Deckers Outdoor Corp (DECK) 2006 Q4 法說會逐字稿

Welcome to the Deckers Outdoor Corporation's fourth quarter and fiscal 2006 year-end earnings conference call. [OPERATOR INSTRUCTIONS]

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 meanings 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 beyond its controls could cause Deckers actual results to differ materially from those described on this call.

Deckers has explained some of these risks and uncertainties in the risk factors section of its annual report on Form 10K and its other documents filed with the SEC.

Among these risks is that 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 customer to carry and promote its products.

Deckers contends that all of its forward-looking statements and this call will be protected by the Safe Harbor provisions of the Security 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 President and Chief Executive Officer, Mr. Angel Martinez.

Please go ahead.

Thank you.

Good afternoon, everybody, and thanks for joining us.

While we are very pleased with our better than expected financial results for the fourth quarter, which represents a great way to finish what was a record year for the company.

Sales for the fourth quarter increased approximately 37% to $124.4 million, compared to $91 million a year ago, which was more than $14 million above the high end of our guidance range of $110 million, and preliminary diluted earnings per share before the impairment charge rose 93.6% to $1.82 versus $0.94 in last year's fourth quarter.

As we stated in our earnings release, we recently conducted our annual evaluation of the intangible assets on our balance sheet and based on preliminary results we expect to report a noncash pretax charge in the range of $14 million to $16 million, reflecting the write down of intangible assets related to Teva's trademark.

The exact amount of the charge will be recorded when we file our Form 10K with the Security and Exchange Commission, on or prior to March 16, 2007.

Similar to our third quarter, the up side was driven by strong full price selling of our entire UGG product line, coupled with a meaningful reorder business and historically high gross margins, due primarily to labor and material costs containment, which as we stated before we expect to return to more normalized levels in 2007.

These record fourth quarter results allowed to us achieve important milestones in 2006.

Notably surpassing the $300 million revenue mark with sales of approximately $304 million, which included UGG breaking the $200 million barrier and exceeding $3 in diluted earnings per share with preliminary EPS with $3.30 before the impairment charge for the full year.

We also ended the year with nearly $100 million in cash and short-term investments on our balance sheet.

As I mentioned, UGG brand sales were strong across the board, increasing 40.1% to $109.9 million for the quarter, versus $78.5 million in last year's fourth quarter.

This, despite the warmer than usual weather throughout much of the United States.

We experienced robust amounts for all of our women's, men's and kids styles across every category, including, boots, slippers, casuals, fashion and surf.

Also highlighting the quarter was a very successful opening of our UGG brand flagship show in Sojo and Manhattan, New York.

I know several of you were able to join us for the grand opening celebration in early December and witnessed the terrific job our team did in designing and merchandising the store.

It truly showcases the breadth and depth of the entire brand.

Importantly the store had a very brisk holiday selling season and traffic has remained robust since the first of the year.

Sales for the Teva and Simple brands were on plan for the quarter increasing 15.5% and 18.8% to $13 million and $1.5 million respectively.

For Teva products, we experienced solid sell through on our limited introduction of fall styles, as well as pull forward on some spring product in part due to the warm start to winter.

The fourth quarter has historically been a small quarter for the Simple brand, however it was an important period as the Green Toe collection continued to gain traction in the marketplace and further solidified its position as a leader in sustainable footwear.

This is a key component to our future, as environmental awareness is positively influencing the entire Simple and Teva product line.

Internationally, we saw significant increase in demand for UGG in the United Kingdom and Canada during the holiday season, which led to a shortage of product at retail and created a similar situation that consumers here in the U.S. have experienced over the past few seasons.

As you can see, we had very strong finish to 2006.

A year to which we executed several strategic initials to ensure Deckers is best positioned to capitalize on all its future growth opportunities.

This included expanding and involving the UGG brands, transitioning and turning around the Teva and Simple businesses, restructuring our international business and expanding our retail operations.

I'm pleased to report that our entire organization performed at a very high level throughout the year, and as a result, we accomplished much and have set the stage for 2007 and beyond.

Our mission for the UGG brand is to transform it into a year-round luxury brand with a full compliment of footwear offerings and related accessories.

To that end in 2006, we introduced our first true spring footwear line for spring 2007, which included sandals, espadrilles, flip flops.

And the response from retailers and consumers has been very positive.

We also expanded our fall collection to include approximately 125 styles for mens, womens and kids, including our classic, mini, surf collection, new fashion boots for women and a more complete offering for men, featuring, driving mocs, casual weekend collection, flip flops and performance boots.

Similarly, our kids collection included more styles of boots and slippers.

Importantly, we continue to see witness growing consumer demand across the country allowing us to increase our domestic penetration outside of California, particularly in key regions like the northeast, the mid west, the southeast, and Pacific northwest, which combined now account for approximately 65% of total UGG business, versus just 17% six years ago.

In order to extend the UGG's brand's reach and better support our growth plan, we increased our marking and advertising spend in 2006.

Our new print campaign highlighting the true lifestyle nature of the brand was featured in key publication such as Vogue, Glamour, Teen Vogue, Lucky, O, Vanity Fair and GQ.

In all we ran approximately 47 pages, more than double the amount of the previous year.

Now as I mentioned earlier, we opened our first flagship store this past year in Sojo and its performance along with the consumer feedback has exceeded our expectation.

Located on Mercer Street, the store is surrounded by luxury retailers such as Mark Jacobs and was the ideal spot to launch the first of multiple flagship stores in key cities around the world.

In all, 2006 was an outstanding year for UGG, the UGG brand, which delivered its ninth consecutive year of double digit growth and surpassed the $200 million revenue mark.

Connie Rishwain and her team did a fantastic job and we were honored that their achievements to not go unnoticed as we were bestowed the Partners in Excellent from Nordstrom's, which went to just two vendors of a possible [inaudible] candidates.

UGG's performance this past year further done straits the power of the UGG brand and our success diversifying the product line and evolving the business.

We began 2006 with a detailed strategy to transform Teva from a sandal brand into an outdoor performance oriented brand, and we executed against our plan on a number of fronts.

It began with upgrading our advertising and marketing plan, primarily significant investments in remerchandising more than 150 retail accounts, totaling more than 700 doors, including REI, The Sports Authority, Nordstroms and EMS.

This included new and enhanced point of sale materials and updated images, from our grow to be advertising campaign, which was also launched nationally in magazines like Men's Journal, Sports Illustrated and GQ. [inaudible] throughout the year and will continue in 2007.

Another important component to our strategy was increasing our research and development budget to reengineer the product line in order to revitalize Teva products at retail and develop a complete line of closed-toe nonweather-dependent footwear and attract a younger consumer to the brand.

Last spring we had a handful of updated versions of our core styles in brighter colors moving away from our historically gray and blue color pallet and the response is favorable.

So for fall we launched a limited number of new products highlighted by the Shay and Terra Wraptor.

And the initial sell through was encouraging.

However the majority of our R&D effort will be seen in 2007, beginning this spring when, as I mentioned before, 70% of the collection is entirely new.

The line will include sport sandals, flip flops, casuals, active casuals, trail runners, amphibious footwear, all segmented under three categories: go, do, and be.

Go are the shoes that you wear on your way to the activity, do are the styles you wear for the activity, and be are the apres activity footwear.

Now we have a lot of great new products entering the market, such as the Karnali Wraptor, our first $100 price point sandals, -- sports sandals, the Sunkosi, the Shay Mary Jane and the Apres clog .

We were encouraged by the sell-in -- during the sell-in period as orders were up approximately 15% compared with a year ago.

And we are pleased with the feedback from retailers who appear excited about the changes that Teva brand has undergone, and as a result have dedicated more shelf space to the brand for the first time in several years.

We recently debuted our new fall 2007 Teva line at several trade shows, including Bread and Butter in Barcelona, Outdoor Retailer in Salt Lake City and WSA show in Las Vegas.

Judging by the level of activity in the booth and the number of appointments, this was our busiest fall showing ever for Teva, underscoring our initial efforts of evolving Teva into a year-round brand.

Based on this and a number of other factors, including a strong and growing brand equity worldwide, this global distribution platform and leadership in the outdoor industries, we are very excited about Teva's future opportunities.

And after several years of flat and declining sales growth and sideways progress, I will now add that Simple has found its footing in 2006, recording its largest sales volume in six years.

More importantly, Simple has established itself as a world leader in sustainable footwear with the introduction of the Green Toe collection, which is creating a solid foundation for the future growth and direction of the brand.

We expanded the Green Toe category in the spring of 2006 with just a few styles and a handful of regions across the country.

At the start, we secured distribution in Whole Foods Market, which was very important as it opened up new channels of distribution for Simple products, namely health and wellness retailers an eco-friendly stores.

The early sell through Green Toe was very brisk and exceeded our initial expectations.

Now as the year progressed we increased the SKU count and added more traditional footwear retailers such as, Nordstroms, Dillards, DMS and Journeys.

Now while still a small percentage of total sales, Green Toe has redefined the Simple brand's message and refocused the brands operations around a sustainable and environmentally friendly footwear concept.

The Simple brand product offering is segmented by good better, and best.

Best being Green Toe, which is made from 100% sustainable materials and under our better category we've developed Eco Sneaks, a line of sneakers manufactured using old car tires for the outsoles and recycled milk jugs and water bottles for the foot beds.

Over the past few months we previewed Eco Sneaks and the response is positive across the board.

Importantly, we believe Eco Sneaks provides with us a large main stream market place opportunity, evidenced by the line's initial distribution which will include Nordstrom, Urban Outfitters and Bloomingdales.

Lastly our good category is comprised of heritage styles such as our old-school sneakers, whose construction now features water-based cements, 100% post-consumer paper pulp, foot forms and packaging.

And this past holiday, I point out that we'd also introduced a line of backpacks and messenger bags to go along with our other accessories, such as T-shirts, hats, and we look forward to expanding these product offerings going forward.

So as you can tell, the Simple brand and the Simple team has been extremely busy involving the brand's business plan and creating new opportunities for growth.

Earlier this month we enjoyed a successful WSA shoe show and based on the types of the appointments that we had and the orders that we received from some of the larger retail chains, we believe the brand has turned the corner and is on its way to becoming a meaningful contributor to our financial results in the years ahead.

We also cohosted the first annual eco ethics panel with the WSA and we had over 200 attendees, including retailers, buyers and other industry leaders.

Now, when I arrived at Deckers in 2005, it was clear to me that our international division was in need of restructuring.

At that time, each brand was individually responsible for its own overseas distribution.

While I also found many of the current distributors did not have the resources and capital to properly market and promote our brands.

So later that same year, we hired Colin Clark to head up our international business, and since that time, Colin has done an exceptional job overhauling the entire division.

This involving expanding the team from 2 individuals to more than 10, including someone to oversee all international marketing as well as a VP of Sales in both the U.K and Hong Kong.

Dissolving existing relationships and signing new distribution agreements, we expanded into new countries and territories.

We began to see the initial results of our efforts towards the end of 2006, particularly in the U.K, as I mentioned earlier.

We ended the year selling in 30 countries around the world, through 34 distributors, including new distributors in Australia and Germany for the UGG brand and the U.K and Italy for Simple products, just to name a few.

It typically takes approximately 9 to 12 months from the time we sign a new distributor, until products hit the shelves, therefore we anticipate experiencing improved results in several markets in 2007, as we work toward our goal of international sales representing 30% of our total business in four to six years.

2006 was also an important period for our customer -- consumer direct segment, as retail became a more significant piece of our business, with the opening of three UGG brand stores during the year.

The flagship store in New York, and two new retail outlets, one in [Rensom], Massachusetts, just south of Boston, and another in Riverhead, New York, on the eastern end of the Long Island, not far from the Hamptons.

The performance of our stores to date has been very encouraging.

In addition to the high margin business they provide, our stores offer a powerful growth platform to showcase our full selections and highlights and lifestyle nature of the brands.

Therefore, we are currently exploring opportunities both domestically and overseas to increase our retail rollout plans for this year and beyond.

Not to be overlooked we also upgraded and enhanced our website in an effort to better reflect each brand's positioning in the market place, as well as improve the overall consumer experience, including broadening our payment acceptance options.

Throughout the year we saw a pick up in unique visits to our website, which translates to increased Internet sales for all three brands.

I would also like to add here that the critical success that we had this year under the direction of Pat Devaney, who is in charge of production, sourcing and development.

Pat was able to not only assure on-time delivery of product, and high quality and great relationships with our factories and very healthy margins.

The development team did a wonderful job in rolling out new products to all three brands.

Now, before I turn the call over to Zohar to review the financials in more detail, I would like to say that while we are pleased with our accomplishments from this of the past year, our sights are firmly set on the long-term future and success of this company.

To achieve our stated goals and looking at our opportunities beyond the four to six year time horizon, it is important that we continually strengthen our organization in order to maximize our efforts.

We added several key personnel to enhance our leadership beginning the appointment of Zohar as Chief Financial Officer, as well as the hiring of Peter Worley as President of Teva.

So I will now turn the call over to Zohar to discuss our financial performance and our updated outlook for the remainder of the year.

Zohar.

Thank you, Angel.

Before I begin, I need to point out the following fourth quarter and full year earnings results are being presented on a GAAP basis, excluding the expected known cash impairment charge and related tax benefit from the write down of intangible assets on our balance sheet that Angel discussed earlier.

For the fourth quarter of 2006 net sales increased 36.7%, to $124.4 million, versus $91 million for the fourth quarter of last year.

Including sales from the wholesale division, as well as the consumer-direct business our net sales of Teva products increased 15.5% to $13 million in the fourth quarter, compared to $11.3 million in the corresponding period of 2005.

Net sales of UGG products increased 40.1%, to $109.9 million, versus $78.5 million for the fourth quarter last year.

Simple brand net sales increased 18.8%, to $1.5 million for the quarter, versus $1.2 million in the same period last year.

Included in these numbers are consumer direct sales for all three brands of $19.5 million in the fourth quarter of 2006, up 28.4% from $15.2 million in the fourth quarter a year ago.

International sales for all three brands increased 47.3%, to $9.7 million, compared to $6.6 million in the fourth quarter of last year.

For the quarter, domestic sales increased 35.9% to $114.7 million, compared to $84.4 million in 2005.

Our gross margin for the current quarter increased 790 basis points to 48.5% compared to 40.6% in the fourth quarter of last year.

The current gross margin is significantly higher than our normal range.

It is important to note that gross margins have fluctuated based upon the company's ability to contain material costs, mainly sheep skin, labor costs in the emerging China labor market and adjust wholesale prices to changes in product costs and control the amount of product close outs.

We expect gross margins to return to more normalized level in 2007.

Our SG&A expenses for the quarter were $23.3 million or 18.7% of net sales compared to $17.7 million or 19.5% of net sales a year ago.

The increased SG&A expenses in the fourth quarter was primarily due to increases in our payroll and advertising and marking expenses as part of our strategic initiative to support future growth.

Our operating margin for the fourth quarter of 2006 was 29.7% of net sales, compared to 21.1% last year.

Our net interest income was approximately $432,000 in the fourth quarter, compared to last year's fourth quarter net interest income of $75,000.

This increase was a result of higher excess cash balances and higher investment return rates.

Net earnings for the fourth quarter were $23.5 million, or $1.82 per diluted share, compared to $12.1 million, or $0.94 per diluted shares in the fourth quarter of last year.

Now to the full year.

For fiscal 2006, net sales increased 15% to $304.4 million, versus $264.8 million in 2005.

Including sales from the wholesale division, as well as the consumer direct businesses, our net sales of Teva products were $80.5 million compared to $85.2 million last year.

Net sales of UGG products increased 23.2% to $211.5 million, versus $171.6 million a year ago.

Simple brand net sales increased 58% to $12.5 million, versus $7.9 million last year.

Included in these numbers are consumer direct sales for all three brands of $35.9 million for 2006, up 32.6% from $27.1 million for 2005.

International sales for all three brands increased 8.7% to $38.3 million, compared to $35.3 million and domestic sales increased 16% to $266.1 million compared to $229.5 million in 2005.

Our gross margin for the full year increased 430 basis points to 46.4% compared to 42.1% last year.

The current gross margin is on the high end of our normal range.

As I mentioned, we expect gross margins to return to more normalized levels in 2007.

Our SG&A expenses for 2006 were $74 million, or 24.3% of net sales compared to $59.3 million or 22.4% of net sales a year ago.

The increase of SG&A expenses for the year was primarily due to increases in our payroll and advertising and marking expenses as part of our strategic initiative to support future growth.

We anticipate that this current level of expenditure is more indicative of levels necessary to continue to achieve our sales growth target.

Our operating margins for 2006 was 22.1% of net sales compared to 19.7% last year.

Our net interest income was approximately $2.4 million in 2006, compared to last year's net interest expense of $29,000.

This increase was the result of higher excess cash balances, and higher investment return rates.

Net earnings for the full year were $42.5 million, or $3.30 per diluted shares, compared to $31.8 million or $2.48 per diluted shares in 2005..

Our tax rate for the full year was 39%, compared to the previous expectation of 41%, as we experienced the benefit of our international tax restructuring and a one-time tax benefit in 2006, as a result of the 2005 repatriation of foreign cash to the U.S. that was not fully recognized in 2005.

For fiscal 2007, we are currently anticipating a tax rate of approximately 40%.

Turning to the balance sheet.

At December 31, 2006, our overall inventories decreased to $32.4 million versus $33.4 million at December 31, 2005.

By brand, UGG inventories were down 21.6% to $13.9 million at December 31, 2006, compared to $17.7 million a year ago.

Simple inventory decreased to $3.2 million as of December 31, 2006, compared to $4.4 million at the end of 2005.

The decreases in UGG and Simple wer partially offset by an increase in Teva inventories of 35.3% to $15.3 million at year end, from $11.3 million at December 31, 2005, due to early deliveries of spring styles.

The overall decrease is primarily the result of the strong reorder business we experienced with -- for our products in the third quarter of this year and tighter inventory management.

In addition we ended fiscal 2006 with cash, cash equivalents, short-term investments totaling $98.9 million, compared to $53.2 million at the end of fiscal 2005.

And accounts receivable were $49.6 million, versus $39.7 million at December 31, 2005.

With regards to our cash position, we are now beginning to more aggressively pursue possible usage, which Angel will touch on it more in a moment.

With regard to our outlook.

For 2007, we remain comfortable with our previously announced growth target of approximately 15% for the full year.

We are also introducing our 2007 diluted earnings per share growth target of approximately 5% over 2006 before the impairment charge.

Again, this is based on more normalized gross margin, approximately 44%, versus 46.4% in 2006, and SG&A as a percentage of sales in the mid 20%.

For budgeting purposes, our total SG&A dollar amount is usually spent evenly throughout the four quarters with the exception of the variable amounts.

This will obviously have the greatest impact in the second quarter where our sales volume is at its lowest.

For the first quarter of 2007, we currently expect revenue and diluted earnings per share to both increase approximately 15% over the first quarter of 2006.

For the full year, we expect UGG and Teva to grow in the mid teens and Simple growth to be approximately 30%.

Looking out to 2008, as we become more of an apple-to-apple comparison we expect to be able to generate more meaningful leverage and therefore we believe our bottom line will grow at even a faster pace than our top line.

I will now turn the call back over to Angel for some closing remarks.

Angel

Thank you, Zohar.

2006 was marked by several key accomplishments, as we described, important milestones and strategic initiatives that have us really excited about our opportunities in 2007 and beyond.

While 2006 was a transitional year on many levels, certain events came together that allowed to us translate 15% sales growth into 30% earnings growth.

Most notably the strong full price selling for UGG products and higher than expected gross margins.

Now as we have explained we are expecting gross margins to return to more normalized levels.

As Zohar said, the cost of materials and labor have increased and therefore we're projecting top line growth of approximately 15% and bottom line expansion of approximately 5% for this year.

While we just debuted our fall lines at Bread and Butter in Barcelona, an outdoor retailer, and more recently completed what I believe to be our most successful fall showing at WSA, the new Teva and UGG spring lines are just beginning hitting the store shelves.

And it is still very early in 2007.

Now that said we believe our long-term growth prospects look very promising.

This coming year we have expanded the spring UGG line of 49 styles from 32 last year.

And of all the collections to include espadrilles, driving mocs, our crocheted boots, sandals and flip flops, we are also increasing our fall line by 25% and including more fashion forward products featuring different heel heights and higher price points.

We just are currently shipping our reengineered Teva spring line.

While it's too early to speak for the sell through experience, the sell in period was encouraging and the feedback has been positive.

Later this year, we will deliver our first comprehensive fall product line for Teva, which incorporates several closed-up versions of our new spring product featuring event, a waterproof breathable technology, as well as our curbside collection, a line of casual lifestyle footwear containing 30% to 40% recyclable materials.

The Simple brand begins 2007 with a lot of excitement in the marketplace, driven by Green Toe and the brand's growing position as a leader in sustainable footwear.

For spring we've expanded the Green Toe line both in terms of product and distribution and we now have 18 styles compared to 8 just a year ago and we continue to increase penetration and gain important shelf space in that healthy living sector as more mainstream accounts like Urban Outfitters open up as well.

We are also excited about the upcoming launch of Eco Sneaks, a great line of eco-friendly sneakers, both sustainable and recycled materials.

We will partner and launch Eco Sneaks with key retailers such as Nordstrom and Lord & Taylors, Kitson and David Z. We are committed to the green lifestyle movement and we will look forward to ways to incorporate this philosophy into all of our Simple products including our sneakers, clogs and sandals, as well as expanding our accessories category.

As the brand continues to evolve, we will pursue additional licensing opportunities with partners that share similar operating philosophies.

On the international front we expect to see improved results in many foreign markets beginning in 2007, and we will continue to work with our new and existing distributors to further accelerate development of the brand in their respective markets.

We are just beginning to scratch the surface of our international potential, both in our established countries, as well as the many untouched regions around the world that we are committed to capitalizing on with the significant growths that we believe exist overseas.

We begin this year with a very heightened degree of excitement and optimism about our consumer direct business, led by our growing retail operation.

When we hired George Troy, Director of Retail, in late 2005, the plan was to open two to three stores per year, a mixture of outlet and full-price stores.

We hoping to add one more flagship store and one or two more outlet stores in 2007 and in addition we are currently investigating retail locations broad in major metropolitan areas and cities of Europe, Asia, for the UGG flagship stores.

Again, in 2007, we should be more normalized in terms of margins.

As we look out into 2008, we expect our earnings growth to exceed our sales growth off projected 2007 levels.

We're confident we're on track to achieve the long-term goals we laid at the beginning of 2005 for sales of $600 million in four to six years, by doubling UGG and Teva product sales and by growing the Simple brand to $75 million with international making up 30% of our total business.

At the same time, we are continually evolving our strategy in order to pursue new growth opportunities.

As Zohar mentioned with roughly $100 million of cash on our balance sheet, we plan to be more aggressive, investing in new growth vehicles, such as accelerating our retail store openings around the world and pursuing acquisitions as they become available and fit in our strategic plan.

To be clear, just because our cash position has changed, our criteria for evaluating possible acquisitions has not.

We will not only explore brands that make, as I mentioned, a good strategic fit with our company, but we'll also look for strong leadership that will allow us to remain focused on further investing our time, resources and capital in the UGG, Teva and Simple brand in order to take Deckers to the next level.

In closing, I would like to thank all the employees of Deckers for their hard work and their tireless efforts this past year, as well as our vendors, retail partners and customers for their on-going loyalty and support.

Thank you again, and, operator, we're now ready to open the call up for questions.

Thank you the question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] Our first question will come from Jeff Klinefelter with Piper Jaffray.

Yes, congratulations, everyone on the team there, and a fantastic finish to the year.

Thank you, Jeff.

Thank you, Jeff.

A few questions.

One would be on the international business.

Is there a way to look at this in terms of your overall growth protection for the year at up 15%?

How much of that growth is coming from international or is anticipated it come from international this year, and can you get any more specific on how in terms of the markets, where you are seeing, like early traction with your new distributors and where that might ramp?

And where you could be surprised to the up side in international this year?

Well, as you know, we don't break out the international sales component, but let me just say that in terms of markets that seem to be gaining tremendous momentum, the UK is the lead market.

As all in the footwear industry know, it's a wonderful footwear market.

It is lead market for Europe and we have the brand in UGGs that really is on fire in the UK.

So we are ramping up as much as we can the opportunities in the UK.

We are looking at investing there.

It's clearly one of the places that we would invest with a retail operation.

Our distributor, as a matter of fact,here the last couple of days.

We've had excellent meetings about opportunities and they keep having to revise their plans.

So it is a good situation to be in, as they say, they feel like they have a tiger by the tail.

Beyond the UK, we also see continued momentum in northern Europe, particularly in [inaudible].

The brand and the new product that we launched with UGGs has been very, very well received.

As has the Teva product line for spring '07.

And then, of course, in many ways, Europe is far ahead of us in the green movement, so the response to Eco Sneaks that we saw at Bread and Butter was really terrific.

So we're aggressively pursuing those opportunities as hard as we can, and we are pretty excited about what the potential is there.

Okay.

Also just on international, you mentioned 30% of total sales within the next four to six years.

Is there a reason that couldn't become 50%?

I mean, just given the market potential out there.

Is there a reason that you see it at that ratio, over that period of time or is it more because of the growth in the U.S. just continues to accelerate?

I think the growth in the U.S. will continue to accelerate.

If you said to me, what about 10 years out, I might say, 50% from our revenues outside of the U.S. is a reasonable goal in 10 years.

It just -- it seems like a very viable number.

Allowing the proper kind of growth in Europe and Asia and Latin America, not pursuing distribution, that's not healthy for our brands, which is very important.

A lot of what has happened in Europe, in distribution, has gone the way of big box, of hyper market, of what I would call less than quality distribution.

And I don't want to put a number out there that forces us to make decisions that are not healthy in the long run.

We are looking for a quality independent, quality department stores and specialty stores, and they will build their business a little bit more slowly than the big box guys will, but it's a more permanent and sustainable kind of model.

Okay.

In terms of the UGG brand, clearly coming off an outstanding season, and when we think about the upside potential in the numbers that you provided for '07, thinking about the original guidance for Q4 of this year, recognizing that your markdowns were, I believe, very low, unusually low, meaning -- resulting in margins up above normal levels.

There's a lot of momentum in the brand and I would anticipate that you are going to see bookings very strong now going into the fall season next year.

What sort of limitations are there on your ability to chase this business, and maybe help us understand how there was that much upside in the quarter?

Was it simply just not having any markdowns, or having to -- providing promotional support to retailers at all, or was there something else driving up the margins in Q4?

Well, as we've said, managing our inventories was very important.

We had very strong full-price selling throughout the quarter.

And so, as we mentioned, as a result, we didn't see the kind of markdown activity that you normally expect.

In general, the brand is just becoming one of those -- it's experiencing something very few brands do.

It's transforming from a fashion and an item to a fully-evolved lifestyle brand that is built around comfort and function.

And I think that that bodes extremely well, because it's creating for the retailer a foundation of sustainable growth, and an opportunity to showcase the brand on a year-round basis.

And one of the things we are seeing this year is more of the UGG shop and shop idea, more real estate in the store.

Now that our brand is year round, it's not the kind of thing that a retailer, would put up for a few month and then take it down.

The UGG brand will be on display 12 months a year.

And that bodes really well for the sustainability of UGG's success.

And Jeff, another thing about the margin and one of the reasons we have increased, if you remember in the last quarter, we gave indications that our gross profit margins for 2007 are going to be approximately 43% and we have increased at this time to 44%.

One of the things that is also impacting the strong margins is also the consumer direct division.

And the success of the division is contributing to the stronger gross profit margins.

Okay.

That's very helpful.

I guess maybe one last perspective on that.

Your guidance going into Q4 was $127 million to $130 million.

You obviously exceeded that significantly.

And going into the quarter, given the lead times of UGG product, you were -- I think you made comments on that call about being essentially sold out of the product.

So the up side was really driven by just pure full-price selling.

As we look forward into the second half or fourth quarter of next year, do you have the ability -- do you have to chase?

And if you have a full sell through again, that would result in higher margins than you are currently forecasting, correct?

Yes, it would, obviously.

It's interesting to see the mix of product that's selling.

It's an across the board success.

It isn't just what we might consider classic and ultra boots, it's not just prime twin-faced sheep skin product, it's the surf collection and a variety of products like that.

Which the more diversed the product offering, the better our ability to actually chase opportunities.

When we have products, for example, in the surf collection, that's not prime twin-faced driven product.

It is lined with fleece, but it's a comfort and function story, utilizing sheep skin as an UGG profile.

And so the more diverse the product offering, I think the better the ability we have to respond.

And that's an important component.

And it's a little different now from years past.

We can -- I think we can do a much better job in balancing demand by having those offerings available at retail and those collections.

Okay.

One last quick question.

Teva, up 15%, sounds like so far in the season in terms of your ship in.

There's a lot of concern out there about weather trends and a lot of retailers have been making comments.

Can you put in perspective the sort of feedback you are getting from your retailers so far?

Are you hearing that -- when would you know -- when do you need to see reorder business to hit your plan for the season?

Weather -- every year weather is an issue.

I have been here a couple of years now.

Every year there's a question about weather.

The key is how strong is the Teva brand?

I know we have taken market share from other key competitors from last year.

I expect that we should see by the middle of April some pretty good momentum on the new products and some reorders starting to flow in from those key markets that had the product a little while in the southern states.

But last year, we had pretty successful sale through of Teva product, all the way through the spring season into summer.

So, obviously weather plays a factor, but the brand is being perceived as being more contemporary, as a more performance oriented.

The product, the materials and colors are more exciting.

It's displayed better.

So as consumers gravitate towards summer looks and warm weather clothing, the brand will be on display.

And a few years ago the brand was really in the background.

So I think that that's a good sign.

Okay.

Great.

Thank you very much.

Thank you, Jeff.

Our next question comes from Mitch Kummetz with Robert Baird.

Let me add my congratulations.

A few questions.

Let me start with the gross margins and I don't want to beat this death.

But, obviously, you don't expect 46% and change to be sustainable, and, Zohar, you mentioned a number of factors that could cause the gross margins to compress in '07.

How would you put those in order?

Is it really just a matter of you -- you would expect to see many closeouts in '07, or how much of a factor would you expect continued costs and labor and materials and some of the other things that you mentioned?

Well, I think that raw materials and the cost increase from China are the significant item.

If you look historically, until 2006, our gross profit margin were under 42%.

And that has been a function of how we manage the inventory and so forth.

So in 2006, we have over 400 basis points increase.

W\hat we have do in 2005, we had a price increase anticipating some increase of raw material and cost from China, that we have managed to contain that.

So that and us managing the inventory and the retail really caused the increase, the significant increase in the gross profit margins.

So if we are saying now we are back to the 44%, you can say that about half of the increase was contributed to the cost increases we are anticipating to materialize in 2007.

Okay.

That's helpful.

And in terms of sales guidance for both '07 and then Q1, I don't know if it's just a coincidence that the full year guidance is 15% increase in Q1 is 15%, or do you expect the sales growth to be fairly linear over the course of the year across the quarters?

I think for right now, it's -- let me look at that.

No, I think it's more of a coincidence.

Okay.

And I would think maybe there's better growth in the back half than the first half, just probably based on what you would think the orders for UGG come in, just based on your strong holiday performance this past year.

I would say that makes sense.

Okay.

And then lastly, on the stock-based compensation, if I calculated the number correctly, it looks about $0.20 in '07.

What was it?

What is it about '06, and imagine something less and why the big increase?

'06, I believe it was about $2.1 million, and the reason for the increase is, as we are all very, very pleased with our share price, every time that we are issuing a new stock compensation program, your pricing is based on your latest price.

So that was the main driver of the higher increase.

Okay.

Great.

Thanks and good luck.

Thanks.

We'll go now to Elizabeth Montgomery with Cowen.

Hi, guys, congratulations on the great quarter.

Thanks, Beth.

I had another question on gross margin, but not on the higher cost, higher commodity cost on labor.

I know that you mentioned that the retail margins, or your gross margins on retailer were higher.

Is there a structural difference in the gross margins between international sales and domestic?

Yes, there is.

International margins are lower because we don't take any inventory risk.

We don't have to provide any markdown money and closeout and you don't have the risk of collection.

Yes.

Could you quantify roughly how much lower?

No.

We have not been breaking it out.

Okay.

Then I guess on your Capex and D&A plans in '07, if you could, and also, Zohar, what should we think of the return on cash for you guys?

The return on cash, we are investing in short-term instruments, so we are looking at about, we have been generating about 5%.

Yes.

And as to -- are you asking about what's our capital expenditure projection for the year.

Yes, Capex and D&A for '07.

Okay.

The Capex -- last year our Capex was about -- let me look here for a second.

It's going to be a little bit lower than this year.

We are probably looking between $4 million and $5 million and it will be mainly in opening of new stores.

Okay.

All right.

Thanks, guys.

[OPERATOR INSTRUCTIONS] We'll good now to Jeff Mintz with Wedbush Morgan Securities.

Thanks.

Congratulations on a very nice quarter.

Thanks, Jeff.

Just a couple of questions.

In terms of UGGs and up side to Q4, I don't know if you want to quantify it or just talk qualitatively, how much of the up side came from the international UGG business, as opposed to the U.S.?

Well, let's see, generally speaking most of that international business is big for us by the time we hit Q4.

I mean, we -- all of those goods are shipped in Q3.

So I would say the biggest driver was really the U.S. business by far and away.

So --

Okay.

So not much in terms of in season orders for the international business?

Yes, no, not really.

Okay.

And then looking ahead to 2007, and even beyond, what are some of the thoughts in terms of distribution channel expansion for UGGs?

I mean where do you go from here?

Or is it more just existing channels taking more floor space?

Are you talking about the U.S., or international or both?

U.S.

U.S.

We set a policy over the last few years to really grow within our existing distributor -- or rather retailer base.

We have been broadening the product assortments.

We have been getting a much better penetration of SKU spread.

We are getting a much better penetration of our mens and our kids product.

We have been expanding doors as appropriate with key customers, and in many cases, we have been unable to expand doors as availability of products puts limitations on that.

We have also been looking at those parts of the U.S. that are underserved or underrepresented with the UGG brand.

We still have growth in the southeast.

This last year we've seen great expansion in the northeast.

The Midwest is still an opportunity.

And by comparison, on the west, we have pretty much all the doors covered that we feel we need to sustain healthy momentum.

Okay.

Great.

And then, Zohar, just a couple of numbers questions to fill in, if you could.

Do you have the number of pairs and the average selling price both for Q4 and for full year?

We are not breaking it down.

For the full year, number of pairs we sold, about 9.3 million and average selling price is $30.25.

Okay.

Great.

And then what was the advertising expense as a percent of sales?

When you say advertising we are looking at our total -- we don't break down our advertising.

We have been breaking only -- I mean, we are doing the marketing.

Okay.

That's been about 4.4%.

And looking out to 2007, should we expect a similar level for marketing/advertising.

On a dollar perspective, yes.

Great.

Thanks.

Good luck.

Our next question comes from Todd Slater with Lazard.

Thanks very much.

Congratulations for the whole team.

Thanks, Todd.

Just amazing.

You beat your original $2.10 guidance only by about $1.20.

That has to be some sort of record since I have been doing this.

I just hesitate to imagine what would happen if you honed the UGGs inventory more aggressively.

But I hate to beat a dead horse on the gross margin question, but based on the success of UGG, which seems to me to be a true successful luxury lifestyle type of brand, might there be some opportunity to pass on some of the material cost increases an even just simply raise prices in any event, especially given where the competition is in that product?

They are probably much higher and probably going even higher.

I'm just wondering how you look at the opportunity to raise the level of margin in that business, as it continues to grow in consumer acceptance.

Well, we have raised prices, as you look at fall '07.

We have selectively raised prices on key styles of UGGs.

But we really do have a philosophy about the price/value relationship with our brand being excellent for the consumer.

The consumer gets great price value for an UGG product.

They are happy with the quality and the material and the authenticity and the comfort of the brand.

Do I think that we could charge a higher price point at retail in the U.S.?

Yes, we probably could.

But there's -- a lot of our consumers are young women and girls and $130, $140 for a pair of boots is not inexpensive.

It represents that you've got to save some money and it's a choice between some things like an iPod, or a pair of UGGs, etc.

We don't want to price ourselves out of the realm of being able to be accessible to the consumer.

Now when you look at internationally, our product in the UK, for example, is quite expensive.

I think given the mechanics of pricing with UK retailers, our price translates at retail to pretty high price.

Almost double the price in the U.S. as it is -- in the UK as it is in the U.S.

So we are pretty much at a ceiling there.

Now despite that, we sold through and sold through quite well.

You also see a lot of Brits over in the U.S. buying UGG in New York City.

So we look at it on a very selective basis, item by item, and wherever we have price increases from our sourcing, etc., we'll look to pass those on where it's feasible.

Or we'll reengineer the product on occasion too, to make sure that we stay in the realm that we feel comfortable.

But we also have introduced $350, $400 product to the market for fall '07, which performance of $350 product this past fall was excellent in terms of sell through.

So there's head room there, but we want to do a new product, innovation, and maintain that value for money scenario that I talked about.

Okay.

And then a follow-up question on Teva.

I'm just wondering if you might provide a little more detail on any early selling and if you could just talk about the $15 million in inventory on hand, how comfortable should we be with that level?

Obviously Teva spring and summer is prime Teva system, but it's the highest inventory of the three brands.

I'm wondering how we should look at that.

Yes, it is too early to judge.

I just have very sporadic information and we are seeing great sell through on the small sample of stores that we have been in touch with.

We are hearing that we have taken market share.

We knew that when the sell in happened.

And from a featuring new product perspective, the product is being displayed properly with new POP, etc.

As far as the inventory level goes, I mean, we are -- part of what we made a decision to do was make sure that we had the sport sandal market covered, that we had Teva in a leadership position with sports sandals and that the key styles that we know are -- we have good response to, that those products are available and we also made sure that we had availability of those products in Q4, so that we can get a nice early start to the season.

Now we did have a warm December, which helped us, but now January and February have been quite cold.

So we'll see.

In about a month, I should have a lot better insight.

Okay.

We're comfortable with the inventory levels on Teva.

Okay.

And then just one quick follow up on the retail side too, just given the success you have seen in the Mercer Street store.

How do you think about the retail opportunity now longer term?

That is that changed at all?

How do you -- in terms of the international retail opportunity, is that more likely to be a licensed joint venture or something you do yourself, operationally?

And then just lastly, kind of conceptually, would you consider a retail store that would showcase the -- sort of an eco-friendly type of orientation, maybe simple and Green Toe footwear, accessories, apparel?

Is that something you've ever thought about?

Yes, we are pretty excited about retail.

We think retail for all the brands, particularly UGG is a great place to showcase the vision of the brand as you saw in the store in New York.

Now what's happened with the store in New York is we had retailers and distributors from all over the world come through that store and they have been very excited about it.

Interestingly the retailer response has been, okay, how do I get this presentation of product in my store?

I've got 20 linear feet you can have.

Can you do this for us in our stores?

We are working very closely with them to do that.

From a distributor point of view, it's -- it was an a-ha moment, because we have been talking about what the brand should look like at retail, and we have been talking about the vision for the brand, and when they came through and saw what we were saying, now all of a sudden, it's more than viable to have retail stores in cities like Milan, for example, and London.

So to me what it's done is it's kind of pushed forward the whole conversation, and ramped up the idea of investment in the brand to include retail.

Now, to do this properly, we could do it a couple of different ways and we have discussed the methodology, whether it be a joint venture, whether it be an outside independent operator, whether it be distributor owned or whether we run it.

I think more control is better than less control, and the more that we can put our resources against our own stores, so that we can very closely guard the brand franchise in every market we are in, and use that to really drive the vision of the brand in every single market and not have to do that through a third party, not even have to do that through a distributor.

That would be preferable for us.

And so we are just looking at models right now to see the viability of all of that and how many doors we could absorb.

And what level of participation the distributors may have.

They may have a level of participation on the operating side, for example, and we may have a level on the build out, the store location, owning the brand in the store, what I call owning the sign.

We'd own the sign and all of that stuff.

So that's an ongoing conversation for the last couple of months.

Great.

Thanks.

You're welcome.

[OPERATOR INSTRUCTIONS] That would conclude our question and answer session.

At this time I'd like to turn the conference back to our speakers for any additional or closing comments.

Well, thank you all very much.

We so much appreciate your support.

It has been a spectacular year for this company, but most importantly I feel that what it's done is solidified the foundation for growth for the future, and we are more excited than ever about the plans that we've laid out and anticipating working with all of you to achieve those plans.

So on behalf of everyone here at Deckers Outdoor, I would like to thank you all, and, again, thanks to our team here.

They have done a wonderful job.

I would like to thank everyone for joining our conference call today.

You may disconnect at this time.