Deckers Outdoor Corp (DECK) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by.

Welcome to the Deckers Outdoor Corporation Second Quarter Fiscal 2005 Earnings Conference Call. [operator instructions] And now I would like to turn the conference over to the Chairman of the Board, Mr. Douglas Otto.

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' 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 sections 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’ll turn the call over to Doug.

Thank you, Brenden.

And thank you all for joining us.

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

Sales for second quarter 2005 were relatively flat at $40.3 million versus last year's $40.5 million.

Teva sales for the quarter decreased to $24.8 million while both Simple and UGG sales increased.

Simple sales increased 22% to $2.2 million and UGG sales increased 14% to $13.3 million.

Second quarter earnings per diluted share were $0.21 versus $0.43 last year.

With regard to inventory, we have successfully reduced our Teva inventory by 49% since March 31st, 2005, and as previously discussed, we have strategically continued to build our UGG inventory in order to deliver our third and fourth quarter orders on time and complete.

While last year our UGG inventory was too law to support our fall business, I'm comfortable with this year's current level.

Scott will now discuss the financials in more detail and I'll give you an updated outlook for our brands.

Thanks, Doug.

For the second quarter of 2005, our net sales were $40.3 million versus $40.5 million for the second quarter last year.

Including sales from the wholesale divisions as well as the Internet and Catalogue retailing business, our net sales of Teva decreased 8% to $24.8 million in the second quarter of 2005, compared to $27.1 million in the second quarter of 2004.

Net sales of UGG increased 22% to a record second quarter of $13.3million, compared to $11.7 million for the second quarter of last year.

Simple's net sales increased 14% to $2.2 million for the quarter, versus $1.8m in the same period last year.

Included in these numbers are Internet and catalogue sales for all brands and $3.5 million for the current quarter and $4.9 million for the second quarter last year.

International sales for all brands was unchanged at $4.5 million in the second quarters of both 2005 and 2004.

And for the quarter, our domestic sales also remained comparable to net sales for the second quarter of 2004.

Year to date our consolidated net sales were $104.6 million, up 23% from $84.8 million last year.

Including sales from the wholesale divisions as well as the Internet and catalogue retailing business, our net sales of Teva decreased by at least $64.2 million for the first half of this year, compared to $64.5 million last year.

Net sales of UGG for the first six months increased 113% to $35.8 million, compared to $16.8 million last year.

And Simple's net sales increased 31% to $4.5 million this year, versus $3.5 million in the same period last year.

Included in these numbers are Internet and catalogue sales of $8.5 million for all brands, for both the first six months of this year, as well as the first six months of last year.

And our international sales for all brands increased 13% to $19.6 million in the first six months of 2005, compared to $17.4 million in the first six months of 2004.

Year to date our domestic sales increased 26% to $85 million compared to $67.4m last year.

Our gross margin for the current quarter was 39.6%, compared to 46.6% in the second quarter last year, primarily due to an increased impact of closeout sales and inventory write-downs during the quarter.

In addition to a decrease in a higher margin Internet and catalogue retail sales, compared to the second quarter last year, also contributed to the lower gross margin.

Our SG&A expenses for the quarter increased approximately $1.7 million to $11.3m or 28% of net sales for the second quarter of 2005, which was up from $9.6 million or $23.8 million -- 23.8% of net sales for the second quarter of last year.

Increase in SG&A expenses include approximately $800,000 of cost associated with the addition of a new distribution center since last year, as well as approximately $700,000 of increased marketing costs compared to the second quarter of last year.

Our interest expense was approximately $6,000 in the second quarter of 2005, that compares to last year's second quarter interest expense of $1.2 million.

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

Net earnings for the second quarter were $2.7 million or $0.21 per diluted share, compared to $5.1 million or $0.43 per diluted share in the second quarter of last year.

Year to date our net earnings were $11.6 million or $0.90 per diluted share, compared to $10.5 million or $0.91 per diluted share for the first six months of last year.

Turning now to our balance sheet.

Overall our inventories increased to $66.7 million at June 30, 2005, from $19.6 million at June 30, 2004.

The vast majority of the increase was attributed to fall of 2005 UGG inventory, which the company brought in much earlier in the year this year than it did last year, noted to insure more timely deliveries to customers in 2005.

I feel comfortable with the inventory balance and I'm confident that the inventory levels will be reduced substantially by the end of the year.

Our UGG inventories were $55.6 million at June 30, '05, compared to $10 mm at June 30, '04.

Teva inventories were $8.6m at June 30, '05, compared to $7.3 million at June 30 of '04.

And our Simple inventories were $2.5 million this year, compared to $2.3 million last year.

And lastly at June 30, '05, we are completely debt free with a cash and cash equivalent balance of $11.1 million.

Thank you, Scott.

I'll now talk about each of our brands, how we're progressing with our growth strategies and what our future expectations are.

As previously discussed, Teva spring sales this year were affected by lingering cold weather, the brand’s dependency on open toe sandals and some international weakness, especially in Germany.

During the second quarter, we moved aggressively to sell inventory and to capture what open to buy was available in a very competitive market.

While this affected our gross margin, we were successful in reducing Teva inventory by $8.3 million from $16.9 miliion at the end of first quarter to $8.6 million at the end of second quarter.

As the weather has broken, our retail partners have experienced a pickup in Teva sandal sales, have also reduced their inventories and are experiencing good profitability with the Teva brand.

We will continue to aggressively sell Teva inventory in third quarter because our experience shows that initial open to buy dollars for the sandal category is usually reduced and pushed back for the year after a cold spring, and that the sandal products that do sell are fresh new products from established brands like Teva.

Today Teva is one of the few authentic and one of the most important outdoor performance brands, and is known for its technical product and river heritage.

However, the Teva product mix has become dependent on open toe sandals and some of our proprietary technologies are under-developed and under-utilized.

This spring has been a real wakeup call for our team and they're taking immediate corrective action.

Teva has consistently grown its revenue base over the last four years based on the strength of our open toe sandals.

And we feel this is a great base from which we can further leverage and grow the Teva franchise.

And this is how we plan to do it.

Angel Martinez, our new President and CEO, is making it his top priority to rejuvenate the Teva brand and position it not as a sandal brand, but as a performance brand reborn from its river heritage.

This heritage and authenticity is what gives Teva what Angel refers to as brand permission, buyer consumers to extend the line.

The first step is to re-engineer the product line, innovating new product, capitalizing on our proprietary technology and developing non-weather dependent footwear.

While you'll start to see some more new developments in fall -- in the fall '06 line, and a completely new spring '07 line, we do have a few new products for spring '06 that have received good initial response from our retail partners and it will help carry us through this transition from a sandal brand to a performance outdoor brand.

We have a new flagship, Terrify, and pretty rugged models that offer better fit, function and aesthetics, as well as extensions of the core collection that's done so well at retail.

And these will be available for spring '06.

Also for spring '06 we have a new pro collection and our new adventure racing collection to capitalize on our core technical competencies and our proprietary technology.

Finally we have the flip sole, which will begin to be delivered next month.

And we also have the utility LX Simpago model and the new Dozer sandal that Angel just showed me a new sample of on his return from China, and he just got in yesterday.

And we've been getting great responses on those models for spring '06 delivery and they're not as weather dependent as our open toe sandals.

We also plan to invest more in marketing Teva in 2006, tripling our measured media spend and our present point of purchase.

We'll be doing our Go Do B message for the media, as well as expanding our Teva mountain games.

In summary, we will promote our leadership position in outdoor footwear, exploit our brand permission for outdoor line extensions, sharpen our worldwide brand message, communicate our core values to our products and tell our story at retail, as we make Teva the brand of choice for the new outdoor athlete.

UGG had a very strong first half of 2005, with year to date sales more than doubling from $16.8 million to $35.8 million.

And the initial response to our first deliveries of fall product are indicative that UGG will retail well in the back half of the year.

For example, the trend setting independent Kitson was one of the first to receive some of the new metropolitan styles and has done very well with the Uptown Mudluck and has already sold out of the Rock Star in black.

We're also getting good initial reads on the new Bella Ballerina moccasin which is featured in the latest issue of “Lucky” magazine.

This year UGG was honored to be asked to participate with two items in Nordstrom's prestigious anniversary sale book that broke last week.

Retail sales have been excellent for both of these items, as well as for other full priced UGG models, including the classic boot.

In fact, I'm told that UGG has been one of the top performing brands during this prestigious event that really kicks off fall retail.

Initial retail responses like these give us confidence in our performance for the back half of the year, where UGG makes up over 80% of our revenue.

Our increases are due in part to our continued growth outside of California and in part to the simultaneous growth of our men's, women's and kids business in a variety of categories.

I want to take a minute to talk about how diverse our UGG footwear collection is, because I don't think that is understood.

While our Classic boot is our most well-known style, the UGG brand of footwear is made up of over 80 styles and the entire classic boot collection is only 26% of the pairs ordered for fall holiday of '05.

Slippers continue to be 25% of UGG's pairs and much of our growth comes from the other categories in our line, like the Ultra collection, which includes the new Ultimate model, the expanded kids' collection, the casual collection that includes our clogs, the new Metropolitan collection, and the new Gortex performance collection.

UGG is a solid brand and consumer demand is strong for all its diverse collections.

UGG is currently the undisputed luxury sheepskin leader, having created not only the sheepskin boot category, but also the luxury slipper category.

We have a diversified product offering and our growing outside of California.

Demand continues to be strong in both wholesale and retail levels, and I can't think of another brand that is better positioned to capitalize on the long-term comfort trend.

We expect 2005 to be UGG's eighth consecutive year of double digit growth.

Over the last few years we've begun to penetrate domestic markets outside of California and are just now beginning to address the untapped international demand.

As we discussed before, UGG has a very diversified product offering spread out over seven collections and all collections are selling well.

Our strategy is to continue to increase domestic, geographic penetration outside of California and to address our international potential.

We expect to continue to grow our casual business to expand our selling season, not just into third quarter, but also into spring.

We've been previewing the spring '06 UGG line with our retail partners over the past few weeks.

It includes our new sandal and casual collections, to use sheepskin not as an insulator, but as a comfort feature.

Initial response has been very good.

We also expect to continue to capitalize on the growing luxury slipper market, which we've created.

Our luxury retailers have discovered that they can sell $60 to $100 slippers and not compete with more moderate retailers.

Over the next few years we will be developing performance products within the UGG brand for the Outdoor Channel, where we have been so successful with Teva.

This will also help increase our men's business, which is fairly untapped at this point, since men demand performance in whatever they buy.

Finally, we will selectively license brand-building complimentary products.

We've been successful with handbags and outerwear and are adding cold weather accessories and personal leather goods for delivery this fall.

Our UGG growth strategies are solid.

The demand for UGG brand is strong.

And we're well on our way to establishing UGG as the premier accessory luxury comfort brand.

This year our Simple, as I'd call it, “anti-sneaker” brand has experienced good growth in both sales and margin, as well as good retail sell through.

For the fiscal year 2003, Simple sales were $7.7 million and the brand was unprofitable.

In 2004, sales were $10.3 million, including $3.6 million of Simple sheep sales and the brand broke even.

This year we expect $10 million to $11 million in Simple sales, without any Simple Sheep and we expect profitability.

With good spring retail sell through, healthy fall bookings, and good initial reaction to the spring '06 line, we expect Simple to eventually become a meaningful contributor to the sales and earnings of our company.

Now I'd like to update you on two growth initiatives that we expect will benefit all of our brand.

First, our consumer direct business made up 9% of our second quarter sales, and once again was a great contributor to our bottom line.

We expect to expand this number, and we'll be opening our first retail outlet during fourth quarter this year.

We've just hired George Troy to run out retail outlet and he comes to us with a strong retail, merchandizing and branding background.

We look forward to this growing division.

Second, we are moving forward with our international infrastructure and distributor review and beginning to implement some of the changes.

Our international merchandizing and product plan is being put into play and we are making headway with our global brand development.

We are starting to make some distributor changes in addition, and we will beginning to sell to European distributors on an FOB basis, instead of a DDP basis as we move to a more entrepreneurial distributor model.

Our vision for the future is to be a company that markets the strongest portfolio of authentic global brands.

Our next milestone is to reach $500m in sales with international sales contributing as much as our domestic sales.

And we expect to achieve this by consistently growing year after year.

Now let me discuss our guidance.

Based on our second quarter performance, the continuing transition of our Teva brand and our international structure and the early positive retail response to this fall's Simple and UGG collection, we are raising the lower end and reiterating the higher end of our sales and earning guidance for 2005.

These forward-looking statements are inherently uncertain and are subject to the risk factors outlined in our latest 10-K and 10-Q.

We now expect sales for 2005 to be a record $251 million to $258 million and EPS to be a record $2.35 to $2.43 per diluted share.

We expect third quarter 2005 sales to be $68 million to $71 million and earnings to be $0.58 to $0.61 per diluted share.

We expect fourth quarter sales to be $78 million to $82 million and earnings to be $0.87 to $0.92 per diluted share.

We now expect Teva sales for 2005 to be $88 million to $89 million, UGG sales to be $153 million to $158 million and Simple sales to be $10 million to $11 million.

Additionally, as we mentioned before, we are considering taking advantage of the one-time opportunity to bring our offshore money back to the U.S. at significantly reduced income taxes under the recently enacted American Jobs Creation Act.

If we decide to do so, this will result in a one-time increase in income tax expense for the quarter in which we make that decision.

Any incremental taxes are not included in the guidance above.

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

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

Thank you.

Ladies and gentlemen, at this time we will be conducting a question and answer session. [OPERATOR INSTRUCTIONS].

Jeff Klinefelter, Piper Jaffray.

Yes.

I have two questions.

The first one is on Teva.

And maybe Angel, if you could approach this question, and I have a follow up on UGG for Doug.

In terms of the strategy to smooth out the assortments or rather skew the assortments more toward the non-flip flop business and capitalize on your brand heritage, what kind of strategy do you have to gain floor space where that might have been challenging in the past to get that year round floor space?

Maybe what strategies do you have to do that with your closed toe product?

Do you have any examples of successes where you're seeing that happen already?

And then can you just recap for us again how much of your business this last spring was in flip flops and where you'd kind of like to see that balance out over time?

Sure.

Well, first of all, the amount of floor space available in retail certainly is directly related to the product sell through.

Seasonality makes a huge difference.

So right now given that we are in a very high season with the warm weather all over the country, you're going to see a fair amount of Teva in the traditional universal strap on the floor.

A couple of things make that very important.

Number one, we're looking at reintroducing, as Doug said, to go to B campaign for next year, which will position the brand to a much younger customer.

Right now the Teva brand is really not positioned by us.

It is positioned by the retail consumer who is wearing the product.

Being that the brand doesn't show up at retail to its target customer, which as I've said is 22 years old.

So we'll be putting quite a bit of emphasis on retail presence, and quite a bit of emphasis on the younger consumer using the brand.

The other piece of it that's important is to have simply a lot more than universal strap in terms of our sandal offering.

And I'm not even going to closed toe yet.

So, for example, the Utility LX which is one of our new products for spring '06 is a fisherman style sandal with a very aggressive performance bottom.

We have a product that Doug mentioned, the Dozer, which is another similar utility type sandal, but more appropriate for the trail versus the river.

It's got more toe protection.

So those are the kind of products that we're starting to drive into the market.

Doing that will give us a lot more relevance throughout a bigger selling cycle.

As far as the mix of product, I'll let Scott answer that.

Jeff, for the second quarter itself, now keep in mind the second quarter is the quarter when we sell a bigger percentage of the thongs and slides, but for the second quarter itself, last year it was about 25% of sales during the quarter and this year it was about 28%.

Okay.

So for the first half of the year, do you have a number as a percent of kind of the total Teva business that would be the thongs and slides?

I don't have one here, but I can tell you from last year it was about -- I think about 12 to 14%.

Okay.

For the whole year.

And it was -- like I said, in the second quarter we're pretty much on track with about the same number.

Okay.

As a follow up on UGG.

In terms of the marketing strategy, Doug, it looks like so far some of the magazines that are out with fall previews, the print campaign is focusing on the slipper.

Is that a deliberate sort of shift in your strategy now to represent that style of product versus just representing the boot?

And will that be more of a focus kind of as you move through the back half of the year?

Also, just in terms of units, could you give us just a recap again on like total UGG units sold last year and what you're projecting for units sold this year?

And then, in terms of your distribution, I don't know if there are any dramatic changes between last year and this year in terms of the number of doors you're in for the back half or any new customers that you've brought on board?

Sorry about the length here, but, just lastly, on Nordstrom, we were out in stores this weekend.

I know they're having a big anniversary sale and actually just anecdotally picked up that as a successful sale and that it seems like the UGG product was moving well.

Is there anything you can comment on that would give you any sort of leading indicator for the fall season?

Okay.

Let me go -- see if I got it all.

First, let me talk about our print campaign this year for UGG.

I think the first ones you'll see, there's slippers and the new Ballerina moccasin.

It's kind of a driving moc.

Some of our new product that we wanted to get out and get a feel for and we've had great response.

I know out Internet and a couple of the other early catalogs that have had it out have gotten phenomenal response on it.

In terms of our strategy this year, while we've always advertised slippers as well as boots, as well as the casual product, we will continue to do so.

But what we have done this year is increased our spend and you'll see us in a lot more publications this year than you will next year.

Also, our presence in Vogue, I believe we're doing a four page spread this fall.

And for the first time, we're going to be actually doing some advertising in some men's publications.

Because we really feel that the men's market for UGG is underdeveloped, with the exception of us surfers out here in California, really the rest of the country and the rest of the world, outside maybe Australia, haven't related to UGG yet as a brand.

So we expect to start that in terms of marketing and advertising as well as with new product development.

And you'll see that grow over the next few years.

I think you had a question on more doors.

I think what we're finding is selectively we're adding new customers, but one thing that we're finding is that more regions are bringing the product in, in third quarter, than they did last year.

So in that respect we're actually going to have retail presence in more doors during earlier this year than we did last year, as well as getting more exposure in all of our categories.

A lot of people were successful with some of our casual models last fall and they've come back stronger with them this year.

And the people that didn't carry them have heard that other people have done well with it.

So they're starting to carry it.

And then I think the other question you had was on Nordstrom and their anniversary sale.

And as I said in my prepared remarks, our sell through has been very good.

They've recognized us and complimented us as being one of their top performers.

That anniversary sale actually started Friday.

In the first three days we were one of the top vendors.

So we're very excited about that.

And, yes, I think that the Nordstrom anniversary sale is very interesting.

Of all the sales there are anywhere in footwear it's really a prestigious event and really is a good indicator about fall sell-through at retail.

And we're, you know, tickled pink with the results that we got.

And then in terms of the pairs, let me turn that over to Scott.

Jeff, last year we did $2.2 million in UGG for the calendar year.

And this year it will be closer to $3 million.

Thank you.

Thank you.

Thank you.

Our next question is coming from Vera Van of Wedbush Morgan.

Please state your question.

Hi.

It's actually Vera Van Ert.

Two quick questions for you.

It looks like you upped the guidance slightly in terms of the range for UGG in your press release this morning.

Can you just talk about what's driving that?

And, number two, what could continue to, you know, allow you to up the guidance in the future?

Is it a combination of some of the good reads on allocated product and a mix of some of -- what business is related to the classic tall and classic short?

And then, secondarily, if you could just talk a little bit more about the gentleman you hired to head up your retail operations, that would be great.

Thank you.

Okay.

I'll address the guidance and then I'll turn it over to Angel and he can talk about George.

But I think with the up guidance.

Why we increased it is number one, based on our order backlog.

Orders have been very healthy as they've continued to come in.

We have already started to get some retail and some reorder business.

And we -- just the trend is good.

We do have this year for the first time our -- we have production in inventory available to deliver and if we want to look at upside, I mean, people are moving their orders up currently.

We're still filling in our inventory on the back half of fourth quarter.

And we do have some inventory available from reorders in select basics, I would put it.

And we expect this year to end the inventory -- or end the year with reasonable inventories.

Obviously if demand takes off better than expected we'll eat into those inventories a bit as we go into our first quarter.

And then, Angel, if you want to address retail?

Yeah.

George Troy comes to us from a background at Williams Sonoma.

He's got pretty extensive 25 years of experience in department store channels as well as sporting goods channels.

So he really is a brand builder at retail.

He understands how the retail function works and the brand building mix and very strong in operations, which is important as we roll out this first store in Q-4.

Okay, great.

Thank you.

Thank you.

Our next question is coming from Mitch Kummetz of D.A. Davidson.

Please state your question.

Questions.

Doug, on your Teva outlook for the second half, I know Teva is not the bulk of the business in the second half, but Q-2 came in a little better for Teva than what I was expecting, and if I do my math correctly, you've taken the guidance down a little bit for the full year and now you're looking for the business in Teva for the back half to be sort of flattish, maybe zero to up 5%.

Could you just sort of walk me through your outlook in the back half, do you expect it to be flattish in both quarters or up in Q-3, down in Q-4.

How do you see that playing out?

I guess what we look at there is we're gong to -- Q-3 for Teva is made up of our fall deliveries as well as cleaning up inventory from spring.

We're going to continue to clean up inventory from spring.

That's going to effect our gross margins and, again, as I think I used an illustration last time I talked was, if we have $5 million worth of inventory that we expect to get $10 million for and we sell it for $5 million, it effects our top line and bottom line both.

So that's really why we brought the Teva number down.

In addition, one thing to note is as we move to an FOB pricing versus a DDP pricing in Europe, we're actually selling at a cheaper price.

We're making the same kind of margin on it, but it's a smaller amount for the same number of pairs.

And what that does in the long run, of course, is make us much more price competitive in a global marketplace.

We feel it's best in the long run.

The distributors are going to be able to price better as well as support the brand at the retail level with marketing.

So that makes it that way a little bit, as well as while people are moving their inventories out now, which is great, I believe there's going to be a smaller open to buy there.

History shows us this as we go into next season and people will want delivery later.

And if you remember fourth quarter is made up primarily of our initial deliveries of our following spring line.

So if you look at the back half Teva business being roughly flat versus last year, would you actually expect the business to be down in the fourth quarter given that there's less open to buy for those spring deliveries?

Well, I think -- I think actually we'll see fourth quarter business up.

Third quarter business will most likely be down because of the pricing, the discounting and stuff.

Got it.

And when does that FOB pricing go into effect in Europe?

That starts with the spring line, which will be third -- fourth quarter.

Okay.

Maybe a couple of other questions.

Marketing.

I think in you prepared remarks, it was you or Scott, you talked about a triple, tripling of some with measured marketing?

I'm not exactly sure how you characterized that.

Could you go into that a little bit more?

Yeah.

What we've done historically is we've been in that 5 to 7% in terms of marketing -- or total marketing spend.

What we want to do now is we want to be at the higher end level of that at 7% for total marketing and skewing more of the mix towards measured media.

We will be investing more in terms of actual dollars and as a percentage of sales in total marketing, and a bigger proportion of that will be skewed towards measured media, basically advertising, print advertising, as well as point of purchase than we've done in the past.

Okay.

And then I guess lastly, we talked a little bit about the new guy coming into run retail, and you mentioned opening up a store in the fourth quarter, I believe.

Could you talk a little bit about what the metrics are on that store and what the plan might be going forward as to opening up additional stores?

Well, the metrics on it, I think it's about a 3,000 foot store.

In fact, I had lunch with George yesterday and saw his version of it, and we talked a lot about branding and different strategies.

But if the initial store is 3,000 feet, it's the Camereo [ph] Outlet Mall.

We envision rolling out maybe a few stores a year, depending on how this goes.

It's really to help with inventory, controlling inventory, brand image.

And I'll tell you, we do have one outlet right now being out of our distribution center, and we sell a heck of a lot of product and it's very profitable for us.

So we feel if we get into an actual outlet mall this will really help us.

And in addition to that, I just returned from a trip to Asia.

Our Japanese distributor Mitsui Goldwin [ph] is opening an UGG store, not an outlet store, but a brand store in the most fashionable part of Tokyo, and that will be opening in February.

Okay.

We're very excited about that.

With the Camereo store will not be an UGG specific store, will it?

Are you also going to have Teva and Simple product in there?

It's going to carry all three brands.

Okay.

All right.

Thanks a lot, guys.

Thank you.

Our next question is coming from Elizabeth Montgomery of SG Cowen.

Please state your question.

Hi, guys.

Can you hear me?

Yes.

Hi.

First I guess I was wondering, and I apologize if this has already been asked.

Doug, how much of the UGG business this year do you think is going to be allocated versus kind of a reorder or replenishment?

Well, we've allocated certain styles.

And the styles that come out of Australia and New Zealand, a lot of the Ultra product, also the Classic products, really they control the distribution and brand image.

And that's what we've done.

That's really what we've done in terms of allocations.

So a lot of the other -- I guess the other thing that we do is we really look at the orders to make sure that they are right for the store.

We don't want anybody to get over excited and order too much.

And Connie goes through every single order, and if it looks like somebody is ordering too much, she just kicks it back to the rep and has them rework it.

Okay.

But you have some -- presumably you have some excess inventory in case at some of your -- at some of the stores where you want the UGG products to be sold, sell through is good enough, you can actually put more in and kind of maximize the business?

Yeah.

We do carry a reasonable amount of inventory expected in the year with a reasonable amount of inventory.

And we have already been receiving reorders as things have sold through at retail.

So there is some reorder potential available, but basically what it does is it cuts into our inventory for first quarter.

And we're still filling bits and pieces from the factory right now where things have already started to run out.

Okay.

And then last year in the back half of the year for UGG you didn't have any reorders?

Last year in the back half of the year we struggled to make delivery of the orders that we had.

In fact, we ended up canceling a lot of orders because we could not deliver them, and we delivered some orders in first quarter that people brought in because they still had the demand.

Okay.

So your guidance for UGG revenue now in the back half of the year, does that assume a significant reorder business this year relative to none last year, or are you not really assuming very much of that even though you've said you've already seen indications that it's going to happen and you feel very confident about it?

Well, I think as I've said before we have enough orders to cover our guidance, and it is our guidance.

Okay.

And then just a question about the product at Nordstrom.

I thought that the boot that is at Nordstrom is exclusive to Nordstrom.

Is that the case or is that one that we're going to see in other points of distribution as well?

That was an exclusive made up especially for Nordstrom.

Okay.

And then my last question, not that I think you guys need to be focused on this immediately, but I wondered if you had any other -- if you had thoughts on adding maybe another brand to the portfolio, when you think you might be interested in looking at that?

Well, our brand mission -- or our company's mission is to build niche brands into global market leaders.

We constantly have our eye open.

We don't feel compelled that we need another brand, however if the right one comes along that's authentic, has all the characteristics we look for in a brand that we can build into a global market leader, we'll take advantage of it.

But as customary, we don't talk about any of that until we have a definitive agreement.

Okay.

Thanks, guys, and good luck.

Thank you.

Thank you.

Our next question is coming from Jean Fontana of Lazard Capital Markets.

Please state your question.

Hi.

I was just wondering, just a follow up for Teva.

Following the first half disappointment, I know a lot of it was due to weather, but are retailers do you feel being a little bit more cautious about carrying the brand concerning the performance, even though it's weather related they have a tendency to be more cautious on a brand that doesn't have strong sell through.

So how do you -- I know that they've been open to new styles, but how do they feel about any changes you're making or the changes you're talking about?

Could you talk a little bit about the tone?

Yeah.

Actually just day before yesterday I was speaking with Jay, our sales manager, and, of course, he's been previewing spring with all our majors and been on a whirlwind trip around the country.

It's actually to the contrary.

The sandals were tough all in all because of weather.

And when I mean that, I mean, open toe sandals.

However, as the weather has broken, Teva has been selling and performing extremely well, better than its competition according to our major retailers.

And because of our golden summer program where we aggressively went out and helped them move product through, the profitability on the Teva brand is very, very strong.

Of any vendor in the category, Teva has got one of the strongest maintained profitabilities for most all our retailers.

So -- and normally that's what happens.

When a category experiences a weather-related issue like we had this year in sandals, the following year it's the fringe brands that tend to fall off and the retailers tend to concentrate on their core brands that have given them proven profitability in the past.

And Teva has continued to perform really well for the retailers this year.

And so to the contrary, the retailers are really looking to us, they like the new product.

They're going to build their walls with our product and we're excited about that.

So I think it's exactly opposite of how you characterized it.

Okay.

And then just in terms of your changes in the distribution, international distribution.

Can you talk about when you could -- when we could expect to see benefit from that?

I mean, is it as early as the second half or is it first half next year?

We expect that by spring '06, we're going to see some much more aggressive brand positioning at retail with our distributors around the world.

Much more exciting presentation of product.

A much more diverse product assortment.

In many parts of the world we've become very narrow in the merchandise mix.

In other parts of the world, we've been too broad because we've offered up just too many SKU's with not enough product focus.

So this is really what we're into now.

It's just looking at the business plans for each of our distributors and helping to guide them in focusing the product line and the marketing statement.

Okay.

And then just quickly on the tax rate.

I somehow missed, it was a little higher in the quarter and what are you guiding for the rest of the year?

And I know there's some question of that.

We're guiding for the rest of the year at 39.3%, which is the rate -- the effective rate we have for the first half of the year combined.

Okay.

So each quarter will be 39.3%.

Okay, great.

Thank you.

Thank you.

Our next question is coming from Angelique Dab of Monarch.

Please state your question.

Could you comment on your expectations for gross margins for Teva during the back half?

Sure.

At the back half of the year, we're expecting gross profit margins -- pretty comparable with last year in the 42 to 43% range.

I'd say also for the operating expenses, again, pretty comparable to last year in the 22 to 23% range.

We're also -- again, bringing in operating income somewhere around 20% or so.

Could you give us a little more color on the breakout by brand?

I think what you'll see is you'll see Teva in particular in third quarter the margins will be lower than what you've seen in the first half of the year.

With UGG you'll see margins be comparable in the 40% range, even the low 40's.

Okay, thank you.

And then could you give us some color on the Finish Line test from this spring?

As far as Finish Line, like a lot of people, it kicked off into cold weather.

I would not call it successful.

What we are going to do with Finish Line is, I believe it's in September, we'll consolidate what inventory it is and move forward in a more regionalized basis with a little bit different product mix.

A couple of the new products that we have for spring '06 really fit their operations.

And so we look to expand the product offerings where it's fairly limited, but in a more regional spread.

Carol Byers [ph] of Cordiar Asset Management [ph].

Please state your question.

Hi, good morning.

A couple of questions.

One, with respect to the back half of the year in UGG, I was wondering if you could -- I know you guys break out your foot reliance and UGG in seven different categories, and when you look at the deliveries for the back half of the year, I was wondering if you could give us a sense of what percentage will be dedicated to, for example, Classic, Ultra, Metropolitan and slippers this year versus last year?

I was just taking on the top brands, the top categories.

And then, second, I was wondering the free shipping on the Internet, is that -- when was that introduced?

Let me address the categories first.

Okay.

Our two top categories, the classic boot is 26% of the second half's bookings.

Slippers are 25%.

Last year slippers were about 25%.

I don't recall the exact number, but classics was a bit higher as a percentage last year.

Was it more like 50 or was it more like 40?

No.

More in the low 30's, I believe.

Okay.

I think combined with the Ultras it was over -- I think it was a little over 50% last year, in the low 50's.

This year with Ultras combined it's in around the 40% range.

Okay.

And then the rest will be made up with Metropolitan and casual?

Yeah, Metropolitan and the casuals, the new performance cold weather group, are the key ones.

Okay.

Oh, and the kids.

Well, would you say -- is Metropolitan going to make up about 10% of that --?

When we did the pie chart at the last conference I think it was 9%.

Okay.

That's of the backlog?

Metropolitan.

Of the back half of the year.

And it didn't exist last year.

Right.

In fact, this started to deliver this quarter.

Okay.

And then what -- and then when you -- actually just before we move on to the shipping, when you were talking about feeling comfortable about the inventory levels and just to kind of pick up on Beth's question earlier about what -- what is deliveries and what's considered to be say a reorder.

What should we expect inventory to be when we're sitting at the end of the last fourth quarter?

Well, last year we ended the quarter I think with about $13m in UGG inventory.

Right.

I would expect it to be a little bit now.

I mean, our domestic business has gone up 50%.

We also have an actual spring line, not just color ups of fall models of this year.

So I'd expect it to be up from last year, but relative to sales.

Okay.

And then what about shipping?

Shipping from the Internet.

Yeah.

You're offering free shipping on UGG and Teva.

I was wondering is that new or has that been around a while?

I just --?

I believe we offered that last year as well.

Last year this time?

Yeah.

Sam Poser [sp] of Mosaic Research.

Good morning.

Good morning.

Is your largest customer Nordstrom?

Yes.

Nordstrom is our number one customer for UGG and actually the number one customer for -- it's not the number one Teva customer, but for all brands combined, it's our number one customer for the company, I guess.

And of the UGG business, can you give us some idea of what kind of percentage that is?

I'm trying to think.

It's a good chunk of the business.

I'd put it in the 20% range.

Okay.

And then can you give us your average selling price and units sold total for the quarter?

Scott will dig that one out for you.

For this quarter it was -- again this is at wholesale.

Our wholesale sales were about 1 -- roughly 1.9 million pairs at $19.63.

And last year it was about 1.7 million pairs at $20.73, for just the second quarter.

Okay.

And then Angel, I-- are you launch-- of the spring goods that you're bringing out, I guess like will come out holiday, are you coming out with a separate delivery this year or next into spring 2006 of-- or are you just doing like two -- spring two line kind of --?

Yeah.

We are, we're going to be doing a spring two line which will consist of additional colors in some of the new product that we're launching with spring one.

So we're pretty excited about that.

But no new product?

Will there be new product in the spring too?

No, there won't be new product per se, just color and fabrication changes.

And that will be what, March, April?

April 1, yeah.

Thank you very much.

Thank you.

Our next question is coming from Heather Boxen [sp] of Sidoti & Company.

Please state your question.

Hi, guys.

First question, you had mentioned in response to a previous question that Teva, since the weather has picked up, has been doing better than the competition and the profitability has been strong.

Do you think there's an opportunity therefore going into spring '06 and maybe even beyond to get back some market share from some of the competitors?

Well, that's exactly-- I see us getting a bigger piece of a smaller pie in terms of open toe sandals.

And also expanding our bite into that other pie called more closed up footwear.

And even sandals that are more closed toe, the toe protection market.

Okay.

And just to clarify.

I know you've mentioned before your long-term goal of about $500m in sales, with roughly half of that coming from international.

Can you clarify a little for me how you get there with -- I mean, the guidance for this year is roughly $250 million or so for sales.

That would kind of indicate no future domestic sales growth, which I doubt is the case.

So can you kind of clarify that?

Actually, I think if you look at it totally we're still a little under, right around the $200 million mark in terms of this year of domestic sales.

We see a big potential, untapped potential, in international.

But we also see growth continuing in domestically as well.

Okay.

So what-- I don't know if you can answer this, but when you say $500 million in total sales, does that -- what's the timeframe on that?

Is that a five year goal, a two year goal, where does that --?

It's-- I put it all out there.

These are our next milestones and when we hit it -- it's not one -- like we haven't given any guidance beyond '05 yet, but it's a milestone for us to hit somewhere in the future.

Okay.

Thanks, guys.

Thanks.

Our next question is coming from Benita Austin of Cedar Creek Partners.

Please state your question.

Thanks.

I wanted to go back to a comment you made about Teva.

I think you said that you had a program that improved the profitability for retailers and that the product had sold well under that program.

Were you referencing the markdowns that you took in the spring or late spring/early summer, or was there another program that helped there?

And also in Teva, when you were talking about the new products and redesigning them for, I guess, really late 2006/2007, I think your strapping patent is running out in 2007, and I was wondering if you were going to address that specifically as you roll out with a new design?

Okay.

Let me first talk about the program and then maybe I'll throw it to Angel for the future product.

The program we did was called -- we called the “golden summer” program which helped retailers really push product through and not that they would put things on sale, but would give them a better margin on the product that they would sell so that they would-- it would be compelling enough for them to give us all their open to buy.

It was successful.

We moved a lot of product through that way.

And as I said, what we're-- our retailers are telling us is we're still wanted, despite the cold weather and everything like that and because of our program, we are one of their top profitability brands.

And our sell-through in open toe sandals has been, if not the best, at least right there in it as the weather has broken.

So it's-- actually it's been successful.

It hurt our profitability in second quarter, but I think it kept the shelf space, it kept the brand out there, and the retailers are loving what they got.

They got their profitability.

And in terms of the Teva universal strap patent, the issue there is really about innovation.

Yes, the patent is expiring, but we are going to be aggressively pursuing evolutions of the idea around universal strap which we already are going to be showing some of that for spring '06 and beyond.

Really aggressively developing ideas for spring '07.

Innovation is the way in which you leverage these kinds of patents and these kind of brand icons that the universal strap as the comforts have them.

And we have a few other technologies that are also patented that have a much longer way to go that we'll be consolidating into our whole technology portfolio.

So you just have to look at Nike's Air-- initial Air technology.

That expired a few years ago.

They have successfully innovated quite a variety of Air ideas from that springboard.

So the same thing is true here.

Okay.

And then just to -- I have two short follow ups.

One, can you give us the segment profit breakdown that you're going to disclose in the 10-Q?

And my second last question is, your UGG sales came in a little better I think than you were expecting in the quarter, and I was wondering if you could tell us what the sell-through at retail was compared to the wholesale increase of about 11%?

First off, on the segment breakdowns for the 10-Q, we don't quite have that yet.

We'll have to get back to you on that.

As far as UGG at retail during second quarter, our spring product did very well.

And really retail has been good for us.

Demand remains strong.

And I think what really chose that is just as the fall -- the first stuff we delivered for fall, which I think like stuff to Kitson [sp] and stuff we actually got out at the end of the second quarter, has been retailing better than expected.

So we're getting great initial reads on that.

Do you mean that-- so some of the orders in the second quarter you had thought you couldn't deliver until third quarter, but you managed to get your production up so that maybe retail sell-through didn’t match the increase in wholesale shipments, but you think that will be happening in this quarter and next quarter?

I guess the best way to answer that is, normally we bring the product in.

We'll ship it to the retailers.

Some of them want fall product in at different times.

This year people have wanted it earlier than they wanted it last year.

And it really depends on the retailer.

Some retailers like to bring in their whole fall supply early and sit on it.

Some like to flow it out on a monthly basis.

So it really depends on the retailer and how they expect to deal with it.

Okay.

Thanks.

Okay.

Thank you. [OPERATOR INSTRUCTIONS].

The next question is coming from Mitch Kummetz of D.A. Davidson.

Please state your question.

Yeah, I just have a couple of quick follow ups.

On the inventory, could you just give us a heads up as to where you would think that comes in at the end of the third quarter.

It was up over 200% this time around.

Where do you think you might end up?

I don’t know if it will-- I don't know how it compares to last year, but compared to where it is now, it will probably be in a similar number as we go into fourth quarter, because most of our fourth quarter delivery will be October/November and all of those good have to be basically in our inventory by then.

You would expect Teva to continue to come down?

Or are you already building for Q-4-- or for spring shipments?

I would say it would tend to be relative-- about flat, I think, Mitch.

Okay.

And then, lastly, could you just talk a little bit about what your sourcing strategy is these days and how much product is coming out of China and sort of what your outlook is there given some of the changes?

Well, in terms of— you know, most of our product now comes out of the Orient.

It -- we still do some in Australia and New Zealand for UGG.

However, we've tapped the capacity of that and all the future growth for UGG will be out of the Orient.

We have a great sourcing arm there and expect that to continue.

Good -- very good relationships with our manufacturers.

As far as what's happening in China, they're really making the changes necessary there.

Moving their factories maybe up north where labor is cheaper.

Things like that.

But our factory partners are -- they're global producers.

They produce in Viet Nam, they produce in Thailand.

They produce in Northern China as well as Southern China where most of the product comes in now.

And as China changes, they tend to change.

Okay.

That's helpful.

Thanks, guys.

Thanks.

Thank you.

Our next question is coming from Elizabeth Montgomery of SG Cowen.

Please state your question.

Oh, Mitch got my question.

Thanks, guys.

All righty.

Thanks.

All right.

Well, maybe what I can do is thank -- I want to thank everybody for joining us today.

Before we end the call, I'd like to announce that we've made a strategic decision to release our future earnings and host our earnings calls after the close of the market on a go forward basis.

And we believe this will be a more efficient way to communicate with investors.

And we look forward to speaking with you then.

Have a good day.

Thank you.

Thank you all for your participation.

This does conclude this morning's teleconference.