Deckers Outdoor Corp (DECK) 2004 Q4 法說會逐字稿

Welcome to the Deckers Outdoor Corporation fourth quarter and fiscal 2004 year-end conference call.

At this time, all participants are in listen-only mode.

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

Instructions will be provided at that time for you to queue up for questions.

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

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

I would like to now turn it over to Douglas Otto, Chairman and Chief Executive Officer of Deckers Outdoor Corporation, please go ahead, sir.

Before Doug begins, let me just review the Company's 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's plans, expectations and objectives for future operations.

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

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

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

Deckers intends that all of it's forward-looking statements in this call will be protected by the Safe Harbor provisions of the Securities and Exchange Act of 1934.

Deckers is not obligated to update it's forward looking statements to reflect the impact of future events.

I will now turn the call over to Doug Otto.

Thank you, Brendon.

With me is Scott Ash, our CFO.

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

Sales for the quarter increased 108 percent to a record $74.2 million, and earnings per diluted share increased more than three fold to a record $0.72 per diluted share.

For the year, sales increased 77.4 percent to a record $215 million, and EPS increased 173 percent to a record $2.10 per diluted share.

I'm really proud of what our team has accomplished this year.

Purged sales for the Ugg branded footwear more than tripled to a record $116 million.

Making 2004 the seventh consecutive year of double-digit growth for the brand.

The high demand for the Ugg Australian brand resulted in increases in, not only sales of our boot, but also sales of our slippers and casual footwear model, as well as our licensed hand bags and outerwear.

Ugg , which had previously been named Footwear News' 2003 Brand of the Year, was also voted Accessory Council's, It Accessory of the Year, and Footwear Plus's 2004 Brand of the Year.

Second, Teva sales grew 15 percent to a record 88 million in 2004.

As this great performance outdoor brand experienced, not only strong sandal sales, but also moved forward in developing its closed footwear business.

We also found that the new message for Simple is working, as evidenced by it's 33.7 percent growth in sales for the year and the increasing momentum of the brand.

In 2004, our internet catalog consumer direct business grew over three fold, and increased to over 9 percent of our total business.

Finally, we completed a follow on offering in May, which enabled us to repay all the debt we incurred to purchase Teva, and we ended year with $25.9 million in cash.

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

Thanks, Doug.

For the fourth quarter of 2004, our net sells increased 108 percent to a record 74.2 million versus 35.7 million last year.

Including sales from both the wholesale divisions, as well as internet and catalog retailing business, our net sales of Ugg increased 191 percent to a record 60.2 million in the fourth quarter, compared to approximately 20.7 million for the fourth quarter of last year.

Teva net sales decreased 12 percent to 11.8 million in the fourth quarter, compared to 13.3 million in the fourth quarter of 2003.

Simple sales increased 33 percent to 2.2 million for the fourth quarter of 2004 versus 1.7 million last year.

Included in these numbers are internet and catalog sales of 6 million for all brands, up 163 percent from 2.3 million for the fourth quarter of last year.

International sales for all brand increased 95 percent to 11.3 million in the fourth quarter of 2004, compared to 5.8 million in the fourth quarter of 2003.

For the quarter, our domestic sales increased 110 percent to 62.9 million, compared to 29.9 million last year.

For the year our consolidated net sales were a record 214.8 million, up 77 percent from 121.1 million last year.

Including both the wholesale sales, as well as the internet and catalog retail sales, net sales of Teva year to date increased 15 percent to a record 88.2 million this year, compared to 76.5 million last year.

Ugg 's net sales increased 215 percent to 116.2 million, compared to 36.9 million last year.

Simple's sales increased 34 percent to 10.3 million versus 7.7 million last year.

Included in these numbers are internet and catalog sales of 19.9 million for all brands, up 206 percent from 6.5 million last year.

International sales for all brands increased 76 percent to 39.4 million for 2004, versus 22.3 million for last year.

For the year, our domestic sales increased 78 percent to 175.4 million, compared to 98.7 million last year.

Gross margin for the current quarter improved to 38.9 percent, compared to 38.6 percent in the fourth quarter of last year due to a combination of factors, including the strong increase in the higher gross margin internet and catalog sales, the addition of .5 million of net license revenue from the Ugg handbags and outerwear, our reduced impact of closeout sales and lower over head costs per unit.

These positive factors were partially off set by increased air freight cost, and an increase in the proportion of Ugg sales, which generally have lower average gross margins in sales for Teva.

Our SG&A expenses also improved to 19.8 percent of sales, compared to 24.9 percent in the fourth quarter of 2003.

Largely due to the continued leverage of operating costs on the higher sales volume.

As a result of the improvements in gross margins and SG&A leverage, our operating margins for the quarter improved to 19.1 percent of sales, compared to 13.7 percent for the fourth quarter of last year.

And improved for the year to 19.8 percent operating income margin for fiscal 2004 compared to 16.1 percent last year.

Interest income was approximately 25,000 in the fourth quarter, compared to last year's fourth quarter interest expense of 1.1 million.

This occurred as we paid off all of our long-term debt with part of the proceeds from our follow on offering in May of 2004.

Net earnings for the fourth quarter increased dramatically to 9.2 million or $0.72 per diluted share, compared to 2.5 million or $0,19 per diluted share in the fourth quarter of last year.

For the year, net earnings increased 179 percent to 25.5 million, or $2.10 per diluted share, compared to 9.2 million or $0.77 per diluted share for 2003.

Looking now at the balance sheet, we improved our accounts receivable turnover to 7.7 times from 6.1 times a year ago.

And, at the same time, we improved our inventory turnover to 5.5 times, compared to 3.6 times a year ago.

At December 31, we remain completely debt free with a cash balance of approximately 26 million, up 19 million from the $7 million cash balance we had at December 31, 2003.

Thank you, Scott.

I will now talk about each of our brands.

How they are doing and what our future expectations are.

Ugg continues to out perform our expectations, and demand for all Ugg branded product remains strong.

Our team worked hard throughout the year to increase sheepskin supply and production.

Greater than expected deliveries in December, allowed us to exceed the high end of our guidance and end the year with a record $116 million in Ugg revenue.

This momentum has carried into the first quarter.

We have continued to keep production at it's increased levels so that we can meet the post holiday demand, deliver our spring collection on time, and build inventory for our 2005 fall and holiday orders.

Our tanneries are sourcing hides from numberous countries now, and both tanning and production capacities have been raised to higher levels.

While we are continuing to allocate certain twin faced styles in order to enhance and control the growth of the Ugg brand, we have also developed popular new models that are made of leather and suede and only lined with sheepskin.

I do not anticipate production constraints this year.

Last year at this time we said that over the next few years we expected to expand the product categories, the selling season, and the geographic penetration of the Ugg brand.

I am very proud of how our team has been executing these strategies.

Not only did our boots sell well in 2004 but so did our slippers and our casual footwear.

Retailers experienced sell throughs of 90 percent plus and maintained margins in the high 40 percent range and even some as high as the low 50s.

Feedback from retailers at recent trade shows confirms the demand remains strong for all these categories, as well as for our new metropolitan collection, which includes the cargo pocket boot and the uptown mukluk, and for our new goretex models, the first of their kind, which include great cold weather product for both men and women.

The licensed Ugg handbag and outerwear lines continue to perform well, and we've now licensed personal leather goods and cold weather accessories such as gloves, hats and scarves for delivery this delivery this fall.

In 2004 we continued to grow our third quarter Ugg business with our clogs and our casual models.

We also began to develop our second quarter business.

This year we have greatly increased our first quarter business, and are offering a spring collection for the first time.

This is helped to expand the selling season for Ugg .

When it comes to geographic expansion, I like to point out that, while our California business continued to grow in 2004, our domestic business outside of California grew even faster, and our International sales grew to $13 million from under $1 million in 2003.

We expect to continue to execute these strategies, as well as further develop our mixed material in our men's and our kid's businesses as we will build Ugg into the premier luxury comfort lifestyle brand.

For any sceptic who thought Ugg was a passing fad, the demand for this authentic and great brand during this last holiday season and subsequent months, has hopefully made you rethink your view.

The comfort trend has been building momentum for at least a decade, and we expect it to continue for another decade or more.

With the Ugg brand leading the way in boots, slippers, casual and cold weather footwear, as well as in other apparel and accessories.

In more mature markets, like California, where they have been present for over two decades, the Ugg branded sheepskin boot has become a staple in many people's closets, and is now replenishment business.

This is now just beginning to be experienced by consumers outside of California.

If we can ship $30 million into the California market as we did last year, just think what we could do in the rest of the U.S.

Then there are International markets where demand for the brand is very strong.

We are just now beginning to exploit that potential overseas.

Now to Teva.

Teva retailed very well in 2004.

Revenue increased 15 percent to a record $88 million.

In fact, we are sold out of some of our core sandal models well before the end of the season, and our ZAKKA hiker with goretex sold well during fall.

Teva sales grew in three of the four quarters in 2004.

Fourth quarter sales did not grow, due primarily to less close shoe closeout sales, as evidenced by a Teva gross margin improvement of 600 basis points from 37.3 percent in 2003 to 43.3 percent in 2004.

It was secondarily influenced by the hurricanes in the southeast and the Carribean.

That being said, we do expect solid sales gains for Teva in each quarter for 2005, and we expect 2005 to be another record year for Teva.

Early feedback from customers at recent trade shows indicate that our sandals are selling earlier this year and that the positive selling is across a broader selection of styles.

Not only are we getting good reads on our classic TERRA FI, PRETTY RUGGED, HURRICANE, ULANI, MUSH, and all EWATO(ph) models, but we're also seeing early sell through of our newer leather models, especially of the VENTURA and the COURT collection.

In closed outdoor footwear.

We are seeing a shift to lighter, faster and most athletically inspired product.

This is just where we position Teva as we expand into this $2 billion market.

Our INFIVIOUS(ph), GAMMA, and PROTON models continue to do well and we're just beginning to shift our X ONE amphibious trail runner, that weighs only 9 ounces in men's and 8 ounces in women's.

Retailers, as well as members of the U.S. trail running team, who have been wear testing the X ONE, are very excited about this great shoe which incorporates our rafter light technology.

Retailers at recent trade shows also expressed a lot of excitement about our new flip sole models, which will be delivered this fall.

In these models, the insole of premium leather closed toe shoes can be removed and turned into a flip flop thong, making it the ideal choice for traveling with one pair of shoes instead of two.

The technology used on the flip sole, is so unique we've applied for patent protection.

While we continue to add innovative product to the Teva footwear and sandal lines, our licensees are doing the same in nonfootwear categories.

At the recent outdoor retailer trade show, the reaction to both the technical and lifestyle part of our sportswear, socks, headwear, time pieces and eyewear lines was very positive.

I especially liked the new technology in certain Teva sun glasses that allows them to float if dropped over board.

In addition to strategically expanding the Teva product offering, our team is moving forward with it's strategy to selectively add new distribution this year.

We begin delivering a 300 store program to The Finish Line in March, and we are doing a 30 store test at Champs this spring.

Our International business remains strong, and even though the bankruptcy of Car Stat has effected our German distributors business, we feel International markets will playing an even more significant role in the future.

To support this product and distribution expansion, the Teva team continues to focus its marketing efforts on owning White Water and Canyon Sport.

Our Teva Mountain Games in Vail, which will be held in June, is the premier multi sport outdoor event and includes white water, climbing, trail running, and mountain biking competitions.

The 2004 games were a huge success with coverage by N.B.C., V H1, Fox Sports Net, Rush and Fuel Networks.

The 2005 Teva Mountain Games are expected to be even bigger and better, and we are hosting an Analyst Day for those of you who want to experience it firsthand.

In summary, we feel a 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 prospects as we move forward with our mission to be the brand of choice for the new outdoor athlete.

Turning now to Simple.

Our Simple brand sales grew over 33 percent in 2004.

It is evident that our team has successfully refocused the brand -- the Simple brand and is experiencing positive momentum in sales.

TIn 2003, sales for Simple were about $7 million, and the brand was losing money. 2004 sales grew to over $10 million and the brand contribution was slightly positive.

In 2005, we expect Simple sales to be 13 to $15 million, and the brand once again will be a contributor to our profitability.

The Sugar Sneaker is retailing well in all channels of distribution from existing customers such as Nordstrom, J.Jill and REI to new ones like Eddie Bower and TSA.

The redesign of our clog offering is also retailing well.

Simple sheep(ph) collection did not retail as well as we would have liked, but we expect the new line of sneakers, sandals and casuals, which received very positive response at recent trade shows, to drive the sales increase we expect in 2005.

Our team at Deckers remains committed to the five strategic initiatives which we expect to drive our growth for the next few years.

But, first just to introduce new categories and styles under our existing brand.

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 that is seven times the size of sport sandal.

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

And in Simple, we'll focus on our heritage clog and sneaker categories and leverage our sandal capability.

Our second strategic initiative is to our domestic business.

In Teva this means rolling out new product categories in our existing retailers and selectively adding new retailers.

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

As I mentioned earlier, we shipped over $30 million into California last year.

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

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

In Simple, we're targeting youth in 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 growing faster than our wholesale business and continues to beat our internal projections.

In 2003 have made up about 5 percent of our business and in 2004 it was over 9 percent of our business.

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

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

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

We have a good base already with Teva, and great potential with Ugg and Simple.

Our fourth initiative is to selectively license our brands in complimentary nonfootwear product lines.

We are pleased with the success we've experienced thus far, and see this as a long term brand building program, which, in a few years, we expect we 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 us with authentic products and brands, potential catagory creators and proprietary technology, all the things we look for in building niche brands.

Now that we have paid 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 the strength and momentum of Ugg, and the strong response to all three brands at recent trade shows, we are increasing, both, our sales and earnings guidance for 2005.

We now expect sales for 2005 to be 250 to $260 million, up from our previous guidance of 220 to 230 million.

This includes Teva sales of 97 to $100 million, Simple sales of 13 to $15 million, and Ugg sales of 140 to $145 million.

We also expect 2005 earnings to be $2.45 to $2.55 per diluted share, up from our previous guidance of $2.15 to $2.25.

Our updated 2005 earnings guidance includes $0.07for equity compensation, without the equity compensation our earnings would be $2.52 to $2.62 per diluted share.

Typically, we update our annual guidance and give guidance for the upcoming quarter only.

We will most likely do this in the future.

However, over the past couple of years, the dynamics of our business have changed considerably, primarily, as Ugg has become a bigger piece of the total.

As a result, we expect to see some shifts in our business on a quarter to quarter basis.

In an effort to help you better understand these shifts, we will now out line our 2005 sales and earnings expectations on a quarterly basis.

It is important to note that these are preliminary numbers and reflect our best estimates at this time.

For the first quarter of 2005, we expect sales of 63 to $65 million and earnings per diluted share of 68 to $0.70.

For the second quarter, we expect sales of 42 to $45 million and earnings per diluted share of 40 to $0.43.

For the third quarter, we expect sales of 65 to $67 million, and earnings per diluted share of 57 to $0.59.

For the fourth quarter, we expect sales of 80 to $83 million and earnings per diluted share of 80 to $0.83.

With regard to the second quarter, while we expect revenues to be up approximately 10 percent, we are also investing in the infrastructure to support the tremendous demand and order flow for Ugg in the third and fourth quarters.

Also, because of the changing seasonality of our business, Q2 is becoming less significant for us from a top line perspective.

Therefore, we don't expect to get SG&A leverage we expect to get in other quarters this year.

More importantly, we do expect significant top and bottom line gains in the first, third and fourth quarters, and we feel great about our prospects for 2005 as a whole.

In summary, we are pleased with our performance in 2004 and expect solid momentum to continue throughout this year and beyond.

We own strong brands that are leader in the niche categories, and we remain committed to fully capitalizing on the many opportunities that lie ahead.

Thank you for your support, and we'll now be happy to answer any questions you may have.

Thank you. [Operator Instructions] And we will pause for just a moment to compile the roster.

And we'll go to Jeff Klinefelter of Piper Jaffray.

Happy finish to the year to everyone.

Thanks, Jeff.

Couple of questions for you.

First of all, Doug, maybe you could give a little bit of a snapshot on how the split of the Ugg product, between your traditional boot and your slipper and some of your other kind of mixed fabric products has changed, and what the boot represented, that traditional boot, last year, this year and kind of next year to see how this catagory is broadening and evolving?

And then, another question is on the fashion trends, we're hearing a lot about, on the women's side, juniors and women's, that the sandal is becoming very important this spring, summer, as more of a fashion product rather than a functional product.

Are you able to capitalize on that through Teva and/or the other brands, and do you see that as being a catalyst for you?

Okay.

Let me address the Ugg percentages first.

In 2004, our classic and ultra boots combined made up about half of our business.

This has remained consistent.

Slippers made up about 25 percent of our business.

And the casual, and cold -- it was mainly casual but there were some cold weather product as well, made up the remainder of that.

As we go forward, we expect to see the slippers continue to grow.

I'll tell you, this is a category I think is a sleeper.

I don't think there has been much innovation in that category up until just recently we sparked it, and I see this as being an area that we will see technology and innovation really explode this category over the next few years.

It tends to work with the lifestyle of people as well.

In addition, we expect our cold weather business to grow dramatically this year.

Because, with the introduction of the goretex models, we've been getting better than expected response on that.

In International markets, as well as domestic markets, so, we see that portion of our business growing.

We also, as I mentioned, the metropolitan collection has gotten great response, this I would call a combination of casual and boot.

It's taking kind of the boot to the next level.

And so, I would see its continue, continue to see less and less emphasis on the classic and the ultra as we go forward.

I think the other thing that -- for those of you that have seen the line for '05, and know the direction that Connie is taking it, a lot more emphasis on kid's and men's this year.

The goretex product fits great into the men's, and we've really increased the number of SKUs that we put into the kid's offering, because, of course, the kids want to look like mom and dad.

As we turn to sandals being the fashion statement for this spring and summer, of course, me living in southern California and growing up here, it's always been a statement for me.

But, I would say that that is very consistent with the feedback we got at WSA from our retailers from the standpoint that product is selling earlier, it's selling across styles.

It is not just our core sandal styles, but it's going into kind of the fringeier ones.

And, are we going to be able to capitalize on that?

I expect us to.

We've got a lot more, in particular, I would say in our sun and moon category, which is our kind of thong and slide category.

We have a lot more self-serve stands out in the market place this year, and we're also taking a position this year of trying to inventory our top 25 SKUs, or our top 25 model colors, as opposed in previous years where we carried a little bit of inventory of everything for the reorders.

So, we would like to keep our top, basic SKUs, in inventory for the season this year, which will allow us to react quicker to any kind of pick up or reorders at that we see in second quarter.

That's great.

One last question, in particular, with Ugg and the cold weather expansion, is that changing your distribution channel strategy at all, creating opportunities going into other key large retailers?

And, is there any over writing change in your distribution strategy for '05?

First off, on our over writing distribution strategy, I would say that remains consistent.

And, that is to be the luxury brand of choice for the comfort market, and department stores, such as Nordstrom and Neimans are still going to play key roles, we've also expanding our distribution a little bit, or our store count, let's say in Saks Fifth Avenue, and we're picking up some independents and some other great retailers that we would have liked to have been into last year, but really couldn't service them and service our existing customers.

When I look at the goretex part of it, it is not going to really increase our distribution so much as I think we will get more business out of some of our existing distribution.

Places like, for instance REI, who carries our sheepskin, our Ugg sheepskin, but I wouldn't call them -- they're not in our top 10.

And with the goretex, it really lends a lot better to a lot of our outdoor distribution, our sporting goods people.

I mean, I've got to say, Sports Chalet has done a phenomenal job with representing the entire line of Ugg, and they're a great sporting good retailer that knows that they can sell, not only the classic and the ultra, but they have a phenomenal (indiscernible) ski business, so the goretex should really help, and they've done a great slipper business with us as well.

So, what I see really happening with the goretex is, not necessarily expanding doors but getting more product out there and more sell through in our existing doors.

Great.

Thank you very much.

Thank you.

Next we'll here from Mitch Kummetz of D.A. Davidson.

First question on the International business, I think you mentioned in your prepared remarks, Ugg was $13 million in '04.

I am curious to know what's your outlook for International, particularly Ugg is, in '05?

And then, is Ugg a 12 month business Internationally yet, or is it basically just kind of a back cap business the way the Ugg domestic business was a couple of years ago?

Okay.

Let me talk to that.

Our Ugg business, we expect Internationally to grow faster than our domestic business this year.

We've really just set the seeds there, and as you did say, we're in the infancy stages there, and the've started with the classic boots, a few slippers, some of of the ultra collection and things like that, that the goretex is really been well embraced, in particular by the European market, and I know that we have just really added distributors in this last year, we had great sell through in places like Harrods in the UK., in Italy.

We've been placed in a lot of the great stores, and we're seeing the same kind of positive response we saw years ago here in California when it was first placed, and as we've seen it grow domestically over the last couple of years, so, we're still at the kind of early stages for International development, as I say, I believe in the long run we can get our International business to be as much as our domestic business.

However, that's going to take time, that's a three to five year proposition.

Do you expect any Q1 contribution from the Ugg International?

Because, I know you have your new, your spring line that launches this year, or has launched this year, is that also shipping internationally.

Yes.

A little bit, but I think it is nominal.

I think that what you're going to see from Q1, Ugg's benefit is primarily coming from first off the holiday business that we couldn't get to people that has remained strong in January and February.

And then second, with the spring line, it is a small collection in just a smattering of colors.

And it is probably more minor in the International markets than it is for the domestic market.

Because, when we already have a built up demand for the product and a real market and a consumer franchise like we do here in the United States, it's a lot easier to come in off season and introduce a splash of a few things than it is when you're incubating the market.

You really want to start during the strong part of it.

We are doing that with Ugg, and International markets, we really feel, we don't want to throw a bunch of product out there during the warm weathers just in case -- the last thing we want to do is leave a bad taste in anybody's mouth.

Couple of other questions.

First, you guys provide a segment outlook for the full year across the three businesses.

Could you do the same for the first quarter?

Yes.

I could tell you, you will see increases in -- you'll see increases all three brands.

I think you are going to see consistent quarterly increases in Teva, as it has been in previous years, maybe third quarter up a little bit more because of the excitement about the flip sole.

With Simple, you'll see the growth pretty much be like it was on a quarterly basis last year.

Ugg is the one that's changing.

If you remember last year, we delivered very little in Ugg, and a lot more in second quarter for Ugg, because we really had no product to deliver in first quarter because we air freighted everything in in fourth quarter of '03.

This year we have the spring collection.

We also just kept the production going, and it brought product in, and there's been demand, so our first quarter is going to be a lot bigger for Ugg than our second quarter.

I believe our second quarter is going to grow a little bit for Ugg, but not a lot.

But, you're going to see first quarter really jump for Ugg.

Then lastly I just had a question on margins.

Just looking at your sales and earnings guidance, if I am doing the math directly, that would imply some operating margin improvement in '05.

What do you see in terms of gross margin and SG&A?

I know you talked in some detail about the impact on gross margin in the fourth quarter.

I think some of that, in terms of air freight, production should improve, but then, of course, you've got mix.

So, what can you tell me about your outlook for your margins in '05?

In 2005, I'd say there is a bit of an up side potential in the gross margin.

Like you mentioned, primarily in the air freight.

We had quite a bit of air freight in 2004 that we're really hoping not to anniversary.

The gross margin I could see ticking up a little bit.

On the operating income margin, where as we were just about, just under 20 percent this year, I say would be a little over 20 percent in 2005.

Great.

Thanks, guys.

Next we will hear from Elizabeth Montgomery from SG Cowen.

Hi, guys.

Congratulations on the great quarter.

Thank you.

I have a couple questions, I guess, the first one.

The test.

I believe you said it was a test of Teva, in finish line.

Is that already in the stores right now?

And is that, do you have any other distribution like that for Teva that is kind of in the real chains, or is it mostly smaller specialty stores?

Actually.

Finish Line, what that is, is that's a 300 store program that our initial shipment is in March, and then I believe it follows in April.

S,o that's an actual 300 store program, involves fixturing and using the self service racks for our, basically, $40 and under product.

I believe in less stores we're also doing some of our higher end product.

The test that I talked about was a 30 store test with Champs.

That has not been delivered yet.

We just got the order in, we've been working with them for awhile now, and, I think, just got the actual order in in January.

And really, selectively, we're looking at adding retailers, but, by and large, what we are doing is trying to increase the turn of our product with existing retailers and putting new product into existing retailers.

Now, the difference being here with the Finish Line and with Champs.

We see a potential 5,000 doors.

Which could basically double our doors.

But an additional 5,000 doors in that athletic specialty market, that eventually we could get to, and I'm talking now three to five years out.

This is an area we that have not been in a channel distribution, we have not been in at least five years.

And a channel distribution, I've got to say is, it has always found sandals to be challenging the market.

So, we're working very closely with them.

Being a sport sandal company, we feel the mix is right, the partnership is right.

It's just making sure that we have the right product so that it's successful with everybody and presented in a way that doesn't detract from our core business.

Okay.

And the 5,000 doors, that's 5,000 additional?

That's 5,000 doors, if we look at all of the athletic specialty stores that we could go into, and some of the sporting good retailers, such as Champs, for instance, that we have not been in in the past, but still have the kind of service and can enhance the brand.

I am not talking about going down market.

What I am talking about is solid full service distribution.

Okay.

All right.

That's really helpful.

And then, another question about the operating margin, (indiscernible) longer term.

I guess, at what point does the revenue base get large enough that you're actually going to need to invest whether, I know you just expanded the distribution center, but invest in some other infrastructure things that could limit the amount of leverage you're going to get on SG&A?

What do you think of operating margins, or the expansion there over the next couple of years?

Well, you know, I look at our infrastructure.

We spend a lot of time developing our infrastructure internally.

A few years ago we did an ERP conversion, and our current system can handle business four, five, six times the size of what we're doing.

In terms of warehousing, I really look at warehousing as being one of those variable expenses.

It always runs a little over 2 percent of the sales.

And as the sales increase, we've got to support that with inventory.

But, I'm not talking about building $50 million distribution places.

We will lease more space, like this last expansion we did, we leased additional 175 thousand feet, we are throwing in a million and a half, something like that in racking, and in a WMS system that bolts on to what we already have.

It is not a big CapEx, I think we have a lot of our key personnel in place.

I see it really, just in terms of any more actual investment, I don't see a lot of CapEx.

That being said, I am not sure there is a huge up side in -- once we are over 20 percent operating margins, my view is is that we can now plunk more into product, we can put more into marketing, into those kinds of things that really grow the brands over the next few years.

We do real well when we are over 20 percent operating margin.

I would think, I would not want to short change the growth of the brands by getting that up too much higher.

Then just a couple of really quick questions I guess about CapEx and DNA for '05.

Which tax rate we should be using?

And, then, if you could just talk about the receivables, because they were a little bit higher than I expected at the end of this quarter?

Okay.

On the CapEx, like Doug was saying, we're in the process of putting a new distribution center in place.

That will be about a million and a half dollars, we think, in itself.

I would say, for the whole year, on top of that maybe another million dollars for everything else.

As far as depreciation and amortization goes.

We have been tracking, I believe, at about 4 or 500,000 per quarter.

I would say that that's something within that range will also continue.

With respect to the receivables.

Receivables did go up at the end of the year.

But, it's pretty much in line with our sales increase.

Our sales for the quarter were up substantially, and, in fact, the sales for the month of December itself were up -- the percentage increase in the month of December itself, was even higher than the increase in the accounts receivable for the period.

That was just from the shipping made in December?

Exactly.

And then, the tax rate?

Tax rate for this year, we came out at 36.5 percent.

For next year we are forecasting it to be up slightly from that.

Despite a greater mix of International sales?

Yes.

Why would you be thinking that?

The main thing is, there's this new -- there's this opportunity that companies have right now where you can bring cash back to the U.S., basically, repatriate money.

And, we're thinking about taking advantage of that.

If you do it, you have to pay a little bit more tax -- you can basically take 5 percent tax to the federal government plus state taxes.

We're weighing our options on that right now.

Haven't decided whether or not we're going to do it, but, in the event that we do our taxes we will probably be up a little bit.

Okay.

Thanks, a lot.

Next we will here from Monica Brisnehan of RBC Capital Markets.

Congratulations.

Thank you.

I was wondering if you could talk a little bit more about Teva closed toe business?

For instance, how much of your current business is closed toe, and how that really is seasonality in the closed toe business?

First half versus second half?

Okay.

Let me tell you that, in the long run, let's say in the next three to five years, we expect to grow our closed toe business as we move out into that 2 billion-dollar rugged outdoor market.

That being said, we have not been able to increase our percentage this last year.

I think we made more money on it last year than we did the year before.

But what really happened is, sandals have been very strong, and because we have more sandals, and we are known for our sandals, our sandal business has grown more than we expected.

We do see the closed shoe business becoming a more important part, especially as we develop our third quarter business, which is our weakest quarter in Teva.

And, you'll continue to see us build that.

The other contributing factor I think that we'll see is, we're beginning to see, kind of, hybrid out in the market, and we're leading that charge as well.

Like our flip sole is an exciting combination, that it's a shoe that you can turn the insole into a sandal.

We are also seeing -- and one of the new product that we have in our hydro series that uses stealth rubber, the -- I forgot the name of it right now.

But, it is basically, kind of half shoe, half sandal.

There is beginning to be a blur between the lines.

And, I think that just, more open footwear that is more breathable, it's lighter, it drains water, is going to be where we're going to make a lot of inroads, and we do expect to grow that quite substantially over the next few years.

Great, and can you also talk about what your expectations for licensed products are in '05?

Yes.

I'll tell you, it's not to the point of where I -- where it is going to be a huge contributor to our bottom line.

I think it's going to be a couple of, a couple of years before that develops.

We've got the Teva product is out there, and it's really just being seeded in some of the independents and some of our key retailers, and we aren't going to see huge numbers from that for the next couple of years.

UGG, which is a little more developed, we expect to see that to continue at roughly the same pace that it has been, and improve a bit as we add cold weather accessories, we expand the handbags and outerwear distribution domestically, as well as starting to play some of the product Internationally.

But you have to remember,Ugg, basically, is only in the last half of the year.

It will be nominal in the first half of the year.

Great.

Thank you very much.

Next we will here hear from Jean Fontana of Lazard Investment Bank.

I just have a follow up question on the Ugg brand.

I was trying to to see if you could tell me, what percentage of the fall orders are in now?

What visibility do you have into the second half in terms of orders?

We have very strong visibility right now.

Just in terms of actual orders in the computer, I can't really tell you the percentage of it.

And it will continue, we continue to have, it changes on a daily basis.

And through, really through April, is where a paper actually gets on our computer.

I will tell you that the commitment, we have worked with all of our big retailers, or our main customers, and some of them we've got the actual paper in the computer.

Some of them we have just discussed their allocation, and what their allocation actually will be.

We've agreed to it, and then it is just a matter of getting the actual paper in.

But, in terms of visibility, and the positive momentum, I think we see that, the one up side that I think we see is, there are certain products that we have not allocated that seem to be getting a little better than expected response.

We'll just have to see how that plays out over the next couple of months.

Right.

Because, when I saw you at the show, you talked about managing the classic and the ultra business flat for 2005 fall.

And I was just wondering if you would have been able to manage to do that, or is the demand strong for that portion of the business that you've sort of grown that business a little bit more than you originally expected to, or has the demand for the other -- I mean, the whole line looks great, but I was just sort of wondering if the mix wasn't where you originally wanted it to be?

Or has it been a little bit more skewed toward the ultra and the classic.

No, we've tweeked the ultra and the classic, again, as sheepskins become more available and stuff, and just to make -- we've tweeked it a little because people have wanted it.

But I don't think that the percentage at all is changing in terms of from where we expected.

The only thing, and this is quite evident.

We kind of saw this anyway and we'd like to keep it that way is, people are now realizing that it isn't all pink and purple and blues and wild colors.

That the real story behind Ugg is the sand, the chestnut, and a distant third the black.

And so, as we are planning our business for third and fourth quarter, there's less on the hot colors.

We keep those as just quick ins and outs to kind of give a little fashion flare, and a lot more of those basic tried and true sands and chestnuts and browns and stuff like that, because that's really what sells day in and day out.

Okay.

And, If the orders were out performed, sort of, your expectations right now, what are your supply constrains in sheepskin.

Because, last time we spoke, I think you had a little bit more than what, sort of a little bit more sheepskin supply than what you had booked.

I was just wondering, if, do you have the capacity if orders increase and demand increases more than where you see it going now, to basically distribute the product.

Yes.

I think, I do not anticipate production constraints this year to be the governing factors.

As you saw at WSA, the frenzy in the Ugg booth was amazing.

Right.

And, it is just the demand for the product is phenomenal.

It's really us and how we're going to control the growth of this brand.

And what that means is, using our restraint in restraining the retailers from getting trying to get too excited about it.

That is what governs Connie's and her teams growth.

And, that's going to do it.

It's like we've got a thoroughbred here, and we are holding it back.

Because, this race is not just a short term sprint.

I know darn well, three years from now our sales are going to be much bigger than they are.

But, when I sit down and talk with you guys next time, I want to be able to say;

See, we went up incrementally each year, rather than having a spike up and a spike down.

Really, what's going to control the growth of Ugg is how we want to to enhance the brand and grow it intelligently.

Okay.

And then just a quick question on SG&A growth.

When you look at it quarterly, I just wanted to clarify, you said it was going to be a little higher because of investments in the second quarter.

Do you see it, maybe, out pacing sales in the second quarter and being more -- I'm just talking about dollar growth, being more in line with sales in the remaining quarters?

For months, the first, third and the fourth quarter?

Yeah, I would say in the second quarter in particular, as a percentage of sales, the SG&A will be a bigger percentage of sales in second quarter than it was in second quarter of '04.

But then, in first, third and fourth, is when we're really going to continue to get the leverage, so that, for the whole year. our operating income should be a bigger percent of sales than it was in '04.

And then, I think you just look at it, and we have second quarters in the low to mid 40s.

First and third quarter are in the mid 60s, in terms of revenue, and fourth quarters in the low 80s.

So, you can see how that works.

Then just one last question, on the athletic front with Teva, I don't know if -- would you potentially do an exclusive or create a Teva product exclusively for a bigger sporting goods chain?

Somebody with 1,000 stores or 2,000 stores?

We actually do use, we call them SMU, special make ups, and we do use old tooling or special colors or unique products, we do do that for some of our large retailers.

Now, is that becoming a more important part of the business?

I would say it's an important part, and it is always -- it has been an important part, it will continue to be an important part as we go forward.

Thank you.

And next we'll here from Vera Van Ert of Wedbush Morgan.

Good quarter, guys.

I wanted to ask you if you could, number 1, could you quantify what the freight, kind of, detracted from gross margin in the fourth quarter, and give us clarity on that, if you could, number 1?

Number 2, if you could kind of tell us how the product will be different on the licensing side for the outerwear and the handbags and how that's being received for fall and winter of '05?

And if you could just, kind of a housekeeping item, number of pairs sold in '04?

Thanks, a lot.

I think Scott can handle the pairs, and the first part, and then I'll address the product.

As far as the number of pairs go.

In the fourth quarter we shipped 1.940 pairs, at wholesale.

Including the retail, it's 2,000,013.

That compares to last year or 1324 at wholesale and including retail, 1357.

Average pairs, or average dollar per pair.

Average cost -- dollar per pair was $34.88 for the quarter this year.

Again at wholesale.

And last year it was $25.07.

And, really, the increase is due to a variety of factors, but the biggest one of which is increase in Ugg in sales mix.

Then the air freight, you want to address that?

The air freight cost, if you look at the whole year in total, the air freight cost probably add about a percent, or took a percent out of our gross profit margin for the whole year, and, obviously, that'd be weighted a little bit more towards the back half of the year.

As we answer the product there, as we look at our Ugg handbags and what's going to change this year.

They are actually doing four collections this year.

Which as last year they had only the one.

And some of that, it is a lot of mixed materials.

There's even the second summer line is a water proofed canvas with leather trim.

There's no sheepskin at all in it.

And they're also adding personal leather goods, as well as picking up some additional territories.

In outerwear, what we are going to see is, we're going to see more real sheepskin stuff and some higher price points.

I don't know particular models, but it's a much more cohesive collection that's closer tide with what Ugg stands for than it was last year.

Have to understand, both of these licensees came on board very, very late and really didn't get to go through a whole development cycle.

So, what you're really going to see this year in both these licensees, as well as in the new cold weather accessory licensee for Ugg, is a much more coordinated package, and it's all going to look like it flows together.

Because they've really worked this year all in conjunction with each other.

It's going to be pretty exciting.

I expect it's going to really send some ripples through their -- each of their categories in what they've done this year.

Okay.

Great.

Thanks a lot.

We have time for one more question today and that comes from Sam Poser of Mosaic Research.

Good morning.

Congratulations.

Just a follow up on Ugg sales in Q1 and Q1, as part of the total for the season, can you sort of -- for the year.

Can you walk me through that?

Yes.

I'd say that we're looking at, again, first quarter being more -- being heavier weighted than second quarter -- I think last year we did about 5 million in the first quarter and a little over 11, somewhere between 11 and 12 million in second quarter.

I would think that this year, our first quarter is going to grow dramatically.

It is going to, triple, maybe, double, triple, something in that range.

Whereas we're probably going to be in the same ballpark for second quarter.

Okay.

Great.

And on the accessories and handbags, what was your average selling, what was the average selling price on those Ugg accessories this year between the handbags and outwear?

And how much growth do you see in that average selling price next year?

I don't know that, Sam.

I know we received in royalty income, from our Ugg licensees, roughly $900,000 and that's combination of Q3 and Q4.

So, I don't know average price points or anything like that.

I am sorry, that we're going to have to do research to find out.

Okay.

So, I'll get back to you on that.

We've already talked about pretty much everything else.

Congratulations.

Thank you.

Great, thanks.

And that concludes today's question-and-answer session, at this time I'll turn the conference back to our host for any additional or closing remarks.

Just like to to say thank you very much for supporting us.

We look forward to our next call and another great year.

Thanks, bye bye.