Deckers Outdoor Corp (DECK) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Decker Outdoors corporation fourth-quarter and fiscal 2005 year-end earnings conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct question-and-answer session, and instructions will be provided at that time for you to queue up for any questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded.

I will now turn the conference over to Mr. Brendon Frey of Integrated Corporate Relations. Please go ahead, sir.

Thank you.

Before we begin, I would 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 Decker's plans, expectations and objectives for future operations. The Company cautions you that a number of risks and uncertainties beyond its control could cause Decker's actual results to differ materially from those described on this call. Decker's has explained some of these risks and uncertainties in the Risk Factors section of its annual report on Form 10-K and in 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. Decker's 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. Decker's 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 President and Chief Executive Officer Angel Martinez. Please go ahead.

Thanks, Brendon. Good afternoon to all of you and thanks for joining us.

With me is Scott Ash, our CFO.

I'm pleased to announce that the Company had another great year in 2005, driven by a greater-than-anticipated performance in the fourth quarter. Net sales for the quarter increased 22.6% to a record $91 million versus 74.2 million in the same period last year. Net earnings for the quarter increased to 12.1 million compared to net earnings of 9.2 million last year, and earnings per diluted share increased 30.6% to $0.94 versus earnings per diluted share of $0.72 in the fourth quarter of 2004.

For the year, net sales increased 23.3% to a record 264.8 million, versus 214.8 million last year. Net earnings for the year increased to a record 31.8 million compared to net earnings of 25.5 million a year ago, and EPS increased 18.1% to a record $2.48 versus EPS of $2.10 in fiscal 2004.

I'm proud of our record performance this year, and I need to acknowledge the talent and hard work demonstrated by our team here in Goleta as well as in Europe and in Asia.

Our top-line performance was driven by robust sales of our entire Ugg product line, including the Metropolitan Collection and men's and women's slippers. For the fourth quarter, Ugg net sales increased 30.4% to 78.5 million versus 60.2 million a year ago. In addition, our improved inventory position versus a year ago allowed us to significantly reduced shipping costs, which helped contribute to a 170 basis point improvement in gross margin in the fourth quarter. Ugg net sales in 2005 increased 47.7% to 171.6 million, versus 116.6 million last year. The brand delivered its eight consecutive year of double-digit growth. This was achieved through several important initiatives, including significantly diversifying our product offering with the introduction of new collections, expanding our penetration within our core channels of distribution, and more effectively managing our inventories.

Teva net sales for the fourth quarter were 11.3 million compared to 11.8 million in the same period last year. For the year, Teva net sales were 85.2 million compared to 88.4 million in 2004. While Teva sales were down slightly year-over-year, we are very encouraged by our initial efforts aimed at reducing the brand's dependency on warm weather. To that end, we've had good response to our fall '06 product offering and will continue to make key investments in design and development to leverage our proprietary technologies and create a more complete line of closed-toe footwear. In addition, for 2006, we've increased our worldwide marketing expenditures as we look to revitalize our presentation at retail and attract a younger consumer to the brand by building on our foundation of an authentic outdoor performance brand.

Simple sales decreased 44.4% to 1.2 million for the fourth quarter, compared to 2.2 million for the same period last year, as the fourth quarter included approximately $1 million of sales of the Simple sheepskin offering, a program which the Company discontinued in late 2004. For the year, Simple net sales were 7.9 million compared to 10.3 million a year ago, but of that about 3.6 million was Simple sheep in 2004. So on an apples-to-apples basis, Simple showed modest growth in 2005 with meaningful gains in gross margins driven by strong sell-through of our original sneakers and clogs.

Sales for our consumer-direct business, which includes both Internet and retail store sales, were approximately 15.2 million for the fourth quarter, compared to 6 million for the fourth quarter for 2004, due to greater availability of Ugg product in 2005. For the year, net sales were 27.1 million, up 36.2% from 19.9 million for 2004.

I will now hand it over to Scott to discuss our financial performance in more detail. I will then give you a brief review of our strategic direction, as well as a sense for the growth potential that we see for each of our brands. Scott?

Thanks, Angel.

For the fourth quarter of 2005, our net sales were 91 million versus 74.2 million for the fourth quarter of last year. Including sales from the wholesale divisions as well as the consumer-direct business, our net sales of Teva decreased 4% to 11.3 million in the fourth quarter of 2005, compared to 11.8 million in the fourth quarter of 2004.

Net sales of Ugg increased 30% to a record fourth quarter of 78.5 million compared to 60.2 million for the fourth quarter of last year.

Simple net sales decreased 44% to 1.2 million for the quarter versus 2.2 million in the same period last year, due to the elimination of the Simple sheep program since last year.

Included in these numbers are consumer-direct sales for all brands of 15.2 million for the current quarter, compared to 6.0 million in the fourth quarter of last year, due to greater availability of the Ugg product in '05, the addition of our first true retail outlet store, and consumers' increased reliance on the Internet as a source for holiday purchases.

International sales for all brands decreased 42% to 6.6 million in the fourth quarter of '05, compared to 11.3 million in the fourth quarter of '04.

For the quarter, our domestic sales increased 34% to 84.4 million compared to 62.9 million in the fourth quarter of last year.

Year-to-date, our consolidated net sales were 264.8 million, up 23% from 214.8 million last year. Including sales from the wholesale divisions as well as the consumer-direct business, our net sales of Teva for the year decreased 3% to 85.2 million compared to 88.2 million last year. Net sales of Ugg for the year increased 48% to 171.6 million, compared to 116.2 million last year. Simple's net sales decreased 23% to 7.9 million this year, versus 10.3 million last year. Included in these numbers are consumer-direct sales of 27.1 million for all brands for this year, compared to 19.9 million last year.

International sales for all brands decreased 10% to 35.3 million in '05, compared to 39.4 million in '04. Year-to-date, our domestic sales increased 31% to 229.5 million compared to 175.4 million last year.

Our gross margin for the current quarter improved to 40.6% compared to 38.9% in the fourth quarter of last year, reflecting an increase in higher gross margin consumer-direct sales, a further shift in sales mix towards domestic sales, which have a higher gross margin, and the elimination of the air freight incurred by Ugg last year. This was partially offset by an increase in lower gross margin close-out sales in the fourth quarter of 2005.

Our SG&A expenses for the quarter were 17.7 million, or 19.5% of net sales, compared to 14.7 million or 19.8% of net sales for the fourth quarter of '04. The resulting operating earnings improved to 21.1% of net sales for the quarter, compared to 19.1% for the fourth quarter last year.

Our interest income was approximately 75,000 in the fourth quarter of '05, compared to last year's fourth-quarter interest income of 25,000. This increase occurred as a result of higher excess cash balances and higher investment return rates.

Net earnings for the fourth quarter increased 31% to 12.1 million or $0.94 per diluted share, compared to 9.2 million or $0.72 per diluted share in the fourth quarter of last year. Year-to-date, net earnings increased 25% to 31.8 million or $2.48 per diluted share, compared to 25.5 million or $2.10 per diluted share for 2004.

The results for both the fourth quarter and the year ended December 31 '05 include incremental income tax expense of approximately 300,000 related to the Company's repatriation of overseas earnings under the Section 965 of the American Jobs Creation Act of 2004.

Turning now to our balance sheet, overall, our inventories increased slightly from a year ago but decreased significantly from September 30, 2005, due primarily to strong Ugg sales in Q4, which depleted our inventory even more than expected. Comparing inventory levels to the end of last quarter, inventory decreased 50% to 33.4 million at year-end, compared to 66.8 million at the end of the third quarter. Our Ugg inventory decreased 69% to 17.7 million at year-end from 56.2 million at the end of the third quarter. Teva inventories increased to 11.3 million at year-end from 7.6 million at September 30, in preparation for the upcoming spring 2006 season. Our Simple inventories increased to 4.4 million at year end from 3 million at September 30.

Comparing to last year, our inventory was 33.4 million at December 31, '05 versus 30.3 million at December 31, '04. Ugg inventories increased to 17.7 million at December 31, '05 compared to 13 million at December 31, '04; and our Teva inventories decreased to 11.3 million at December 31, '05 from 14.9 million at December 31, '04. Our Simple inventories increased to 4.4 million at December 31, '05 from 2.3 million at December 31, '04. Lastly, I'd like to add that, at December 31, '05, our cash and cash equivalents increased 40.4 million at December 31, '05 to 50.7 million from 10.4 million at December 31, '04.

Thanks, Scott.

Now, let me take a few minutes to guide you through each of our brands with a clear focus on our long-term expectations. Let me begin with Ugg. Clearly, we had an excellent year. As the brand's across-the-board sell-through performance at retail demonstrated, to the consumer, Ugg has transcended from an item to a powerful brand. As distinct from previous years, the brand offered consumers a more diversified product assortment. Everything performed well at retail from slippers for both men and women to the Metropolitan Collection, to the Classic and Ultra boots, to the cold weather technical product; it all sold through at strong, double-digit rates in virtually every channel of distribution.

The Uptown boot was featured on Oprah's favorite things gift show in November, and this was the third time in five years that Ugg was featured on the gift show, which is a real testament to our products.

The only disappointment we heard was expressed by some catalog-only retailers for whom the brand was not as explosive as it was for them last year. We attribute this to the availability of product in retail distribution this year versus last year.

Across all channels, retailers maintained margins approached and often exceeded 50%. At price points above $100, the Ugg brand has emerged as an essential component of profitability for many retailers in the fourth quarter. For this reason and as a result of several solid years of consumer acceptance, Ugg has emerged as one of the must-have brands for retailers in our distribution matrix.

This year, we introduced our first true spring product line. The line consists of more than classic boots and colors. We offer sandals and clogs as well as driving mocks and slides, where sheepskin is used as a comfort device on the footbed versus our traditional 360-degree of sheepskin approach. We began selling this product last August and retailers were conservative. Some were even skeptical that we could sell Ugg in the spring at all. But now that the consumer has had their say, we see enthusiasm for our spring line, as it is selling well at retail, particularly the [tie-bow], which are moccasins, the Layback, the Spinner and [Wiltshire] logo boot. The sell-through performance our spring collection is giving retailers conference that Ugg can be a an important brand not only in the fourth quarter but year-round, which is a key strategic initiative for us in growing our Ugg business in the future.

The fall, '06 product line has also been very well received by our retail customers. There was genuine excitement for all of the new product we showed at the recent WSA show in Las Vegas. The men's product in particular had a strong positive reaction, as did our exclusive Collecionne collection designed in Italy for a limited distribution with price points on the boots in the 350 to $400 range.

While we are confident in our strategy for the Ugg brand, we feel that sustainable growth for the long-term will require ongoing investment in design and development, on par with other premium luxury brands like Coach, Cole Haan and Prada. As we look down the road, we see Ugg as more accessible than those competitors, yet with a brand image and retail presentation that matches them. Some of you may have already seen our new print campaign for Ugg, which is premium in its tonality and features aspirational lifestyle images for both men and women. I feel confident that with a careful and steady approach to building year-round business for our retailers through great product with aspirational brand imagery in our marketing communications and with an international distribution focus, that we should be able to sustain Ugg's momentum and double global revenue within the next four to six years.

Moving onto Teva, we've already stated that the brand is facing some significant challenges in 2006. Increased competition in the sandal category made urgent the need to reinvigorated Teva, which had begun to age with its core customer. Now, by that I mean that if an authentic performance brand like Teva is not consistently bringing new consumers into the brand franchise, when those consumers are most likely to be active participants in outdoor activities, then the brand is losing relevance and energy over time. Teva's core franchise is people in their 40s. Our challenge is to keep this consumer in the fold by offering them great product that builds on the Teva performance attributes that they've loved over time. But in addition, we must use its authentic foundation to bring the 19-year-old into the fold with new and more bold and exciting performance product. Color is important, technology is important, but innovation is crucial. To this end, as we've announced previously, we've made an investment in design and development in 2006. This investment should pay dividends in our spring, '07 line which we have already previewed in its early stages to selected retailers. The response has been very encouraging, so we know we are on the right track.

But before '07 hits the stores, we need to freshen up our brand image and our retail presence. Another part of our marketing investment focuses on this and is rolling out currently with new print ads featuring younger, active outdoor athletes and enthusiasts, as well as a new look for Teva at retail. This process will be ongoing between now and the end of our selling season in September. We need to create an appropriate and credible environment at retail, including a selling staff on the floor at many of our major retailers so that when the new Teva emerges in the spring of '07, there is belief, enthusiasm and excitement for our brand and our new products.

Looking forward for Teva, assuming success at the ongoing evolution of our fall line, which has also been well-received by retailers and they've said it's the best fall line that they had ever seen from Teva, we feel that the Teva brand can also double worldwide revenues within the next four to six years. Teva remains one of the most authentic outdoor brands in the world. We feel it is well on its way to the turnaround needed to get back on track towards its global potential.

Now, let's talk about Simple. There was quite a buzz at the recent WSA show over Simple's fall, '06 product line. Retailers saw a complete line of product, ranging from updated styles of our classic old-school sneakers to the "9 to 5" collection of casual athletically inspired shoes for the 20-something consumer who has to join the workforce and wear "real shoes" instead of flip-flops, to the Green Toe collection, the most commercial and comfortable 100% natural footwear on the market. As a matter of fact, with Green Toe, Simple is the world leader in natural footwear. The environment is a trend, not a fad, and Green Toe is a footwear solution for consumers who share a concern about environmental issues. Innovation is at the core of Simple, and the use of environmentally friendly materials will find its way from the Green Toe collection into the entire Simple product line. We feel that these 20-something consumers have a shared desire to tread lightly on the planet, and simple will enable that without compromising the comfort or style. Now, the response to the fall, '06 line was the best Simple has ever had, so we have very high expectations for Simple going forward. Beyond solid double-digit growth in 2006, we see Simple achieving approximately $75 million of revenue within the next four to six years.

One of our other key initiatives for 2006 is the international division, headed by Colin Clark. Colin helped me build the international business at Rockport and is a seasoned professional.

As we look to the overseas markets for all three brands, we see nothing but opportunity. But before the opportunity can be fully realized, we've had to assess our distributor network and assure ourselves that they are prepared and structured for growth. This review and evaluation process takes time and in some cases will yield a change in distributors, a restructuring of others, or perhaps a consolidation in some markets. In addition, an experienced management team must be put in place to assure that the brands develop consistently with their brand strategies around the world. This process is in full swing and I can report that our distributor in Japan, Mitsui Corporation, has opened their first Ugg Australia concept store in Tokyo just about ten days ago. Mitsui, through their Goldwyn Group, will also distribute Simple and Teva in Japan. In the UK, AMG Group will distribute all three brands as well. Both companies have the resources to grow our brands through marketing spending, distribution capability and retail.

In addition, we have a new distributor in Australia for all three brands -- True Alliance -- who also distribute Reebok and Rockport, among other brands. We will also be having new distributors for Ugg in France and Germany, new Teva distributors in Panama, and a new Simple distributor in Italy, Spain and Panama in time to see a modest impact in sales in the back half of '06. Looking four to six years ahead, we expect international to contribute roughly one-third of global revenue.

Now, let me move on to our guidance. As you saw from our press release, we are increasing our sales and EPS guidance. We remain comfortable with our previous-stated first-quarter guidance of 48 to $50 million in sales and earnings of $0.22 to $0.24 per diluted share. Our investments of approximately $9 million or $0.40 per diluted share in design and development, marketing and international and infrastructure are in full swing and are front-half loaded. Without this expense, our EPS expectations would be significantly higher, but we believe these investments are crucial to the sustainability of the brands for the long-term. In addition, I remind you that Q1, '05 included $10 million of late Ugg shipments from Q4, '04 that makes for a false comparison into the first half of '06.

Teva remains locked in a battle to retain market share from intense competition, and this transition period has just begun. The early read on our new spring, '06 product sell-through is good, but there is a long selling season ahead.

As I've stated before, we are very encouraged by retailers' strong response to our new lines at the WSA show, but it still very early. Therefore, we believe it is prudent to err on the side of conservatism. That said, we are anticipating a solid increase in the fourth quarter of '06 versus Q4, '05. As a matter of fact, we anticipate all earnings increases for the second half over last year to occur in Q4. We are projecting sales guidance for the back half of the year of 174 million to 180 million and earnings per share of $1.74 to $1.80.

For the full fiscal year, we are increasing our sales guidance to between 260 and $270 million, and raising the low end of our previous annual EPS guidance to $2.05 to $2.15. Also, the fiscal 2006 guidance includes approximately $700,000 of additional stock compensation expense related to the adoption of the new accounting requirement for stock options. Based on our current reads, we expect Ugg sales to be flat to slightly up for the fiscal year 2006. We expect Teva sales to be flat to slightly down in 2006, and we expect double-digit growth in 2006 for Simple.

In my opinion, great companies deliver consistent results year after year, and in this transitional year, we've taken the steps we feel are necessary to deliver consistent and dependable performance from all of our business units. We feel that investors will reward this approach in the long run. While we are extremely bullish about our brands and their global potential, a transition year is, by definition, a time in which we're trying new things, refining our business model, and recalibrating our approach to maximizing all of our opportunities. So we feel it is important to be conservative at this point in the process. Those of you who know me know that I'm upfront and transparent in my business philosophy. With that in mind, rest assured that as we get more insight and as our year solidifies, I will keep all investors updated on our progress.

So in summary, our portfolio of brands is our most important asset. 2006 represents a year in which we must be assured that each of our brands is on a solid foundation for growth around the world. As previously stated, investments, the design and development marketing international and talent are critical to meeting the four to six-year growth objectives I've articulated today, which total $600 million in worldwide revenue. This includes doubling of Teva and Ugg businesses and building Simple to $75 million while generating one-third of our business from overseas markets.

Clearly, our objective would be to leverage our expense space and maximize earnings by continuing to run as lean and efficient an operation as is reasonable. However, we cannot starve our brands of the investments necessary to assure their sustainable growth into the future. In the end, we are in the business of delighting consumers with great product and inspirational marketing, which in turn will build our brands' equity worldwide and increase our shareholders' value.

We'd like now to open it up for questions.

Thank you, Mr. Martinez. (OPERATOR INSTRUCTIONS). Jeff Klinefelter, Piper Jaffray.

Yes, congratulations first of all on a great fourth quarter. A couple of questions for you -- first of all, maybe on the fourth quarter, Angel, you did mention that you had very strong sell-throughs across all channels of distribution, all styles. Were there any particular out-performers when you look at the styles of Ugg product in your retailers? Any particular successes that surprised you and may be encouraging going into '06, in terms of your assortment?

Then also, international percent of revenue from each band -- I might have missed this on your summary upfront but did you break out international as a percent of each brand for '05, and then what we might expect for the contribution in '06?

Okay, let me start with the Ugg styles. The Metropolitan Collection was just a phenomenal performer throughout the season, and then of course the Uptown boot, especially after Oprah showcased it on her show and Jim [Cramer] wore the Uptown boots on his show. You know, that boot was just really flying at retail.

Then the other piece that we are constantly impressed with and we really don't know how high up is the slipper business. Our slipper business continues to grow and be very solid for us year after year.

Scott, would you like to answer the -- (multiple speakers)?

Sure. The international breakdown, by brand -- for 2005 for the year was 22.7 million for Teva -- this is in dollars. Simple was about 300,000, and Ugg was about 12.3 million for this year.

Great. In terms of how you are planning that business, appreciating that international is a big opportunity, is '06 the year when you see that start to ramp on (indiscernible) or is this something you'll press a little harder in '07? You know, you have a number of distributors in place today. It sounds like your network is ready to go. I'm just kind of curious on how to be thinking about that as a component of your growth.

Well, I think what we're doing in '06 is continuing to build and solidify our network. You know, a lot of our current distributors haven't been geared up for the kind of growth that we expect from them and that they have signed up for. We are also seeing that, in some markets, it's very important to have success in one of the larger markets. So for example, in the UK, it's very important for AMG Group in the UK to be successful with Ugg and all the brands, and it will allow us to have a much stronger presence and a much better distributor relationship in France, for example, right next door.

So sometimes what you want to do is sort of plan these things in a sequence that builds from strong market to strong market, versus rushing to just fill the slots on a chart, you know? It's important that we build from strength. So that's why the key distribution right now in the mix are Japan and the UK, because we feel that growth from those markets will solidify, in the case of the UK and the rest of Europe, beyond our course strength that has been Benelux and Switzerland. In Japan, that is clearly the anchor market for the rest of Asia.

Okay, great. One last question -- it would be in terms of the sheepskin supply and your production in China. I know you've been migrating production to China over the last year. Could you give us an update on kind of where the sheepskin market stands currently, the pricing in that market, and then also how much it has moved to China at this point?

Well, we feel pretty confident in our sheepskin supply, given what we know right now. The quality is very high. We've worked very hard and our suppliers have made big investments in tanning capability to assure the kind of quality standard that we need. I would say 85% of our supply is now coming out of China. Is that about right?

That's right.

So we expect that as long as we are able to accurately project our needs, that we should be in good supply of the premium sheepskin that we require.

Okay, great. Thank you.

Mitch Kummetz, D.A. Davidson.

Thank you. I've got a few questions. Let me start on (indiscernible) with the guidance for 2006. I think you made to comment, if I heard you correctly, that all of the earnings growth in the back half is going to be in the fourth quarter. Was that correct? Did I hear that?

Given what we know today, yes, that's how we see it.

Why would that be? I mean, I know that you guys had a good third quarter; I know Ugg was up big in the fourth quarter. Is that the main reason that you don't expect to see quite as much growth in Ugg in the third quarter -- that more of it is going to come in the fourth quarter?

Well, we see retailers now taking their winter boots and their winter product later in the year. They are trying to get as close to the market as they can with consumers, and we saw already this year a fairly big spike in demand as fourth quarter got underway. So consumers are postponing their purchases and we think retailers are going to want to keep their inventories consistent with that. You know, they will try to move as much as they can into the fourth quarter.

I got it; that makes a lot of sense. Then secondly, on Teva, you know we are basically two months into the new year. I'm wondering if you have any sense at this point what the reorder opportunity might be for Teva in the first half and what position you guys might be in to benefit if reorders do come in stronger than a year ago.

Well, on core product -- and we're in good shape in inventory for that. For example, the new Terra Fi, we've had good early read on that product pretty much across all channels, although again I will emphasize it's very early, and you've got -- what is it, about 15 degrees back there? So it's not exactly sandal weather. But we've had some pockets of warm weather. The Southwest, for example, has been pretty warm, so we're getting good early read on the Terra Fi 2; we are getting good early read on the [Dozer]; we are getting good early read on the Yampa collection. So we think that might be an opportunity, if warm weather continues, if we don't suddenly have a return to frost in the late spring, that Teva should be in pretty good shape. But it's a real slugfest at retail; there's so many different brands out there with sandals and sport sandals that we're just fighting for every single inch.

Okay. Then the last question -- I want to ask you about your Q1 outlook. You mentioned, in your comments on the guidance, that a year ago you had $10 million worth of late Ugg shipments. Given how strong Ugg was in the fourth quarter this year, are there any deliveries, any holiday deliveries that ended up getting moved into the first quarter as well? Then also, you know, last year, your spring line, as you mentioned, consisted mostly of boots and of various new colors, and this year you have a true spring line. Are you still expecting your spring Ugg business to be down from a year ago, given how popular those spring colors were last year?

Let me start with the first part. We were able to get -- to the amazement of everybody -- I mean, our warehouse has done a wonderful job. We were able to get all of the goods out in Q4 that were required for Q4 in Q4, so we didn't have any of that carryover into the first quarter.

Yet, that being said, that last year's $10 million -- that's a big number. As I mentioned, buyers were pretty conservative when they bought in -- they brought in the spring line of this year. It is selling well though; it's selling quite well, which bodes well for the future.

What we are finding is that since we were able to be in a better inventory position and on some core styles, we've been able to ship some fill-in business in Q1, which we'd really never been able to do, so we're starting to understand what the core Ugg product line looks like for Q1 beyond the spring line. I'm talking fill-in of Ultras and Classics and things like that. So we're starting to understand that we have a good Q1 fill-in opportunity downstream, down the road and years to come. We will try to maximize that.

You're capturing a little bit of that already this year in the first quarter?

Yes, yes we are.

Great, thank you very much.

Elizabeth Montgomery, Cowen.

Amazing quarter! I guess I have a couple of questions. Angel, I guess first can you talk about maybe where you think that advertising expense should go as a percentage of sales longer-term? Because it seems like it's a little bit below some of the competitors.

Yes. My opinion is that you are really talking about 5% -- you know, if you have a marketing budget that's 7% of sales, 5% of sales really should end up as media spending.

Now, one of the things everybody's confronting is the shift in the definition of media spending. I mean, what is media spending today? It used to be heavily oriented towards electronic media -- television, etc. -- for bigger brands. You're starting to see that waning thanks to TiVO. You're starting to see, for fashion brands, a lot more emphasis on the Web and a lot more emphasis in vertical advertising, vertical print, fashion books. In our case, with Teva, we've got vertical books in the outdoor channel. With Ugg, we've got Vogue and books like that. So, we intend to be present in the media, consistent with the top brands that I mentioned. I think it's very important for Ugg to be seen by consumers as an aspirational brand and surrounded by other aspirational brands. So that means that you cannot be invisible.

What was advertising as a percentage of sales in '05?

I believe it was between 3 and 4%.

Oh, wow! Okay. Then can you guys allocate -- and I'm sorry if maybe you've done this before -- the 9 million investments between the three brands?

Sure.

Sure. There's basically four components do it. One was the whole marketing. Marketing is about $4 million of it. International is about 2 million, a little bit over 2 million of it. The retail infrastructure is a little over 1 million. Then the design and development is about 1 million.

So you're more thinking of it as those buckets as opposed to --?

As opposed to by brand. It's difficult to break up some of the retail and the infrastructure by brand.

Okay. Then, Angel, when do you see the orders for Ugg's fall season from the retailers?

Well, we are sort of halfway through our booking period now. So we will know better -- certainly know better, by the next earnings call, how we fared. We are feeling good about the trend but it's still early.

If -- even if the revenue outlet could be a little bit conservative, maybe given how strong Ugg was in Q4 and the new styles in both brands, if you guys see the revenues accelerating relative to what you've told us in your guidance, do you increase the spending from 9 million or does it flow-through as upside to the earnings estimates?

Well, I think it flows through as upside for the most part. I think, obviously, we will be opportunistic. If we have some product that really takes off with the retailer and they want to work with us and do some marketing together, we will work with them, obviously. But my guess is that we have -- we've pretty much laid our plans for the year and we are pretty confident in the total spend.

Thanks, guys. Good job and good luck!

Todd Slater, Lazard.

Thanks very much. Just to follow up on the question on the spend of the $9 million, has that -- has there been any adjustment within the components of that spend since you originally provided that number? Has that changed at all?

No, not really. As I mentioned, the number was front-end loaded and we were really focused on Teva and the improvement of retail presence across the board. Obviously, you have to get that out early in the year with our spring line hitting the stores. But no, we really haven't changed that too much; that's been pretty consistent.

Okay. Sort of a question on the guidance -- if I do the math and I take out the investment spend, we're looking at kind of flat earnings expectations overall. You gave us some revenue projections by brand. Could you maybe just talk about what your earnings expectations are, generally speaking, by brand in '06 versus '05?

Yes. Overall, I would say, for each of the three brands, given the guidance where we are at right now, if we were to add back the $0.40 like you're talking about, (indiscernible) would be pretty comparable. On the sales side, we did talk about double-digit increases on Simple, so I would say, on a percentage basis, it's going to get the biggest percentage increase of the three. Likewise for Ugg and Teva. You know, if Ugg is going to be up slightly, it's going to get a bigger share than if Teva is flat to down slightly.

Okay. Of this, it just seems to me that I can't at least tell from your guidance if you expect any of this spend, this investment spend, - a lot of which is marketing, to accrue in '06. I mean, I understand that much of it is really expected to benefit '07, but what about potential positive impact from this -- these initiatives in 2006?

I think we are already starting to see a bit of that. Again, it's very early, but the response to the advertising we're doing on the new Teva product, the new Terra Fi has yielded some better-than-expected turn at a few of our retailers, which is a good sign. I feel pretty good about that, you know? We've got some new product that's coming a little bit later in the season. That will be showcased in the advertising.

You have to understand that, in the past, we've pretty much have been invisible in the media, so even if there was new product from Teva, it really didn't get the kind of visibility that it needs to get at that crucial time of year, which is right now when consumers are making some of those purchase decisions.

More importantly, at the retail store, I think there was a statistic I read while ago that said that 70% of the purchase decisions in footwear are made at the point-of-sale, so if you're not -- if you're looking tired at point-of-sale, the odds of you closing that sale are very -- are slim. So we hope that this continues, that we start to see, because of a freshening-up of the Teva brand, that we start to see that impact translated into sell-through of our line and then reorders as we move toward the back half of the spring season.

Lastly, is it safe to assume you guys are thinking about '07 as a powerful revenue and earnings-growth year?

You know, my expectation is very high for '07. I think that we've made investments and we expect a payoff for those investments. It's a very competitive business, and what we're learning to do as a company is just compete on an effective basis with all the people in our respective categories. I mean, my attitude is that great product is what turns the screw, and that's what we've been focusing our effort on -- is really making sure that, as we drive toward '07, that we have a product assortment across all brands that is extremely good.

Once we know we have that and once we showcase that finished product to retailers later on this year in June, we will then make very specific decisions about where we're going to put our emphasis in the marketing and what specifically are going to be that biggest drivers of the growth opportunity. So, we're taking it a step at a time, you know? It just starts with great product.

Right. I'm just thinking that we should be looking and I'm just wondering what your thoughts on (indiscernible) we should be looking at 250, about $2.50 as kind of the base earnings -- again, this is before the $0.40 spend -- from which we should be growing '07, as opposed to the $2.10, or the midpoint of your guidance range of '06.

Yes, I hate to say it, Todd, but it's still too early to start with it -- to start talking about '07. You know, there's still so much yet to be done.

We still don't have -- you know, we're only part-way through the development, or the finalization of our '07 product line for Teva, for Simple and for Ugg. So we are right now just zeroing in on making sure we can deliver what we said we would for '06 as a point of focus. Everybody is anticipating that we will have a breakout Teva business in '07. It's very important for us because Teva was the driver of our first half, and with Teva on the ropes a little bit, you know, we end up not wanting to have undue pressure put on the other brands because in the end, that's not a good thing. So, we need Teva to come back to full health and that's what we are zeroing in on.

Good luck as the year progresses.

Ed Aaron, RBC.

Thanks. Good afternoon and congratulations on the quarter.

A couple of questions -- first, I was just hoping you could elaborate a little bit on what you're hearing from some of the retailers. I think it's fair to say that, this past season, some of the bigger retailers maybe even passed on the Ugg -- taking on the Ugg product because either they felt it was no longer exclusive enough or that the trend might not last, but I would think at this point, after the selling season that we just had, it's probably tougher and tougher for a retailer to say or do that, just out of the fear of being left behind, so to speak. I mean, how do you think about kind of your account base on the Ugg side as you look out into 2006?

Well, we feel and we heard it from retailers that may be some people didn't emphasize Ugg last year in 2005 and kind of paid a price for a little bit. You know, we have a very, very loyal stable of retailers out there, people who have been with the brand for a long time, and so our whole approach is really to help them build their business. I think that's an important thing for us to do with more spread and assortment inside the existing distribution that we have.

We are adding very few additional customers because we feel that we have -- most of the customers that we want to have, we already have in the mix nationwide. Now obviously, we want to grow our business with more spread, more assortment, and then there are the regions of the country where we think there's upside. You know, we had a good strong Midwest performance this year; the Northeast was on fire for us this year. We've still got a lot to do in the southeast of the U.S., and just in general, just building the assortments, men's, women's and kids.

You know, my feeling is and what I heard from retailers was that they are saying Ugg is now one of the key franchises that they have to have in their stores at the back half of the year. My goal is to make it a key franchise they have to have in their store all year. So, -- and it's interesting because those retailers who have had faith in the brand from the beginning -- and I will point to Nordstrom that's a good example of that, you know, they have really supported the brand -- and they are seeing what we're doing for spring as very positive, and they are having good results with it. That's giving them confidence. So you know, I think Connie has done a great job of building the business to the benefit of the really loyal customers that we have had and we will continue to go down that path.

Okay. Then just looking out to the '06 guidance -- I mean, I understand the (indiscernible) the kind of the need to be conservative, especially as it relates to the Teva business, as well as kind of all the investment spending that you're doing. What I'm still trying to get my arms around is the sales guidance for Ugg. We're -- just because we're coming off of such a strong year, there's -- you know, you're talking about rave reviews on the product line, and it seems like the retailers all want the product. So if you look at your kind of four to six-year goal, I mean, you need kind of 15 to 20% growth to get there. I'm a little confused as to why it's not realistic to assume that 2006 would be a 15 to 20% growth type of year for Ugg, just given the momentum in that business.

Well, as I said, we had a great fourth quarter. It's still very early, you know? We've got -- if you want to talk about some of the things I learned a while ago, sort of that you're not supposed to do, you're not supposed to introduce so many new categories and styles all at one time, you know? That tends to make people pretty nervous. So, I sort of have an inbred kind of nervousness about expanding the product line as quickly as we have, and we have to see the results from retailers in the form of orders and paper. It's too early for us to get that read. By the time we get to the next earnings call, I'm going to have a lot more visibility on that, and I think I will be able to give you a much better idea as to where we are trending.

We are feeling bullish, we're feeling enthusiastic, but you know, I'm not of the mind to sort of just take that enthusiasm and have that convert right into guidance. I don't think that's a wise thing to do.

Fair enough. Thanks.

Melissa Otto, Decker Investment Research.

Just a quick question on the international sales, but since they were lighter year-over-year, would you talk about which countries performed a bit lighter than you had expected and which products those were for? You could even just categorize it by brand.

Sure. I'd say a piece of it is going to be -- if you remember about a year ago, we had that distributor that kind of went belly-up on us, so a piece of it is going to be replacing that business. That was for Ugg in the UK.

I would say, across the board, one of the big things that we're doing right now is we are -- we've added Colin Clark in as head of that whole division. He's putting together the infrastructure; he's working with each of the distributors to determine which are the right ones to be with, which ones are not. I would say, going forward, we really are setting it up pretty well for the future.

You know, one of the things that we lost -- we did lose momentum on the Teva side of the business without new innovation and new product. That I think hurt us in Europe. We have already previewed the spring, '07 first-look samples as we move through the development cycle with our distributors in Europe and in Asia. The response has been very good, very enthusiastic. Most of them said, you know, we wish we had that for this year.

So, it's just been -- it's I think been a product issue since Teva was the bulk of our international business and we didn't have as much innovation as we needed. You know, we stalled out a little bit.

Okay, great. Thank you very much.

Heather Boksen, Sidoti & Company.

The main question I had -- you guys spoke in the prepared remarks about doubling global revenue in about four to six years for both Ugg and Teva. Is that just basing off the roughly the 264 million in sales this year?

That's correct.

You know, given that next -- that '06 is, in terms of where the guidance is right now, is going to be roughly flat, it would seem like to meet those goals you'd have to have a hell of a '07 through 2010. How do you get there? Is that through the international only in Japan and the UK? Is that it?

Well, a couple of things -- I mean, as I said, it's still early for us to really confirm what '06 is going to look like or not look like. Secondly, if you start looking at our distribution around the world, if you step outside the U.S. for a second and realize that our biggest market in Europe is Benelux, you know, a region with 5 million people or so doing approximately $5 million. Now, Germany right next door has done -- we only do $500,000 in business in Germany. The simple question is how many pair of Ugg boots do you think we can sell in Germany if we sell that many in Benelux? Or -- not to mention Russia, for example, or France, where we have not had a distributor, really, to speak of. So you know, you sort of start looking at brand momentum as it rolls out around the world, and first of all build a very powerful brand that's very important in the United States -- you can translate that brand momentum into some pretty significant growth opportunities worldwide. I've experienced that in the past in the same time frame that we're talking about here. Yes, of course you have to have things go your way, you've got to have great product, but I think we are lining ourselves up to meet that challenge and take advantage of that opportunity.

Okay, and a couple of kind of housekeeping questions. I'm not sure if you guys give out this number, but do you have a backlog as of the end of the year?

We've never disclosed our backlog, Heather.

Okay, I wasn't sure if you did or not. Lastly, a cash from operations and a CapEx number for the year?

Cash from operations I believe was about 29 million. CapEx for the year was about 4 million -- the CapEx -- a large piece of the CapEx related to the building-out of our distribution centers during the year.

Okay. Would you -- in terms of CapEx on a go-forward, I mean in the past, you've ran significantly less than the 4 million. Is there a guidance number that we should be using for CapEx on a go-forward?

I think for next year we're going to continue to do some more build-out, building the infrastructure. I could see it between 3 and 4 million or so again.

(OPERATOR INSTRUCTIONS). Sam Poser, Mosaic Research.

Good afternoon. Congratulations. Can you talk about what percent of the 2006 business do you see being international, right now? I mean, how do you see that?

I think somewhere in the neighborhood of 15%.

So you're expecting some good growth there then?

Significant growth, yes.

Okay. Then, have you seen any major changes of late in regional -- regionally in the United States this spring? We heard a little rumblings out of some source in the Southeast, that there might be -- that they weren't stepping to the plate as much as would have been expected for Ugg on the first half of the year.

I think, in general, we've had a very conservative approach by retailers to a spring Ugg business, and those retailers who are believers in the brand and see what the brand has done over the years, that they did step up. As I mentioned, the Southeast is not our strongest region for Ugg in the first place. I mean, we have trailed in the Southeast in developing that brand -- the brand in that part of the country. So, it's natural to assume that if the market hasn't fully embraced Ugg as a powerful brand in the fall, that they are not going to fully embrace it in the spring, to this point. So you know, I am pretty confident that the direction we're going in will have product that the Southeast is going to do well with, as well as other warm climates, but first things first, you know? The brand has got to become significant in the back half of the year, which is its core franchise, and that's really where we need to build it from.

Okay. Then one last just housekeeping for Scott -- could you tell us what the ASPs were in Q4 in the unit sales?

Sure. Q4 this year was 35.25 compared to 34.88 a year ago. The total number of pairs at wholesale was -- this year was 2.2 million and last year was 1.9 million.

Thanks very much. Congratulations again.

Adam Comora, Entrust Capital.

Yes, it's really been asked and answered, but I guess, just to clarify one last time, you know, obviously you guys had just a terrific fourth quarter and a terrific holiday season. It looks like revenues are, apples-to-apples, if I pull out that 10 million of shipment issues, were up 8% in the quarter, and then it sounds like we're still guiding to a down 8 to 10% in the first quarter. But it sounds like what we are really going to do is feel the benefit of that when everybody reorders for the fall season. But I just wanted to ask -- are we prepared for fill-in business here in the first and the second quarter if it shows up?

Yes, I think we are on the Ugg side. The only exception to that would be some of the very early adopters of the Ugg spring line that we've never shown before, the brand new collection. We tend to be pretty conservative in buying brand new assortments, so we would like to have a track record. But we're seeing fill-in business on core Ugg styles, so I think we are in good shape there.

On the Teva side, we are in good shape because we made a decision that we are going to support the core styles in the new color waves that we're doing because we wanted new color to showcase the brand. We had some pretty excellent sell-through on the [Dozer] -- or rather sell-in on the Dozer product and we did step up, and based on that sell-in, we made sure we have the inventory to fill in on that. So, in general, I would say we are in decent shape for that.

Okay, terrific. Thanks, guys.

A follow-up from Elizabeth Montgomery.

Actually, all my questions have been answered. Thanks.

Thank you. We have no further questions at this time. I'd like to turn the call back over to Mr. Martinez for any closing remarks or additional comments.

Thank you. Well, I just want to thank you all for your support throughout the year. It's, as I said, a year of transition and we really look forward to the next earnings call and giving you an update on where we stand against our strategies at that point. So thanks very much for joining us.

Ladies and gentlemen, that does conclude our presentation for the day. We do appreciate your participation. At this time, you may disconnect.