Deckers Outdoor Corp (DECK) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Deckers Outdoor Corporation third-quarter fiscal 2005 earnings conference call. (OPERATOR INSTRUCTIONS).

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

Before we begin, I would also like to remind everyone of the Company's Safe Harbor language.

Please note that some of the information provided 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.

The Company cautions you that a number of risks and uncertainties (technical difficulty) its control could cause Deckers' actual results to differ materially from those described on this call.

Deckers has explained some of theses risk and uncertainties in the Risk Factor section of its annual report on Form 10-K and its other documents filed with the SEC.

Among these risks is the fact that the Company's sales are highly sensitive to consumer preference, to general economic conditions, to the weather and to the choice of its customers to carry and promote its products.

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

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

I would now like to turn the conference over to the Chairman of the Board, Douglas Otto.

Please go ahead, sir.

Thank you and thank you all for joining us.

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

We are happy to announce that our sales for third quarter 2005 grew 24% to a record third quarter of $69.2 million, and our earnings increased to a record third quarter of $0.63 per diluted share, up from $0.46 per diluted share last year.

Scott will now discuss the financials in more detail.

Then I will talk in more detail on our guidance, and Angel will finish by giving you an updated outlook for our brands.

For the third quarter of 2005, (technical difficulty) were 69.2 million versus 55.8 million for the third quarter last year.

Completing sales for the wholesale division, as well as the Internet and catalog retailing business, our net sales at Teva (inaudible) 18% (inaudible) 1 million in the third quarter of 2005 compared to 11.9 million in the third quarter of 2004.

Net sales of UGG increased 46% to a record third quarter of 57.3 million compared to 39.2 million for the third quarter of last year.

Simple net sales decreased 54% to 2.1 million for the quarter versus 4.6 million in the same period last year due to the elimination of our Simple Shoes program since last year.

Included in these numbers are Internet and catalog sales for all brands of 3.4 million for the current quarter compared to 5.4 million for the third quarter last year due to greater availability of UGG products at local retailers in 2005.

International sales for all brands decreased 15% to 9.1 million in the third quarter of 2005 compared to 10.7 million in the third quarter of 2004.

For the quarter, our domestic sales increased 33% to 60.1 million in the third quarter of '05 compared to 45.1 million in the third quarter of last year.

Year-to-date our consolidated net sales were 173.8 million, up 24% from 140.6 million last year.

Including sales from the wholesale division and the Internet and catalog business, our net sales of Teva decreased 3% to 74 million for the first nine months compared to 76.5 million last year.

Net sales of UGG for the first nine months increased 66% to 93.2 million compared to 56.1 million last year, and Simple's net sales declined 18% to (inaudible) compared to 8.1 million in the same period last year.

Included in these numbers are Internet and catalog sales of 11.8 million for all brands for the first nine months compared to 13.9 million last year.

International sales for all brands increased 2% to 28.7 million in the first time months of '05 compared to 28.1 million in the first nine months of '04.

Year-to-date our domestic sales increased 29% to 145.1 million compared to 112.6 million last year.

Our gross margin for the current quarter improved to 42% compared to 39.8% in the third quarter of last year, primarily due to a combination of factors including a reduced impact of closeouts sales, reduced impact of inventory write-downs, the elimination of the airfreight costs incurred in the third quarter of last year and lower production overhead costs repair.

Our SG&A expenses for the quarter were 15.1 million or 21.8% of net sales for the third quarter of '05 compared to 12.9 million or 23.1% of net sales for the third quarter of '04.

The improvement in SG&A expense as a percentage of net sales was largely due to the continued leverage of operating costs on the higher sales volumes.

The resulting operating earnings (inaudible) .3% of net sales for the third quarter, compared to 16.8% for the third quarter last year.

Our interest expense was approximately 167,000 during the quarter compared to last year's third-quarter interest income of 28,000.

The increase occurred as we accessed our line of credit during the quarter to meet our seasonal borrowing needs.

Net earnings for the third quarter increased 40% to 8.2 million or $0.63 per diluted share compared to 5.8 million or $0.46 per diluted share in the third quarter of last year.

Year-to-date net earnings increased 21% to 19.8 million or $1.54 per diluted share compared to 16.3 million or $1.37 per diluted share for the first nine months of last year.

Turning now to our balance sheet, overall our inventories increased to 66.8 million at September 30, '05 from 27 million at September 30, '04.

The vast majority of this increase was attributed to fall and winter 2005 UGG inventory, which the Company brought in much earlier in the year this year than it did last year in order to ensure more timely deliveries to customers in 2005.

Our UGG inventories were 56.2 million at September 30, '05 compared to 14.9 million at September 30, '04.

As we finish out the 2005 UGG season, we will reduce our inventories substantially by year-end.

Teva inventories decreased to 7.6 million at September 30, '05 from 9 million at September 30, '04, and Simple inventories decreased to 3.0 million at September 30, '05 from 3.2 million at September 30, '04.

Lastly, (inaudible) 30, '05, our cash and cash equivalents net of debt was approximately (technical difficulty)--.

Thank you, Scott.

I now want to talk more in detail about the revised guidance we just issued.

We now expect sales for 2005 to be a record 246 to $249 million and sales for the fourth quarter to be 72 to $75 million.

This new topline guidance is predicated on the following.

First, we are reducing Teva sales for 2005 to 85 to $86 million and Simple sales to $8 million because we're driving for less dependence on pull forward order (technical difficulty)--.

That is those orders from the spring line for delivery during fourth quarter.

Second, we are maintaining UGG sales guidance for 2005 of 153 to $155 million, which is at the lower end of our previous guidance, because we expect lower Internet sales since more UGG inventory is available (inaudible) shelves at local merchants.

We have orders to cover this guidance.

Any material adjustments to these orders has already been made and is behind us, and retail sell-through for UGG is good, and especially in the last couple of weeks as the weather has begun to cool down, it has really picked up.

We now expect earnings per diluted share for 2005 to be a record $2.13 to $2.17 and EPS for the fourth quarter to be $0.60 to $0.64.

This new earnings guidance takes into account the rollover of some third-quarter closeout sales that will now be delivered in fourth quarter.

The reduced percentage of high margin Internet UGG sales and our accelerated and increased investment in product development, in marketing and in the infrastructure to support our international and consumer direct businesses.

Additionally, as we mentioned before, we are considering (inaudible) of the onetime opportunity to bring our offshore money back to the U.S. at significantly reduced income tax rates under the recently enacted American Jobs Creation Act.

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

Any incremental taxes are not included in the guidance above.

We are also introducing guidance for 2006 of record sales of 255 million to $265 million and 2006 earnings of $2.00 to $2.15 per diluted share.

We view 2006 as a transitional year as we consolidate our sales base and set the stage for growth in 2007 and beyond by continuing our investment in product development, marketing and infrastructure.

This investment in product development, marketing and infrastructure is about $9 million for 2006 or roughly the equivalent of $0.40 per diluted share.

But it is an investment we feel is needed for the long-term sustainability of our brands.

Typically we update our annual guidance and give guidance only (inaudible) coming quarter, and we will most likely do this in the future.

However, certain circumstances make a straight quarter to quarter comparison between 2005 and 2006 difficult.

First, as historically has happened during the year following a cold spring, retailers open to buy for open-toe sandals has been reduced, and it is affecting our spring orders for Teva.

Second, wholesale UGG sales for the first half of 2005 were about $30 million and included roughly $10 million of holiday 2004 orders that were not delivered until first quarter.

Much of the remaining 20 million in wholesale sales and much of the 5 million in Internet UGG sales was generated from pent-up demand for original sheepskin boots.

While this year we have a strong spring casual collection that includes more seasonally appropriate styling and it is getting good response, we do not feel we can annualize last year's first-quarter and first-half numbers.

Third, as I mentioned previously, we're investing about $9 million or roughly $0.40 per diluted share in product marketing and infrastructure.

And finally, during the back half of the year we will start to deliver some of the first new products being generated from our investment in product design and development.

As a result, we now expect first-quarter sales of 48 to $50 million and earnings of $0.22 to $0.24 per diluted share, first-half sales of 86 to $90 million and earnings of $0.31 to $0.35 per diluted share and back half sales of 169 to $175 million and earnings of $1.69 to $1.80 per diluted share.

We expect UGG sales for the year of 2006 to be flat to slightly up, and we expect Teva sales to be flat to slightly down in 2006 with increases in the back half of the year offsetting decreases in the first half of the year for both brands.

We expect double-digit growth throughout the year for Simple.

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

Angel will now talk about each of our brands and give you an insight on where we're going in 2006 and beyond.

Thank you, Doug.

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

Let me start with UGG which experienced 46% growth for the third quarter to a record third quarter of 57 million and is well on its way to another record year.

As you know, last year our deliveries were late and retail sales were erratic depending on when product arrived in the stores.

This year deliveries to our customers have been on-time (technical difficulty)-- so there is a more appropriate inventory level at retail.

This has resulted in more normalized selling patterns with good consistent sell-throughs, while key items are experiencing double-digit weekly sell-throughs.

Also, as the fall weather has begun to cool down, retail sales have accelerated, especially for the boots.

The UGG brand of footwear is made up of over 80 styles spread out over seven collections (inaudible) retailing.

Our growth so far this year can be attributed to our strong growth in all of our categories -- Fashion Collection, traditional sheepskin boots, slippers and casuals in women's, men's and kids.

The Fashion Collection is being driven by the Uptown boot and the Cargo boot that were well placed in the market and are both retailing extremely well.

The traditional twin faced boot style such as classic short and tall continue to retail well with double-digit sell-throughs in chestnut, black and sand colors, and our premium luxury slippers continue to do well at retail as well.

All great brands begin as great items. (technical difficulty) knit shirt, Nike with a waffle trainer, Reebok with an aerobics shoe.

These items were then leveraged and the product lines extended to build great brands.

At UGG our Genesis product, our must have item, with a sheepskin boot.

So now we are building a great global brand on a diversified offering of premium luxury product.

For that objective, reaction to the UGG spring '06 collection of sandals and casual footwear -- our first true spring line -- has been good, and we're getting placement with key retail partners, but we do not expect first-quarter sales from this collection to make up for the $10 million of holiday '04 orders that were delivered late in the first quarter of '05.

In the fall of '06, we will broaden our men's and performance offerings, and we are just beginning the refinement process as we preview the product with key customers and international distributors.

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

Earlier today in New York City we unveiled the Third Annual Art & Sole collection of celebrity designed one-of-a-kind UGG boots which will be up for bid on eBay for the next three weeks with all proceeds to benefit the St. Jude Children's Hospital.

I encourage all of you to log onto UGGAustralia.com to view and bid on these unique works of art that have been designed by such celebrities as Donald Trump, Terry Hatcher, Faith Hill, Debra Messing, Pierce Brosnan, just to name a few.

You will be supporting a great cause.

UGG's mission is to be the premier brand in luxury comfort.

UGG is a solid brand, and consumer's demand is still strong for all of its diverse collection.

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 continue to grow outside of California.

Demand continues to be strong at both wholesale and retail levels, and I cannot think of a better brand that is better positioned to capitalize on the long-term comfort trend.

Before we move on to Teva, I would like to give you an update on the condition of Carlo Lingiardi, Teva Brand President, who was involved in a serious road accident on October 12.

He is recovering and is currently in stable condition.

We are all very positive and hopeful for Carlo's full recovery as he is making good progress everyday.

Meanwhile I have stepped back into the role of Teva Brand President, implementing the strategic objectives that I had handed off to Carlo who was only in the job for eight weeks before his accident.

I'm also now joined by Keith Sparks, our new VP of Sales for Teva who joined the Company on October 3rd.

As previously discussed, Teva's spring sales this year were affected by lingering cold weather and the brand's dependency on open-toe sandals.

As the weather warmed up during the summer, our retail partners experienced a pickup in Teva sandals sales, reduced their inventories and experienced good profitability with the Teva brand.

However, and as Doug mentioned, our experience showed that initial open to buy dollars for the sandal categories are usually reduced and deliveries are pushed back for the year after a cold spring and late summer.

We're expecting this to happen for the spring of '06.

The silver lining is that the sandal products that do sell well the following year are usually core classics and fresh new products from the established brands like Teva.

One of our biggest challenges at Deckers is to reduce the seasonality and stretch the selling season of our brands.

While we're proud that Teva has grown its revenue base over 30% since 2002, more than 85% of Teva's business is in weather dependent open-toe sandals.

One of our top priorities in turning around the Teva brand is to position it not as a sandal brand exclusively but was an outdoor performance brand.

With its river heritage and authenticity, Teva has been given what I call brand permission by (technical difficulty) extending to other categories of outdoor performance footwear.

So to take advantage of this opportunity to bring more consumers into the Teva franchise, we are reengineering the product line, innovating new product, capitalizing on our proprietary technologies and developing non- weather dependent footwear.

Our plan is to accelerate the process of bringing new product to market at Teva without compromising quality and performance as we make this transition from a sandal brand to an outdoor performance (inaudible).

For spring (technical difficulty)-- we have a new flagship Terra-Fi and Pretty Rugged models that offer better fit, function and aesthetics, as well as extensions of the cork collection which has done so well at retail.

We have a new Teva Pro collection.

Our new adventure, racing and trail running products that capitalize on our proprietary technologies are new.

We have the Doozer and the Utility Elect sandal models, which offer off-road traction, lightweight comfort and total protection from Teva, and which are not as weather dependent as our open-toe sandals.

To help spread our global brand message and to support our new product introductions, we are also increasing our investment in marketing worldwide, especially in measured media and point-of-purchase.

In summary, over the next few years, we will exploit our brand position in outdoor footwear by developing innovative new products, sharpening our worldwide brand message to a new 22-year-old target consumer and communicating our core values through our products that tell our story at retail as we make Teva the brand of choice for the new outdoor athlete.

Now let's talk about Simple.

This year our Simple brand, which some refer to as our anti-sneaker brand, has experienced healthy spring and fall retail sell-through.

Reaction to and initial orders for the spring '06 collection are also good.

The momentum for this cult brand is strong, and gross margins have improved.

We expect double-digit growth from Simple in 2006, and we expect the Simple brand to be a meaningful contributor to the sales and earnings of our Company in the years to come.

The Simple brand's potential is untapped and I'm expecting -- I'm excited about the new product that I am seeing for '06.

Green Toe, in particular, is a collection of extraordinarily well engineered environmentally friendly footwear.

As a matter-of-fact, the Green Toe collection is state-of-the-art in green footwear.

All materials and components come from nature.

There are no synthetic dies, threads or rubber compounds.

We have received great press on this product, and I believe that we're on the cusp of an important change in consumers attitudes about green products in general.

In the past, attempts to make environmentally friendly footwear has yielded ugly shoes that were uncomfortable and did not fit.

As with the Toyota Prius in the automotive world, consumers have shown that when the product is right, green is a major value added.

So we feel that we are at the very front of the footwear industry's solution to the consumers increasing interest in green products with the Green Toe collection.

At a recent investor conference, Doug was asked to comment on the future of our industry and on our biggest opportunities.

I think it's important that I pass on to you how he responded in order to help you better understand our corporate strategy.

We at Deckers believe there are a few macroeconomic factors that will influence the future of our industry.

The first factor is that authentic brands are becoming even more important than they have been in the past.

Consumers are increasingly turning to brands to get products consistent with the values of the brand and to gain access to that lifestyle which the brand represents.

Consumers are also becoming more knowledgeable, and they can differentiate authentic brands from the knockoffs and they demand the real thing.

Another factor is the ongoing influence of the Internet.

Internet sales are expected to experience 14% compounded annual growth in the next five years.

The Internet is also a valuable tool to directly reach our consumer, to get across our global brand message and to cost-effectively conduct market research.

The Internet gives consumers access to the brands they want whether they are in Hong Kong or Paris.

The third factor important to us in the long-term is the long-term comfort trend.

Comfort has been a growing category in our industry for well over a decade and will continue for at least another decade.

Once you have experienced comfort, you don't say, well, now I want to go back to discomfort.

That is not who we are as human beings since we all strive to be more comfortable with each passing generation and as we age as individuals.

Another major factor is that the athletic market is being redefined.

It's not just about team stadium sports anymore, but especially with the new generation of athletes, it's also about hiking, biking, climbing, kayaking and other individual and accessible outdoor sports.

We are entering the era of the non-jock athletic, and the brands that will be -- the players of the authentic outdoor athletic brands like Teva.

So what opportunities do we see out there for Deckers?

We see an opportunity to expand our international penetration.

While we're proud that our domestic business has more than doubled in the past three years, our international business is still less than 20% of our total sales.

I recently brought on an old colleague from my Rockport experience, Colin Clark, to put together a comprehensive international strategic plan.

He is beginning to put the infrastructure in place in order to capitalize on an international business that can potentially be as big or bigger than our U.S. business.

Exploiting our brand permission by expanding product categories is another great opportunity for Deckers.

Because of the authenticity of our brands, the consumer has given us permission to expand our product categories.

For instance, the same person who kayaks, also bikes, climbs and runs trails.

If she has already experienced the technical performance of a Teva sports sandal, she knows that she will get the same performance in a Teva trail runner.

So the next time she goes to purchase a new pair of trail running shoes, she is more likely to pick up a Teva trailrunner.

We have seen this happen with happen with UGG as well, where the UGG customer who has experienced the luxury and comfort of a UGG boot or slipper is now purchasing a UGG clog or a handbag or a sheepskin coat.

Finally, I feel that we can continue to grow our consumer direct business.

Going forward we plan to capitalize on the consumer trend toward more online purchasing and, with the help of our distributors, launch international websites.

We are also opening our first retail outlet in Camarillo, California next week, and our Japanese distributor is opening a flagship UGG store in Harajuku in Tokyo next year.

Harajuku is the most fashionable area of Tokyo for the younger generation.

These consumer direct initiatives send a strong global branding message and help us control distribution of closeouts and help our retail partners sell more of our products.

Before I turn it over for questions, I would like to leave you with one final message.

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

Our next milestones are to reach $500 million in sales and to have international sales contributing as much as our domestic sales.

Furthermore, we expect to achieve these milestones by consistently growing year-over-year.

Thank you for your support.

We will now open it up for questions.

(OPERATOR INSTRUCTIONS).

Jeff Klinefelter, Piper Jaffray.

A few questions for you, Angel, or however you want to approach this.

First, could you start with the 9 million or $0.40, Doug, that you mentioned in terms of incremental expenses for 2006?

Could you break that down a little bit more and give us a little more granularity on where you expect that to be spent?

And then also in terms of expectations for '06, you gave us some pretty detailed guidance.

What are the expectations for the international business in '06 in terms of growth?

I know that is a big initiative for you.

I'm just wondering how you see that playing out in '06 and then I have a follow-up as well.

This is Scott.

Let me answer your first question here, Jeff.

To break down the $9 million, the biggest component of it is marketing, spending additional money on marketing in the neighborhood of about 4.2 million.

The international infrastructure is about $2.3 million.

The retail infrastructure is about 1 million 4, and R&D we're planning on spending about another $800,000 in that area.

So the total of that is around $9 million.

Okay.

With regard to international, we actually see a slight improvement in that or a slight increase in that for 2006.

And it will happen towards the end of the year.

I think most of the infrastructure that we're putting into place is really to set up our spring '07 line, which we start to deliver in the fourth quarter of 2006.

So that will give you a little bit of flavor on the.

But we should really see that start to accelerate more into '07.

Okay and then a couple of follow-ups.

One, inventory.

Scott, can you give us a sense for where if you have 56.2 million in UGG inventory at the end of September, where -- give us a sense for where that is tracking?

You know, currently I would imagine a lot of the orders are flowing out of this time and were you expect UGG inventory to be sort of as you get to the end of the fourth quarter?

Sure, you are exactly right.

We are -- we frontloaded the inventory a lot more this year than we did in previous years.

So the inventory for September is about $56 million.

We do plan on shipping quite a bit of that out during the quarter.

We currently anticipate it will be somewhere in the neighborhood of $20 million or so in UGG at the end of the year.

I think, Jeff, just to give you where I would like us to be is under $40 million in total inventory for the Company versus 30 million last year.

Okay. (multiple speakers).

Okay.

And then I guess just lastly, maybe a little more color on UGG.

The business apparently has picked up here in the last couple of weeks.

Can you give us a sense for the performance of the brand in terms of the boot versus the non-boot?

I know you're expecting the boot to decelerate as a percent of total in the fourth quarter.

How is that playing out with your key accounts?

And then as you look at UGG, your flat to slightly up guidance for next year, is there a mix shift inherent in that guidance meaning that more of your lower retail price points are going to become a bigger part of the mix again?

Is that putting some pressure on the overall revenue?

This is Doug.

Let me address that.

First off, sales are picking up.

It is amazing just as the weekly sell-through numbers have almost doubled in the last two weeks from where they were two weeks before.

It strictly has to do with weather.

Boots are making up more of the sales as the weather gets colder.

However, we continue to get very strong sell-through in our slippers and what Connie calls the Fashion Collection with the Cargo boot and the Uptown, which are both boots, by the way, are selling very well.

As we go into '06, we definitely see a shift towards more casual product.

We have got quite a bit more casual product, and I will actually let Angel talk about the fall line.

But I think the other impact will be just the first half of the year in '06 this year, or in '06 will be made up of sandals and casual product that retail, let's say, for under $100.

Whereas last year, meaning '05, the first half of the year, the bulk of the product were boots that retailed in excess of $100.

And as we go forward into fall of '06, we are going to be introducing more waterproof and technical product on the women's side, and that product will be at higher price points given the nature of technical product.

We will also be introducing a better collection than we've ever had of men's product, men's casual product as well, both technical and nontechnical.

And again, those products will be priced at appropriate levels mostly over $100.

So we really feel that the expansion of the product line into men's and into technical products should give us more for the consumer to get excited about.

Mitch Kummetz, D.A. Davidson.

Just a follow-up to Jeff's question about UGG.

You guys mentioned that you have to allow $10 million worth of sort of carryover holiday sales in the first half, and UGG did I think do about 36 million in the first half last year.

Where would you see that business coming in at this point for the first half?

I mean is it going to be a $15, $20 million business in your opinion?

Yes, I think that puts it in the ballpark.

We actually have not given any specific guidance on that, but we definitely feel that that 10 million that actually happened in first quarter was really a rollover of the holiday orders, will not happen.

We also anticipate less Internet sales of UGG and shipments of boots, which I think were really a lot of that pent-up demand for the classic boot and those original sheepskin boots that we did take care of in the first half of this year.

So I look at a more what I would call normalized selling season with a lot less boots going out into the market.

On the other hand, we will have a lot more casuals.

Last year we basically added some colors in the Kaylee (ph) Clog.

This year we have a couple of almost little ballerinas, as well as the sandal offering that have been very well-received, and we've placed them in department stores from Nordstrom to Neiman, just to name a few, Lord & Taylor, Dillards, Marshall Fields.

So we're excited about that product.

Okay.

And then on the Teva business, which for the full year of '06, you're now modeling or guiding flat to down a bit.

I assume that you expect given your comments on shrinking open the body for the category, I assume that you would expect Teva to be down in the first half?

Yes.

We expect Teva to be down in the first half.

We expect to make up most if not all of that in the back half with new product.

But again it is a brand that is so heavily dependent on sandals, especially in the first half of the year, where the bulk of its business is, that to make it up and actually have it have a positive year is not what we are expecting at this point.

We may be surprised, but that is not what we're expecting.

In your outlook for making up most of it in the back half, is that a function of new product that you are introducing for fall, or is that more a function of spring '06 product that will hit late in the fourth quarter, or is it just kind of a combination of the two?

Mostly it is product that -- it is new product for fall.

We feel in our previewing the product line with key customers we have got the best assortment of new product we have ever had for fall, and we don't have to hit a home run to do a good job in fall.

We need some good solid sell-through from some core products, and we feel pretty comfortable that we are starting that process.

Okay.

Great.

And then lastly, Scott, on the '06 guidance, can you help us out a little bit with the margins if I just plug in some of the numbers, it looks like maybe your op margin is down 100 basis points or so.

And it looks like all of that is coming on the SG&A line, given the investment that you're making.

Do you actually expect the gross margins to improve next year?

I would say the gross margins for next year -- let me start with '05 real quickly.

For '05 we would expect our gross margins for the calendar year to be somewhere in the neighborhood of 42% or so.

Our operating income is somewhere around 19%.

For next year, I see us improving on that 42% to somewhere in the 42 to 43% range on gross profit margin and having operating income somewhere around 16 to 17% with a tax rate of about 36, 36.5% next year.

We're doing an international tax restructuring project.

It should be completed sometime in the back half of this year or very first part of next year, which really should bring our tax rate down to about 36, 36.5 or so.

Jean Fontana, Lazard Capital Markets.

I was wondering if you could tell me in terms of the UGG selling and the UGG fall business, are there any retailers who are not carrying the brand anymore and that carried it last year or cancellations this year?

I don't know of any retailers that are not carrying the brand that carried it last year.

We have adjusted it -- made what I would call adjustments in certain orders.

As we see things start to trend and the retailers do, we will cancel certain styles and replace it with the other styles, maybe adjust sizes, things like that.

Most of that is usually done -- it has been done really September/October as the weather starts to break, and they start to get a real feel of how things are going.

But most of that now is behind us.

In fact, I would say anything that is material is behind us.

Now it is just a matter of the normal count and feel.

Okay.

And so there are no retailers that just canceled their UGG business altogether?

Not that I know of.

Okay.

And then just looking at Teva for the spring season in terms of the retail doors, has there been any sort of decline in the retail doors carrying Teva for spring? (multiple speakers).

Or is it too early to tell?

No, it is -- well, we have a very good feel as we've gone out and previewed the product line and shown it at tradeshows, and we have not seen any reduction in the number of retailers that represent our core customer list.

If anything, I think what we're doing is by the new product introductions and the new direction around technology and our core technologies, you know, we are getting a lot of our very important key retailers back into the fold.

Those who maybe thought they could only buy a few styles from Teva and that represented just the Terra-Fi, for example, and some other very core products, are now broadening their assortments based on what they have seen.

So I think it bodes well for improvement of our performance distribution channel, which is the channel that I think for this brand we really need to become very important to once again.

Ed Aaron, RBC Capital Markets.

A couple of questions.

On UGG in terms of your '06 guidance, could you may be help us understand how you came up with that number?

It just seems like we're still pretty early in this year's retail season.

I mean do you have a pretty good sense from most of your bigger accounts that they plan to order next year's product flat to up?

How do you come up with that number that you are factoring into your guidance?

Well, we do preview with our major customers the fall product early.

We get a sense for it.

We also have a sense of how retail is going now.

And you know, again with a lot of our key retailers, we are one of the top performing, if not the top performing, brand at retail right now both from a sales and a maintain margin perspective.

So we plan pretty far in advance with that.

We also work with them on the new product and the new collections that we are coming up with.

So it is a combination of looking at the core business and what is going to happen like, for instance, slippers, for instance, which is an ongoing day after day business.

And then looking at some of the new items, some of the areas that we are maybe not as strong in that we want to be more stronger in such as men's, and then putting that out and working with our key retailers to know what part of the business we're going to be able to get with our product.

I would also like to add that if you really look at the what is being shown on the runways of very high-end products this year and also as a preview to next year, sheepskin has become an ongoing and important category in just about all premium brands.

So at one time sheepskin was something that was a bit unusual, and UGG had it and other people did not.

Now you're starting to see sheepskin as an important mix in the product assortment.

You see it at retail.

And UGG is the player in that whole mix.

So certainly in terms of accessible product at retail, you know, we don't -- our business is not built on $800 sheepskin boots.

It is built on product like slippers and the other products that are accessible to the average consumer.

Okay.

And then my other question was just on the marketing spending that you're planning for '06.

Could you just maybe help me understand what that consists of?

What type of marketing spending that consists of?

The bulk of that is going to be on the Teva side primarily.

It will also be on the Teva side to try to get a better retail presence at store level, which I'm not happy with the way we look at retail currently, and we're going to improve that.

To position the brand to a 22-year-old target customer, our brand to some extent has aged with our consumer, and that is not a good trend.

That does not bring new consumers into the franchise, which we really need to do.

So we will be placing ads in the vertical media -- Outdoor Magazine, Outside, Men's Journal -- those kind of magazines, to position the brand as much more relevant to that core customer.

On the UGG side, you will see more fashion, more high-end fashion positioning from the brand with all of the products from the sheepskin jackets, the handbags, the summer or rather the spring and the fall collections.

UGG has not been a brand that has been built by a tremendous investment in media.

We have been very successful with public relations, but we also now need to start showcasing our product assortment through placement in media.

To the extent that we might see margins, operating margins come down next year, would it be fair to say that most of that change is going to be on the Teva side relative to the UGG side?

I think that is a fair assumption.

Heather Boksen, Sidoti & Co.

A quick question before I get into my real one.

Can you go repeat what you said about the first-quarter sales and earnings guidance?

I did not catch that first number.

Yes.

First-quarter sales of 48 to $50 million and earnings of $0.22 to $0.24 per diluted share.

Okay.

And the first half was $0.31 to $0.35 and the sales number was --?

86 to 90 million.

86 to 90.

Okay.

Thanks.

Can you talk a little bit -- I noticed if you look at the balance sheet, you have 13.2 million in long-term debt this quarter.

Can you tell me what that is?

Sure.

We borrowed 13.2 million as of the end of the quarter on our line of credit basically to fund the inventory purchases.

We do have about 19 million in cash on the books at the end of the quarter as well.

The vast majority of that money that is in our cash account is sitting offshore and is part of this possible Section 965 repatriation of money that we're looking at this quarter.

So if it all plans out and we can meet all the requirements whereas we will bring some of that money back to the states and you could repay debt.

At the same time, we are collecting quite a bit of our receivables that built up at the end of September and are already paying down quite a bit of the debt, even this early into the quarter.

Okay.

So you are paying -- you are looking to pay that down?

Yes, I would say that that debt will be paid off pretty quickly.

By the end of '05 quickly or looking into '06 quickly?

I would expect to do it by the end of '05.

Okay.

And my second question, you know, the classic boot as a percentage of pairs sold at UGG, you had said it was shrinking about 40% this year.

Any idea of what kind of number we would be looking at for next year (multiple speakers) roughly, just like a rough number.

Yes, I just want to correct something though.

The classic boot collection actually represented about 25% of the pairs on order for the back half of this year as of 6/30, which is when we measured that and actually quoted.

So I just wanted to make sure (multiple speakers) --

Does that include Ultra?

Pardon me?

Does that include Ultra or --

No, that would come out of the Ultra Collection, and yes, you're right if you include the Ultra Collection, it was about 14%.

So it was a little bit under 40, so you're right in that respect.

Okay.

And those two combined, any idea what that -- those are going to be next year?

We actually have them planned out.

I do not have those numbers at my fingertips, but I know that that is in Connie's business plan, and it is trending those down.

Okay.

All right.

Thanks, guys.

Melissa Otto, DE Investment Research.

Just a quick question.

Would you be able to give me the margin breakdown for the quarter for each of the business divisions?

I'm afraid I don't have that with me here.

We break that out in the 10-Qs, and I'm sure Scott can follow up with you on that.

We just don't have it right at our fingertips and don't want to give you the wrong numbers.

Okay.

That is fine.

I will wait for the Q.

Brad Leonard (ph), BML Capital Management (ph).

I'm sorry.

You have already answered the question.

Thank you.

Ellen White (ph), Rice Volker Brokers.

I had a couple of quick questions, and if I missed any of these answers previously, I apologize.

But what were the ASPs in the third quarter?

Third quarter of this year was 39.77 for our wholesale business.

That compares to last year at about 30.97.

30.97?

Yes. 30.97 a year ago, 3977 this year.

A real big thing there is lower impact and closeout sales and then UGG became a bigger percent of the total.

You know, UGG was I think 83% this year and 73% last year.

Okay.

And speaking of closeouts, you all mentioned margin impacts that are falling to the third quarter.

Into the fourth quarter?

I'm sorry, yes in the fourth quarter.

Can you expand on that a little bit?

I think that is just a matter of we had planned originally to close out some product in third quarter, and as the orders have come in, they have rolled into fourth -- for fourth quarter delivery.

So (multiple speakers) in third quarter.

It will be a little downside in the fourth quarter.

Okay.

The product that we saw in Marshall's then, which it looked like spring product, that was sold through them, are you saying that we will see more closeout product during the fourth quarter at retail, or is it only discounts on the Internet?

You know, I don't know exactly what you're referring to.

I think there was some product in Marshall's that was some of the spring colors that we closed out at the end of the season.

I'm talking companywide there is still some product in Teva, as well as Simple, that we had planned to go out this quarter, as well as a little bit of UGG.

Okay.

And the licensing revenues, what should we look for -- or what are you guys looking for for the second half of this year?

What are you looking for in '06?

Where do you stand on your licensing business?

You know, last year we did I think a 900,000 in the back half of the year. (multiple speakers) I'm really just talking about for UGG this year, it should be somewhere around I think 400 to 500,000 for the whole year combined.

Okay (multiple speakers) and next year?

And then for next year, we do expect it to be up a little bit.

But I think overall we are really -- we have said all along that the licensing business is not a material component for several years out.

I think one of the things.

I think one of the things that we have been talking about that is very important, we have to make sure that the licenses that we do have are successful in the marketplace.

That the inventory levels are managed right, so that the products that they have out there are in the appropriate distribution.

I think last year some of that product got a little bit ahead of itself.

We were probably in too many places, and we've made a conscious decision to really bring the licensing back into the fold and make it very consistent with the distribution of the UGG brand as you have seen in the market, and then work with the licensee strategically to grow the business in the way, in the incremental way that we feel is very healthy, especially internationally.

Okay.

All right.

And have you all had to give any retailers -- this is relative to UGG -- if the season -- maybe the season or the boot season started off slower than expected for some retailers.

Have you had to give any retailers margin assistance?

No, that is a policy that we have that we don't do that.

What we do do is we work with our retailers upfront very close, and when we see a sales trend starting to be one way or another, we make adjustments in their orders.

And like I said, that is what we do during September and October, and we've got that behind us now.

But that would be reflected in the fourth quarter?

No, what (multiple speakers)

It is reflected in the third quarter.

It is reflected in our guidance for fourth quarter I guess is the way to look at it.

But yes, in terms of actual markdown, we just don't do that.

What we do is we help the retailers manage their inventory upfront and not let them get in a situation where they will have to come and ask us for that.

We have a very tight working relationship with all our major retailers with UGG.

As you can imagine, at this time of the year, being one of, if not their top performer from a sales and margin standpoint for them, I mean we worked very very closely with them upfront.

But everybody knows going in that, you know, we just are not in the business of giving markdown money.

We don't do that. (multiple speakers).

Liz Varney, Eagle Capital Partners.

This is Mara Whitmer (ph).

I'm trying to, one, understand why the 19 million is offshore.

Is that -- just a quick questions -- is that money that was earned offshore, or why is the money there?

It was earned offshore.

It is not the entire 19 million.

The majority of it I think it the end of the quarter it is about 12 million offshore.

That was money that was earned offshore and just accumulated here over time.

Is that like in Australia and Europe?

Is that --?

Primarily in Hong Kong.

Hong Kong.

Okay.

And then just for the cash generation between September 30 and year-end, it sounds like you will pull hopefully around 26 million out of inventory and I'm guessing around 10 in Accounts Receivable.

Does that make sense?

Yes, the inventory sounds about right.

We will still have pretty high receivables at end of the year because our fourth quarter is going to be pretty substantial as well.

So you would say -- you would not pull money out of Accounts Receivable?

Probably not on the receivables line. (multiple speakers) -- on the inventory, yes.

Okay.

And then would that be in the quarter thereafter in the first quarter you generate -- (multiple speakers)?

In the first quarter, we will collect -- exactly -- we will collect our receivable down from Q4?

And what would you expect that collection to be roughly?

Maybe 25 million.

Collecting 25 million?

So, in other words, down 25 million?

Improvement, yes (multiple speakers) in improvement of it.

Okay.

So 26 inventories, say -- this is by the end of the first quarter now -- 25 in Accounts Receivable, then you'll earn about 7 million in the fourth quarter, and you have about 6 million of cash, although you may pay a little tax to bring some of that 12 back.

Is that the right math?

Yes, I would say that we will also have inventory -- the inventory for UGG in particular is going to come down to a low at the end of December, and then we are going to start building back up again.

So it is (inaudible).

At the end of March we are going to start building inventories again.

As well as we will have pretty good inventory then for Teva to support.

The second-quarter Teva business, which most of the second-quarter Teva business happens in April and the beginning of May.

So we have to have the inventory -- we have to actually own the inventory for any April or May 1st order delivery because we take ownership when it leads to the factory in China.

Okay.

So last year in the first quarter that Teva inventory was 26 million -- I mean I'm sorry, 16 million?

So that -- so I was -- was that about what you would expect again?

I don't have the number in front of me here, but I would say yes, our Teva inventory last year and this year at the end of March, probably relatively comparable.

Okay. (multiple speakers).

So anyway it all adds up to whatever 3, 350 cash per share possibly at the end of the year?

I'm sorry, I'm not quite following you.

Well, you have 6 million.

You should make 7 million, and you pulled, call it, 26 out of inventory.

So 26 and 6 and 7 is 39 million?

Is it 13 million shares roughly? $3.00 a share?

Yes, that make sense.

Any missing pieces?

I don't think so.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

Eric Neimes (ph), SG Cowen.

Just a couple of quick questions.

Are you guys planning on increasing distribution in UGG to new doors going forward or just focused on better sell-through at existing accounts?

And then secondly just a follow-up to that, does increased sheepskin competition make it difficult to maintain such a huge market share?

I know you guys are the dominant player, but clearly there are some new knockoffs sort of entering the market, maybe not so new anymore.

And then lastly Teva, is it crowded?

Is the crowded outdoor market-making business a bit more challenging in general, and is that partly why you are targeting this new 22-year-old customer?

Okay.

First of all, no, we are not planning to expand distribution in the UGG retailer network.

We feel that there is plenty of places to buy UGG, and we are going to be broadening the distribution with new product -- I mean broadening new product assortment in the existing distribution.

That is the approach we are taking.

As far as sheepskin and knockoffs go, you know a lot of what you see out there as knockoff is not the twin face sheepskin.

What it is is fleece laminated to cow suede, and that is really kind of an inferior product to the twin face sheepskin that we use.

And that's who we measure ourselves against.

We really consider ourselves as a premium product purveyor of sheepskin.

And our businesses in a way have been helped by those knockoffs.

People last year particularly when they got a knockoff boot for Christmas, really went back to retail when it was available, got a refund or an exchange and then upgraded to an UGG when it was on the shelf.

As far as Teva and the outdoor industry goes, there is no doubt that everyone has jumped into the sports sandal business.

Certainly the athletic brands have tried and mostly failed to do that because they don't have what I refer to as the brand permission.

That young customer is the person who is out there spending the money on the vehicles.

They have the time to do it.

They have the physical prowess to do it, and it is really at the core of where the brand began, and we are just simply reorienting the brand to its core customer.

We feel that when the brand offers our product and talks to that customer, we can compete with anyone in that marketplace.

Jeff Klinefelter, Piper Jaffray.

Yes, just one quick follow-up.

In terms of the fourth quarter, you mentioned next year that there would be about 9 million or $0.40 of incremental expense international marketing, etc.

You also mentioned it is kicking off I guess think Scott in the fourth quarter.

What is in that $0.60 to $0.64 EPS guidance?

How much in terms of the incremental margin or infrastructure build?

The 9 million that we were talking about in -- that 9 million is all for 2006.

Right.

There is a bit also in Q4 this year.

I'm going to say -- Jeff, I would probably be guessing.

It is in the probably few hundred thousand to a million.

That's you know --

Okay.

It is in that range.

And there would be more than what we were looking at six months ago.

Right, right.

Okay.

So you have essentially accelerated some of those initiatives and started them, kicked them off in Q4?

Right.

I mean if you get the right guy, you hire him.

I don't know if you're going to expect to hire him a month or a quarter from now and he is right, you get him in now.

Okay.

And then just lastly, Angel, maybe we have had a lot of footwear companies reporting here over the last couple of days.

Maybe just an update on your perspective on what is going out, what is going on out there in the marketplace in the industry as we head into the spring of '06?

Well, I think we're starting to see what I mentioned.

A movement really away from pure jock sort of athletic, you know, that consumer out there.

If you travel around the country, there are pockets of the market which are wide athletic driven, but this whole part of the country out here, I meant I am hard pressed to see kids on the street in white athletic basketball and crosstraining and those kind of shoes.

Generally they are used for the sport they are designed for.

Kids here are in outdoor footwear.

They are in flip-flops.

You know, they are in sandals.

They are in boots.

Lots of the country is seeing cowboy boots is making -- really coming into a strong performance once again like they do every eight years or so.

So I just think the market is in a sense fragmenting in different directions away from the monolithic athletic mold that it has been in, which is a great opportunity for us with the diversity of product that we have in Deckers Outdoor.

So I'm pretty excited about that.

And that concludes our question-and-answer session.

I will turn the conference back over to Mr. Otto for any additional or closing remarks.

Thank you all joining us, and we look forward to talking to you a good year-end result.

Good-bye.

That does conclude today's Deckers Outdoor Corporation third-quarter fiscal 2005 earnings conference call.

You may disconnect at this time.

We do appreciate your participation.