Deckers Outdoor Corp (DECK) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen thank you for standing by welcome to the Decker outdoor corporation 3rd quarter fiscal 2004 earnings release conference call.

At this time all participants are in a listen only mode.

Following the presentation we will conduct a question and answer session .Instructions will be provided for you if you have a question.

If anyone has any difficulties hearing the conference please star zero for operator assistance at any time.

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

Please go ahead.

A 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 forward looking statements within the meaning the security clause.

These statements concern Decker’s plans, expectations, and objectives for future operations.

We caution you that a number of risks and uncertainties beyond our control could cause our results to differ materially from those we describe on the phone.

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 with the fact that our sales are highly sensitive to consumer preferences, to general economic conditions, 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 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 Brandon, and thank you for joining us, with me are Scott Ash our CFO, and Pat Devaney, Senior Vice President of global sourcing and development.

We are happy to announce that our sales for 3rd quarter more than doubled to a record $55.8m, all three brands enjoyed significant growth without growing UGG 177%, (inaudible) growing 32% and Simple 165%.

I am also happy to report that our consumer direct sales increased 241% and made up 9.7% of our 3rd quarter sale.

Earnings for the quarter increase over 10 fold to 46 cent per diluted share.

This is a record 3rd quarter for the company and I am really proud our team in having expanded our brand selling season and balance the seasonality of our business.

Scott will now discuss the financials in more details, and I will give an updated out look for our brand.

For the current quarter our net sales increased 124% to a record $55.8m, versus $ 24.9m last year.

Including sales from the whole sale divisions as well as the internet and catalogue retailing business our net sales of Teva increased 32% to $11.9M, in 2004 compared $9M, in 2003.

UGG sales increased 177% to $39.2 M in the 3rd quarter compared to approximately $14.1M for the 3rd quarter of last year.

Simple sales increased 165% to $4.6M for the 3rd quarter for versus $1.8M last year.

Included in these numbers are internet and catalogue sales of $5.4M for all brands up 241% from $1.6Mfor the 3rd quarter of last year.

International sales for all brands increased 268% to $10.7M in the 3rd quarter of 2004 compared to $2.9M in the 3rd quarter of 2003.

For the Quarter our domestic sales increased 105% to $45.1M compared to $22M last year.

Year-to-date our consolidated net sales were $140.6M up 65% from $85.3M last year.

Including the both wholesale sales as well as the internet and catalogue sales our net sales Teva year-to-date increased 21% to $76.5M compared to $63.2M last year.

UGG sales the first 9 months increased 247% to $56.1M compared to $ 16.2M last year.

Simple sales increased 34% to $8.1M versus $6M and included in these numbers are internet and catalogue sales of $13.9M for all brands that is up 229% from $4.2M for the first nine of months last year.

International sales for all brands increased 70% to $28 points for the first 9 months versus $16.5 M for the same period last year.

Year-to-date our domestic sales increased 64% to $112.6M compared to $68M in last year.

Gross margins for the current quarter increased to 39.8% compared to 38.2% in the third quarter of last year due to a combination of factors including a strong increase in the higher gross margin internet and catalog sales and $400,000 of net licenses revenues from UGG handbags and outerwear, a reduced impact of inventory write down or over head cost per pair.

Our SG&A expenses decreased at 23.1% of sales compared to 31% in the third quarter of last year, largely due to the continued leverage lost on our higher sales volume.

Interest income was approximately $28,000 in the third quarter compared to last year’s third quarter interest expense of $981,000.

This was as a result of paying off all of our long term debts with part of the proceeds from our follow on offering in May 2004.

Net earnings for the third quarter increased dramatically to $5.8 million or 46 cents per diluted share compared to $400 (inaudible) or 4 cents per diluted share in the third quarter of last year.

Year-to-date our net earnings increased 144% to $6 (inaudible) million or a $1.37 per diluted share compared to $6.7 million or 57 cents per diluted share for the first nine months of last year.

Turning now to our balance sheet, we improved our accounts receivable turn over to 7.6 times from 5.8 times a year ago and at the same time we improved our inventory turn over to 4.8 times compared to 3.3 a year ago.

Lastly, on September 30th, we remained completely debt free and we have a cash balance of $15.7 million.

Thanks Scott.

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

First, UGG continues to be on fire, third quarter UGG sales were a record $39.2m, which is more than all UGG sales for the entire year of 2003.

All categories, boots, slippers and casuals are selling well and retailers are selling through their product as fast as they receive it.

We are hearing the customers are passing on the knock-offs and waiting for the authentic UGG branded boots.

We have also begun to ship UGG into Europe, Canada and other international markets where demand in retail is also strong, and we expect international sales to grow dramatically over the next few years.

The collections offered by our handbag and our outerwear licensees have also been selling exceptionally well and we recently announced a new license for cold weather accessories which will begin to ship in fall of 2005.

Reaction to UGG’s first ever spring collection has been excellent and bookings for the first half of next year is strong.

Early response to UGG’s fall 2005 collection has also been outstanding and even though we’ve already secured more top quality sheep-skin and manufacturing capacity for next year than we use this year, we continue to offer certain 2005 styles on an allocation basis so that we can better control distribution and enhance the image of the brand.

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 sheep-skin market, and the recipient of the Accessories Counsel’s coveted Ace Award for the ‘it’ accessory of the year, UGG is well on its way to becoming a global luxury lifestyle brand.

Teva sales were up 32% for the quarter.

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

Teva’s product retailed very well this year.

In fact, we are sold out of some core sandal styles well before the end of the season.

We are pleased with the sales of our zafa light hiker our first model to (inaudible, technical) as well as the sales of some of our closed-toe styles from our nomadic collection.

We are currently booking our spring 2005 line and based on the great retail sale through this last spring, the style assortments being selected and the orders being placed by our retail partners for next spring, we expect good growth and another record year in 2005.

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

We are now addressing the entire $2 billion rugged outdoor footwear market, a market that’s over seven times the size of the sports sandals market.

Our men’s sportswear, headwear, eyewear, and time pieces licensees will also begin to deliver products in 2005.

Toward this expansion we’re continuing to focus our marketing efforts on owning white water and canyon sports.

The Teva Mountain Games at Vail, which is held the first week in June, is the premier multi-sport outdoor event and includes white water, climbing, trail running, and mountain biking competitions.

The 2004 Teva Mountain Games were a huge success with coverage by NBC, VH1, Fox Sports Net, Rush and Fuel networks and the 2005 Teva Mountain Games are expected to be even bigger and better.

We feel Teva’s combination of authenticity, great sports marketing, and innovative and proprietary products will 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 prospect as we move forward with our mission to be the brand of choice for the new outdoor athlete.

Simple sales for the quarter grew 165% over last and we’re experiencing an increase in future bookings.

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

We feel confident it will give us the growth we want from Simple.

We are 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.

Both the new clog and the sugar sneaker are retailing very well and reaction to Simple’s spring 2005 sneaker collection has been nothing short of outstanding.

We are pleased with the selling of our Simple sheet program and expect retail to pick up as we approach the holiday selling season.

We believe that we’ve finally turned the corner with Simple and that our new product and distribution initiatives will give us the growth we want.

Our team at Deckers remains focused on the five strategic initiatives which we expect to drive our growth for the next few years, to produce new categories and styles under existing brands.

In Teva, we will continue to offer innovative, open and closed-toe product that addresses the entire $2 billion rugged outdoor footwear category.

Again, a market that is seven times the size of sport sales.

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

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

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

Our second strategic initiative is to grow our domestic distribution.

In Teva, this means rolling out new product categories to our existing retailers and using special make-up product to reach select new retailers.

In UGG, this means continuing to build distribution outside of California.

We believe we will ship $25-$30m into California within the next two years.

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

We also plan to further develop our UGG destination retailers, like Nordstrom and Neiman Marcus, who carry the breadth of the line and are becoming known as the place to go for the UGG brand.

In Simple, we are targeting youth and more moderately-priced retailers.

And when it comes to building our domestic business, I cannot forget our consumer-direct internet and catalog business.

It is growing our wholesale business and continues to beat our internal projections.

Last year, a percent of our business, and this year, it is almost 10% of our year-to-date sales and with growth margins running up to 70% plus, a contributor to the bottom line.

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

We are proud of the 40% growth received in the U.S. over the last two years.

Our international sales represented only 18.5% of our total 2003 net sales.

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

We already have a good base with Teva and great potential with UGG whose 2003 international sales were less than $1m.

In 2002, we brought on a Director of Sales for Europe and we are staring to see positive results with European sales of 84% for the first three quarters of this year.

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

Our fourth initiative is to selectively license our brands and complimentary non-footwear product lines.

We are pleased with the success we are experiencing thus far and see that this a long-term brand 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 founders asking us to help them bring their ideas to market.

They come to many products and brands, proprietary technology, potential category creators, all the things we look for in building niche brands.

Now that we have repaid our debt, we can seriously consider these opportunities and are keeping an eye out for the next Teva or the next UGG.

Now let me now discuss our guidance.

Based on this third quarter performance, the continued momentum of UGG, the positive response to both Teva’s and Simple’s Spring ’05 lines, and subject to the risk factors outlined in our latest 10K and10Q’s, we are increasing both sales and earnings guidance for the fourth quarter and full year 2004 in introducing guidance for 2005.

We now expect sales for 2004 to be $196-$201m and EPS to be approximately $1.85 to $1.88 per diluted share, up from our previous guidance of $1.70 to $1.75.

We expect fourth quarter sales to be a record $55-$60m and earnings to be $0.47 to $0.51 per diluted share.

We are increasing Teva sales guidance for 2004 to a record $89-$90m.

We are increasing UGG sales guidance to a record $97-$100m.

And we expect Simple sales to come in the high end of our previously stated $9-$11m range.

We expect sales for 2005 to be a record $220-$230m, including record Teva sales of $97-$100m, Simple sales of $13-$15m, and record UGG sales of $110-$115m.

We expect 2005 earnings to be $2.15 to $2.25 per diluted share.

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

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

We are pleased with our performance thus far this year and expect momentum to continue throughout the rest of the year and in the next year.

Thank you all for your support and we would be happy to answer any questions you might have.

Thank you.

The floor is now open for questions.

If you have a question, please press star one on your touchtone phone at this time.

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Questions will be taken in the order they are received.

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Please hold a moment while we pull for questions.

Our first question is coming from Mr. Jeff Kleinfelter (ph) of Piper Jaffrey.

Sir, please pose your question.

Yes.

First of all, congratulations on another terrific quarter.

The questions I have are on…you know, there was some thought there was some delays in shipment of, particularly your dye products, your color dye products from Q3 and into Q4.

Could you talk about a little bit about that and what kind of delays you actually did end up experiencing?

And what sort of shift that is causes into Q4?

And then also, can we talk a little more about the sheepskin supply?

I think last time on the conference call, there were some things that the supply on the futures market, the supply might be stabilizing and actually increasing again, which would help to kind of pull the cost down on the ’04 basis.

Maybe we can touch on that as well?

Sure.

Let me address first the question.

Anybody’s out there channel checking, I am sure is getting the same feedback we are.

And that is that UGG is selling extremely well and people are just waiting in line for it.

And the other thing… (technical difficulties)…getting all that they want or that they expect.

You know, as I previously stated, we are limiting distribution and allocating product.

We see this continue this year.

We have also been in particular on some of the pastel-colored classic boots.

We have been running a bit late.

Those are the things that are most difficult to dye.

I will say that we shipped 86% of the products that had start ship dates as of September 30th during third quarter.

We have been air freighting some product in, is continuing to go out.

We expect to get up to 95% in shipping this quarter.

A lot of product has hit the market in September, continues….it is just really continuing to – between now and holiday, the ships are lined up and airplanes are flying in we are putting a lot out there right now.

As to sheep skin supply again, sourcing the top quality sheepskin that we use in our boots, is something which we really play close attention to, we are the largest user in the world, consider is one of our valuable trade secrets and as I said we have already secured more than what we used all year this should be used all this year for next ear and we are continuing the source.

We have, we are doing a good job on that wand without going into the details I would just like to say that our team has done fantastic again our business is almost tripling this year and we expect to have adequate supply to give us the growth that we want for next year.

Okay.

Two quick follow ups, one would be on the shipping itself, maybe you could just touch on the topic of shipping delays on the west coast ports just in general and maybe how you have navigated through that this quarter and anything you are anticipating for Q4 and then in terms of the SKUs, I mean it does seam like you are expanding the SKUs and the assortment of the product successfully right now and if you could characterize a little bit on the year over year basis of the boot versus non boot SKUs that you have out on the market and that you expect to have on the market his coming Spring season for the up brand.

Okay.

Let me first address the situation down in Long Beach and I understand it is also spread to all the other west coast ports which are very strong too.

A lot of businesses a lot of commerce coming into the west coast.

We are finding that it has taken us up to two weeks to clear things now, I saw a picture that was sent to me yesterday, actually Pat sent it to me, it was just container ship after container ship anchored outside of Long Beach, we expect this to continue and possible even lengthen through the holiday season, we have taken this into consideration with our guidance, where also we have air freighted some product in, we expect to continue there, air freight and product in to take of some of our retailer needs, but really everything is already, we have conservatively looked at that shipping issue when we put forth our guidance.

As we turn to the number of skews in us, we have brought in a skew count and Connie keeps bringing this up to me, you know when we got the brand it was two boots and two slippers, we now have seventy styles, multiple colors in each style as we go into Spring we have added colors really, we have got a tangerine a lemon and a lime green that are going in and retailers have hands on that and in Spring actually what we have done is one more of a color selection and no new styles.

As we go into 2005 Fall, we have expanded a lot of new style in particular in the casual area, we have gotten phenomenal sell through on the clogs we have done this year so we have expanded that program, ew have got what they call the fashion part of the boot line where we have appliqués and studding and very much limited one of a kind type things, and then in the cold weather area, we will be offering our first Gore-Tex (ph) sheepskin boot, a first time Gore-Tex (ph) has ever been offered in any sheepskin footwear in the world, so this is real exciting, we have had the Fall 2000 lkine actually previewed by Nordstrom and a couple of our other major accounts and they are really flipping over it.

So, we are really excited about that as we go forward and again I want to reemphasise, we are not just a boot, you know again slippers are selling extremely well, our sell through is just phenomenal there, close to a quarter of our business and in our casual and cold weather areas are doing extremely well too.

It is like anything with the Ugg brand right now is doing exceptionally well because I have got to say the success of our licensees are experiencing as well is just great.

You know all in all, the Ugg brand is very strong and we expect that to continue into next year and beyond.

Okay great thanks a lot, good luck with the holidays.

Thank you Jeff.

Thank you our next question is coming from Mitch Kummetz of D.A. Davidson.

Sir please pose your question.

Thank you and congratulations on a great quarter.

As far as the (inaudible) guidance for next year goes I am curious to know what that is based on, it looks like roughly a 15% increase.

And what indication do you have from your retailers do you have right now that either leads you to that increase or do you ultimately think it could be something better than that?

Well I think as with this year, if we left it to our retailers, they would like to double or triple our business, maybe quadruple it.

The way we have gone about it, we have the supply for that right now and we, we look as being – you know again we go back Mitch and I know you follow Quicksilver and I love their model of consistent year after year growth and if it warrants it and it is prudent to grow our brand at a faster rate, we will look at that and in particular international markets we have just started to see this year, the first shipments just arrived last month we understand sell through has been very strong, especially in the UK and in Italy and some of these new areas that we are penetrating, if we feel it prudent to increase our distribution, and our sales at a faster rate we will but again I go back to the quick silver model, I always like when Bob talks about organic growth.

I am firm believer in that.

Ok, In terms of the international business, I believe you have allocated about 10% of your business international, what you are looking to do next year?

I would think, you know again based on leads that we get again this is the first season that we really are getting it out there we will roll it out and increase it I would think in the long run at least over the next few years, I’m not sure that will necessarily be the case next year but I would expect our international business to grow at a faster rate than our domestic business, just because we have such little amount out there.

And if retailers were to come in and want to double orders for ‘05 and you decided ultimately that you have to work prudent to grow the business more than 15 %.

You think there is enough sheepskin available to do that or are you going to have to look to alternative raw materials, how would you address that?

We believe there is adequate supply as we go forward, in particular when we look at some of the product that we’ve offered for next year, we’ve got some great product design innovations that have really helped us with sheepskin and the sourcing.

So I don’t see that as an issue.

Maybe a couple last questions.

What about in terms your margins next year with continued production coming out of China but then some higher raw material costs, how do you expect those to pan out at this point, I mean comparable to what they were or what there are this year, or you expect an uptick ?

We’re planning it at roughly where it was this year, your right sheepskin prices are going up as we all know freight prices are not going well, any thing has rubber in it like soles, those kinds of materials are going up.

We are selectively increasing prices, we are also selling more direct through internet, and so that’s good and as we look into next year I am hoping we can avoid some of those air freight charges that we have this year.

Ok that’s it.

Thanks Mitch.

Thank you our next question is coming from Beth Montgomery of SG Collins.

Ma’m please pose your question.

Hi Guys congratulations on a very good quarter.

I have a couple questions, the first one, how much of the line for Teva in the Spring is booked right now?

Okay, really it’s all allocated, it’s basically allocated to the retailers.

It is similar to what we did this year, that is each territory is given a certain amount and each of the retailers are allocated a certain amount out of that.

Just as it was this fall, the retailers would like to have more than what we’re allocating.

Did I say UGG, I meant Teva

With Teva, our patterns normally with Teva is that we break the line in June, hit the trade shows in July, August, early September.

Paper hitting the computer, really September, October, November, just when I look at the style assortments coming in and the size of the orders coming that are coming in versus last year I see good solid increases.

The other thing I’m pretty excited about out, our thong business has just been really strong the last couple of years and a lot more of our retailers next year are going to be using our self service racks and with that increases the sell through sometimes in multiples of 3 or 4 times, in terms of inventory turn over, so we’re real excited about that.

And then the slipper business in Q4, is that per, that’s also replenishment right?

There’s not outline business there?

Right there is, yeah that is pretty much allocated to although we have bit more supply on that and I think there are certain styles we do have a little bit of availability on for fourth quarter.

Ok, and then, with the simple revenue next year of 13-15.

If you guys make that, that should be break even, is that right?

Actually it takes us into profitability.

We are right now and when we’ll be at the high end of our guidance, which was $9-11 million, that’s around breakeven what we’ve experienced, we’ve experienced with UGG, with experienced it with Teva also.

When we get up to that 15 million, we’ve hit a critical mass and then it starts kicking out profitability.

The last question and I apologize if someone asked this before but when you guys look (inaudible) UGG products for next year, and I know that you have the Vortex 2 and it sounds exciting, is there something you have considered doing where you capitalize on maybe some trends in other boot styles, maybe like an UGG moon boot and stuff like that?

We introduced for the first time this year in 2004, some product that was not full sheepskin, but trimmed in sheepskin and if I look at the 2005 line there is still a sheepskin connection there, I’ll say though that our handbag licensee for their later summer, their second summer season I guess it is, is doing a canvas and leather with no sheepskin line, that color coordinates off course with the colors we’re doing and that’s the first non sheepskin product that’s coming out in fact in 2006 to actually be doing non sheepskin footwear, but in that luxury comfort market for us.

Okay, that sounds great, Thank you

Thank you.

Thank you our next question is coming from Steven Martin from Slater Capital, Sir please pose your question.

Thanks a lot, Most of my questions have been answered, can you talk about Teva’s distribution this coming season, versus last year this time?

Yes, Teva’s distribution this year I think there is very little that is changing over this year, although we are starting to get back into that athletic specialty store.

Finish Line has stepped up and we’ve been doing the 300 store program with them.

But other than that there are not too many new accounts, its really broadening our assortment in our existing account base.

Thank you very Much, and same question for Simple for this coming Spring.

I think you’ll see expand its distribution quite a bit ‘cause it’s been primarily independent, I was just ….

I got a message from Monica whose is my product manager there and I guess Andy was just back working with TSA and apparently the Sugar sneakers is their number one selling casual shoes.

We’re excited about that.

That was a test for them so we’re expanding that as well as we’re just really expanding our department store as well as our sporting goods and our independent shoes store distribution with Simple so we will see a lot more doors with Simple than we had this last year.

Thank you very much.

Thanks, your next question is coming from Carol Byers from RBC Capital Market.

Ma’am please pose your question.

Thanks and congratulations.

Just a couple of questions on UGGs.

When you look at the gross that you’re seeing in UGG sales, how much were you expecting to see bleed into the spring quarter in Q1 an Q2, can you specifically break out how you see the quarters breaking for UGGs on sales?

I know that I don’t have it actually quite broken out right here but I can tell you that we do believe our business will be up in the first half of next year and we will have a stronger first quarter next year … or let me put it this way.

First quarter will make up a higher percentage of the first half sales in 2005 than it did for 2004 because if you recall in 2004 we air freighted everything in, in December and really did not have much in first quarter and some of that spilled into second quarter in 2004.

This year we expect it to be more balanced between first and second quarter but up in the aggregate.

Okay, and then when you look at the visisbility on say the back half of ’05 when do you actually start taking orders for UGG for the fall?

That norm ….. we have our sales at the middle of November where we release the line to the salesmen.

We’re pre dealing with our major guys but we’ll start getting that paper.

Usually it’s during the first quarter although with the way things are going, people sometimes are writing their orders early so that they can be assured of delivery.

So we may be getting some of that paper in December this year.

Okay, and then when you look at the gross items for 05 what percentage do you expect to come from new products versus your core products?

I would say, you know, we do some product updating where we do a new sole on it, or new colorations or things.

If you don’t count that I would say that we’re probably looking at, I’d say half and half and I’m just shooting from the hip right now, I’d have to go back and really look at the plan that Connie has put forth.

Okay, and then just two more questions.

What percentage of sales this quarter are Adjustable Classics in all different colors?

I’d say the Classics for third quarter was about a quarter of the sales.

This normally make up a bout half of those are Classics, slippers are about a quarter of our business and the casuals make up the balance

Okay got you and then just two house keeping items, maybe this is more for Scott.

The tax rate going forward and then the share account in ’05?

Tax rate going forward should be … for this year we expect it to be about 37.3, typically what we would expect for fourth quarter and for next year, a comfortable amount too.

On the share account next year, somewhere for the year about 13.2 or so.

Slightly from Q4 this year through the end of next year.

Thank you.

Actually I’d like one more question and you may have answered this in your prepared remarks but just the closed toe for TEVA, what percentage of sales this quarter were closed toes?

for third quarter it was a little over, a third of it was closed toe.

I think we’re expecting again to be that 13% range for the year and our closed toe business continues to expand but it has been a really good sandal season too so the sandals business has grown quite a bit as well.

You said 13% of TEVA sales for the year?

Yes for the year and third quarter is a little over a third with closed toe.

In the third Quarter?

Yes.

Got you.

Thanks.

Alright, thank you.

And your next question comes from Vera Van Ert from Wedbush Morgan.

Please pose your question.

Hi, great job on the quarter guys.

A question on Teva, if you could just go through a similar exercise as you did with UGG in terms of preparing the STU count say spring ’05 or spring ’04 and give us a little more detail on the types of offering you’re going to be having and then a quick house keeping thing.

Can you just go over your anticipation, your expectations for sales for the three brands of Teva, Simple for ’05?

Thank very much.

Okay, first off on Teva, the actual skew count is not going to … it’s going to remain fairly simple.

What we do there is, we’ve just modified, we have more skews in a couple of categories where we see a lot of strength and growth and kind of cut the ones that aren’t working.

So the skew count themselves, the total skew count isn’t very much.

If I look into sales in 2005 for each of the brands again Teva sales, we’re expecting a record $97m to $100m 2005.

Simple sales of $13 – 15m in UGG sales of $110 - $115m totaling $220m- $230m

Great.

Thank you very much.

Thank you.

Thank you, our next question comes from Angelique Dobbs from Whittaker.

Please pose your question.

Good morning

Morning

Could you discuss licensing and what point you may break that out?

Yes ….

Scott do you want to address that one?

Sure.

Angelique we will….

As you can see in the press release we put out, we didn’t put the number in there it’s about $400,000.

I think what our plan is for …. current is to just put it in as we do our 10Qs and 10Ks to just have it as a component it’s in our revenues, just one number revenues which would include everything.

However we will always footnote it in the ND&A section.

So it will always be broken out there.

Okay fantastic, and then could you always discuss average pricing at Teva?

Teva… I’ll tell you, here’s what I got for the whole … for the entire company consolidated.

This year, those three months we did 30.97 with the average going price at 30.42 It really reflect a combination of two things, one you know we had an increase because of UGG.

UGG is 2% percent of sales increase but (indiscernible) by 268% increase in international business.

Has lower selling prices so that pull it down a bit.

But overall it was up to 30.9.

Okay.

Thank you.

Thank you.

Our next question comes from Ravi Sharago [ph] from First Liberty Capital.

Please pose your question.

Couple of quick - - just follow-up questions.

The air freight costs - - and you’ve talked about before of shipping because some of the ports are slow on the west coast.

Have you already figured that into your margins and you EPS assumptions for the fourth quarter?

yes, we have figured that in.

And are there any new majors because Nordstrom and Neiman that are -- you’re considering for ’05 shipment of UGGs domestically and where you would take the brands into any major department stores?

The one major department store that we’re testing with this year is Sach’s Fifth Avenue and we’re doing a small test there with the intention to roll that out.

I understand too we’re shipping handbags and outer wear to Bird’s Off and we didn’t have them this year but we’d like to roll them in next year.

And third question is, with some of your costs going up, some sheepskin and some rubber prices.

What sort of pushback do you get from the retailers as afar as price increases on all your brands?

You know whith UGGs there really is no resistance to any prices, you know.

As you can see it’s evident, I guess, by the sales on eBay.

That being said, we always price our product to what we feel is value for the comfort and quality that we provide and, not that we’re into gouging people, cause that’s not where we come from.

We try to price it fairly.

There are a few items that will go up in price next year based on the sheepskin pricing but we’re selective in how we do that.

Sure you can pass through?

We pass some of them through and we also see there are areas where we can improve our efficiencies and save money too, whether it be from design doing less air freight, product mix, stuff like that.

Okay.

Thanks.

Thank you.

Thank you.

Our next question comes from Miriam Meglin (ph) from Advent Partners.

Please pose your question.

Right.

Yeah.

I have a question about handbags for you -- -I’m interested in the potential size of the market as you estimate it for you - - the UGGs handbag.

And also, I’m curious as to the demography of your customers - - the demographic of your customers - -older, younger? - - So - -go ahead.

Okay.

In terms of UGG handbags, you know, I don’t know the potential market for handbags.

I’m going to have to be - -love to answer that one and I want to consult with our Licensee on that before I give you any answer to that.

I really don’t know.

I know that - -

But surely you must have some kind of ballpark idea in entering into that licensing agreement.

No?

Well, I look at the size of coach and figure that that’s pretty good - - but actually Miriam, I really - - I’ve got to say I don’t know.

I haven’t been in the - - myself in the handbag business for probably three decades and I know it’s changed since then.

I would like to answer that and let me just say that we’ll get that answer for you.

I will tell you that with UGG handbags, what we have done is just really tested in some select stores you know, Neiman’s, Nordstrom, Sach’s - - some of the really kind of cherry picking our distribution to roll it out further in distribution over the coming years.

So, we see great growth potential there.

And then you asked about the demographics of - - are you referring to the UGG customer? - - It varies from brand to brand.

Who’s buying the handbag - - the UGG handbag?

Okay.

Who’s buying the UGG handbag - -?

You know, another way of putting it would be who are you taking business from on the handbags?

I’m not really sure who we’re taking business from and it might just be that - - you know, I don’t know, but I know my wife.

What she does is she just adds another handbag to her collection similar to which shoes and I think that is the case.

I do know that the target customer is that 35 to 45 year old woman with a lot of disposable income, luxury shopper who is adding and accessorizing her outfit in that way.

I do know also of a 15 year old that some of the more affluent teenagers are picking them up as well, but again there - - I guess, they’re cheap if you think of them compared to Hermes [ph] or somebody like that but I feel they are still expensive, you know, for a teenager.

Thank you.

Thank you.

Our next question is coming from Sam Poser from Mosaic Research.

Please pose your question.

You’ve covered everything thanks.

Once again, ladies and gentlemen if you do wish to pose a question at this time, we ask that you press *1 on your touch-tone phone.

Once again, at this time if you do wish to pose a question we ask that you press *1 on your touch-tone phone.

Our next question is coming from Mitch Kummetz from DA Davidson.

Please pose your question.

Okay.

I just have a couple additional questions.

First off Scott, in terms of next year’s guidance, what are you looking in terms of margins?

I imagine that there’s some margin improvement there.

Is it more so on the gross margin side SG&A?

Can you give us some rough idea?

Sure.

The margins - -historically that margin has been around 42%.

This year it should be in that same range.

I think next year- -I think there’s potential for some slight improvement there in the 42 to 43 range.

It’s still having the - - you know, this year our operating income, we’re still targeting about 19% or so.

Next year I see that improving, you know, with a target of 20.

Okay and then another question.

I think on the last conference call it was mentioned that you know, there might be a little bit of additional upside in the fourth quarter on the UGG business if some shipments that was slated for Q1 get delivered early.

Is that now factored in your guidance for this year is that in next year’s number and what is the likelihood of some of the product coming earlier this year.

I think the guidance that we’re giving for fourth quarter still takes into consideration the ports being what they are.

I’ll tell you right now that the increase in our inventory at the end of the third quarter is basically in transit products for UGG.

I anticipate that there is – we’re going to be at the same situation at the end of fourth quarter.

So what we try to do with our guidance is look at our best guess of how product is flowing in all be it on a conservative basis but you know that’s how we look at it right now.

Okay and I guess lastly Scott I know you mentioned that you’ve seen a big increase in your consumer direct business (indiscernible).

How much of an impact have that had on gross margin this year I was wondering if you could quantify that?

And then maybe where would you expect that – at what levels would you expect that business to be in next year and how much of an impact on gross margin next year?

Mitch I don’t have the exact percentage but you know if you just look at it it’s about 70% margin for that business compared to the average 42 for the rest of it.

Okay.

And then you know just kind of work through the numbers.

As we look to next year we do see that business growing faster than the regular business and our wholesale business.

And that’s you know one of the things that’s contributing to that increase in the gross margin I was referring to.

Great that’s all I had, thanks.

Thank you Mitch.

Thank you our next question comes from Beth Montgomery from SG Accounting please pose your question.

Hi, I had to hop off for a second so hopefully no one else asked this but I thought you said that the international zone price was a bit lower than in the US I’m wondering is that because it’s through distributors.

Yes it is.

And then the other question was did I hear correctly that there is a tested finished line for Teva?

Yes, there is actually – it’s a 300-store program that we’re rolling out for next spring.

And what’s the difference between a test and just you know gain in distribution Finish Line?

We’ve tested on and off with finish line the last few years and this is really the first I guess meaningful commitment it’s not all stores but it’s a pretty good store and I guess it’s a sizable order for us is a way to put it.

Okay and is that a replenishment thing or is that just your selling you know ‘x’ amount and --?

We are trying this year on a couple of our – as we go forward into 2005 I mean, to maintain an inventory for replenishment on a couple of our core models.

And those are part of that same program with Finish Line as it is with Varei and TSA and numerous other accounts bars.

That being said we tried to do that this year and we ran out of those products early.

If you recall it got hot all of a sudden in late February, March and the inventory that we had planned really evaporated and there was an absence of inventory of our core product as we entered the key summer months.

We are trying to make available inventory for replenishment on again a couple of our key models in the key colors.

And you know again we just have to see how weather plays out and whether or not we’re able to maintain that inventory or whether it sells out early again next year.

Okay thanks a lot.

Thank you.

Thank you at this time I would like to turn the floor back over to Mr. Otto for any closing comments or statements.

Sir the floor is yours.

Very well, thank you again every body for your support.

We look forward to announcing our year-end result in February and thanks again, bye-bye.

Thank you ladies and gentlemen, this does conclude today’s teleconference.

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