Deckers Outdoor Corp (DECK) 2007 Q2 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation second quarter fiscal 2007 earnings conference call.

[OPERATOR INSTRUCTIONS.] I would like to remind everyone that this conference call is being recorded.

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

Please note that some of the information provided in this call will be forward-looking statements within the meaning of the securities laws.

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

The Company cautions you that a number of risks and uncertainties beyond its control 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 10-K and its other documents filed with the SEC.

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

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

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, Angel Martinez.

Please go ahead.

Well, thank you.

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

We're pleased with our overall results for the second quarter of 2007.

Net sales increased to $52.7 million, up 26% over the second quarter of last year, and ahead of our expectation for 15% growth in Q2 of 2007.

Our top line performance was driven by strong consumer demand for UGG, both in the U.S.

and internationally, as well as solid improvement in Teva's international business.

Diluted earnings per share were $0.20 compared to $0.21 in the second quarter of last year.

As we expected, diluted earnings per share were down year-over-year due primarily to higher SG&A levels and lower gross margins compared with the second quarter of last year.

While Zohar will go into more detail on gross margin, I would like to again remind everyone that our full year SG&A budget is being spent evenly throughout all four quarters, and therefore we did not expect to experience more meaningful operating expense leverage, as the second quarter represents our slowest quarter in terms of sales volume.

That said, our better than expected sales results allowed us to exceed our original EPS guidance of approximately $0.04 for the second quarter and the first call consensus estimate of $0.11.

As I just mentioned, UGG delivered another strong performance, with sales increasing 65% to $26.3 million in the second quarter compared to $15.9 million last year, which was on top of the 68% growth reported in the first quarter of this year.

We once again saw strong retail sell through for the expanded spring line led by our espadrilles and sandals, which resulted in a strong re-order business.

I think it's important to point out that we witnessed a meaningful increase in the level of scheduled deliveries for the second quarter versus the same period last year, when UGG's performance was largely driven by reorders.

We believe the fact that retailers scheduled deliveries in Q2 versus taking a wait and see approach on Q1 sell through rates before placing reorders indicates their growing confidence in the spring line, as well as consumer acceptance of UGG as a year-round brand.

Additionally, we benefited from early delivery of fall product at the end of the second quarter.

Internationally, we saw a strong demand for UGG product in key markets like the U.K.

and Canada, and we are optimistic about our opportunities to further expand the brand's spring presence outside the U.S.

in 2008 and beyond.

Also contributing to our second quarter results were early shipments of fall product to our international distributors.

We're very pleased with several of our new distributors' recent efforts to properly market and position the brand, and as a result of their investments in marketing and advertising and the broadening of our product offering at retail, and we are experiencing a meaningful increase in sales outside the U.S.

in the second half of 2007.

In the U.S., UGG enters the third quarter with a lot of positive momentum.

Similar to international, our domestic order book came in better than we expected and we recently began delivering product to many of our key retailers as they prepare to set their shelves for fall over the next several weeks.

We're very excited about the product offerings for the season, which include a broader assortment of boots, casuals, slippers, performance and fashion for men, women, and children.

We are once again supporting the brand with an extensive advertising campaign across major publications such as Vogue, Glamour, Vanity Fair, O, Teen Vogue, Lucky, and Men's Vogue, featuring updated imagery that further authenticates the brand as premium, luxury and comfort, as well as showcases the aspirational UGG lifestyle.

Now to Teva.

As we have previously outlined, our strategy is to reposition Teva as a performance outdoor brand versus a sandal brand, while at the same time target a younger, more active consumer.

With more than 70% of the spring 2007 line made up of new styles, this past season was an important period for the brand as it essentially served as a starting block toward achieving our long term goals.

Our goal for 2007 was to stop Teva sales decline, and we're pleased with our recent performance and are encouraged by the positive feedback we've received from retailers and consumers about the changes Teva has undergone and the new direction the brand has taken.

With regard to the second quarter, sales increased 5.6% to $24.1 million driven by a solid performance from our international markets, particularly in Europe and Canada.

While domestic sales were lighter than we expected, primarily due to lack of reorders, we are confident this was primarily related to unseasonable cold weather during the month of April and early part of May, which affected much of the footwear industry.

Despite increasing sales of the Teva brand by only a single digit in the U.S., we believe we've outperformed many of our retailers' original expectations and we're confident that our recent that our recent accomplishments and hard work have positioned us well for the next year.

Importantly, retailers have shown a renewed interest in the brand and they are equally excited about the opportunities that lie ahead for Teva.

I think a key point for them was the performance of our Pro Series featuring the Karnali Wraptor, our first ever over-$100 price point sandal, and the Sunkosi, a hydro shoe with a similar price point, which both sold through very well.

As a result, we are getting very good placement with new as well as existing distribution for our new Spring 2008 Teva product, and that's something we didn't have the past few years.

As you recall, Teva had a very solid start to the year with sales up 11.6% in the first quarter, and I believe we would've seen similar success in the second quarter had it not been for the roughly four to six week hit we took from the unfavorable weather.

As we look ahead to 2008, we believe we are well positioned to build on our momentum by further expanding the line and introducing new and better products for our target customer.

We are very pleased to report that one of the brand's key retailers recently committed to a much broader assortment and additional doors for next year after pre-lining the Spring 2008 line, and we just opened Bass Pro Shops with a good assortment for next year as well.

We're also very focused on increasing the level of excitement we've created in the marketplace by keeping the brand relevant year-round.

This fall, we'll be offering an expanded collection of footwear that will build on the success of many of our recent spring styles.

The sell-in for this line has been good, and while it is still a limited assortment of merchandise, it represents an important step in the ongoing evolution of Teva.

Turning to Simple.

As you saw from our press release, net sales for Simple in the second quarter of 2007 declined approximately 21% to $2.4 million compared to the second quarter of 2006.

While Green Toe continues the success at retail, overall the brand's sales were affected by a lack of reorders due to a delayed industry-wide selling season and the shift in international shipments to the third quarter.

While we did witness solid sell-through during the quarter, retailers wanted to exit June with clean inventory levels and therefore were very cautious with reorders.

That said, we're confident that Simple's sustainable lifestyle strategy is in sync with the consumer shift of support and purchase of eco-friendly products.

This emerging lifestyle movement is hitting the masses.

In fact, Green Toe continued to retail well in health and wellness retailers such as Whole Foods and Gaiam's Catalogue.

Looking ahead, we're excited bout the upcoming launch of ecoSNEAKS, our line of recycled and sustainable sneakers, which will debut this month in key retailers such as Urban Outfitters, Bloomingdales, Kitson, Nordstrom, and Dillard's to name a few.

The initial feedback from retailers has been that the line has broader commercial appeal, and we're excited about the potential of this new collection.

Notably, Simple's second quarter performance in our Consumer Direct business was up 54% over the previous year.

Typically, internet sales are a good indication of the current consumer trends in the marketplace.

In fact, unique visitors to Simple's website were up over 150%, which indicates to us that there is a real demand for the brand.

However, consumers are having difficulty locating the products at retail.

Importantly, we continue to enhance our position as the world leader in sustainable footwear through our national print campaign in key publications such as Vanity Fair, Rolling Stone, and The New York Times.

We also participated in a number of Earth Day promotions at key cities like Chicago, New York, and Toronto, where our Stopglobalwarming.org Green Toe flip-flop was prominently featured.

At the same time we've been collaborating with key members of the surf community on new product that are helping Simple establish itself as an authentic lifestyle brand in the surf channel.

As we head into the third quarter, we believe Simple's momentum is building and we're optimistic about our prospects for the second half of 2007.

Next, our Consumer Direct business, which comprises our eCommerce websites for each brand and our retail locations, posted a 54% top line gain in the second quarter as sales increased to $6.1 million compared to $4.0 million last year.

Our stores, particularly our UGG flagship store in New York, continue to perform very well, and we're obviously very excited as we get set to open three additional locations over the next several months.

They include two full-price UGG stores, one in Montreal that will be opened this quarter by our Canadian distributor, and the second in Chicago scheduled for October, as well as an outlet store about an hour north of New York City in Woodbury Commons scheduled for August.

Now, as we've previously stated, we believe the opportunity exists for UGG stores in many of the major metropolitan cities around the world and we're committed to expanding this growing segment of our business.

Meanwhile, all three brands' websites continue to draw more visitors each month, which have contributed to higher than expected sales for our Direct division.

Finally to our international business.

International sales rose to 100% to $14.7 million from $7.3 million a year ago, driven by strong gains in UGG and Teva.

For UGG, the U.K.

continued to be the brand's strongest market where the spring line retailed very well and sell-in for the fall is up significantly over last year.

There was similar retail and sell-in strength in Canada as well as our Benelux region, where our business is well established and our brand plus a position sets a great example for other international markets to follow.

We also saw a meaningful increase in fall orders from some of our new markets such as Germany.

More recently, our new distributor for Scandinavia debuted UGG to the press and the reaction was very strong and positive across the board, underscoring our belief that this region is an ideal fit for UGG.

For Teva, the brand performed very well internationally including Benelux, Switzerland, and Canada.

A special mention should also be made of Singapore, where our established business is significantly up over the same period last year.

Unlike the U.S.

where the brand's positioning has slipped over the past few years, Teva has maintained its premier status internationally, particularly in our European market.

This is obviously very important and we are now seeing continued market share gains as a result of our new product introductions such as the Karnali Wraptor and Sunkosi, and we expect this trend to continue with the launch of our new fall line.

As I mentioned earlier, international shipments of Simple shifted into the third quarter impacting the brand's overall performance in Q2.

At this point, Simple's presence outside the U.S.

is still relatively small.

With that said, the Green Toe movement -- the Green movement rather -- is a global concern, and we're working hard to identify the right distributors to partner with internationally in order to build on our position as a world leader in sustainable footwear.

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

Zohar?

Thanks, Angel.

For the second quarter of 2007, net sales increased 26.4% to $52.7 million versus $41.7 million for the second quarter of last year.

Including sales from the Wholesale division, as well as the Consumer Direct business, our net sales of our product increased 65.2% to $26.3 million compared to $15.9 million for the second quarter last year.

Net sales of Teva product increased 5.6% to $24.1 million in the second quarter compared to $22.8 million in the corresponding period of 2006.

Simple brand net sales decreased 20.6% to $2.4 million for the quarter compared to $3 million in the same period last year.

Included in these numbers are Consumer Direct sales for all three brands of $6.1 million in the second quarter 2007, up 54% from $4 million in the second quarter a year ago.

International sales for all three brands increased 101.1% to $14.7 million compared to $7.3 million in the second quarter of last year.

For the quarter, domestic sales increased 10.7% to $38 million compared to $34.4 million in 2006.

Our gross margin for the current quarter decreased to 41.4% compared to 45.6% in the second quarter of last year.

This decrease was primarily due to higher inventory write-down of Teva and Simple resulting from the difficult footwear retail environment.

Gross margin was also impacted by the 100% increase in international sales, which were 28% of total sales in 2007, compared to 18% in 2006 in which we had lower gross margins than domestic sales and had higher impact on gross margin, as the second quarter represents our lowest quarter in terms of sales volume.

As you will see when I speak to our forward guidance, we expect gross margins to be up significantly in Q3 and Q4 versus Q2.

Our SG&A expenses for the quarter were $18.8 million or 35.7% of net sales compared to $15 million or 36% of net sales a year ago.

The total SG&A dollar amount was up year-over-year as a result of increased personnel, marketing, and stock compensation costs associated with our growth.

Our operating margins for the second quarter of 2007 was 5.7% of net sales compared to 9.6% last year.

Our net interest income was approximately $1.4 million in the second quarter compared to last year's second quarter of $704,000.

This increase was a result of higher excess cash balance.

Net income for the second quarter was $2.4 million or $0.20 per diluted share compared to $2.7 million or $0.21 per diluted share in the second quarter of last year.

Again, our EPS was down slightly year-over-year due to higher SG&A levels and lower gross margins, which I just touched on.

Turning to the balance sheet.

At June 30, 2007, our overall inventories increased to $66.3 million versus $45.2 million at June 30, 2006.

By brand, Teva inventories increased to $11.1 million at June 30, 2007, compared to $7.2 million a year ago due to the lower than expected spring sales.

UGG inventories increased to $51.9 million as of June 30, 2007 compared to $32.2 million last year due to the early arrival of our fall '07 inventory in anticipation of increased sales in the third quarter, and Simple inventories decreased to $3.2 million at June 30, 2007 compared to $5.8 million at June 30, 2006.

In addition, at June 30, 2007, we had cash, cash equivalents, and short-term investments totaling $96.6 million compared to $64.9 million a year ago, and accounts receivables were $30.2 million versus $24.6 million at June 30, 2006.

Now to our outlook.

Based on our better than expected second quarter results, coupled with improved visibility into the back half of the year, we are raising our 2007 guidance.

We now expect revenues to increase approximately 35% over 2006 levels, up from our previous revised guidance of approximately 25% growth.

We also now expect diluted earnings per share to increase approximately 25% over 2006 before the impairment charge, up from our previous guidance of approximately 15% growth.

Again, this is based on more normalized gross margin of approximately 44% in 2007 versus 46.4% in 2006.

In addition, our fiscal 2007 guidance includes approximately $5.1 million of stock compensation expense, an increase of $3 million over 2006.

For the third quarter, we can expect both revenues and diluted EPS to increase approximately 45% over the third quarter of fiscal 2006, with gross margins up approximately 43%.

For the fourth quarter, we can expect revenues to increase approximately 30% over the fourth quarter of fiscal 2006 and diluted EPS to increase approximately 10% over the same period last year.

Our earnings per share guidance is based on gross margins of approximately 45% versus gross margins of 48.5% in the fourth quarter of 2006.

If gross margin is comparable to last year's Q4, our projected earnings per share growth target would be more in line with our projected revenue growth target.

For the full year, we now expect UGG sales to increase approximately 45% and Simple sales to increase approximately 20% and Teva sales growth approximately 10%.

One last comment before I turn the call back over to Angel.

As you saw in our earnings release, we recently discovered that the employee payroll declarations and certain tax payments made by some of our foreign subsidiaries in foreign jurisdictions have been underreported and underpaid.

Management advised the audit committee of the board of directors of the matter, and as a result, the audit committee has engaged special outside counsel to undertake an internal review of this matter.

Based upon the investigations to date, we believe that inadequate declarations and underpayments did not exceed $500,000 in any given year and $2.7 million in the aggregate.

However, the internal revenue is not yet complete and there can be no assurance that the final amount will not be materially different.

Though the internal review is not sufficiently complete for the Company to determine whether or in what amounts the underpayments will result in any government action or whether any past-due interest, fines, or other penalties will be required, the Company currently believes that interest and penalties with respect thereto could range from $3.3 million to $15.4 million.

Certain of the Company's historical financial statements may be required to be restated and the financial result and guidance included in this earnings release issued today may change depending on the results of the internal review.

Both Angel and I are committed to ensure that the Company has all necessary internal and disclosure controls and is currently evaluating the impact of the matters described above on its internal controls over financial reporting and its disclosure control and procedures.

Again, because the internal review is not complete, this is all we can really say at this time.

Angel?

Thanks, Zohar.

Well, the first half of fiscal 2007 was filled with many positive takeaways for each of our brands.

Teva's currently in the early stages of a multi-year turnaround and we're very pleased with the progress we've achieved over the past six months.

Not only are we undergoing a product mix shift, moving away from an assortment dominated by flip-flops and casual sandals, toward the more high performance type of footwear, but we're also executing a consumer mix shift toward a much younger and active consumer.

Now, this transformation will take time combined with continued investments in R&D, marketing, and advertising, we are confident that we will achieve our goals.

UGG had a standout performance this spring, further validating that the brand is evolving into a year-round luxury brand.

At the same time, it has helped set us up for a strong second half of the year as retailers are confident in the strength of the brand and committed to supporting a diversified collection of footwear for men, women, and children.

Since the debut of Green Toe in early 2006, Simple has become the world leader in sustainable footwear.

Given the brand's drastically different market positioning versus just a couple of years ago, we have in a sense started from scratch.

The foundation has been established and we are now focused on taking the necessary steps to move Simple beyond its niche status and into the mainstream.

To properly support our brands, we'll continue to invest in our infrastructure in order to create a global operating platform that will allow us to maximize our opportunities.

We currently have plans to increase capacity at our Company operated distribution facility here in California to better handle the future of business -- increases in business and volume that we look to add, and we also look to add key personnel throughout our different departments as needed.

We're also actively exploring potential acquisitions.

As we've said before, we're looking for a lifestyle brand that would be a good fit with our Company, while at the same time bringing with it an experienced management team that will allow us to focus on our current objectives.

So, in closing, we move ahead with a clear and compelling growth strategy and an organization that remains committed to delivering long-term growth and increasing value -- and increased value for our shareholders.

At this point, Operator, I'd like to open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS.]

Our first question comes from Stephanie Wissink, Piper Jaffray.

Good afternoon, guys.

Congratulations on a good quarter.

Thank you.

I have three questions.

The first, if you could just -- Angel or Zohar, the number of SKUs in Teva and UGG, specifically the second half of this year versus last year, what's the total SKU count?

Well we have not been breaking down the total SKU count by brands or in total, but I would say that the SKU count for Teva from spring '06 to spring '07 went up by approximately 30%.

And how about for the fall?

For the coming fall?

Yes.

I would say about 15%.

Is it the same dynamic in UGG or is it more exaggerated in terms of SKUs?

UGG, it will be a greater number.

And that's primarily because we've -- the spring lineup's been evolving and we've been building that line, so obviously, a few years ago it was primarily driven by just basic color-ups of existing styles.

Now the spring line is a complete -- more complete spring line.

Right.

The spring line growth percentages is greater than the fall line, as you can imagine.

Yes.

Okay.

Understood.

The second question is, Zohar, if you could just talk a little bit about the gross margin in international markets.

What is the dynamic that's causing that to be so much lower?

Okay.

Our gross profit margin for international is basically the same for all the markets.

Because we are not taking any inventory risk, there are no discounts, there's no markdown or credit risk, the margins for the international business is lower than a domestic one, but they are the same for all the countries.

Okay.

And then when you look at gross margin outside of the international/U.S.

blend, how much of the gross margin deterioration in guidance is based on mix among your brands versus cost pressures that you might be seeing in some of the commodities used for the manufacturing?

Stephanie, are you talking about the guidance?

Yes.

So, in your -- in the Q3 and Q4 guidance that you provided on the gross margin lines --?

Right.

-- how much of that is sales mix among the three brands and how much of it is costing pressure if you exclude the international/domestic mix?

I would say it has to do more with the mix because as we said, Q3 we're looking at approximately 43% and Q4 it's 45%.

So, within our guidance -- but, you cannot just look at that, Stephanie, as to the mix in domestic.

It's also the relation -- our guidance that we are giving you is including also the international components.

Correct, so if you were to strip out the international component of your sales and just look at what's left, your domestic business, is there a change in margin -- whether it's a shift among your brands in terms of the composition or any cost pressures that you're seeing in the manufacturing of any of your products?

I would say the cost pressure that we've been feeling we impacted --it's the cost for the whole year, so it will be more of a product mix.

Okay.

Thanks.

That helps.

Sure.

Our next question comes from Angelique Dab, Nollenberger.

Good afternoon.

Could you give us a quick update on your expectations for the tax rate going forward?

Yes, our tax rate for the year, we're looking at approximately 40%.

And then could you talk a little bit about the sourcing for sheepskin and how that's not impacting you as much?

Well, we negotiate our sheepskin prices at least a year in advance, and given our -- the diversity of our sources for sheepskin, as well as our impact on that market, we feel pretty comfortable that we're negotiating very solid pricing as we go forward.

And we build all that into our models, and we're pretty confident with not only the availability but the pricing that we have.

And yes, there are going to be moderate increases in sheepskin pricing, but, again, we've accounted for that and that's planned.

Thank you.

And then lastly, could you talk a little bit about the Teva fall product and any initial feedback you might be getting from it?

Yes, we've had actually very good feedback.

A couple of the styles are performing well and they're evolutions of a product we had done in the past like the DX1 for example.

The new product, it's a very narrow and tight line and I think retailers have looked at that and seen a lot of opportunity.

We're not trying to go in and expect too much from fall.

We think of fall as a real adjunct to the brand's evolution, and the product has to be very, I think, precise for the retailer.

In other words, they have to see the customer.

They have to see the functionality in the product, and so far we've been able to put that kind of product on the table, so we're very optimistic about what we've shown for fall.

Thank you.

Our next question comes from Elizabeth Montgomery, Cowen.

Hi, guys.

Congratulations on the good quarter.

It's good to see that nothing's changed.

Thank you.

Thanks.

I had the same questions about sourcing and sheepskin, but I think I'm -- I think I understood your answers to that, Zohar, so if I could ask about the Teva inventory, how much of that inventory is still summer product versus fall, and should we be concerned?

I apologize if you mentioned this already.

That's okay.

No, we have not mentioned.

The bulk of the inventory is from the spring line, and as we indicated, the increase of the inventory is due to the lower expected sales in the United States.

We have incorporated any close-outs or write-down that we have to take in the projected number that we put in front of you.

So, that's assumed in the gross margin guidance for Q3 and Q4?

Correct.

Correct.

Okay.

Then I had a question about the Simple brand.

How much is Green Toe as a percentage of Simple's revenue?

Because I'm trying to remember exactly when it debuted at retail and what other parts to Simple there might be.

It seems like ecoSNEAKS hasn't really happened yet, right?

That's correct.

Yes, I think I mentioned that in a sense we think of Simple as almost a start-up, if you will.

In other words, the brand was very unfocused a couple years ago.

Green Toe came along and became a focal point for the brand, and by focal point I mean an assortment of product that we could showcase as unique and independent from what we'd been doing in the past.

Yes, we'd been selling our conventional old-school sneakers and sugar sneakers, and those continued to be a fairly large chunk of Simple's business.

But the difference between those and Green Toe was Green Toe was oriented toward a very specific customer for a very specific lifestyle.

Now, as we now move forward and introduce ecoSNEAKS, ecoSNEAKS represent, and this is the retailers saying it, is a more commercial type of product.

In other words, it's not as niche oriented as Green Toe.

So we're pretty optimistic about the evolution of ecoSNEAKS.

We think that when you look at the product, it's easy to see yourself wearing it, and we understand that Green Toe in and of itself is not for everyone, although it's pretty surprising and interesting that some of the Green Toe product, the GTJ and some of the other things we're doing, are retailing extremely well in more mainstream consumers outside of the Whole Foods and the Giam and those kind of places.

So, I think the world's kind of coming to Simple's approach, and we'll see how it plays out.

So, ecoSNEAKS could, based on that type of commentary, end up being a bigger part of Simple than Green Toe (multiple speakers)?

Well, I think at this point that would be my expectation.

I think that's the evolution of the brand and that's what we would try to make happen.

Okay.

And then -- and I apologize if this was like discussed more specifically too, but the shift in the international shipments in Simple year-over-year, was that reorders or is that like fall just being (inaudible)?

That's the introduction of the ecoSNEAKS.

Last year, Simple international sales went out in Q2.

This year, because of the introduction of ecoSNEAKS, it's going to go out in Q3.

Okay.

All right.

Thanks, guys.

Good job.

Thank you.

[OPERATOR INSTRUCTIONS.] We'll take our next question from Jeff Mintz, Wedbush Morgan Securities.

Thanks and I'll add my congratulations on a good quarter.

Thanks, Jeff.

Thank you.

Angel, a couple of broader questions on UGG for the upcoming fall season.

Last year you obviously had issues with being under-inventoried for fall, and clearly people were chasing the product as we got into kind of the fourth quarter.

How are you kind of prepared for that looking ahead?

I mean, are you taking a bigger inventory position this year in anticipation, or are you willing again to kind of be -- kind of have your customers chasing and unable to get it?

We weren't willing to have people unable to get it.

This thing just continued to explode.

This year, as you can see from the inventory numbers that we've reported, yes, we've taken an earlier position in inventory with UGG and we're in good shape to delivery goods well into fall, and where our customers have indicated that they've placed backup orders or that they see an opportunity for a fill-in business around a classic product, we've taken an inventory position on that.

So I think we're as prepared as we could reasonably be from an inventory perspective, and I think our customers -- our retailers will see the aggressiveness on that front as a benefit to that.

Are you -- would say the inventory position is broader across styles this year than last year as well?

I think if you sort of look at the evolution of the line, you'll see that there is a much broader assortment, men's, women's, and kids.

So the answer to that is yes.

But, the way we buy inventory, we really drive from core styles, so the formula doesn't lie.

I mean, we tend to take risk on inventory where we know we have -- it can be minimized.

Some of the brand new styles, I've said this in the past -- you sort of come from history when you buy product on our level, so we have our best guess up front, and then this year as a result and merge from fall, we'll know better next year what kind of levels of inventory to support, say the $300 new product with, the boots.

So, it's an ongoing refinement if you will.

Okay.

Understood.

And then in terms of the non-footwear UGG product, do you anticipate that being kind of measurable or having any impact this year and if not in '07, is that something we could see have a more significant impact in fall '08?

We're looking to make some revisions on that front.

I think the product -- we've been so busy with footwear, it's just been hard to focus on anything else, and so as we now get properly staffed and we have more management time to devote, yes, we will be paying a lot more attention to the handbags and to the cold weather accessories, which are licensed, and the outerwear.

That being said, we're primarily a footwear brand, and to the extent that we have an UGG lifestyle that is showcased in our UGG Australia stores, you'll see a complete assortment of head-to-toe UGG, but what you'll see for the next couple seasons out there at retail is going to be primarily footwear driven.

Okay, great.

And then Zohar, a couple questions on the internal review.

Any sense of when that might be completed?

Is that something we'll see completed in the third quarter or might it drift into the fourth?

Jeff, as we indicated in both (inaudible) and the scripts, the investigation is ongoing at this time.

We really cannot comment on that.

Okay.

And then, I guess both of you -- both Angel and Zohar, you both talked a little bit about -- it sounds like some needed SG&A investments in people and things like that.

Any sense of kind of the magnitude of that and what we should be modeling going forward?

I would say as we continue to grow, we'll have to continue to add personnel in various places.

We've indicated in the past that we'll keep our operating expense margin in the mid-20s -- in low-mid 20s, but where you would see the -- probably some bigger investment since we -- our growth is faster that we planned in the past, it will probably be some, as Angel indicated, some expansion in our distribution centers.

So, we'll need additional space that you'll probably see in later this year or early next year.

Okay.

Great.

Thanks very much and good luck this quarter.

Thanks, Jeff.

Our next question comes from Todd Slater, Lazard Capital Markets.

Thanks very much and congratulations on the excellent execution again.

Thank you, Todd.

Thanks, Todd.

I just want to start with Teva.

I'm wondering if you go sort of beyond the challenging sandal environment, if you could give us some of your takeaways or learnings about all the changes, some of them dramatic, that you made in terms of upgrading the features and pricing and so on, and just both in the performance SKUs and the fashion SKUs.

In other words, what worked in the quarter, what changes are you planning or would you plan for next spring?

I think the most important thing that happened in the quarter was number one, the mix shift.

The fact is that in the past we had been driving a disproportionate amount of our business in Teva with flip-flops and mush product, and a lot of price point sandals that were built on universal straps.

And what I'm really excited about now is that those products really don't appear too much on the radar screen as far as what is volatile in retail, what's selling through, what the retailers are talking about, what consumers are excited about.

Yes, we still do our mush business, but we're not -- that's not Teva.

That's a part of Teva.

Teva is a performance brand, so the reception we got, to Sunkosi, Karnali, the Dozer product, that's continued to sell well.

The updated Terra-Fi, a big surprise to me has been how well the new Terra-Fi has done, and I think that's largely because we stopped confusing consumers with so many universal strap products at competing price points.

Now Terra-Fi is exceptional and a really good product, and it's got its core audience.

I think the other thing that I've learned is that it's a very powerful brand in outdoor.

A lot of retailers for many years have been very successful selling Teva.

I think they were very disappointed for a few years there in not getting anything new from Teva, and in the end, in many cases they'd kind of given up on the brand.

I mean -- and that was a hard thing to overcome, but the strength of the brand has allowed us to do that, and now combined with new product, they see the direction.

We're getting great feedback on spring '08, which is also exciting.

And as I indicated a couple of new retailers picking us up again, so I think all those things bode really well for Teva.

So can you talk about how the mix in price points will change for next year, more SKUs, what percent of the lines sort of involves price points that (multiple speakers) --?

Yes, I think what you'll see in Teva is a continued focus on performance product.

You'll see us really fill the gaps in between where we were, say $75 to $80 and $100, and there's some great things we can do there with technology.

I think as you see the fall line evolve and waterproof product comes into the mix, you'll see a little higher price points on that front, as well because of the nature of that kind of product.

Membranes are expensive.

And yet compared to the market, running shoes, trail running shoes, $120 to $130 is not an unusual place to be, especially if you include some technology in there and some waterproof membrane type of stuff.

So I think in general you'll see just a much better configuration of the product line for our type of distribution with a lot more story to tell at retail to the consumer.

Okay.

Great.

That's helpful.

And then just moving quickly to UGG, you talked about the SKU change.

Could you just -- what's happening on the AUR or the average wholesale price of the product for fall '07 versus '06?

For fall'07, probably you will see a higher price -- average price with the introduction of the higher fashion boots of $350 and so forth.

You will see overall increase of the price.

Okay.

Can you tell us about sort of roughly how much on average?

No, Todd, we're not breaking average prices by brand.

Okay.

And then lastly, just looking at international -- one last question there because the second quarter penetration was a very high function of the size of the quarter probably, but what should we expect for the international mix to be for the full year?

What about going into 2008 and beyond?

If you could just sort of highlight the international penetration that one should expect.

Well, this year we'll probably be looking at closer to 14 to 15%, the international.

And going forward, that relationship has to grow because we indicated -- our goal is to be at 600 million by 2010 to 2012 and we said that 30% of that should be international.

So that relationship has to grow in the next four years to get to the 30%.

Great.

Okay.

So maybe 20% by '08?

Something along those lines or more?

Yeah, maybe a little bit less.

Okay, so '09, '10 --?

Yes, '09 probably the 20% and then keep on growing.

Got it.

All right, great.

Thank you very much.

Thanks, Todd.

We'll take a follow-up from Stephanie Wissink, Piper Jaffray.

Hi guys.

Just one quick follow-up on the comments regarding the early shipments of UGG that came into the second quarter.

If you could just quantify those so we have some sense on the third quarter guidance, that'd be very helpful.

Thank you.

You're talking about the early shipments of UGG in the fall?

Yes.

That comment was related to international.

Was it just international, or did there also --?

No, the bulk of it was international.

Okay, and was it sizable?

Yes, it was sizable.

That's what helped the increase that they had this quarter.

And would you be willing to quantify how much it was, either as a percent or in total dollars?

International grew 100% this quarter.

So, I would say it was a good portion of that, but we're not going to break it down by -- to that level.

Okay.

Thanks, guys.

Sure.

[OPERATOR INSTRUCTIONS.] We'll take a follow-up from Todd Slater with Lazard.

Hey.

I just wanted to clarify in the marketing spend in the quarter, what was the -- what did you -- did you provide some detail on that?

No.

No, we have not.

We're not breaking it by quarters.

Okay, but it's continuing to increase as a percent of sales or is it flat as a percent of sales?

No.

For this year we're going -- it'll probably decrease some because we are keeping -- it's going to be about the same dollar as last year, so, as a percentage it'll probably go down a little bit.

Okay.

Got it.

Thanks.

Thanks.

It appears there are no further questions in the queue.

Mr.Martinez, I would like to turn the conference over to you for any additional or closing remarks.

Well, thank you very much.

I would just like to thank you all for your time this afternoon.

It's clear that our strategy implemented over the last couple of years is showing good traction, and I've very excited about the direction we're going in and the continuing evolution of the brand.

I'd also like to thank all the hard work by people here in the Company and the people overseas.

We've got a very dedicated team of people, and I'm very proud of everything we're doing as a Company.

So, thanks for joining us and take care.

This concludes today's conference.

Thank you for your participation.

You may disconnect at this time.