Deckers Outdoor Corp (DECK) 2007 Q3 法說會逐字稿

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

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

At this time, all participants are in a listen-only mode.

Following this presentation, we will conduct a question and answer session.

Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties hearing the conference, please press star, zero for operator assistance at any time.

I would like to remind everyone that this 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 different materially from those described in this call.

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

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

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

Please go ahead, sir.

Thank you.

Well, good afternoon to all of you and thanks for joining us.

The third quarter was another period of strong revenue and earnings growth for our company, with sales increasing 57.2% and diluted earnings per share of 81.5% over the same period a year ago.

Our results, which exceeded both our internal projections and the analyst consensus estimate were driven by strong demand for the Ugg brand, both in the U.S.

and our international markets.

It is important to note that these figures include a one-time charge of approximately $2.1 million or approximately $0.10 diluted EPS related to the expenses associated with the investigation into the underpayment of certain taxes at our China operations and the resulting restatement of our consolidated financial statements.

On October 11th, we filed an amended 2006 10-K, an amended first quarter 2007 10-Q, and our second quarter 2007 10-Q, which included the restatement of our consolidated financial statements for the fiscal years 2004 through 2006, as well as certain financial information related to fiscal 2002 and 2003.

And the condensed, consolidated financial statements for the period ended March 31st, 2007 and 2006 and the period ended June 30th, 2006.

The cumulative impact was $3.8 million as a charge to retained earnings at December 31st, 2006, relating to taxes, interest, and penalties for the previous 10 years.

We are obviously very pleased to have this incident behind us, and we're committed to taking the necessary steps to strengthen our organization both in China and here in the U.S.

in order to prevent similar situation in the years ahead, particularly as we continue to rapidly grow our business around the world.

On a different note, we're pleased to announce that Deckers has climbed to number nine on the Forbes 2007 list of 200 best small companies, up from number 80 in 2006.

Forbes' list is based on annual sales, percentage of growth, net profit and operations, and management style.

We're proud of our accomplishment so far and are grateful for the acknowledgement of our efforts from Forbes magazine.

Now for more details on our third quarter results.

Ugg brand sales were up 67.5% to a record quarter of $113.7 million as we continue to experience exceptionally high full-price selling across the entire product line.

Led by our women's boot, Metropolitan, and slipper collections as well as our expanded men's and kids' offerings.

We also witnessed very positive reaction to our new fashion boots on wedges and heels that combine the comfort of sheepskin with high quality leather and suede silhouettes.

The initial success of this collection is important, as it takes the Ugg brand in new directions, including higher price points and different materials while also providing women more opportunity to wear Ugg brand products either to the office or out for the evening.

A key component of our long-term growth strategy has been to evolve the Ugg brand from its classic Twin Face sheepskin origins into a diversified product offering that better reflects the lifestyle nature of the brand and underscores the Ugg brand's leadership position in luxury and comfort.

We believe the performance of our spring line combined with the recent results of our expanded fall product offering indicates that we have successfully executed against our plan and are creating a strong foundation for the future.

Looking ahead, we see a big opportunity to evolve our men's business, similar to what we have done in our women's line over the last few years.

We will be increasing our R&D budget and bringing on another men's designer in order to expand our successful surf, boot, and casual collections.

Another key to achieving our three-to-five-year growth objective is increasing the Ugg brand's international presence.

During the quarter, we added new retailers and introduced new styles in our existing markets like the UK and Benelux while entering new regions such as Scandinavia, where early results have been very promising.

We're now in key retailers across all our international markets such as Kurt Geiger and KCuba in the UK, Galeries Lafayette in France, Raspini in Italy, (inaudible) in Spain, and (inaudible) in Japan, and Brown's in Canada.

We're very pleased with the work our distributors have done over the past 12 months, including highlighting the brand's awareness, securing distribution and more key accounts, and establishing the Ugg brand as a lifestyle leader in luxury and comfort.

As many of you probably saw, we ran full-page ads throughout the quarter featuring new images of our fashion products and publications including Vogue, Glamour, Lucky, Teen Vogue, Men's Vogue, and Vanity Fair, in addition to our largest-ever outdoor advertising campaign.

We were also very excited and very active to be advertising in international markets and now have one unified global brand position and marketing strategy in place for the Ugg brand that will run year-round and worldwide.

Looking out to 2008, we have expanded our spring collection to include more comfort sandals, casuals, wedges, boots, ballerina flats, and beach thongs.

Based on recent booking trends, we expect this business to be up double digits in the first half of the year.

For Teva, the third quarter was highlighted by the debut of several new closed-toe footwear styles which contributed to a 12.1% increase in sales year-over-year.

Developing a more comprehensive fall line allows us to reduce Teva's dependency on weather, further migrate away from lower price points, and extend the brand selling into the second half of the year.

These products, many of which are line extensions of spring styles, performed very well at retail, including the men's Ossagon, a fall version of the popular Sunkosi that utilizes our patented Drain Frame technology, and the women's Ventura clog and sling back.

We were also please by the reaction to our new Curbside collection.

This new line of environmentally conscious footwear was well-received by retailers who unanimously agreed that the message is a great fit for a brand like Teva.

While closed-toe products still represented the minority of our fall style, we're pleased by the performance of this growing category and we are encouraged by retailers' feedback on our efforts to make Teva a more meaningful brand in the fall and winter.

We remain focused on evolving Teva into a year-round performance outdoor brand.

Now despite the difficult retail environment for sandals created by the cold, wet weather in April and May, we did see a nice pick-up and sell-through rates for our open-toed merchandise throughout the third quarter, and we expect to end the year with inventories on plan.

Importantly, our two major trade shows, Outdoor Retailer and WSA, where we previewed our spring 2008 line, went very well, and based on our bookings to date, we expect a solid double-digit increase in our business compared to spring 2007.

We will once again be introducing several new styles of high-performance footwear, $100-plus price points.

Sell-in of our spring '08 line is being led by the open Toachi, which is a new silhouette on our technology Drain Frame platform, and the Omnium and Omnium leather, two multipurpose outdoor performance sandals, as well as the men's Mesa collection and the women's [Kailani] collection.

Internationally, Teva continued to post solid gains in its core markets like Switzerland and the UK and Benelux, while newer territories such as China and Latin America are all off to a good start.

We're confident that we have not even begun to scratch the surface in terms of Teva's full international potential, highlighted by China, where we think the business can grow to be a major part of international revenue.

Now turning to Simple, sales were flat during the third quarter and below our forecasts due to production delays with styles in the ecoSNEAKS collection.

Due to these unforeseen 30- to 45-day delays, we were unable to meet the consumer demand for the product as we'd originally anticipated.

These production issues have been resolved and were the result of innovating new materials and eco-friendly processes.

As the industry leader in sustainable footwear and accessories, Simple will continue to break new ground and evolve an important core competency which is unique among footwear brands.

This advantage should serve the Simple brand well in the years to come.

Yet despite the delay in shipping, ecoSNEAKS had a very solid debut across a broad spectrum of retailers, including Nordstrom, Bloomingdale's, Urban Outfitters, Whole Foods, REI, and Zappos.com, to name a few.

Over the past several weeks, retail sales of ecoSNEAKS have continued to pick up in all channels of distribution, with several major accounts as well as our own website reporting high double-digit sell-through rates.

This further validates our strategy of bringing eco-friendly product design to the mainstream.

We were also pleased with Green Toe's performance in the third quarter.

Green Toe continues to grow as a percentage of Simple's overall sales, driven by increased distribution and greater consumer awareness of the product and the collection.

Now over the last two months, we previewed the 2008 spring line at WSA, Outdoor Retailer, and the Action Sports Retailer's Show.

The September Action Sports Retailer's Show in particular was a great success for the Simple brand.

In a segment of the market in which it is typically tough to earn credibility, we've successfully opened many of the key influential surf shops in Southern California and are currently experiencing solid sell-through of our ecoSNEAKS, especially in collaboration with surfer and photographer Joe Curren.

Overall, for spring 2008 we're seeing a significant increase in future bookings and we're confident about the direction of the brand.

Internationally, we shipped ecoSNEAKS to all of our markets, including our new distributors in Germany and Scandinavia.

With a heightened focus on green issues in those markets, we continue to see significant global opportunities for the brand in the years ahead.

This will further help us establish Simple's positioning as a world leader in sustainable footwear.

Also helping drive our record third quarter results was the 82.3% growth of our consumer direct business.

Both our Internet business and the retail stores continue to perform at a very high level, with unique visits to our Ugg, Teva, and Simple websites up 70%, 22%, and 108% respectively for the quarter over the same period last year, and traffic at our Ugg Australia stores steadily increasing as fall product hits the shelves.

Over Labor Day, we opened our newest Ugg Australia outlet store at Woodbury Common in New York and the turnout was excellent, with initial sales far exceeding our projections.

Two weeks ago, in Chicago, we opened our second full-price Ugg concept store to similar results, along with great local and national media coverage.

In addition, a third full-price store, owned and operated by our Canadian distributor, opened its door this past weekend in the heart of Montral.

Sales the first two days have been excellent, and we're particularly pleased that consumers are reacting very positively to our latest footwear styles, as well as the accessories.

Retail, as you all know, is an important part of our future growth strategy for the Ugg brand, and it is stores like these that showcase the full scope of the product lines and the lifestyle nature of the brand.

We're currently scouting additional locations in other cities, both in the U.S.

and Europe.

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 third quarter of 2007, we achieved our highest sales quarter to date as net sales increased 57.2% to $129.4 million compared to $82.3 million for the third quarter of last year.

Including sales from the wholesale division as well as the consumer direct business, our net sales of Ugg brand products increased 67.5% to $113.7 million compared to $67.9 million for the third quarter last year.

Net sales of Teva products increased 12.1% to $11.2 million in the third quarter, compared to $10 million in the corresponding period of 2006.

Simple net sales were $4.4 million for both the third quarter of 2007 and the third quarter of 2006.

Included in these numbers are consumer direct sales for all three brands of $10.6 million in the third quarter of 2007, up 82.3% from $5.8 million in the third quarter last year.

International sales for all three brands increased 58% to $14.2 million compared to $9 million in the third quarter of last year.

For the quarter, domestic sales increased 57.1% to $115.2 million compared to $73.3 million in 2006.

Our gross margin for the third quarter remained consistent at 45.4% compared to 45% for the same period last year.

Our LG&A expenses for the quarter were $28.1 million or 21.7% of net sales, compared to $19.9 million or 24.1% of net sales a year ago.

The total LG&A dollar amount was up year-over-year as the result of increased variable costs related to our sales increase, personnel, and stock compensation costs associated with our growth, as well as approximately $2.1 million of expenses related to the investigation and restatement of the Company's consolidated financial statements.

Our operating margin for the third quarter of 2007 was 23.7% of net sales compared to 20.9% last year.

Our interest income was approximately $851,000 in the third quarter, compared to last year's third quarter of $688,000.

This increase was the result of higher average cash balances during the third quarter of 2007 compared to the third quarter of 2006.

Net income for the third quarter was $19.3 million or $1.47 per diluted share, compared to $10.4 million or $0.81 per diluted share in the third quarter of last year.

Turning to the balance sheet, at September 30, 2007, our overall inventories increased to $88.1 million compared to $51.5 million at September 30, 2006.

Ugg brand inventories increased to $72.4 million as of September 30, 2007, compared to $38.9 million last year due to the early arrival of our fall '07 inventory in anticipation of increased sales in the fourth quarter over last year's fourth quarter.

Teva inventories increased to $11.7 million at the end of the third quarter compared to $8.7 million a year ago, due to the lower-than-expected spring sales.

Simple inventory slightly increased to $4 million at September 30, 2007, compared to $3.9 million at September 30, 2006.

In addition, at September 30, 2007, we had cash, cash equivalents, and short-time investments totaling $74.7 million compared to $45.3 million a year ago, and accounts receivable increased to $74.4 million from $49 million at September 30, 2006, due to the increase in sales.

Now to our outlook.

Based on our better-than-expected third quarter result coupled with improved visibility into the fourth quarter, we are raising our 2007 guidance.

We now expect revenues to increase approximately 39% over 2006 levels, up from our previous revised guidance of approximately 35% growth.

We also now expect diluted earnings per share to increase approximately 35% over 2006, which was $3.30 before expenses related to the investigation and restatement of our consolidated financial statement and the impairment loss related to our Teva trademark, up from our previous guidance of approximately 25% growth.

This is based on a gross margin of approximately 45% in 2007 versus 46.2% in 2006.

In addition, our fiscal 2007 guidance includes approximately 5.3 million of stock compensation expense, an increase of $3.2 million over 2006, and approximately $2.4 million of expenses related to the investigation and restatement of the Company's consolidated financial statements

For the fourth quarter, we now expect revenues to increase approximately 35% over the fourth quarter of fiscal 2006, up from our previous guidance of approximately 30%.

We also now expect fourth quarter diluted earnings per share to increase approximately 15% over the same period last year, or $1.81 before the restatement adjustment and the impairment charge, up from our previous guidance of 10%.

This is based on gross margins of approximately 45%.

For the full year, we now expect Ugg sales to increase approximately 50%, Simple sales growth to be in the low teens, and Teva sales growth of approximately 10%.

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

Angel?

Thanks, Zohar.

Well, clearly, the third quarter was another period of rapid growth for the Ugg brand, as consumers responded positively to the fall line.

As I mentioned earlier, sell-through rates were very high, not only for our core styles but for our new fashion footwear, which bodes well as we look to introduce additional collections and take the brand in new directions going forward.

Not to be overlooked were the performances of Teva and Simple this past quarter.

On a much smaller scale than the Ugg brand, each achieved important objectives as part of the long-term strategy; for Teva, with the launch of more technical closed-toe footwear.

This past spring, we reestablished Teva as the performance leader in water and we're now leveraging that position into a much broader performance platform that covers water, trail running, light hiking, and multisport.

Simple's third quarter was by the debut of ecoSNEAKS, our more mainstream collection of sustainable footwear.

After a delay in initial deliveries, ecoSNEAKS are off to a very strong start, with retailers across the board reporting excellent sell-throughs on key styles.

Meanwhile, our international business is performing very well, driven by broader distribution for all three brands coupled with more comprehensive marketing and advertising efforts in each of our international markets.

Likewise, sales in our consumer direct division continue to outpace expectations both on our websites and at our retail locations.

So we're very pleased with the many accomplishments here today.

Not only the record financial results but the many initiatives we have executed that have strengthened our brands and created a stronger organization for the future.

We believe we have a very clear and compelling long-term growth strategy in place and we're very confident in our ability to capitalize on the many opportunities we believe that exist for our Company.

Operator, I would now like to open the call for questions.

Certainly.

(Operator instructions.)

We will take our first question from Mr.

Jeff Klinefelter of Piper Jaffray.

And you guys, it's Stephanie for Jeff.

Hi, Stephanie.

Congratulations on a fantastic quarter.

Thank you.

Thank you.

Zohar, I wonder if you could just go into more detail on the inventory position at the end of the quarter and you made some comments around quarter-end position and then looking into where we are today.

Any comments on deliveries to date or where that position might stand today/

As we indicated, our inventory has increased significantly and mainly for the Ugg brand.

And that's all anticipation for the sales growth that we're expecting in Q4.

Okay.

Yes, Stephanie, do you want to elaborate?

I mean, what do you want explained?

No, I think that you're speaking to the expectations for growth, maybe more directionally, what's your comfort level with that inventory position and your ability to [chase] as we move into the holiday season?

Well, we feel we've got the inventory to chase to our guidance.

We're fairly comfortable with that.

Okay, and then just my second and last question, any change in the margin structure in your international markets?

If you could just walk us through that variance, that'd be helpful, thanks.

No, the margins in the international markets have been consistent across all the boards in all our international markets.

As we've indicated before, the international margins are lower than the domestic margins because we're selling it through a distributor who are selling to the retailers.

But conversely, we don't take any inventory risk, we don't have any mark-down, closeouts, collection risk, and so forth.

Great, good luck, you guys.

Thank you.

Thanks, Stephanie.

Our next question comes from Mitch Kummetz of Robert Baird.

Yes, thanks.

Let me follow up Stephanie's question about the gross margin, because in Q3 it looks like you came in better than what you were indicating, and I'm just curious, on the international business, what is the differential between the international margin versus the domestic margin?

Because even though you're selling to distributors, it seems like the product is sold for a much higher price internationally, particularly in the UK.

It's correct that they are selling it for (inaudible), like in the UK, they're selling at a higher price than the U.S.

market, but in unit it's the same price as here.

For example, if a price of a pair of Uggs is $150 here, it's 150 pounds over there.

But remember, you have the distributor -- you have another layer of distribution in the middle.

Right.

It's between the domestic and the international, we are not disclosing that number.

Okay.

And then in terms of the -- Angel, you mentioned that some of your newer, more fashion-forward styles, heels, wedges, performed very well in the U.S.

and that's a higher-priced product.

Is that also higher margin, and if so, did that contribute to some of the better-than-expected margin in the quarter?

Those product are consistently at our standard sort of margin structure.

We really don't -- what's different about the brand versus other people making high-end premium sheepskin, you know, I'm not a believer that if you're going to sell, say, an $800 boot, let's say, that you should kind of gouge the customer and take giant margins.

Our products are fairly priced.

Our $300 boot is comparable to other people's $800 boot, and the consumer sees that and is voting with their wallet.

So we're still not doing the volume base, of course, that we do compared to the more classic styles, but what's important about the wedges and heels in the fashion collection is that it's re-framed the brand to a lot of people and created a lot of excitement in the marketplace.

Okay.

And so then maybe on the gross margin, can you just explain why it was as good as it -- I mean, it was flat till last year, but the expectation was that it was going to be down a couple hundred basis points.

Where did you make that up?

Well, I think as we indicated, it was made up by the sales of full-price mainly Ugg products.

Okay.

So your overall full-price percentage was just higher than -- you were probably being conservative going into the quarter in terms of any potential closeouts that you might have expected.

Well, as I've always said, we would be irresponsible to not anticipate closeouts.

Right.

I mean, after all, this is a retail business.

And when we don't have the closeouts we anticipate, obviously that falls to the bottom line and we see improved margins.

Right.

And Mitch, one more point.

As our consumer direct business continued to grow and improve, you know, we get a double margin there.

Right.

So that's helping the overall gross profit margin of the Company.

Okay.

And I would imagine that the international growth in the quarter was primarily driven by Ugg and at what point now, either for the quarter on a trailing 12-month basis, what percentage of the Ugg business is now international?

Because I know historically, it was actually Teva that was a bigger international business than Ugg, if I'm not mistaken.

Well, we don't break out the percentages, but I will say that Ugg is catching up.

Teva's still our strongest business internationally, but the success of the Ugg brand in the UK, for example, is driving some very big growth in the Ugg business outside the U.S.

Okay, and then a couple last items.

Tax rate, Zohar, in Q4, would you expect it to be comparable to Q3?

Because I think Q3 came in a little lower than what we were modeling.

Yes, we do.

Okay.

And then any comments on '08?

I know Angel, you mentioned that it sounds like spring bookings across all three businesses are double digits.

I think on the Q3 call last year you provided some preliminary guidance; would you care to talk about your overall sales or margin outlooks for '08?

No, we're pretty confident in the direction we've taken with the new product.

That's really the most important thing, is that we are driving against a strategy [with the outline] of building year-round businesses with all three of our brands.

So the spring season, while it is less important for Ugg historically, it's very important for Teva to introduce leadership products.

So the results that we're getting, and not only when we preline that spring '08 product line but the excitement the retailers are showing for the new product means that the brand has gained significant momentum.

We're excited about ecoSNEAKS on the Simple side because the fabric-uppered ecoSNEAKS, because the ones we've been selling now are leather-uppered, are really the higher-volume product when you're in vulcanized sneakers.

And that also gives you a chance to do color and stuff like that that you can't do so much in leather, and there's a lot of excitement about that.

And then not to mention, as I indicated, great response to the Ugg line for spring.

So everything's pointing in the right direction, and we continue to evolve and diversify our brands.

Okay.

Well great, good luck, thanks.

Thank you.

Thanks.

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

Thanks very much.

Well done all around.

Thanks, Todd.

Thank you.

Those are some very eco-friendly numbers, I'll tell you that.

But I just want to just really quick, just so I understand it, the earnings you reported, $1.47, included the 2.1 million, correct?

That's correct.

Okay.

And I didn't hear you guys address the marketing and advertising component in the SG&A.

Would you just talk about whether that was leveraged or de-leveraged, and how that was growing in the quarter?

From a dollar perspective, our marketing strength this year is going to be comparable to last year.

Okay, so obviously some good leverage there.

Yes.

And fourth quarter, could you just talk about what you expect?

Is it a similar type of plan?

You mean on the marketing or --

Yes.

-- on the expense side?

Yes, I mean, look, obviously you've ramped that up significantly last year and this year was -- I actually expected it to go up a little bit.

You're saying you're going to hold it flat in dollars?

On the marketing side, -- I will tell you in a second.

The overall expenses for -- the operating expenses for the quarter are going to go up because we are anticipating higher sales.

So the variable cost will go up, such as commission, variable labor in the warehouse, and so forth.

On the marketing side also you will see some increase of marketing strength between Q3 and Q4.

Okay.

And then Q4, how about Q4 versus Q4 last year?

In terms of percent growth and spend?

Again, are you asking on the marketing or the overall --

Marketing and advertising.

I'm just really focusing just on that increment.

Okay.

As a percentage, it will go down compared to last year.

It'll go down -- when you're saying percentage, rate or are you talking about the dollar spent?

No, the dollar spent is going to go up slight.

Yes.

But as a percentage, it will go down.

Yes, because of the increased sales.

That's exactly what --

Yes.

That's what I was getting at, perfect, okay.

And then I was just wondering if you could revisit on the Ugg brand your first half '08 commentary, which I think you said you expect up strong double digits?

Did I hear that correctly?

No, I said double digits.

Up double digits.

So what does that mean, example, because I mean it's been growing, I mean, very strong.

More than what I would consider to be strong double digits -- over the last couple of years, 28% over the last two years on average.

Obviously I understand the previous year was a big of a blip but what does that -- can you give us some more guidance on what double digits mean?

No, actually.

I mean, look, we're continuing down the path that we've been on.

We have relied on the expansion of spread and assortment of retail.

If you visited our key customers, you'll see a much broader presentation of the brand, you'll see POP.

And a lot of this POP is not coming down after the season, it's staying up year-round now that we have a spring line.

So it's inevitable that you're going to see some significant growth in certain parts of the country and with certain retailers.

Retailers prefer to have a very stable and solid brand for the whole year, versus having a brand that performs in a certain season and then sort of, you know, goes dark.

So you can -- you're good at this, Todd.

You can fold that up and figure out what double digit means.

All I'm saying is that we're very confident with the direction we're going in, and we've had great response to the product line.

All right, it's just that double digits are from 10% to 99%, so it's a pretty wide range there.

That it is.

All right, and then just lastly on the international, if you could just -- I'm not sure I understood the impact on the EBIT margin in the third quarter from the international mix, and could you talk about structurally what it would mean, the P&L, if you owned that business instead of sold it to distributors?

Well, as we discussed, right now we have lower gross profit margins but we don't take all the carrying costs of the inventory and the risk associated with that.

So even though you have lower margin than gross profit line, it's not as a big impact as you come to a contribution income.

Clearly, when we own the business and we sell directly to the retailer, we'll pick up some margin and income, but there'll also be costs and risks which are associated with that.

So overall, when we owned the international distribution, you will see improvement in the gross profit margin, but you will see higher expenses on the SG&A.

Sure, but overall in the international margin -- the EBIT margin for that business, could that be higher?

It should be, yes.

And is that something that -- could you talk about what your plans are in terms of potentially owning that business or controlling it?

No, we've said we're looking at, as markets evolve, that the best way to grow a brand is to be able to leverage into the market with more marketing effort, with more inventory to support growth, and it's inevitable that when a distributor starts with a brand, perhaps they don't have the resources necessary to grow at a certain rate.

And when you have a brand exploding in a market, it takes a lot of cash.

I mean, footwear businesses are very cash-intense.

Obviously, inventory is a big factor, and you've got to support the retailers with marketing effort as well.

So we want to make sure we don't lose any momentum, we want to make sure that we can fuel the flames, you know, from a consumer point of view with our brand and not miss any opportunities.

So there in those markets it might make sense to step in and have a subsidiary model versus the distributor model.

But we're not -- there's no sort of rigid plan through which we're rolling through Europe or Asia with this, it's on a market-by-market basis and it depends on what's happening in that market at any given time.

Okay, great, thanks.

Thanks.

Our next question comes from Robert Samuels of J.P.

Morgan.

Hi, guys, it's Allison Richard for Robert.

Could you talk a little bit more on what's going on with Ugg sales internationally, particularly in the UK, in terms of what's working over there, and is it similar to the U.S.?

Yes, I think if you look at the UK, I was just there last month and it kind of reminded me of Ugg in the U.S., say, in 2003, where you had a lot of the fashion-forward people wearing Ugg, people who discover the brand.

I saw a lot of it in London, and there's a lot of intensity at retail for the brand, a lot of demand.

People coming in and sort of coming in early to get their product before it's sold out.

So we feel that there's -- we're on the cusp of something pretty significant in the UK, and that's why it's important to focus on that market and really make sure that we're driving the business there with our distributor partner.

So I'm very excited about the UK market.

I think it's a very important market for footwear in Europe, by the way.

I think it's the lead market for footwear in Europe.

It's not the cutting edge of fashion market, necessarily, it's not like Paris or Italy with very niche-oriented businesses.

The UK is a market where brands do well, and there's a lot of volume.

Brits like footwear, and it was a great athletic shoe market, it was a great market for the Rockport Company when I ran that, and it's proving to be a great market for Ugg, Teva, and Simple.

Great, thank you.

And then in terms of the U.S., can you comment at all about what your retailers are telling you about the consumer in general?

Well, only the consumers specific to Ugg, you mean?

And what they feel about Ugg, or other brands?

Just the more general consumer environment heading into holiday.

Well, I know what you know.

I read the papers and the blogs and everything else, and there's a lot of nervousness.

But when it comes to our brands, particularly Ugg, the consumer's excited.

And what a lot of people fail to understand about our brand and the Ugg brand is that it is a comfort story.

People who own Ugg, people who have Ugg in their closet, male or female, they generally will always have Ugg in their closet.

It's one of those things that you grow comfortable with, it's just a great thing to put on whether you come from the beach or whether it's cold outside, and that's why once you come to the brand, you tend to stay.

So that is emanating as kind of a truism, you know, for the brand across all distribution, which is very exciting, obviously.

Great, thanks so much.

Thank you.

And our next question comes from Jeff Mintz of Wedbush Morgan.

Thanks.

Let me add my congratulations on a great quarter.

Thank you, Jeff.

Thanks, Jeff.

A couple -- a follow-up question on the marketing questions that Todd was asking.

When you look out into 2008, kind of how do you think about marketing spend?

Do you consider it as being something you look at on a dollar basis, or is it more that you look at it as a percent of sales and kind of ramp it up as your sales ramp?

I tend to look at it as a percent of sales, but I also don't believe that you just keep ramping up as your sales go up.

I think marketing does get to the point where especially in a business like Ugg, we're a print-oriented marketer, that's our focus.

We're now doing outdoor to support our retailers.

And there's only so many quality books you can buy where you can be on those pages with other premium brands.

And the goal is to just continue to be present in those environments.

The other area that I think we need to focus on where we will be spending money, and I think it's probably the bulk of the increase that you'll see, is our in-store retail presence.

We really feel that our [shop and shops] have been extremely well-received.

We've got several of them that have opened in independent retailers.

You've probably seen the [shop and shops] in some Dillards stores and Nordstrom.

And that becomes a key area of consumer interaction with the brand.

They get to understand the full scale of the brand and the focus on all the new products.

So I think that marketing as an objective has got to live in an environment consistent with where you're positioning your brand, and I don't want to spend any money that's outside of that.

So by definition, there's a finite spend, in a sense, that you'll reach.

We're not there yet, and as I say, eventually I'd love to have [shop and shop] and that kind of presentation everywhere we sell Uggs.

So we're a long ways from that, but it's a lot of work to do on that front.

Okay, thanks, that's helpful.

And then just on a non-boots Ugg product, I know it's a small part of the business, but can you just give us a sense of how you're planning that business for this season compared to last year?

Are you looking forward to double, are you looking for it to be up 200%?

Well, we don't break that out, but our slipper business is an exciting, very strong business for us.

Every year we think we're ordering too many slippers, and every year we seem to run out of slippers come around Thanksgiving and the first couple of weeks of December.

So that's a very, very strong business, men's and women's.

And our goal now is to expand that business to the international market.

It's curious that internationally, people don't seem to wear slippers like we do in the U.S., and I take that as a challenge.

We're looking at how we can present the product in a compelling and unique way.

As far as our spring business goes, of course, we expect growth there with our espadrilles and our driving mocs and a variety of other things, and our sandals.

And we have seen no reason for consumers not to embrace the brand, because we use the sheepskin in those products as a comfort device, not as a warmth device, necessarily.

And from what I've heard from female friends, the espadrilles with the sheepskin at the ball of the foot are extremely comfortable.

So we'll just keep moving in that direction.

Okay, and then just one follow-up question on the inventory issue.

Can you just give us some sense with regard to your inventory that you have to chase business in the fourth quarter, would you say that's primarily in kind of the core styles, or do you have the ability to chase on the fashion product, as well?

Yes, generally, it's on the core styles.

Like I think I've mentioned in the past, part of your inventory decisions are based on sell-through in the previous year, based on history, and obviously we have much greater history and knowledge about the performance of our core styles than we do new styles and fashion styles.

So if you're going to take a risk, you always will err toward those products that you have history with.

So generally speaking, we've put our eggs into that sort of core business in terms of inventory, and we did actually get pretty aggressive with the fashion styles, they've just performed very well and we've been selling through extremely well across all channels.

Great, thanks very much and good luck in the fourth quarter.

Thank you.

Thanks, Jeff.

And as a reminder, that's star, one to signal for a question.

We'll go next to Sam Poser of Sterne, Agee.

Good afternoon and congratulations.

A question, with the -- what percentage of your business now is the Twin Face core boots?

Well, we don't break that out.

It's always been -- it's a core business, which means that retailers will always buy our classic and core product, and then they'll surround it with so much more of the brand.

So it's inevitable to expect that as our business grows we continue to grow our core business.

Now we have, over the years, and we've talked about this in the past, been less dependent on the classic styles.

And we've been aggressively moving in that direction.

The Metropolitan collection and those similar styles are not classic styles, and they have moved the brand in what I think is a broader foundation.

And we'll continue to do that, but classic and core are very important to all retailers, and to us.

And I'm not going to break out the percentage, but I'll always say it will always be a very important part of our mix.

But as a percent of your total, I mean, because of those additions, it is still very important, it's probably still growing.

But just with those additions, it's really less a percent of your total than it has been.

Is that a fair --

Well, that's a reasonable assumption.

Okay, now, I would assume that the margin on the Twin Face, is that less margin than on a non-Twin Face product because of the production issues?

Again, we don't break out our margin structure across different products.

Our margins are pretty healthy across all of our products, and we work real hard to keep them that way.

Okay.

What kind of cash do you expect to have at the end of the year?

I would say probably around 140, 130.

Okay, and then I have one last question.

Last year, it looked like at the end of the quarter, I mean, you brought in around 71 million of product, based on your inventory at the end of Q3, and it looks like based on the numbers you gave, you're prepared to bring in about the same amount or sell through the same amount.

But what efficiencies have changed?

I mean, you continue to get more efficient and be able to bring more goods in than the previous year.

Can we assume that you have that potential for Q4, as well?

Well, the way that we are planning on building the inventory and distributing to the retailers is based on our shipment schedule and our projection for the quarter.

So we do have the inventory and the infrastructure and the (inaudible), and we are planning it accordingly to the expected sales in the quarter.

Okay.

And then are you getting more response to the core product for Q4?

A good response to the spring -- for Q1, a good response to the spring product, but are you also seeing more response to the classic boot product?

Because apparently, a lot of people were sold out first quarter a year ago.

Well I think a lot of folks may make a distinction between our core product, our fashion product.

The consumer doesn't.

What's happening is the consumer's seeing Ugg.

They're seeing a lot of different styles from Ugg, they're seeing things from Ugg they never expected, and if you talk to any of our retailers, they'll tell you if it says Ugg, it's selling, and it's selling well.

So I think it's less important now as to how the core classic does against the broader base of the brand.

It's about the whole brand moving forward.

And it's a bit of an artificial comparison to sort of look at the fashion boots as distinct and separate from the classic boot.

Both are doing well and pushing the brand in a new direction.

I was really comparing the spring sandals and having them -- talking about them adding more boots than they did a year ago into the first quarter.

Well, what we have said, and we now have -- and this is something we learned last year -- that we have a first quarter boot business that we really didn't know we had in the past, because we didn't have the inventory to ship.

So this year, we've decided that we are going to see how well we can build our first quarter business and that is a mix of the sandals, it is a mix of core styles, which obviously will perform better in the early part of the quarter than in the later part of the quarter as it warms up around the country.

Great.

Well thank you very much, continued success.

Thanks, Sam.

Thanks, Sam.

And as a final reminder, that's star, one to signal for a question.

And we have a follow-up from Jeff Klinefelter, Piper Jaffray.

Hi, Steph again.

Just a real quick follow-up to Todd's earlier question.

Angel, could you just rank your international markets by size?

I'm curious as to Europe, which markets are emerging for you, and which are growing to be more mature.

Thanks.

Well, the UK market has now become our biggest market.

Following that, it's Benelux.

Following that I think it's Switzerland?

Switzerland, yes, I think so, yes.

Yes, Switzerland.

And then it sort of falls of.

So you can see in that, there's opportunity, because I didn't mention Germany, I didn't mention France, I didn't mention Scandinavia, I didn't mention Eastern Europe, Poland, Hungary, the Czech Republic, and certainly didn't mention Russia.

So there is -- we're just getting going, and we're focusing on the UK because as I said earlier, that's a great footwear market.

You have distributors in all of those key regions, Germany, France, Scandinavia, Eastern Europe, Russia?

No.

Nope, we don't.

We're just about to consolidate a deal with a German distributor for Ugg.

We do not have a distributor in France yet.

And that's okay.

I think the more momentum the brand builds, the higher level of distributor you'll be able to get.

Someone with the resources.

I've been holding out for someone who's really got the resources to drive the brand to where it needs to go in their market.

France is a big market.

Germany is a big market.

It requires a lot to build a brand.

We're not going to, say, have a new distributor in Germany and then have them increment their way to growth and having initial orders of a couple thousand pair for the whole country.

Those days are gone, and it needs to be born fully mature in every market that it's introduced.

That's helpful, thank you guys.

Good luck.

Thank you.

Thanks.

Our next question comes from Chris Svezia of Susquehanna Financial Group.

Good afternoon, guys.

Just one quick question, if I can switch gears quickly.

Just on the Teva business, I believe for the spring of this year, from a SKU perspective, I believe your SKU count was up 25 or 30%.

Can you add any color as you go into spring of next year what potentially that increase would be?

And I guess secondly, as you look to new retail doors, I believe you've just opened up Bass Pro as one of the retail channels for the brand, can you talk about the growth between new channels of distribution and core channels of distribution for Teva?

Okay.

Yes, in terms of our SKU count, I'd say it's up about 20 percent in 2008 spring, versus 2007, which I think is appropriate, given the direction of new product that we've been going in.

Most of that is going to be some closed styles in the spring, so we won't be so dependent on open-toe product for spring.

Our distribution for Teva is quite broad and very healthy.

It's an excellent distribution.

And we have suffered from the fact that we didn't really have enough great product to put into our distribution channel, so the brand has significant growth staying within its distribution framework.

With the kind of products that we're now bringing to market and the kind of spread and assortment we're getting, we could see that growth begin to showcase itself in 2008.

Okay, so is it fair to say that the backlogs with your existing retail partners, are those up for the Teva brand going into spring '08?

Yes.

Okay.

All right, that's helpful.

Thank you, I appreciate it.

You're welcome.

Thanks.

And we'll take our final question from Mitch Kummetz, Robert Baird.

Yes, thanks, just wanted to follow up a little on the Ugg inventory.

How much of that would you say is product that you have orders against, that it's basically just pre-booked for deliveries over the fourth quarter versus open-stock inventory that's basically available for reorders?

It's not something we're breaking out, Mitch.

Is it mostly pre-booked inventory, though, or?

It's a fair assumption.

Okay.

And then how much of it is product for spring delivery, Q1 delivery versus -- or maybe late Q4 delivery for spring merchandise versus fall stuff?

All the inventory, basically, (inaudible) for Ugg, it'll be for the fall season.

Okay.

And then lastly, can you just speak to your inventory levels at retail?

I know that you guys delivered Ugg, a lot more product, a lot earlier than a year ago.

It seemed like last year, retailers didn't want it quite as early, and I don't know if -- I know you mentioned that full-price selling has been good, and that's contributed to the strong gross margins, but has the weather had any adverse impact on the business and are retailers pretty clean and in need of additional product as we kind of work through the balance of this fall holiday season?

Yes, the take I -- what I get from our retailers is A, they're happy the brought the product in early, and B, weather is not a factor.

It's selling, and selling well.

And as a matter of fact, even some retailers want us to pull their next deliveries forward from what was originally scheduled.

I just need to point out one thing, which is important.

People talk about the weather as being a factor with Ugg, and as I mentioned earlier, Ugg is a comfort story, not a fashion story.

Well, the other thing about Ugg is that it's been selling, and selling extremely well, in California for 25 years, and California does not have rough winters, as you all know.

The fact that we have temperate climate and we still sell, this is still our biggest market, we still have the greatest amount of sales here, this is a warm market, a warm climate market.

And that's what's unique about sheepskin, it's a comfort product.

So all that has to happen is you need to have some cool evenings and some cool mornings, and the next thing you know, out come the Ugg products.

So as a result, most retail -- I don't know of any retailers who've told us that the weather has impacted their business on Ugg at this point.

Okay.

And then just one last thing.

The inventory increase on Ugg looks big, just year over year, and I know you guys are comfortable with it.

But as I recall, inventory into Q3 last year was severely depleted by a lot of reorder business happening in the third quarter.

I mean, how can we think in the inventory if we -- it may make some people nervous to see that it's up basically double year over year.

Is there any way to think of it to get a better sense as to what the increase really is?

Well, as we mentioned, we feel comfortable with the inventory level to meet our guidance.

We feel comfortable with the inventory level over last year, given the orders we have on the books.

And what we anticipate and what we can do to fill in some customers who have, as best they could, have tried to anticipate but maybe fall a little short.

So the inventory level is appropriate to the level of growth that we're seeing, and the kind of energy that we're getting around the brand.

Okay.

And Mitch, just to follow up on that, you're right.

I mean, last year, the inventory level for Ugg at the end of Q3 was probably lower than it should have been, and when we're looking at the scheduling of the inventory, it was a function of the production of the factory to accommodate the needs that we have, and also from the distribution center, our distribution center, and how to have the flow the most efficient way.

Right.

So we're very comfortable with the level of inventory that we have right now.

Okay, great.

That's all.

Thanks.

Thank you.

And that does conclude our question and answer session.

For closing remarks, I would like to turn the conference back over to Mr.

Martinez.

Thank you very much.

Well, I thank you all for your questions.

It's clear that a lot of the strategic initiatives we put in place, even a couple of years ago, are starting to bear fruit.

Most importantly, the Ugg brand has, I think, turned a very, very big corner, and we're seeing that this fall.

International business continues to roll forward.

We're seeing excitement over the brand, especially Ugg, in the UK.

We're seeing now in Canada some excellent results.

That market is becoming a very important market for us, and last year they were distributor of the year.

It is very exciting to see, because it bodes well for the kinds of opportunities that we'll see in other markets.

I also want to emphasize what I said on the call, that Simple's ecoSNEAKS have been very well received across all channels outside the U.S., and we're anticipating that's a brand -- that's a product that we'll see doing quite well across all of Europe and Asia.

So thank you very much, and I will be speaking to you shortly.

Thanks.

And ladies and gentlemen, this does conclude today's presentation.

You may disconnect --