Deckers Outdoor Corp (DECK) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Deckers Outdoor Corporation first-quarter fiscal 2005 earnings conference call.

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

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

Instructions will be provided at that time for you to queue up for any questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Chairman of the Board, Douglas Otto.

Please go ahead, sir.

Before Doug begins, let me just say that we note that some of the information we provide in this call will be forward-looking statements within the meaning of the securities laws.

These statements concern Deckers' plans, expectations, and objectives for future operations.

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

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

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

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

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

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

Thank you, Brendon, and thank you all for joining us.

With me are Scott Ash, our CFO, and Angel Martinez, our CEO and President.

Angel is the newest number of our senior management team and spent 21 years with Reebok where he held numerous positions, including Executive Vice President and Chief Marketing Officer, and was also CEO and President of the Rockport Company.

Most recently, he was CEO of Keen Footwear.

And he has only been with us for a little over a week, but I have asked him to speak so that you can get a little flavor for him.

We're happy to announce that our sales for first-quarter 2005 were a record first quarter $64.3 million, up 45% from last year's $44.3 million.

Sales for each of our three brands increased.

Teva sales for the quarter increased 5% to $39.4 million, making it Teva's biggest quarter ever.

Simple sales increased 41% to $22.4 million; and Ugg sales more than quadrupled to $22.5 million, up 337% from last year's first quarter of $5.1 million.

Earnings for the quarter increased 65% to $8.9 million; and earnings per diluted share increased 41% to $0.69 versus $0.49 last year for the same period.

Scott will now discuss the financials in more detail; then I will give you and updated outlook for our brands; and Angel will give a brief description of the opportunities he sees.

Thanks, Doug.

For the first quarter of 2005, our net sales increased 45% to a record first quarter of 64.3 million versus 44.3 million last year.

Including sales from the wholesale division as well as the Internet and catalog retailing business, our net sales of Teva increased 5% to 39.4 million in the first quarter of 2005, compared to 37.4 million in the first quarter of 2004.

Net sales of Ugg increased 337% to a record first quarter of 22.5 million in the first quarter, compared to approximately 5.1 million in the first quarter of last year.

Simple's net sales increased 41% to 2.4 million for the first quarter, versus 1.7 million in the same period last year.

Included in these numbers are Internet and catalog sales of 5 million for all brands, up 38% from 3.6 million for the first quarter of last year.

International sales for all brands increased 17% to 15.1 million in the first quarter, compared to 12.9 million in the first quarter of last year.

For the quarter, our domestic sales increased 57% to 49.2 million compared to 31.4 million last year.

Our gross margin for the current quarter was 46.0% compared to 46.1% in the first quarter of last year, as a result of several offsetting factors including the shift in sales mix as a result of the significant increase in net sales of Ugg products, which generally have a lower average gross margin than sales of Teva products.

This was partially offset by the increase in the higher-margin Internet and catalog sales and the reduced impact of closeout sales in 2005 compared to 2004.

Our SG&A expenses for the quarter increased approximately 4.4 million, from 10.8 million for the first quarter of '04 to 15.2 million for the first quarter of 2005.

The increase in dollars includes approximately 2.3 million of cost associated with the increased revenues, namely, sales commissions, distribution costs, and Internet and catalog retailing costs; 0.8 million of increased marketing costs; 0.5 million of increased bad debt; and 0.4 related to the initial compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

As a percentage of net sales, our SG&A expenses improved to 23.6% of sales, compared to 24.3% of sales in the first quarter of 2004, largely due to the continued leverage of our operating cost on the higher sales volume.

As a result of this leverage our operating margin for the quarter improved 70 basis points to 22.4% of sales, compared to 21.7% for the first quarter of last year.

Interest income was approximately 69,000 in the first quarter of 2005, compared to last year's first-quarter interest expense of 1.1 million.

This occurs as (ph) we paid off all of our long-term debt with part of the proceeds from our follow-on offering in May 2004, and we are now earning interest on the balance.

Net earnings for the first quarter increased 65% to 8.9 million or $0.69 per diluted share, compared to 5.4 million or $0.49 per diluted share in the first quarter of last year.

Turning now to our balance sheet, overall our inventories increased 27.8 million, from 17.7 million at March 31, 2004, to 45.4 million at March 31, 2005, primarily related to our decision to bring our Ugg Fall and Winter inventory in earlier than we did last year in order to ensure more timely deliveries to our customers in 2005.

By brand, our Ugg inventory increased 22.4 million;

Teva inventory increased 5.3 million; and Simple inventory level was virtually unchanged.

On March 31, we remain completely debt free with a cash and cash equivalents balance of $17.6 million.

Thank you, Scott.

I will now talk about each of the brands, then Angel will give you his first impressions of opportunities, and I will end with updating guidance.

Teva sales for first quarter were a record $39.4 million.

Despite the cold weather this Spring, we're getting good reads on our classic Terra-Fi, Pretty Rugged, Hurricane, Ulani, Mush, and Olowahu models, as well as on some of our newer leather models like the Ventura and the cork collection.

We're also encouraged by the sales of our X-1 amphibious Trail Runner, which incorporates our wraptor-like technology and was selected as the Editor's Choice by Trail Runner Magazine.

Our new flip sole model, which will be delivered this Fall, are also generating a lot of excitement.

The insoles of these premium leather closed-toe shoes can be removed and turned into flipflop thongs, making them the ideal choice for traveling with one pair of shoes instead of two.

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

While we continue to add innovative products to the Teva footwear and sandal line, our licensees are doing the same in non-footwear categories.

Teva non-footwear products are beginning to be available in limited quantities this year, and we see this as a great brand-building opportunity over the next few years.

In addition to strategically expanding the Teva product offering, our team is moving forward with its strategy to selectively add new distribution.

We have just delivered a 300-store programs to the Finish Line and are about to deliver a 30-store test to Champs.

While we are experiencing some challenges with our overseas distributors, we feel international markets will play an even more significant role in the future.

To support our product and distribution expansion, the Teva team continues to focus its marketing efforts on owning whitewater and canyon sports.

Our Teva Mountain Games at Vale will be held in June, and it's a premiere multisport outdoor event including whitewater, climbing, trail running, and mountain biking competitions.

The 2004 games were a huge success with coverage by NBC, VH1, Fox Sports Net, Rush, and Fuel networks.

The 2005 Teva Mountain Games are expected to be even bigger and better, and we're hosting an analyst day on June 3 for those of you who want to experience it firsthand.

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

Ugg continues to perform very well, and demand for Ugg branded product remains strong.

Our team worked hard last year to increase sheepskin supply and production, and we ended the year with a record $116 million in Ugg revenue.

This momentum has carried into the first quarter of this year, when sales more than quadrupled to $22.5 million from $5.1 million for the first quarter last year.

During the quarter, we were able to meet the postholiday demand, to deliver our Spring collection on time, and to start building inventory for our 2005 Fall and Holiday orders which we expect to deliver on a timely basis.

Retail sell-through of our new Spring colors and our new Kalie clogs has been good, and our Fall and Holiday orders are up significantly.

We are continuing to allocate certain twin-face styles in order to maintain the quality of our distribution and to enhance and control the growth of the Ugg brand.

In addition, we have developed a collection of suede and leather footwear lined in sheepskin that is also booking well for Fall 2005.

While we are well known for our Classic and Ultra boots, we have grown a very good Ugg branded premium slipper business that makes up nearly a quarter of our Ugg pairage.

Ugg has also established a sizable casual footwear business that has helped to stretch the selling season into third-quarter back-to-school, and we have developed a solid cold weather and apres ski franchise.

We have over 80 Ugg footwear styles that address men’s, women, and kids in the luxury footwear markets.

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.

Fall and Holiday orders from retailers confirm that demand remains strong for all these categories, and we are receiving better than expected reaction in orders to our new Metropolitan collection, which includes the cargo pocket boot and the Uptown Mukluk, as well as to our Gore-Tex models, the first of their kind.

We are also pleased with the licensed Ugg handbag and outerwear Fall 2005 collections, and we have licensed personal leather goods and cold weather accessories such as gloves, hats, and scarves for delivery this Fall.

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

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

Simple sales grew 40.7% during first quarter, as we continued to see positive momentum and great response to the refocused branding message.

The Simple sneaker collection is retailing well in all channels of distribution, from existing customers like Nordstrom, J.Jill, REI, and other trendsetting independents, to new ones like Eddie Bauer and TSA.

We're just beginning to begin deliver our new Simple sandal collection, and we're getting great response in the orders to our Fall footwear offerings.

We are expecting good growth for Simple this year and a positive brand contribution to our profitability.

Angel will now talk about some of the opportunities he sees.

Then I will finish with guidance.

Thank you, Doug.

First off, let me convey how excited I am to be a part of the Deckers team.

Deckers Outdoor Corporation is really a true leader in the outdoor industry.

Our brand portfolio offers a unique opportunity for me with my background and experience to build on a solid foundation of authentic performance in premium products.

Although it has only been a week since I joined the Company, my observation is that we are well positioned to exploit a variety of opportunities across the board.

Beginning with Teva, I'm excited by the product that I have previewed for Spring and Fall '06 as well as at the near-term opportunities in closed footwear.

In addition, the positive response we've had from women to our more casual product offers great potential.

Teva must emerge as a full line year-round footwear brand, and we will be driving toward that goal as aggressively as possible.

In Ugg, I see a brand that is undeveloped in most markets outside of California.

Large sections of the U.S. have not seen the brand come to life.

We look forward to putting great product in front of many more consumers this Fall.

In addition, we are well positioned as a premium quality luxury brand by the nature of our distribution mix, which is all A-door oriented.

Furthermore, our men's line offers untapped potential, as men have not discovered the brand's relevance to them; and we expect that the men's collection this fall will spark an enthusiastic response.

I am also impressed with what I have seen for Spring and Fall '06, which bodes well for developing the brand's potential with year-round product offerings.

Simple is a surprise to me.

I did not expect the line to be so fully evolved and complete.

It offers the independent retailer an opportunity to grow the athletic casual segment of the business without having to compete with the wide athletic brands in the mall.

I also see an opportunity across all three brands to market more effectively and consistently to the consumer via in-store presence and print advertising.

In many ways, I feel we have a building full of well-kept secrets, great product ideas, and marketing support that need to be given a chance to shine for the consumer.

I also feel we have a significant growth opportunity internationally, particularly as the product lines evolve in both genders and as year-round offerings.

I see Europe and Asia especially as markets where consumers place high-value on authentic brands, not me-too products.

Our distribution is undeveloped outside the U.S. in all brands, and the quality of our brand positioning in all three cases allows us to develop and attract excellent distribution partners who understand the long-term value of our brand assets.

So from my perspective, the rest of the world has yet to discover Teva, Simple, and Ugg.

Thank you, Angel.

Now let me discuss our guidance.

First, I would like to confirm our previous guidance for 2005 of a record 250 to $260 million in sales and a record $2.45 to $2.55 in diluted EPS.

Second, now that we have a bit more visibility I would like to refine the preliminary numbers we gave during our last earnings call with regard to the brand mix and quarterly breakdown.

We now expect Teva sales for 2005 to be 92 to $95 million, in part because of the cold weather in early Spring and in part because of lower international expectations.

We now expect Simple sales for 2005 to be 10 to $12 million, because the expected increase in our sneaker and casual business -- although growing rapidly -- cannot fully offset the absence of the Simple Sheep collection.

We now expect Ugg sales for 2005 to be 148 to $153 million because of the better than expected orders for our new non-allocated product.

Because of the brand mix shifting more towards Ugg we now expect and increase in sales and earnings during the second half of the year, primarily in third quarter; and we now expect second-quarter sales of 40 to $41 million and second-quarter diluted earnings per share of $0.28 to $0.30.

In summary, we are pleased about our first-quarter performance, and we expect solid momentum to continue this year and into the next year.

We own strong brands that our leaders in their niche categories, and we are very encouraged about our prospects for 2005 and beyond.

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

(OPERATOR INSTRUCTIONS) Mitch Kummetz of D.A. Davidson.

You didn't mention anything about the UK distributor in your prepared remarks.

I was hoping you could go through that, talk a little bit about the bad debt expense there, and what do you see for that business going forward?

With the UK distributor, that was our Ugg distributor.

We actually had a bad debt situation; we terminated that distributor; and that is at the top of our list right now to take care of.

Angel has jumped right on that.

Connie is actually on a plane here within a week to go over.

We do expect to continue to sell into that market and have identified ways in which we can continue that.

That being said, we will be conservative in that.

We want to keep the retailers happy and provide them the service.

But I don't think we will be getting the international growth this year that we were hoping in that one market.

That being said, the business overall with the other distributors in Europe, with Asia, Japan in particular coming onboard, as well as the strength in the United States, way more than makes up for that.

Would you expect to replace that distributor with another distributor?

How do you plan to deal with that void?

Yes.

What I would say right now is that we are looking at our international business.

I think Angel comes onboard with a lot of international strength, and that is one area that we have put on the table.

We are also not seeing what we would like to see in Teva this year.

So I would say if I look at one of the things that rises to the surface, in terms of concentrated priorities, our international business is one of those.

Okay.

Maybe on that note, can you talk about Teva?

First of all just give us a sense as to how the business performed U.S. versus international.

It was up 5% consolidated, but was it down internationally?

Could you give us the percentages?

Yes.

Let's see.

Hold on, Mitch.

On that international I don't have my chart in front of me.

Mitch, it's relatively flat in first-quarter internationally, with the growth coming domestically.

Okay.

Could you give me some sense as to what that increase domestically is?

I'm not exactly sure what the split is for that business.

It was roughly 13, about $13 million internationally with the balance of 25 and change domestically.

Okay.

And that does not include the Internet.

Just continuing with Teva, could you just quickly address, aside from the weather issues, is there anything else happening there?

Is this also a function of you guys losing some share to competitors?

Maybe actually Angel could jump in there given his past association with Keen.

Or is it just weather-related?

And how would you expect that business to move going forward?

Let me jump in, and I will let Angel make his comments.

Because I have got to say, one of the things that I am excited about is having him working for us instead of against us.

But I have got to say that weather right now is the issue as we go into second quarter.

It has been a colder Spring.

Teva makes up the majority of our second quarter.

And with that colder start to Spring, the sandal business itself at retailers is running behind last year.

So we feel that will affect our Teva business in particular at the top line, but also on the gross margin line.

The other issue that we see is internationally.

We are having a hard time, I believe, making the leap to where we want to be from a product mix, competitive pricing, and different distribution initiatives that we need to address.

With that, Angel, if you want to add.

Of course there's going to be increased competitive pressure on these kind of niches that -- well, traditionally they have been niches.

I think niches are kind of going away in the market, with so many brands working to expand their franchises across the entire year.

In the case of Teva's business, I think more than the impact from sandal brands, one of the advantages of a Keen, for example, is that they have got a very successful closed footwear program, which really indicates that Teva's success beyond sandals is tantamount to the future.

We really do have to create and develop an ongoing strength on a year-round basis.

That is really the fundamental difference between those competitors that were formally just going at Teva as a niche, a sandal company, and in the case of Merrill, for example, are offering a significant and quality lines of closed footwear.

Keen would be included in that group.

So we have really got an opportunity on that front, because we are the authentic brand in this particular category.

Okay.

I would like to explore that with you some more, but I had one other question and then I want to give someone else a chance here obviously.

In terms of the second quarter revision to the earnings coming down as much as it is, with the sales I think only coming down 2 to 4 million, Doug, is that mainly a reflection of the gross margin impact in the second quarter on Teva?

Maybe because you guys have some inventory that you were previously expecting some good full-price reorders on, that you now have to move at a lower margin?

I think, again, to remember the second quarter the majority of our second-quarter revenue, and margin for that point, is made up of Teva.

With it running 30 days behind last year's, we feel that it will affect not only our top line but also our gross margin.

I think the other thing to consider is that we have invested in the infrastructure to support the increased orders that we have for Ugg in the back half of the year.

We don't – we strategically feel it's right not to cut back on marketing or product development, and feel that is the best approach.

Even given second quarter, I think you have to remember that for this calendar year, on the high end of our expectations, we are expecting a 21% increase in earnings per share; and that is on top of a 172% increase last year.

So we still expect a very strong year.

Okay, great.

Thanks, guys.

Jean Fontana of Lazard.

I have a question on Teva, just a follow-up.

Can you tell us what percent increase in inventory was Teva, just breaking that out in 1Q?

Yes, Teva was approximately a $5 million increase, and the reason --.

What percentage was that, would you say?

What was it last year?

I will let Scott get that.

One thing I will tell you is that we brought in Teva inventory earlier this year than we did last year, too.

Mainly for the reason that we wanted to get the production capacity open for Ugg as well as have it in place when the reorder season hit; and we missed that last year.

Okay.

Jean, it increased from 11.6 million to 16.9 million.

Okay.

Now I am just trying to understand.

You're talking about making up the $0.12 in the second half of the year.

But when you look at your total sales, and Ugg being a lower-margin business, where do you think you're making that up in the third quarter?

We are making it up mainly in the third quarter and a bit in fourth quarter.

A couple of things that we have done by bringing the Ugg product in earlier, the sales are going up, as well as we are not going to have to spend the airfreight that we did last year.

As well as the product mix, as it is coming through in Ugg, between selective price increases and just the mix of the margin in products, is improving for us in Ugg.

So that is above your expectations initially?

Yes, as orders have come in now, we have a better visibility of the mix.

We have allocated certain products that are probably some of the least margin items.

There's stuff coming out of Australia and New Zealand we don't get as much margin on; and capacity is what it is.

With the better-than-expected orders for the new product, which carries a bit of a higher margin, it is giving us a favorable impact.

So the last conference call you still expected the Fall to be maybe 50% the casual and the traditional styles; and then 25% slippers; and then 25% new products.

What does the mix look like now with the higher-than-expected (multiple speakers)?

I think we're looking at the Classic boot, which has been the big one.

This year that should come in around the 20% range.

So while we have allocated those products, there are certain other products that have taken off.

Like for instance the Kalie clog, the casual product, that is selling in springtime, it is selling in back-to-school, it is selling year-round.

Whereas we go into second quarter in particular, it is not what you would call a big boot area.

The Gore-Tex again has gotten better-than-expected response as has the Metropolitan collection.

Okay.

In terms of just turning to Teva really quickly, you're talking about the Spring weather being sort of impactful on that brand.

But just if you can talk about it a little bit, do you see anything in merchandising that you can do better that might have offset some of the decline in the sandal business due to weather?

Like it's going forward to next year; because Angel, you said you saw next year, the 2006 Spring and Fall line.

How do you think it looks compared to this year?

Is it better positioned than it was this year?

Because the competition is getting tougher out there.

I think one of the things I am very excited about is the new line, the new product development that has gone on.

I think the gaps are being filled and filled rather quickly.

I think we do have a strong closed footwear offering.

We are also doing a very good job in my opinion of offering product for women, which is a strength of some of our competitors.

Our brand has been very strictly performance oriented, so women buy our product as a technical solution to their outdoor needs.

But we have a long way to go as far as the casual side of our business of Teva.

Those areas I think have been well executed.

We have tweaked things a little bit since I got here.

We have made a couple of revisions, and I'm very excited about it.

So we really think we have got a great opportunity going forward.

So you can affect Spring at this point still?

Yes, we were able to -- in my first -- actually before I came on the job, we reviewed product, and I was able to suggest some improvements, additions, fill in a few extra gaps.

So, yes, I am pretty confident that we have all the product that we really do need for next Spring '06.

Okay, thank you.

Elizabeth Montgomery of SG Cowen.

I guess I have some questions on the inventory and on Ugg.

Is it fair to say that at the end of Q1 last year Ugg inventory would have been like 5.5 million or so?

At the end of March of '04 it was about 3.7.

3.7.

Should we be expecting right now Ugg revenue to be up in Q2?

No.

I think in our guidance what we have got is relatively flat, maybe slightly down.

If you remember last year Q2 -- we had nothing to deliver in Q1.

So two-thirds of our business in the first half of the year was done in Q2 for Ugg.

This year that ratio is about reversed, with two-thirds of our business coming in in the first quarter, because we did have product to deliver for first quarter, which is the natural quarter for it to be delivered.

If I am not mistaken, that is not a very large change from what you said at the end of Q4, in terms of your plan for Ugg in Q2?

No.

Our Ugg business has remained about what we have said for the first half of the year.

Where we are getting the increases is really the second half of the year.

That is where the orders are coming in strong in third quarter and fourth quarter, which are the more natural seasons for Ugg.

No, that makes sense.

So would you -- I guess you are not going to provide a backlog number for Ugg.

No; we have never provided a backlog number, and we are going to stay with that tradition.

I will tell you that the backlog is up significantly.

We basically have third-quarter's backlog is all in.

We still do have some quarters coming in, but it is more for the back half of the year.

It is just kind of cleaning things up?

But we are very excited about how Ugg has sold into the marketplace.

We are excited about how the new Spring colors have been selling.

So in general, as is shown by our increased guidance for Ugg, retailers are supporting that brand and are very happy with it and see it growing as we go forward.

I think as Angel mentioned, geographically we still have a lot of expansion to do.

I know that our kids business and our men's business are -- orders for those are up, because we sold out of that product last year and there is a lot of opportunity there.

I guess the concern may be though that the inventory in Ugg is up quite as much as it appears to be, when you have three months before the real shipment quarter begins.

Unless I am mistaken, I thought part of the advantage of having more of the Uggs manufactured outside of New Zealand and Australia was that you would not have some of the capacity constraints that you have had in previous years.

So then there would be less need to bring the inventory forward.

A couple of things.

Number one is last year, we were running late on a lot of stuff.

We were shipping certain orders, invoicing them anywhere from three to five times, very inefficient.

We never had everything in all at once.

A lot of the inventory is what is coming out of Australia and New Zealand.

That continues.

They are at their capacity and we just run them at their capacity, and we allocate that product.

Sorry, Doug.

That would be the 20% that is the Classic styles that presumably have less fashion, then?

The Ultra, more the Ultra and some of the slippers actually come out of Australia.

The Ultras, the Sundances come out of New Zealand.

Okay.

The other thing to remember, if you remember last year there was an issue with the Long Beach Harbor.

You know, I think people are burying their heads in the sand if they aren't thinking that's going to happen again this year.

So we definitely made a concerted effort and a decisive strategy, I guess, to bring the product in early.

We are happy it's coming in.

We have said that is where we're going to put our money.

The inventory is already spoken for.

It is not like we're building inventory here, to build inventory in the hopes that we're going to get orders.

We have the orders.

Are we going to carry it a couple of months longer?

Yes, but we really want to service our retailers this year.

We did not do a good job of that last year, and it is probably the thing we did the worst at last year.

And we want that credibility back.

We got it back by delivering Spring on time.

People got great sell-through on the new Spring colors and the Kalie clog that we shipped for Spring.

So we are proving to our retail partners that we can service them on a timely basis.

Just one other question on Uggs.

Is the fact that the percentage of the product that is on allocation for this fall, down versus last year, does that increase the risk of cancellations?

Or have you arranged somehow to make sure that there can't be too many cancellations if, say, the weak trends in footwear continue and the retailers just pull back their open to buy across the board for the back half of the year?

I think there a couple of things to say about retailers open to buy for the back half of the year.

One is, if you can carry the Ugg brand you carry it.

It is absolutely a must-have brand for Fall and Holiday.

If there is an open to buy cutback, it doesn't them from Ugg.

The second thing is, we really monitor what we allow our retailers to have.

Even though we have product that is unallocated, it doesn't mean that we just let everybody get what they want.

We really control what we want the retailer to have.

We are very cognizant of the fact, especially with the premium luxury brand, that you don't overload the pipeline.

We want to keep people hungry for the brand and have demand ahead of supply.

We will continue to do that.

So even on the unallocated orders you're being cautious in terms of giving people completely what they may be asking for at this stage?

Right.

There is no such thing as carte blanche in this brand.

That's very helpful.

Thanks a lot.

Monica Brisnehan of RBC Capital Markets.

I am wondering if you could help us out at Teva, looking at the growth there, if you can break that out between sort of unit growth and average selling price; and what sort of trends we are seeing there.

Let me give a qualitative and then Scott can look at kind of some of the quantitative.

I think what we are seeing is, especially in the springtime where we are selling a lot of thongs and flipflops, the kind of disposable $20 product, we are seeing a decrease in the average cost per pair.

As we go into the back half of the year, where we have gotten great response to the things like the flip sole and the closed shoe leather model, we are actually seeing an increase in the cost per pair.

So that will give you a little flavor on it from a first half versus second half of the year view.

Do you have the actual numbers for first quarter?

Overall, the weighted average wholesale price per pair -- again wholesale -- is $21.23 in the first quarter of this year.

It was $18.61 in the first quarter of last year.

That is all encompassing including all brands.

All brands, okay.

Can you just talk about -- obviously it's getting more into the Trail Runner and Light Hiker business, that is proving to be pretty competitive and tough.

What are some of the things that you're doing to improve your penetration in that market?

A couple of things in that, and then I will turn it over to Angel.

But two things in particular.

Number one, we draw on the heritage and authenticity of the Teva brand.

It gives us the credibility; and that is by the amphibious nature.

Number two is proprietary technologies.

We have some technologies that we use, that we own, that are not available to other people.

We find that it translates from sandals into closed footwear.

I will turn it over to Angel.

On that very point, I think the direction we're going is to leverage that technology.

It is really underdeveloped as technology for closed footwear.

In addition we have got technology that, for whatever reason, we developed a while back and it has been on a shelf that I think is ideally suited for trail running, for example.

And we are going to be looking at some of that and bringing that back into the fold.

Because it really doesn't make an impact and make a difference on how the product performs.

So we think we have good opportunity there.

The thing I would also add is that the brand is such an iconic brand in outdoor.

It's a brand consumers have come to depend on as a truly authentic performance-oriented brand.

So we have great opportunity and the permission from the consumer to put performance trail running product on the market.

So we are looking forward to that.

Great.

One more thing with regard to Teva.

We are seeing a lot of interest in the younger consumer in the Keens and the Chacos.

I was wondering how you see that as an opportunity going forward to really reconnect with that younger consumer.

I think, again, as I said in my comments, that we have a building full of well-kept secrets.

One of the things that I have noticed is that there are some fantastic authentic images that Teva has in its image bank for many, many years of young people out enjoying the outdoor, rock climbing, kayaking, doing all the things that active people do in the outdoor.

Unless we get those images visible, and demonstrate to the consumer exactly who the Teva tribe, if you will, is, I think we're doing ourselves a disservice.

So at retail you will see the Teva brand come to life with that kind of exciting, youthful imagery.

You will see an increase in print advertising what we will showcase exactly who is this Teva consumer.

I think we've been a little bit very product specific in our advertising lately, which in light of the competition showcasing an alternative I think has left us open to some other brands leveraging against us.

Great, thank you.

Angelique Dab of Monarch Research.

Could you talk a little bit about what you are seeing in Asia?

Yes, in Asia, I think it is almost brand by brand.

But with Teva, we are continuing to do our business.

It is not growing at what I would call -- it's actually doing better than Europe in terms of a year-over-year comparison.

That being said, I think there is still a lot of untapped market there.

When it comes to Ugg, we just recently brought on a Japanese distributor.

We see that as been a great potential market for the luxury Ugg brand.

But it is virtually untapped right now.

Also, with your Simple revenue revision, could you discuss that a little bit more in detail, please?

Really what that has to do is -- you know, we did the Simple Sheep last year, and it did not perform up to our expectations.

I think really one of the things it has done is actually put a roadblock out there in terms of pulling in the orders that we would like to for Fall.

So we are going to make sure that we work with the retailers to get that.

In addition, we continue to see great sell-through, I mean strong, strong double-digit sell-through during the Spring for the Spring sneakers.

We are getting good bookings for Fall.

But I just don't think -- whereas a couple of months ago I was thinking that we might be able to make up the difference as well as -- basically double our business; now we're only going to see it go up about 50%, if you take out the Simple Sheep.

Last question.

Could you give us any color on the initial reads for the deliveries to the Finish Line?

They have just gotten it out there.

We were talking with Jay yesterday on that.

It is still a little early.

It has been less than a month since we delivered them.

They are happy with how the assortment looks.

But again by the time it actually gets out on the floor, I think we're looking at another couple of weeks before we get a response on that.

Okay, thank you.

Terry Viliplana (ph) of Wedbush Morgan Securities.

Can you guys give us an update on the licensed apparel and accessories for Teva?

Whether or not those products are shipping; and if so any indication of how well they are doing; or anything you can say on that.

My second question is just given that you guys have exposure to licensing through your Teva and Ugg apparel and accessories, have you guys given any thought to growing the business through potentially owning an apparel brand, as opposed to just continuing to license apparel products?

Thanks.

First off on the Teva licensees, that will be available only in limited quantities this year, and I believe most of them start delivering in May.

As for your question on whether we want to own apparel versus license it, right now, we are more (inaudible) -- we dabbled in apparel a bit a few years ago and really did not do well with it.

It is not one of our core competencies.

Footwear is.

So at this point, we are very secure with our licensing strategy.

Okay, great.

Thank you.

Sam Poser of Mosaic Research.

The tax rate for the rest of the year, how are you seeing that fall out?

I see the tax rate for the year being the same as what we had in the first quarter at about 38.6%.

Okay.

Speaking of licensing, on the Ugg licensing can you talk about -- did that contribute in Q1?

How are you looking for the contribution for the rest of the year?

Q1 was not a big contribution.

Q2 will probably be nothing.

You know where it is?

It's in the back half of the year, and we are pleased with how it's doing.

Again, I think I have said it before, though, that we do not anticipate licensing revenue to really have an impactful or a material addition to our income for the next few years.

It is really more of a brand-building opportunity.

That is really what we see continuing this year.

On the European business, can you just give us a little more color on was it all out of -- was the problem all in the UK?

Or was there specific countries that were not up to the standard in Q1?

I think, in Q1, we talked about that the bad debt was from our UK distributor specifically for Ugg.

I think one of the issues that we need to deal with in a long-term strategic standpoint is how we are able to control the product mix, the competitive pricing, the distribution initiative, as well as the financial ability of some of our distributors to be able to take these brands to where we expect to take them over the next few years.

So we are looking at all of that now.

In first quarter, we had an isolated case with a distributor.

However, on a go-forward basis, we are really looking at which ones are going to be able to grow the way we want to grow.

I've got two more questions.

Unit sales, you talked about ASPs.

What were the total unit sales for the quarter?

Total units, again wholesale, is 2 million 755.

Last year it was 2 million 167.

So that is about a 27% growth in units, more or less?

I believe.

On the gross margin and SG&A, can you give us a little more direction for Q2 on how you see this playing out?

I think that, as I have said, we expect our margin to be affected as well as our top line because of the weather, in Teva in particular, which is the bulk of the second quarter.

We are continuing with our investment in the infrastructure.

We feel it is the smart thing to do to support the orders we have for Ugg.

We don't feel it is wise to cut back on the marketing or the product development.

That is as specific as you will be on that right now?

Yes, I don't think we have gone out --

Sam, last year gross profit was about roughly 47% in the second quarter.

So like Doug was talking about for the second quarter this year there is probably going to be a bit of downward pressure on that.

Okay.

Very good.

Thank you,

Melissa Otto of DE Research.

Just a question on the Internet sales.

Would you go through what the Internet sales were for each of the divisions for the quarter?

Sure.

Bear with me for just a second here.

It was -- for Teva we had 963,000;

Simple 244;

Ugg 3,758.

That compares to last year of 934 for Teva;

Simple of 168; and Ugg at 2,501.

Great, thank you.

I just wanted to follow on.

The gentlemen before me was asking about SG&A.

I'm just curious; will SG&A as a percentage of sales remain basically in trend with last year?

Yes, it will.

On an overall annual basis, again, with second quarter becoming our smallest revenue-producing quarter, which we expect that to be kind of more the pattern, as Ugg has grown the third and fourth quarter, and Teva is very strong in first and second quarter, again the percentage will be up in second quarter, but down in the other three quarters.

Okay.

Great, thanks so much.

Tim Guyer, (ph) Piper Jaffray.

Just a couple questions about bookings of your Ugg product.

I was just wondering where regionally there was strength in those bookings, if any retailers you saw have big increases in bookings?

And also, which categories have booked well?

Really it is pretty much across the board.

We are seeing obviously bigger increases in our distribution outside of California than inside California, because California is a bit more mature market.

That being said, again, we did more than $30 million in California alone last year.

If you can extrapolate that to the population of the United States, you can see that there is a lot of potential if we can get that kind of penetration outside of California.

So in general, outside of California geographically is growing faster than California.

When it comes to the categories, as I have said, we have allocated the boots themselves, the Classics and the Ultras.

So that is becoming less of a mix.

We are getting very strong response.

Our slipper business grew dramatically.

The sell-throughs were very very good last year in slippers; and I am talking a premium slipper category that we are really pioneering that.

The bookings on that continue to be strong as we go into the year.

As I have said, the areas where we got a little better than expected -- we expected slippers to continue strong, because I feel that is an underdeveloped category in general.

But where we got some really good upside surprises were in some of the new product in the Metropolitan collection as well as the cold weather collection was very well received.

Okay.

One last question just regarding how much of your production is going to China this year?

I don't have the percentage, but any of the increases are going to China.

Basically we have maxed out our capacity in Australia and New Zealand.

We did that last year.

So all of the increases are coming out of China.

All right, thanks a lot.

Benita Austin (ph) of Cedar Creek Partners.

Since you break it out in your 10-Q, could you comment on what happened with Teva and Uggs margins in the first quarter?

Also can you just talk about what direction you think the margins will go for the year for the two brands?

Than I have two other questions.

You know, we might have to get back to you on that.

I don't know if I have that handy.

But I can tell you that the margins were strong for both brands.

On a go-forward basis, I would say that we expect Ugg's margin to continue to be strong especially in the back half of the year.

With Teva, we feel that there will be some pressure on the margin, in particular for spring.

Second quarter, let's say.

And then again with Teva, our third-quarter product, which is closed footwear does not normally have as high of a margin as our sandals do.

So I guess the long and the short of it is I see the Teva margins going down a bit in the rest of the year, and I see the Ugg margins continuing to be strong.

Okay, but directionally would you say it is fair for me to assume that Ugg's margins were up in the first quarter and Teva margins were down?

I would say Teva margins were about on par during the first quarter.

Ugg's margin might have been up a little bit, yes.

I think you will see improvement in Ugg in particular in the back half of the year as we eliminate the airfreight that we spent last year, as well as the product mix that tends to favor the non-twin-faced lower-margin product.

Another question I have on Ugg in particular was that my observation is that you have improved your manufacturing capabilities quite a bit; and that you shipped in product early to Nordstrom and Neiman Marcus, at least relative to what they were saying on their websites about availability of product, if we wanted to order the products ahead of time.

So I was wondering if you could comment on the Uggs sell-through at retail relative to the shipments that you had to retailers in the first quarter.

The shipments that we made to in first quarter were a couple of different kinds.

Number one was, we were catching up on some of the holiday demand that we missed and basically filling some of the order lists that those retailers, as well as our website, had.

In addition, we have delivered on time our Spring collection, which are our new colors.

I forget; let me see.

The tangerine, the lemon, and the lime, which have retailed very well; as well as we have a new pink and blue.

I forget the colors or what they are called.

Cornflower and something else.

Orchid.

That are going forward that have been retailing very well, as has the Kalie clog.

I think what we have done is retailers are happy with what they are seeing with this product that we have ongoing.

We continue to get good sell-throughs on those.

As we go into second quarter, I would see that slowing down, let's say, to second quarter as it heats up and it becomes 80, 90 degrees out there you are not going to be selling a lot of sheepskin.

But looking forward our Spring collection of next year actually had some sandals in it and some non-sheepskin product, very well-positioned for the luxury comfort market that it is going after.

Am I correct in saying that you were able to get your shipments out to Nordstrom and Neiman Marcus for the Spring lines earlier than you had hoped?

It looks like you were going to deliver to Neiman Marcus in particular not until the very end of April; and they already had the products in stock before the end of first quarter.

A lot of the product seemed to be scheduled for Nordstrom delivery in mid to late April, and a few items in May; and you again were successful in getting the product out, so that they were selling the product in March.

Am I wrong on that?

That is true.

We had -- we were a little gun-shy, let's say, in terms of quoting dates.

Or we were conservative in quoting delivery dates to our retailers.

Obviously they would like to have the product in in March as opposed to April.

After having the delivery issues that we did for the holiday season last year, we were being very conservative.

As it did come in we called them and said, gee, would you like it?

And consequently that is why you have the proportion of product in the first half of the year this year being weighted more towards first quarter; whereas last year it was weighted towards second quarter.

I will tell you, we are banding over backwards this year to make sure we service our retail partners.

As I said before, that is an area where last year I feel we missed the ball.

Okay.

My last question is, I understand you guys are excited about the second half of the year.

One thing that causes me some concerns about what will happen later in the year is that when you look at the product that is available out there, there are a tremendous number of sales on products, on the Internet in particular.

Various retailers and Internet retailers have products that are marked down.

It's not just like last year's pink and blue boots; it is a lot of different, even the natural colors in some places have been marked down.

The product has appeared in some Nordstrom racks around the United States.

And the eBay prices are very, very right now.

I just wonder if you can comment on that, and what you hope to do to make sure that you don't have any kind of a pricing pressure at retail when you get out to Fall.

Number one, it's controlling the orders coming in from our retailers that really balances that demand and supply.

I think we are darn good at that.

What you see out there right now, the predominance of it is people -- like with every other brand, they do with a discontinued color, they will mark it down and move it out of the end of the season.

We are replacing the pink and the blue from last year; and that is what you see.

The other thing that you see are some odd sizes.

In particular, the bigger sizes in women's.

That is really it.

I think it is the normal course of the business in that.

Relative to any other brand that I can think of in our industry, it is very, very minimal.

Mr. Otto, due to time constraints that is our last question.

I will turn it back over to you for closing remarks.

Listen, thank you all for joining us.

We look forward to talking to you again concerning second quarter, and thank you again for your support.

This does conclude our teleconference.

If at this time you would like to disconnect, we thank you for your participation.