the SEC.

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

Deckers intends 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 impact of future events.

With that out of the way, I would like to turn the call over to Doug.

Thank you for joining us.

With me is Scott Ash, our CFO.

We're happy to announce a record second quarter with sales up 67 percent to $40.5 million from last year's $24.3 million.

Each of our three brands exhibited sales increases in excess of 20 percent and both domestic and international sales experienced marked increases.

Earnings for the quarter were a record 43 cents per diluted share, an increase of 153 percent from last year's 17 cents.

I am also happy to say that Deckers is now debt free.

Two years ago in order to purchase the Teva brand we issued preferred stock that was convertible into 1.5 million shares of common stock and took on more than $40 million in debt.

In December 2003 we repurchased all of the preferred stock for $3.92 per share of common stock, if converted.

And 2 months ago the Company completed a follow-on offering of 1.5 million shares of common stock at $24.75 per share.

This allowed us to repay all of our long-term debt and provided additional working capital so that we can now focus on our strategic growth initiatives.

One other thing I would like to emphasize before I turn the microphone over to Scott, is that the nature of our business is changing, and the second half of the year is becoming a much 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 is doing more fall closed-toe shoe business.

And more Teva customers are carrying our basic sandal models year around.

We expect this trend to continue going forward as we move towards our objective of developing a more balanced year around business.

Scott will now discuss the financials in more details.

Then I will give you an updated outlook for our brands and discuss our strategic growth initiatives.

For the second quarter our net sales increased 67 percent to a record 40.5 million versus 24.3 million last year.

Including sales from the wholesale division, as well as the Internet and catalog retailing business, our net sales of Teva increased 21 percent to 27.1 million in 2004 compared to 22.4 million in 2003.

UGG sales increased to 11.7 million in the second quarter compared to approximately 400,000 for the second quarter of last year.

Simple sales increased 21 percent to 1.8 million for the second quarter versus 1.5 million last year.

Included in these numbers are Internet and catalog sales of 4.9 million for all brands, up 218 percent from 1.5 million for the second quarter of last year.

International sales for all brands increased 49 percent to 4.5 million in the second quarter compared to 3 million in the second quarter of last year.

Quarter to date our domestic sales increased 69 percent to 36 million compared to 21.3 million last year.

Year to date our consolidated net sales were 84.8 million, up 40 percent from 60.4 million last year.

Including both the wholesale sales as well as the Internet and catalog sales, net sales of Teva year to date increased 19 percent to 64.5 million compared to 54.1 million last year.

UGG sales for the first 6 months increased 733 percent to 16.8 million compared to 2 million last year.

And Simple sales aggregated 3.5 million versus 4.3 million last year.

Included in these numbers are Internet and catalog sales of 8.5 million for all brands, up 222 percent from 2.6 million for the first 6 months of last year.

International sales for all brands increased 27 percent to 17.4 million for the 6 months -- for 6 months of 2004 versus 13.6 million for the first 6 months of 2003.

Year to date our domestic sales increased 44 percent to 67.4 million compared to 46.8 million last year.

Our gross margin for the current quarter was 46.6 percent compared to 48.6 percent in the second quarter of last year, due in part to the significant increase in UGG sales during the quarter, which generally carry a lower gross margin than Teva, an increased impact of closeout sales, and the non-recurrence of last year's gain caused by the favorable impact of selling in euros in the European markets in 2003, whereas all sales are denominated in U.S. dollars in 2004.

Our SG&A expenses decreased to 23.8 percent of sales compared to 31.4 percent of sales in the second quarter of 2003.

This was largely due to the continued leverage of operating costs on the increased sales volume and a decrease in bad debt and marketing costs during the quarter.

During the second quarter last year operating margin was favorably affected by 500,000 or 3 cents per diluted share of litigation income resulting from a European anti-dumping duties matter.

Despite the non-recurrence of this matter in 2004, the operating margin improved considerably to 22.9 percent of sales for the 3 months ended June 30, 2004 compared to 19.2 percent for the 3 months ended June 30, 2003.

Interest expense was approximately 1.1 million in the second quarter, which was a slight reduction from last year's first quarter interest expense of 1.3 million.

In connection with the early repayment of debt during the second quarter, the Company incurred approximately .7 million or 4 cents per diluted share of expenses related to the write-off of financing costs and prepayment fees.

These costs were included in interest expense for the 3 months ended June 30, 2004.

Net earnings for the second quarter increased 154 percent to 5.1 million or 43 cents per diluted share compared to 2 million or 17 cents per diluted share in the second quarter of last year.

Year to date our net earnings increased 69 percent to 10.5 million or 91 cents per diluted share compared to 6.2 million or 54 cents per diluted share for the first 6 months of last year.

Looking now at our balance sheet, as a result of continued improvements in our credit and collections area, our accounts receivable increased only 24 percent compared to that at June 30, 2003.

Just at a time when our sales for the quarter increased 67 percent.

We also reduced our inventories by 15 percent or 3.4 million since June 30, 2003, reflecting a decrease for UGG of 2.1 million, a decrease for Teva of .2 million, and a decrease for Simple of 1.1 million.

And lastly, during the quarter we repaid all of our outstanding debt using a portion of the proceeds of our public stock offering.

As a result at June 30, 2004 we have cash of 24.4 million and no outstanding debt.

I will now talk about each of our brands, how we are progressing on our growth strategies, and when our future expectations are.

Teva sales for second quarter increased 21 percent to $27.1 million.

Spring retail sell-through in the U.S. and in Europe has been strong.

We have experienced good sell-through across the board, especially in our core Terra-Fi, Pretty Rugged and Hurricane sport sandals, and our Mush and Lonnie (ph) casual sandals.

Other newer model standout performers are our just introduced women's Terra-Fi sport sandals and our Ventura and Uluwahoo (ph) after sport sandals.

While our sandal business remains strong and growing, we also experienced success with our closed footwear.

The Gamma, Proton, and Neutron amphibious shoes have continued to retail well.

And we're finding that our customers want Teva not just for the rivers, but also for the trails up the canyons and into the mountains.

Our new Romero trail runner experienced strong sell-throughs this thing at many of our important retail partners.

We'll be delivering the Zaka (ph) Hiker, our first footwear model that uses Gore-Tex later this quarter.

And we're getting great reaction to our lightweight amphibious Trail Runner the X1, which will be delivering in spring of 2005.

The X1 uses our wraptor technology and was worn by Simon Gutierrez when he won the U.S.

National Trail Running Championships in June at the Teva Mountain Game.

We were also getting good reaction to other spring '05 models like our Steep XER (ph) low-cut hiker with our patented liquid frame technology and Gore-Tex XCR, and our new group of waterproof leather sandals.

This is helping solidify our leadership position in sport sandals and to drive our expansion into leisure sandals and rugged closed-toe footwear categories.

Owning Teva and having the freedom to do what we want with this great brand is what has fueled Teva's growth in what we expect to be a record year.

We just had 35 our best retailers in Vail last month to attend the Teva Mountain Games and to preview our spring '05 line.

Based on their planned assortment for next year and the great sell-through the spring, we expect good growth and another record year for Teva in 2005.

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

We're now addressing the entire $2 billion rugged outdoor footwear market, a market that is over 7 times the size of our sport sandal market.

We're also making progress in selectively licensing other non-footwear products.

We are coordinating with our licensees the launch of Teva sportswear, headwear, eyewear, socks and timepieces at the Outdoor Retailer Trade Show next month.

While they are offering spring 2005 delivery, we expect it to be a couple of years before the royalty income is material.

We continue to focus our Teva marketing efforts on owning whitewater and canyon sports.

Our premier event, the Teva Mountain Game at Vail, was held last month and included whitewater, climbing, trail running adventure racing and mountain biking events.

Coverage is being provided by NBC, VH1, FOX SportsNet, Rush and Fuel networks.

The NBC segment will air August 7th at 2 PM Eastern daylight savings time.

Make sure you tune in, and also mark your calendars now for the first weekend of June next year.

We would really like you to witness first hand the excitement of the Teva Mountain Games at Vail.

In summary, we expect a combination of great sports marketing, authenticity 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're excited about our prospects as we move forward with our mission to be the brand of choice for the new outdoor athlete.

Second quarter has historically been immaterial to UGG.

However, this year UGG sales exploded to $11.7 million in the second quarter as we strived to fill the pent-up demand.

All categories, boots, slippers and casuals are selling well, even in the summer.

And retailers are wanting to receive their orders as fast as they can get them.

Depending on how quickly our production arrives, we may have a larger third quarter for UGG than fourth quarter.

We have secured more top-quality sheepskin and manufacturing capacity, but we continued to offer certain styles on an allocation basis so that we can better control distribution and enhance the image of the brand.

We're seeing demands for UGG in Europe, Canada and other international markets, and expect international sales to grow dramatically this year and over the next few years.

The collections offered by our handbag and our outerwear licensees have been received exceptionally well and bookings are strong.

The handbags began being delivered this month and sell-through has been phenomenal.

For example, one Neiman Marcus store sold 53 of the 54 handbags it received during the first week of them being on the sales floor.

The outerwear is being delivered for holidays.

And I've got to say retailers are eagerly awaiting their arrival as well.

Over the next few years we will continue to expand UGG's product categories, its selling season, and its geographic penetration.

As the leader in the luxury sheepskin market and Footwear News' Brand of the Year, UGG is well on its way to becoming a global luxury lifestyle brand.

Simple sales for the quarter grew 21 percent over last year's.

And we're experiencing an increase in future bookings.

Our new Simple growth strategy, which better takes advantage of our corporate strength and market opportunities, appears to be working.

And we feel confident that it will give us the growth we want for Simple.

We're building on the retail successes and icon status of the old school sneaker and the original clog by launching new versions of these classic simple styles.

We're beginning to deliver the clog this fall.

And you'll see it featured in not only Nordstrom's fall catalog, but also in Nordstrom's BP Mailer.

Those who have seen Simple spring 2005 sneaker collection say it is awesome.

And I've got to say I agree, and I would like you all to have a chance to see it too.

Come by our booth at the WSA Shoe Show and see for yourself.

Finally, our Simple sheep program is doing very well.

This quarter we will be delivering our moderately priced shearling boots and slippers to department stores like Macy's East, Carson Perry Scott, Profits and Parisians, and the sporting goods retailers like Galyan’s, Finish Line and Sports Chalet.

We believe that we're finally turning the corner with Simple, and that our new product and distribution initiatives will give us the growth we want.

There are five initiatives that make up our corporate strategic plan, which subject to the risk factors outlined in the latest 10-Q and 10-K, we expect to drive our growth for the next few years.

The first is to introduce new categories and styles under our existing brands.

In Teva we will continue to offer innovative open and closed-toe products that address the entire $2 billion rugged outdoor footwear category, a market again that is 7 times the size of the sport sandals.

We're finding that the same proprietary technologies that work in our sandals also work in closed footwear.

In UGG we will continue to offer new boots, new slippers, new casual shoes and new cold weather footwear that will help us expand our geographic penetration and our selling season.

And in Simple we will focus on our heritage clog and sneaker categories, leverage our sandal capabilities, and expand our Simple sheep program.

Our second growth initiative is to grow our domestic distribution.

In Teva this means rolling out new product categories to our existing retailers and using special makeup product to reach select new retailers.

In UGG this means building distribution outside of California.

We believe we can ship 20 to $30 million into California within the next few years.

And if we can do this in one state with 10 percent of the U.S. population, just think what the potential is for the other 49 states that represent the other 90 percent of the population that arguably have a climate that is better suited for sheepskin.

We also plan to develop our UGG destination retailers.

That is those who carry the breadth of the line and are known as the place to go for the brand, retailers like Nordstrom and like Neiman Marcus.

In Simple we're targeting youth and more moderately priced retailers.

And when it comes to building our domestic business, I can't forget our consumer direct Internet and catalog business.

It is really on fire I've got to say, and continues to beat our internal projections.

Last year it made up 5 percent of our business, and this year it is 10 percent of our first too quarters' sales.

And with gross margins running up to 70 percent plus, it is a great contributor to the bottom line.

This quarter our consumer direct division will be shipping UGG handbags, which represents our first offering of licensed non-footwear products.

UGG outerwear will be available online for the holiday.

And Teva licensed products will be available for spring 2005.

Expanding our international distribution is our third initiative, and is a huge opportunity for us.

While we are proud of our 40 percent growth in the U.S. over the last two years, our international sales represented only 18.5 percent of our total 2003 net sales.

We believe our international business has the potential to be as big as our U.S. business.

We have a good base already in Teva.

In 2002 we brought on a Director of Sales for Europe.

And we started to see positive results with European sales up 36 percent for the first two quarters this year.

With UGG we have a blank canvas. 2003 international UGG sales were less than $1 million.

This year we have 4 distributors in Europe, a Canadian distributor, and a handful of distributors in the Pacific Rim.

And we have allocated 10 percent of our UGG production to seed international markets.

We expect our international sales to grow dramatically this year and over the next few years.

Our fourth initiative is to pursue licensing of our brands in complementary non-footwear product lines.

We're pleased with the success we have experienced thus far, and see this as a long-term brand building program, which in a few years we expect will materially add to the bottom line.

Finally, we will remain true to our mission statement and build new brands.

We have a reputation in the industry for treating brand founders fairly and rewarding them handsomely, therefore we have a lot of people asking us to help them bring their ideas to market.

They come to us with authentic products and brands, potential category creators and proprietary technologies; all the things we look for in building niche brands.

And now that we have repaid our debt, we can seriously consider these opportunities.

And we're keeping an eye out for the next Teva or the next UGG.

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 '05 line, and subject to the risk factors outlined in our latest 10-K and Q, we are increasing both sales and earnings guidance for 2004.

We now expect sales for 2004 to be 182 million to $190 million, and earnings per share to be approximately one $1.70 to $1.75 per diluted share, up from our previous guidance of $1.42 to $1.51.

We expect third quarter 2004 sales to be $45 million, to $49 million, and earnings to be 33 to 36 cents per diluted share.

We expect fourth-quarter sales to be 52 to $56 million, and earnings to be 45 to 47 cents per diluted share.

Our quarterly guidance is based on our current expected UGG production and delivery schedule.

We do have UGG orders in hand for third quarter that are in excess of our guidance.

And while we are comfortable with the guidance for the year, we may ship more in third quarter if product comes in early enough to allow it.

We are increasing our Teva sales guidance for 2004 to a record 87 to $89 million.

We are increasing UGG sales guidance to a record 86 to $90 million, and maintaining Simple sales guidance of 9 to $11 million.

In summary, we have strong brands that are doing well and are leaders in their niche categories.

And we have a strong team that is focused on executing a solid growth strategy.

We're pleased about our performance for the first half of 2004, and we expect momentum to continue throughout the rest of year and into next.

Thank you for your support.

And we would now be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS).

Jeff Kleinfilter (ph).

Congratulations to the whole team.

That's just a terrific quarter and it looks like a great second half.

A couple of questions for you.

First of all just a recap again on the gross margin trend during the second quarter.

You indicated closeout sales were up slightly and more UGG versus Teva.

I am just curious on the closeout sales dynamic.

And then on the UGG is it likely that going forward the gross margin on the UGG product would actually increase as more of the production is done in China, thereby driving margins up a little bit in that category?

And then the other question I have is how does -- in your opinion talking to the retailers -- how is UGG fitting into the current fashion trends?

Doug, maybe you've gotten that feedback from your field, where they see -- beyond just filling up a demand that hadn't been met is there something that is driving it in terms of the current silhouettes of sportswear?

And then finally, what advertising will you use to support the expansion of the Teva clothes (ph) product other than your event that you hold in June?

Thank you.

Let me start.

I think I got all those -- it sounded like 4 questions to me.

The first being Q2 gross margin and how closeouts figured into that.

We're still living out some of the excess inventory of Simple, as well as we are moving quicker now to move inventory.

Instead of waiting until the end of this season we will do it kind of towards the back part of it in Teva as well.

I think that should address the Q2 gross margin.

When we talk about UGG's gross margin, as we go forward here -- and I think your question was should we see an improvement because we're making more in China?

We're working in that direction.

I will tell you with the demand that we have put on sheepskin, the sheepskin prices are going up, so they counterbalance each other.

The next question on UGG, how does it fit into the current trends in clothing?

I think the thing that really makes UGG so lasting is the comfort.

That has been a long-term trend that has been going on for a good decade now, and we see continuing for another decade.

The thing that we have done is of course we have colored it to coordinate with ready to wear.

It fits in with the preppy look.

It fits in with all of the casual looks from beach to -- pretty much all the different looks that people have -- denim to skirts, as well as high-fashion Chanel outfits.

So there is pretty broad acceptance from that.

But I really have to go back to the comfort feature and the functionality.

It wicks away perspiration.

The good twin face sheepskin breathes, and of course it insulates as well.

But then we talk about Teva in our advertising of the closed-toe product, you will see it featured quite a bit in our print.

That is where we do most of our media buy.

And this year we actually have -- each of the brands has their own marketing and advertising plan.

And a lot of the advertising was geared towards the launch of the new Gore-Tex product here this fall.

And you'll see the X1 being featured quite a bit as we go into our spring.

So you'll start seeing probably a higher percentage of advertising dollars per sales dollar goes into our closed footwear, because we're just really starting to scratch the surface on that.

Carole Buyers.

RBC Capital Markets.

And let may add my congratulations.

I would like to piggyback on Jeff's gross margin question and get more specific on -- by brand.

Is it fair to say that maintain margins for Simple went up year-over-year?

And could you specifically state any maintain margins versus sell-in and discuss where we saw any gap?

I don't have the exact numbers on it, but I will tell you that we take an aggressive stance in terms of moving closeouts this year earlier than we have in the past.

So that impacted a bit on the margins.

I think too you know -- I just want to let everybody know, we really pride ourselves in being one of the top -- let's say -- the leaders in terms of gross margin.

Last year's 48 percent is even beyond our own things.

That was a combination of almost all of the sales being made of full priced Teva product domestically, which is by far and away -- in sandals for that matter -- by far and away our biggest gross margin item.

We had almost no sales in UGG last year.

And there is about -- between our sandals and -- our Teva sandals and our UGG sell-in margins there is almost a 10 percent gross margin difference.

So if you look at how much -- this is the first time we have done any kind of materials sales of UGG in the forth quarter -- excuse me, in the second quarter.

And again we also did quite a bit of international sales as well.

So those are the factors.

I will tell you, I don't think we will ever hit another quarter where we do 48 percent.

That is just -- that is way -- 46 percent is nosebleed area.

We do believe in the long run that we will continue to be, if not the best, at least one of the best, in our industry.

We see our margins maintaining steady, possibly creeping up a little.

Catalog helps a lot.

There's a lot of things going in both directions.

I will tell you, we do feel comfortable with 42, 43 percent gross margins.

I think if you look at the year when it balances out, that is where we come into that range consistently.

And we expect that to continue in the future.

RBC Capital Markets And then just as a second question, I was wondering could you -- and you may have done this in your remarks, but I didn't catch it -- could you break out the composition of international sales and Internet sales with Teva and UGG?

Let me start with the Internet sales.

Internet sales for the quarter Teva was 1.8 million, Simple .1 million, and UGG 2.9 million.

And that compares to last year's Teva 1.3, Simple .1, and UGG .1.

Internationally Teva sales for the quarter were 3.9 million.

And Philipsberg (ph) was about zero, and UGG was about .6 million.

That compares the Holbrook -- I'm sorry, Teva international last year was 2.8, Philipsburg, which is Simple, internationals was .2, and UGG was about zero.

Scott Johnson.

Highland Capital.

I have three questions.

First of all, with regards to UGG, considering that Nordstrom for example has a private label UGG out there, and I saw knockoffs at places like Claire's.

How do you guys plan to manage the brand given the onslaught of knockoffs, given the fact that UGG, quite frankly, is not a strong as let's say Teva or Prada?

I guess first off I would tell you that I think UGG is every bit as strong as any of those other brands, you said Prada, Teva.

What we have done, we realized that we cannot fulfill everybody's demand.

So what we have done -- and we learned this with Teva and we have learned this with Simple -- what we have done is really focus on who is our core customer, our core distribution, our core retailers, and who do we want to be our UGG customer.

So we have concentrated on the high-end of the market, because we use the top quality sheepskin that is unlike any of the others that you see out there, I mean other knockoff brands.

And we have also gone and really put breadth into the line.

And we sell our casuals, our cold weather, our slippers, as well as our boots, and really have picked the people like Nordstrom, like Neiman Marcus as destination retailers, and really worked with them.

And we have seen time and time again in California over the past decade private label and other brands come in.

And I will tell you when UGG it moves off the shelf, and the other ones sit there.

So what we have done is we're managing our business, growing our business, year after year, not spiking it.

But if you look 3 years down the line, you're going to see UGG being a very, very strong brand, embraced by the consumers and still out there on the shelves of the retailers.

And you're going to see a lot of these who have jumped in on the popularity of the look of one of our boots, they will be gone.

And that is our belief in the market and that is how we have addressed it.

So if I hear you correctly you're saying you are just going to focus on high-end retailers and let the knockoffs basically be sold to lower end retailers?

Yes.

And at the end of the day the brand will win out?

Right.

Exactly.

And we have seen it happen time and time again in our industry.

We have seen it happen in sport sandals.

And that is -- I guess that is the business model that we do.

And again I always go back -- I'm a surfer at heart and I love the quicksilver model of year after year consistent, sustainable growth as opposed to the spiked model that we have seen in some other brands, L.A.

Gear is always a good example of that.

With regards to retailers and the UGG's, you guys have seen phenomenal growth in your boots.

How do you guys plan to manage the unlikely event that you're going to have excess inventory?

Will you guys take it back?

And if so, do you run the risk of hurting your earnings, or will you allow retailers to mark it down if they don't sell it?

My concern is that the retailers, because they were unable to fulfill demand last year may actually be ordering in excess, assuming they're going to get cut back by you guys.

So at the end of the day they may be sitting on inventory that they don't want.

So are you guys going to take it back or allow them to mark it down?

First off, I think you're right.

We're doing an allocation basis in order to control the distribution of our brand.

And we don't want retailers to dictate to us what they think they can sell.

We're not delivering everybody what they want.

We're keeping that demand -- we like that pent-up demand.

We also work very closely with our retail partners in terms of monitoring that demand.

And I'll tell you that the boots are still moving -- a lot of times they don't even make it to the floor because there's a waiting list for them.

And this is how we have always done it in the past.

One thing about basic styles in a line or a brand such as UGG, they carry year-over-year.

Our policy is not to have people come back.

But I will tell you like Nordstrom for instance at the end of the season anything that they have left over, and they have done this for years, they would just put on the rafters and hold until the following years.

Now I will tell you what is happening now though is the demand, the selling season has actually stretched out.

So now they just keep them out on the floor and sell them.

So I don't foresee us running into a situation like that.

Our policy is that we do not take returns.

But we work way in advance and really monitor it up close so that there is no excess inventory out there in the marketplace.

We're going to make sure that that doesn't happen, but we're not going to deliver product if it doesn't look like it is going to sell.

But I will tell you all indications are we could ship a lot more than we're going to ship this year.

Fair enough.

And last question.

With regards to the shares that you sold, I'm a little -- actually I am extremely concerned that you sold such a large position of your shares.

And given how upbeat you are about the prospects of the Company, it doesn't seem to make sense that you liquidated -- sold 64 percent of your shares.

I think you might have the numbers strong.

It was 36 percent of my shares that I have in my trust and my kids' trust and all of that kind of stuff.

I will tell you that that is the first time that I have sold any material amount.

I'll tell you that I had some loans I needed to repay, and in today's market it is very -- or today's environment I would say it is very tough to go out and sell anything.

And I will tell you I have more than two-thirds of my net worth is tied up in the Company.

I'm not going anywhere.

So you own -- I thought you only -- so you hold 1.8 million shares today?

I don't know the exact number.

You have to look at --.

At that you held -- you sold 1.2 and I thought you only earned 1.8.

So you were left with 646,000 roughly, is what I thought, if I read the filing correctly.

Go back and check the number because I think my beneficial holdings prior were 3.342 million in addition to my kids' trust of another 384,000 shares.

And, yes, go back and look at the chart.

I think it's on page 63 of the prospectus.

Okay.

So basically you're saying you're doing this for estate planning purposes?

Exactly.

Okay.

Well, great quarter guys.

Sam Poser (ph).

Mosaic Research.

On average selling prices can you discuss -- can you give us a (indiscernible) on that?

Sure.

Average wholesale selling prices is what I have here.

Right.

For the second quarter this year it was 20.73.

And the second quarter of last year was 20.59.

And your unit sales for the quarter?

Unit sales -- again on wholesale was 1695 thousand (ph).

And last year it was 1093 thousand (ph).

So what is not in the -- your catalog is not in there?

Correct.

Can you just go through the opportunities with the clog business again with Simple.

Can you just go into more detail there?

Yes.

We're just going to be delivering here in the next couple of weeks the first clogs of the new clog we have called the Ease On and Ease Off.

Completely updated.

Really colorful.

Followed -- we've got very wide reception on it from all our strong independents.

As I said, Nordstrom is going to have it in not only their fall catalog but also their BP flyer.

It is just -- it looks really good.

Connie put together a fantastic team at Simple.

And I've got to say -- we had our sales meeting the beginning of June and showing that spring line -- it is the best put together, most well coordinated and thought out line that I have seen us do.

I would say that we have ever done in any of our brands.

It's got a really fun message to it and a unique marketing message.

All I can say is come by at WSA.

There will be a new trade show booth.

And they will be launching the new program of which the clog is really the first one that Monica designed yourself under her direction.

So you'll see this kind of roll out through fall and into spring of next year.

And I have got to say that is the one of the most exciting things for me.

It may not be the biggest revenue getter, but to say that we finally got something there that retailers are embracing is real exciting.

Great.

And just to follow-up on the ASP's one more time.

Because of the big acceleration we're going to see in UGG in the back half this year versus last year, do you foresee some more significant growth in the average selling prices toward the back half?

Yes.

And that historically has happened in the back half of the year.

Exactly what you're saying.

UGG becomes a bigger portion of our business.

As well as you see Teva we sell the last thongs and more of the more expensive closed footwear as a percentage of the business as well.

Thanks very much.

Great quarter.

Andrew Delmonte (ph).

Artemis Advisers.

Also an excellent quarter.

Just a couple of quick questions.

Just to follow-up on the ASP question.

It looks like your ASP then for the first half of this year is going to be flat to slightly below the ASP of last year.

And I'm curious with all the demand and you're obviously trying to cut back on your suppliers to manage their expectations, why don't you just raise price?

Why with all the new products are you bringing your ASP down? (multiple speakers)

I think one of the -- on the ASP there that thongs have been phenomenal business this year.

There has been a trend in the last few years of people going away from what I call the soccer slide to thongs.

And our thongs -- and that is in the Teva line.

And that business has just really skyrocketed.

And it is $10 wholesale.

So we're selling a lot of those in addition to our other product.

As far as raising prices, what we try to do is we try to charge fair prices.

And we don't want to gouge people.

We kind of pick out what we think is a good value relationship, and then just go with that.

So -- we aren't opportunistic to go out on eBay and sell it 4 times retail.

That is not our business model.

So there is a mix shift going on inside Teva basically that we can't really see as outsiders?

That is it.

It especially happens in the first half of the year when thongs, and this is just been a trend that has been going on for the last couple of years, thongs have just been very a big growth side of the business for us.

I guess if you're looking back on '03 the back half of the year seems to have higher ASP's.

And would you expect that to continue this year then?

Yes.

Like substantial --?

Yes, again as UGG becomes a bigger portion of the mix in the back half of the year, and also in the back half of the year you'll see Teva's closed footwear -- and like for instance the Gore-Tex hiker that retails at 110, $120 versus the $20 thong it becomes a bigger portion of the Teva mix as well.

I understand.

Then moving to UGG, can you give us a sense of where you think the demand for the next two quarters -- or as far as you can see it.

Is it girls?

Is it boys?

Is it going to be the winter states and not the summer states?

Can you give us a sense of where the demand is coming from?

And just following up on your question -- about your statement than you can sell substantially more than you are currently selling?

Women's is a strong portion of the business obviously.

Our men's business remains strong though.

Kids has grown quite a bit.

In terms of geographically, we are consciously growing the business outside of California.

Again, we have allocated 10 percent of the production for international markets.

And in some of the areas where we have not delivered as much.

Obviously where the population is strong in the mid Atlantic and the Northeast is getting a big chunk of it.

But geographically it is kind of like where the population is.

Cold weather states get a little bit more than -- I mean Florida is not -- and Hawaii are not strong markets for us in UGG.

Did I answer it?

One other question on that then.

You see the growth particularly coming from women that did not buy last year and are buying it now this year, now that they saw what happened last winter season?

Or do you see it as recurring revenue shoppers coming back and wanting to upsell into the more expensive and newer brands or newer styles?

I think is a combination of both.

Obviously there's a lot of demand because people don't have it.

In California here we continue to sell and continue to grow.

And what we have found here is that women in particular will carry 2 or 3 pair in their closet.

They will go for colors.

A lot of people that had had the sand or the chestnut in the past now are picking up the pinks or the lilacs or the blues, or they might go to a different model.

We're also finding that people that have the boots will buy a slipper or they will buy a casual shoe to go with it.

So we're starting -- we see a lot of repeat customers.

How we really see UGG work in the past is usually you get a pair of UGG boots or something as a gift, and you like it so much you buy it as a gift for other people, and then you start buying it.

Men will buy a new pair every two to three years, women almost every year.

Some of them will -- I would say one to two years.

And then one other question.

I would suppose the cash cycle when you sell off the Internet is substantially better than when you sell it through the wholesale channel.

And I guess my question is when I look at your inventories they are very impressive relative to where your sales growth is.

And is that a function -- in other words can you keep that same percentage of sales and maintain the growth rates that you're talking about?

Or is there a mix shift that is allowing you to keep that inventory on your balance sheet at this fairly low-level relative to the growth.

Our inventory level is too low right now.

We wish we had a lot more UGG available to ship it.

It is coming in and turning as fast it as it comes in, which is great, however, we are missing sales because we don't have the inventory.

Just to carry the SKUs in the size ranges, stuff like that, to be able to ship complete, it is making it difficult for us now.

We would like to invest in more inventory.

We just haven't been able to build it up.

We do anticipate in areas where we can over the next year beef up our inventories -- in particular in Teva we actually -- we missed business this year because we were out of some things we really wanted to keep in stock all season long.

I have got to say now that we have paid down the debt it affords the luxury of being able to build inventory.

We were squeezing our inventory, squeezing our receivables, and actually even relying on our factories in terms of giving us extra dating, just so we can pay down some of the debt.

If you remember -- or if you don't, I will tell you that we -- our last tranche of debt we got to buy Teva we were up at North of 16 percent in an interest rate.

So now that we're debt free it allows us really the ability now to get a proper level of inventory as we go forward.

So what would be a target inventory level based on your sales projections?

You know again, and I have said this to some people who have asked before, I would like to see us end up this year with $7 million in inventory in UGG alone.

Whether that happens or not (multiple speakers) I'm not sure because it seems like we're selling it through.

When you say 7 million, you mean finished goods, right?

Yes.

And just going back to your question -- or to your statement on sheepskin procurement -- supply price can you just give us a sense of where you -- where you see that going?

Yes, I got to say securing top-quality footwear great sheepskin is challenging, especially in drought times like we have seen in Australia over the last couple of years.

But the other thing I have got to say is we are the largest user in the world, and we really consider it one of our trade secrets.

We work very closely with the top sheepskin tanners in the world.

We have secured enough to cover our needs through the middle of next year.

We are currently working on the last half of next year right now, and feel very confident with that, albeit, sheepskin prices are going up.

I did -- I was in Australia last week actually.

And I got to say that lamb at least -- the prices of lamb meat is coming down.

So that means more going to slaughter, which means that there are going to be more skins available.

So that is putting us in the right direction.

But I will tell you that sheepskin prices are going up.

And we're dealing with it.

I'm just real glad we're at the high end of the market instead of low end of the market.

And that we are as good a sourcer as we are, otherwise you would be seeing margin erosion.

Are these take-or-pay contracts?

What we do is we work very closely with our tanners and give them projections on what we need.

They commit to us the amount and a price that they are willing to give us, or that they are able to give us, let's put it that way.

And then we allocate it to our factories.

We never actually contract for it, take ownership of it, or anything like that.

We just allocate it to our factories.

Last question, I promise.

Thanks for answering all the questions.

Your cash flow in the balance sheet when up nicely from the 11 million or so level from last quarter, if I remember correctly.

And I'm curious is that cash flow from operations or is that the equity offering or some combination of both?

It is a combination of both.

We raised about 36 million in the equity offering over the course of last year.

We also had earnings of about 10 million.

So you got between the two of those it's about 46 million.

And then we repaid about 30 million of debt, and the balance went into cash.

Got you.

And it sounds like most of that cash you're going to use to put right back into inventory?

I wouldn't say most of it.

I would say a portion of it we will.

Like Doug said, we would like to have about 7 million more -- or 7 million of UGG inventory.

That is probably about 5 million more than we had last year.

(OPERATOR INSTRUCTIONS).

Julie Lerner (ph).

Metropolitan Capital.

First congratulations.

Two questions, one a follow-up to the last question.

You guys, just to clarify, plan to end this year with about 7 million of inventories in finished goods, correct?

That would be in UGG.

Yes, in UGG.

And then in that UGG number why do you think you'll have that much inventory left?

It would seem that given the prior years as well as the high demand that is out there right now that would be a lot lower?

Could you just maybe go into that in a bit more detail?

We have actually got a -- we call it a spring line, but really it is a first quarter line for UGG this year.

And one of the things that we missed out on this last year, meaning first quarter of 2004, is we had air freighted all the production.

We had the factories work right down to Christmas.

We air freighted it all in just to meet -- to try to fill the demand that was there.

By the time the factories got up and running, -- what did we deliver 4, $5 million in first quarter?

All of that second-quarter business could have been delivered in first quarter.

And so there is a substantial business for UGG in first quarter that we have not been able to fill because we were just scratching like we did.

I think if we look towards 2005 we're planning a good first quarter business, probably not as high as second quarter business in UGG as we have seen this year, but a lot -- you know you'll see growth in the first half of the year, but it will be shifted more towards first quarter than second quarter.

And that is really why we need it.

As well as when you carry -- what do we have, 69 styles in a multitude of colors and sizes.

You can never shift down to zero.

And when we shift it down to, I think, 1 million 5, 2 million last year that was on less SKUs, and we had broken sizes all over the board.

So --.

And just to be clear, if the demand does end up being stronger than I guess maybe you're anticipating now, is that inventory available for holiday shipping if it needs to be used then?

I think that -- I'm not counting on that, because the way I look at it is it is hard to ship it for holiday if it comes in that last week of the quarter.

I mean we have got them working full bore right now.

And it really depends on how -- if it comes in in time, yes.

And the demand is there, yes.

The demand obviously seems to be there.

And again I go back to the guidance that I gave.

We're comfortable with the guidance for the year.

We upped from our last guidance by -- actually I have forgotten how much we upped it.

But we've really looked at the production.

If it comes in a little earlier, we will be able to deliver more in third quarter.

But I guess just given the schedule that we have now and what I see, that is my best guess of how it will be.

And then my second question, obviously you guys are shipping -- or creating a tremendous amount of UGG.

How big, given the sheepskin constraints on the supply, how many pairs of shoes or how big can sales get over the next, call it, two to three years given your supply constraint?

I see us working in advance, and I see us being able to grow our business the way they want to grow it.

Do I see us tripling our business every year, by no means do I see that.

But I see us being able to continue strong growth in the future, and don't see the constraints.

Again, without going into too much detail because I have got to say that the whole sheepskin sourcing and how we design products and develop it and source it is really what we consider one of our trade secrets.

We have a plan internally that is supportable from a sourcing side that gives us strong double-digit growth going forward in UGG.

Can the UGG brand surpass over the next few years 150 million in sales or does it cap out at some point?

Yes.

I see it being able to be over the next few years -- I see that being a real possibility.

I actually believe that there is a bigger market than that for the brand.

And I -- I see -- if I look at our five-year strategic plan, I see it being a lot bigger than that.

And then my last question is, could you just discuss -- obviously you guys are starting to do some stuff in handbags and apparel -- why you are licensing that instead of doing it internally?

Our core competency is footwear.

My team, I put them up against any other team in the industry when it comes to footwear.

We're the best at sourcing, development, making a profitable product that is a good value relationship.

We're really good at that.

We're not good at apparel.

We did a Teva apparel license a few years ago.

And I mean literally it sold well at retail.

But we literally lost our shirt.

We couldn't make money at it.

What I would prefer to do is utilize the expertise and identify a licensee that has the same vision of the brand and that has the good design development, the infrastructure to do it.

I don't want to reinvent the wheel on that.

And it is what we do is we share design concepts.

And make sure it all coordinates.

But we feel that that is a better way to go.

I've got to say we're just now delivering our first product that is licensed.

And I will tell you I'm extremely happy with the program.

The handbags are selling extremely well.

The acceptance is great.

The marketing, the PR, and I'm looking forward to the outerwear coming through.

I'm looking forward to the Teva product coming out in spring.

And I will tell you, you almost have to define what you are good at and what you're not.

We are good at building brands.

We are good at sourcing footwear.

The other products -- we want to bring in exports.

And that is really why we go the licensing route.

Thank you Mr. Otto.

There are no further questions at this time.

Great.

Well, thank you everybody for joining us.

We look forward to talking to you in another quarter.

Bye.

Thank you, ladies and gentlemen.

This does conclude this morning's teleconference.

Everyone may disconnect their lines at this time.

Have a great day.