Deckers Outdoor Corp (DECK) 2008 Q1 法說會逐字稿

Good afternoon, Ladies and Gentlemen and thank you for standing by.

Welcome to the Deckers Outdoor Corporation first quarter fiscal 2008 earnings conference call.

(OPERATOR INSTRUCTIONS) I'd like to remind everyone that this conference call is being recorded.

Before we begin, I'd 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 on this call.

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

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

Deckers intends that all of its forward-looking statements and this call will be protected by the safe harbor provision 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 and good afternoon to everyone joining us today.

We're pleased to report first quarter sales and earnings that exceeded our expectations.

Our performance was especially gratifying given the current economic climate and challenging retail environment.

While no company in our space is immune to the slowdown in retail traffic and consumer spending, we believe our results highlight the strength of our brands and underscore the benefits of our controlled distribution strategy.

Sales for the first quarter rose approximately $25 million or 34.4% to $97.5 million.

This was roughly $7 million ahead of our original forecast, due primarily to high demand for our UGG spring line.

At the same time, diluted earnings per share rose 17.8% to $0.86 versus $0.73 a year ago and compared to our prior guidance for the first quarter of 2008 of flat to up slightly over the first quarter of 2007.

The upside to our earnings was driven by the higher sales and strong full price selling of our UGG brand products, which allowed us to expand gross margins by 130 basis points over last year's first quarter.

Before I review each brand's performance, I'd like to briefly touch on some key hires and strategic initiatives we've recently executed.

First, as you saw from the release issued this afternoon we have completed our search for a Chief Financial Officer and we are excited to announce the appointment of Tom Hillebrandt to the role.

Tom most recently served as Corporate Controller and Chief Accounting Officer at K2.

Prior to that, Tom served as Chief Financial Officer of Fotoball USA, a publicly held souvenir and promotional products company that was acquired in 2004 by K2.

Tom brings with him a great deal of valuable experience that will be an important asset to the Company as we continue to grow and expand our business around the world.

We also recently appointed Dick [Ambrosio] to the newly created position of Vice President of China Operations and Sourcing.

Dick will be based in our office in Southern China and oversee the manufacturing of all three brands at our third-party production facilities located around the country.

Dick has extensive footwear sourcing and manufacturing experience and he will help expand our factory base and streamline the product sourcing and quality control processes that we already have in place.

And finally we have signed a letter of intent for a joint venture in China for the UGG brand, through which we plan to open two stand-alone stores in 2008 or 2009, one in Beijing and one in Shanghai, as well as three shop-in-shops.

At the same time we're very excited to announce that our Teva and Simple China distributor plans to open two stand alone Teva stores during the second quarter, the first in Shanghai next week, followed by Beijing in mid-May.

And they are also planning to open 10 more shop-in-shops later in the year.

They will also oversee the debut of the Simple brand in China, which includes plans to open 10 to 15 shop-in-shops by year end.

As everyone is aware, China has quickly become a dynamic market for American branded footwear and apparel and we believe that each of our three brands' unique positions will resonate very well with consumers throughout the country.

In addition, our Taiwanese distributor opened the first ever Simple stand-alone store for the brand in Taipei.

Appropriately the store opened its doors on April 22nd, Earth Day.

Now to the brands.

The UGG brand had an exceptional first quarter with sales of $54.8 million, an increase of 83.6% over sales of $29.8 million for the same period last year.

The spring line sold through very well at retail as demand for this season's product offering, including sandals, boots and slippers exceeded our expectations.

Some of the key styles were Cardy, Gypsy, Nomad, Layback and the Fluffie.

January is an excellent retail month traditionally for UGG.

We pre-booked a substantial increase in boots for this time period and they proved to be very successful at retail for us including the Cardy boots, the Classic short and tall, the Wahine and the Wilshire logo boot.

We also pre-booked an increase in slippers for January, which performed very well.

For February we sold in the comfort sandals, including the Gypsy, the Nomad and the Layback which have been selling through at retail, as well.

Sales were consistently strong across all channels, department stores, specialty retail and independents, as well as our e-commerce and our Company-owned stores.

All posted meaningful gains in spring sales versus a year ago.

I think it's worth noting that each of our wholesale accounts that carry the Fall line purchased a Spring product in 2008 which is an important step in our efforts to evolve the UGG brand into a year-round brand.

Turning to Teva, sales were down slightly in the first quarter compared to a year ago.

The shortfall was attributable to the delay in shipments to both domestic and international accounts, as well as lower than expected fill in orders late in the quarter.

While we're certainly disappointed by Teva's start to the year, we believe the brand's performance was negatively impacted primarily by external factors, most notably, challenging economic conditions that have created a difficult retail environment for the entire industry.

In fact, while general commentary from outdoor retailers on the quarter was discouraging, including talk of widespread cancellations, specific feedback on Teva has been encouraging.

Many of our accounts continue to tell us that the brand is holding its own against the competition.

And we have not experienced any meaningful order cancellations to date.

Importantly, at REI Teva sales were up high single digits compared with a year go, despite REI's overall sandal business being flat to slightly down.

Several of the standouts from this year's new spring lines comes from both our Technical and Casual collections, highlighting the increased breadth of our product mix and the wider consumer appeal of the brand.

They include the Open Toachi, the Omnium, the Fossil Canyon, the Dozer, Westwater, Mandalyn Wedge and the Sunkosi.

Simple had a good first quarter with sales of $5.1 million, an increase of 25.2% over last year's Q1.

The brand's performance was fueled by strong demand for ecoSNEAKS, which made up more than 40% of Simple sales during the period, as well as strong sell through of the Spring Green Toe collection.

We experienced double digit gains for the brand across all channels of distribution, including key accounts such as Dillard's, Nordstrom, Urban Outfitters, REI and Whole Foods, in addition to our strong portfolio of specialty stores and independents.

Simple is quickly becoming a more meaningful contributor to our overall results, as awareness of the brand is growing and the product collections are gaining traction at retail.

Over the past several months we've increased our marketing efforts to build on this momentum.

This has included traditional print advertising in major publications like Rolling Stone, Teen Vogue and Surfer, as well as more enhanced point of purchase materials at retail that convey the sustainable lifestyle story.

We also continue to take part in sustainable promotions and events around the world.

This past weekend we were at Earth Day events worldwide with our retail partners, selling product and educating the consumer on the brand's commitment to sustainability.

Importantly, we're seeing a very good return on these investments as traffic and sales on Simple's eCommerce website are up 100% and 50% respectively, versus the same time a year ago.

Finally our consumer-direct business nearly doubled from a year ago as sales increased approximately 89% to $21 million, which includes revenues of $15.6 million from our eCommerce division and $5.3 million from our seven retail locations.

Increased demand and heightened interest in all three brands, coupled with more effective marketing programs have resulted in a significant spike in total visits to our websites, including a triple digit increase at Simpleshoes.com for the first quarter.

Meanwhile, despite the general slowdown in traffic levels discussed by many retailers, we saw healthy increases at our Company-owned stores versus the same period a year ago.

More importantly, both our full price and outlet stores reported solid gains driven by demand for our new Spring products.

With regard to our store opening plans, we expect to open an UGG concept store in San Francisco during the third quarter, which will be located near Union Square, and a second location in New York during the fourth quarter, which will be located near Lincoln Center.

We also plan to open an outlet store in New Jersey during the fourth quarter.

Overseas we are aggressively searching for real estate to open at least one and potentially two UGG brand stores in London.

And as I mentioned earlier, our distributor in China plans to open two Teva stores there next month and as part of our joint venture, we expect to open two additional UGG brand stores in China.

Before I turn the call over to Zohar to review the financials, I wanted to point out for those who might have missed it that Deckers was recently named to Outside Magazine's Inaugural List of the Best Places to Work.

The list was created by employee surveys and aimed at identifying employers that not only create a great work environment but also promote an environmentally friendly business process and create a work-to-outdoor life balance for its staff.

We're honored to have received this award and I'm extremely humbled that it was our own employee feedback that resulted in this nice designation.

Zohar?

Thanks, Angel.

For the first quarter of 2008 net sales increased 34.4% to $97.5 million versus $72.6 million for the first quarter of last year.

Including sales from the wholesale division, as well as the consumer direct business, our net sales of UGG products increased 83.6% to $54.8 million versus $29.8 million for the first quarter last year.

Net sales of Teva products decreased 2.6% to $37.7 million in the last quarter, compared to $38.7 million the same period of 2007.

And Simple brand sales increased 25.2% to $5.1 million for the quarter, versus $4 million in the same period last year.

Included in these numbers are eCommerce sales for all three brands of $15.6 million, up 75.4% from $8.6 million in the first quarter of 2007 and retail sales of $5.3 million, up 145.4% from $2.2 million in the prior year period.

Also included in the brand sales numbers, international sales for all three brands increased 11.3% to $18.8 million, compared to $16.9 million in the first quarter of last year.

And domestic sales increased 41.4% to $78.7 million, compared to $55.6 million in 2007.

Our gross margin for the current quarter was 47.3%, compared to 46% in the first quarter of last year.

Our margin remains high due to the robust full-price selling and low inventory write-downs for the UGG brand.

In addition, the change in sales mix toward higher eCommerce and retail sales as well as slightly lower international sales as a percentage of total sales also contributed to the higher gross margin for the current year.

Total SG&A expense for the quarter was $29.1 million, or 29.8% of net sales, compared to $18.3 million or 25.3% of net sales a year ago.

The planned increase in SG&A expense in the first quarter was primarily due to variable costs associated with the higher sales, such as commission, marketing and other selling expenses and two new retail stores that were not open in the first quarter last year.

As we discussed in the prior quarter calls, we also incurred a higher stock compensation expense and higher distribution center rent expense related to the additional space added in December, 2007.

In addition, we incurred higher expenses in 2008 for our portion of the production costs of the Teva IMAX movie.

It is important to note that a substantial amount of our SG&A expenses are fixed and evenly spread throughout each of our four quarters.

And as a reminder, in addition to typical yearly increases in our spending, we expect three incremental components to our SG&A in 2008, which include additional stock compensation, several new senior level hires and the expansion of our distribution capabilities.

As a result, our operating margin for the first quarter of 2008 was 17.5% of net sales compared to 20.8% last year.

For the full year we expect our operating margin to be in the low 20's.

Interest income was approximately $1.4 million in the first quarter, compared to last year's first quarter interest income of $1.2 million.

This increase was a result of higher cash balances, partially offset by lower interest rates.

Net income for the first quarter was $11.3 million, or $0.86 per diluted share, compared to $9.5 million or $0.73 per diluted share in the first quarter of last year.

Turning to the balance sheet.

At March 31st, 2008 our overall inventories increased to $49.4 million versus $34.2 million a year ago.

By brand, UGG inventory increased 84.6% to $26.9 million.

Teva inventory increased 15.8% to $18.3 million.

And Simple inventory increased 11.7% to $4.2 million.

The increase in UGG brand inventory occurred to meet demand in [booked] orders and the increase in inventory for our Teva and Simple brands was due to higher anticipated sales for the second and third quarters of this year.

In addition, at March 31st, 2008 we had cash, cash equivalents and short-term investments totaling $183.4 million, compared to $109.5 million at March the 31st, 2007.

And accounts receivable were $40.7 million, compared to $36.4 million at March 31st, 2007.

With regard to our outlook, based on our first quarter results coupled with improved visibility into the back half of the year and based upon the current pre-book and discussions with our retail partners we are raising our 2008 guidance.

We now expect revenues to increase approximately 31% over 2007 levels, up from our previous guidance of approximately 25% growth.

We also now expect diluted earnings per share to increase approximately 27% over 2007, up from our previous guidance of approximately 20% growth.

Again, this is based on first quarter results and improved visibility based upon the current pre-book and takes into account a gross margin of approximately 45% in 2008 versus 46.2% in 2007 and SG&A as a percentage of sales approximately 23%.

In addition, our fiscal 2008 guidance includes approximately $8.8 million of stock compensation expense, an increase of approximately $2.2 million over 2007.

For the second quarter as compared to the second quarter 2007, we currently expect revenues to increase approximately 50% and diluted earnings per share to increase approximately 30%.

Our forecast is based on a gross profit margin in line with the second quarter of 2007 and SG&A on an absolute dollar basis up slightly from the first quarter of 2008.

The increase in Q2 SG&A on a year-over-year comparison is based on the same reasons as the increase for the first quarter of 2008 which I have discussed, in addition to the recent hired executive expense.

For the full year we now expect UGG sales to increase by approximately 37%, Teva sales to grow by approximately 8% and Simple sales to increase by approximately 35% over 2007.

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

Angel?

Thanks, Zohar.

Again, we are very pleased with our strong start to 2008 and we feel very good about our opportunities for the remainder of the year, evidenced by our heightened outlook.

As we begin the second quarter and approach the back half of the year we're very excited about what we see for all three brands.

The UGG brand's Fall line is broader and more diverse than ever before with a significant amount of new styles for women, men and kids.

Based on our first quarter performance coupled with our current pre-book, we are predicting another year of strong double digit growth for the brand.

As the weather has begun to warm over the past few weeks, we have seen retail sales for Teva pick up.

We expect this to accelerate through late spring and early summer and anticipate Teva sales in the second quarter to increase by approximately 10% over the same period in 2007.

Later this year we'll mark the debut of Teva's inaugural Fall line of closed toe and toe-protective footwear.

The reaction from retailers to this product has been positive and we expect Teva sales in the second half of the year to increase by approximately 20% over the same period in 2007, which gives us confidence in our belief that we can evolve Teva into a year-round brand.

The momentum from ecoSNEAKS, from that introduction last summer has continued to fuel Simple's recent performance and proven that the combination of sustainability and commercial success in the footwear industry are achievable.

We're still in the early phase of development, but we believe the global potential of this business is considerable.

In closing, I want to reiterate that we remain confident about our prospects this year and feel it is important to point out that our outlook does take into account the current economic trends in the U.S., as well as overseas.

We feel our upwardly revised guidance is not optimistic but rather realistic, based on our order book and discussions with retail partners.

During my 30 years in the footwear industry I've witnessed several similar market conditions before.

And what I've consistently seen is a flight to quality and a flight to comfort during times like these and that is certainly what we are experiencing right now.

Looking beyond this year, we're excited about the many global opportunities we still believe exist and importantly we are putting the pieces in place now to support our long term growth strategy.

Thank you again for joining us and we'll now be glad to take questions.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll pause for a few moments to assemble our queue.

And we'll take our first question from Mitch Kummetz with Robert Baird.

Thank you.

Congratulations, guys.

Great quarter.

Thank you, Mitch.

A few questions here.

Let me start with the guidance.

Obviously you're raising the guidance for the full year by more than you beat in Q1.

So clearly there's some confidence in the business going forward.

Could you talk a little bit about the visibility that you have there?

I mean, is it mostly Fall pre-book orders?

And then Q2, I guess I'm surprised how strong your sales outlook is for Q2.

I know you mentioned Teva up 10%.

Obviously you're expecting a big increase in UGG and is that pre-book driven?

Or are you expecting reorders there?

I'm kind of curious as to what the expectation is on the Q2 UGG sales to get to that big sales increase for Q2.

Well most of our assumptions are based on our pre-book and the visibility that we've been discussing is based on that.

Obviously, we consider the macro economic factors, not only in the U.S.

but around the world.

And we take that into consideration, as well.

But we remained very bullish on the product and the sell-through that we're seeing and the way retailers have responded to new product.

So it's based on pre-book, Mitch.

Okay.

In the Q2, as well?

And what is your expectation for UGG in the second quarter?

I haven't had a chance to back that out yet.

But I'm assuming it's up more than 50%.

Yes.

It is more than 50%.

You know if we're looking at a 50% and as I said Teva is about 10%, UGG will be in the neighborhood of 80%.

You know I think the second quarter also includes our introduction of the Planet Walkers, with the Walking Company on a nationwide basis.

Plus for Teva, we're really pulling the Fall introduction of the Mountain Scuff into July, which I think is also going to prove to be important.

And I think retailers are excited about that.

Okay.

And a couple questions on the long term outlook for UGG.

I know you've in the past talked about that being a $500 million business in three to five years.

I think if you look at the guidance you have now for this year, I think you said up 37%.

That gets you pretty close to $500 million.

I think around $475 to $476 million.

At what point do you start talking about a new target for that business, maybe a billion dollar business and at what point do you think you could get to a level?

And how do you get there if indeed that might be a target of yours?

You're right, Mitch.

As we're looking at the numbers right now we are looking at UGG to reach our number much quicker than the target that we have set.

You know we go through our strategic planning that we're going through next month that will be reviewing our long-term goals and the projection for the three brands and for the Company.

So we'll probably update the target for the brands and the Company in the second quarter call.

Okay.

And is it premature to ask you about your long-term international opportunity?

I know that you talked about international getting to 30% of the business, also in that three to five year timeframe.

And I'm just curious as to when you might be going direct in Europe?

And I know that could hinge on your U.K.

distributorship.

And I'm curious as to when that agreement runs out and when a decision might be made to go direct in Europe?

Well we haven't specifically outlined a date.

But as the agreements expire we will be replacing them with subsidiary models.

In the end, what we've been up to in Europe is building a solid foundation of quality distribution.

And in addition to that, at retail we've been developing the retail relationships that allow the brands to be showcased the way we want them to be.

So we don't want to just be driving volume in Europe.

We want to be building our brand in Europe.

Stepping outside of Europe for a second, you can see the aggressiveness with which we're pursuing China.

Things in China move very quickly.

There is a lot of demand for our products over there and but we're, I think, going at it the right way with quality distribution, quality presentation of the brand and quality relationships with our partners.

Inclusive in that would be the joint venture we just entered into.

So we're very firm on our expectation of 30% for our international business.

And we're going to be as aggressive as we should be in reaching those goals.

Mitch, in addition the London store that will be opening, that will be owned 100% by the Company.

So that will be kind of the first foothold into us establishing a fully operating subsidiary in Europe.

Okay.

And then last question.

On the inventory, I just wanted to clarify, Zohar.

I don't know if I heard you right on the Teva inventory.

I think you said it's up 16.8%, 1-6 point 8?

Not 6-0 point 8.

Is that correct?

No.

Teva inventory is 15.8%.

One-five -point-eight.

All right.

15.8%.

So it doesn't sound like there's any excess inventory on your books even as the Teva business is off a little in the first quarter?

No.

When you're looking at anticipation for Teva, 10% in Q2 and 20% the second half of the year.

And so as you can see we're managing the inventory quite tightly.

When you look at the big increase for Simple, they only went up by 11.7%.

And I know in a percent basis UGG inventory is up 84.6%.

But as I said their sales are going to be approximately the same level and the bulk of this inventory is booked.

Okay.

Great.

Thanks a lot.

Good luck.

Thanks, Mitch.

And next we'll go to Stephanie Wissink with Piper Jaffray.

Hi, guys.

Congratulations on a fantastic quarter and welcome Tom to the team.

First, I have a few questions actually.

We'll just go one by one.

First, could you Angel give us some color as to the composition of the UGG bookings for the second half?

Just given the strength across the range in the Spring.

Are the retailers willing to take some bets on some of your newer items or categories into the Fall?

Yes.

We've had just a tremendous response to the new items, inclusive the Fluffy Flip Flop has been very successful.

We've sold -- the Cardy has been really spectacular.

We had a great Classic boot business.

The slippers have done well in the first quarter.

All of that sort of creates great momentum and we'll continue to see the casual products I believe perform well because it is performing.

Driving Mocs for women, espadrilles -- while the weather has probably been an issue there, we expect those to continue to perform as the weather heats up.

So it's really a business that's not dependent on items, per se.

It's really one -- and if you see our presentation at retail around the country you'll see a much better spread and assortment.

Retailers are understanding that the brand is built on comfort and we're delivering comfort in each of the product categories.

And that's what consumers are responding to.

Great.

That's helpful.

Second, maybe Zohar if you could just provide us an update on your sourcing costs?

And maybe some of the cost engineering initiatives you have in place particularly for the UGG brand?

Well as we mentioned, specific for this year our cost structure has been -- the costs been fixed with the factories.

So that's baked into our prices.

Looking at costs, we're developing the items for coming year.

Some of the things that we are doing, we have moved some of our factories, especially for the UGG brand, they have built a new factory in the northern part of China where there are lower costs.

It's next to the tannery.

So we're looking how to mitigate some of the cost increase from China.

In addition, part of the major responsibility of Dick who has joined us -- he's got extensive sourcing and manufacturing experience in China -- is to expand our sourcing capability and to make sure that we are containing cost increases.

And one of the other things that I think is perhaps not as clearly understood, but the footwear industry is going through I believe a bit of a revolutionary change.

It used to be that people would constantly chase lower cost manufacturing wherever, in Asia or Latin America or wherever they needed to.

But these markets are maturing and developing and it's going to be important for us, not just to source the product well.

But also to make sure that we're efficiently managing our supply chain.

And to that extent, the addition of Mark Fegley who is new to the team, improvements in our distribution capability, improvements in manufacturing efficiencies in all of our factories, those are all things that will yield benefit to our bottom line.

So for many years those were not big priorities.

Supply chain was not something talked about in the footwear industry, per se.

But I think that's all changing and changing quickly.

The new pick module which you know that we've spent a lot of money on, it's going to be up and running in June.

And that just creates tremendous efficiencies for us in handling product, et cetera.

So we're actually very excited about those improvements.

My third one is Zohar or Angel, if you could just remind us the ranking in markets internationally by country or even general regions?

Well right now Europe is, outside of North America obviously, Europe is the most important market for us.

It's the one that we've put effort and energy into for quite a few years, beginning with our distributors in Switzerland and Benelux.

We've been in Germany with the Teva brand for many years.

The U.K.

is probably the lead driver in the European market, primarily because it's a great footwear market.

And we think there is just a great affinity for the UGG brand in the U.K.

But as we move around the rest of Europe, you start to see opportunity in markets like Germany, which are very undeveloped for the UGG brand.

We've got a good Teva business there but we think that there's a very large UGG business potentially.

Scandinavia is a market that just came onboard last year.

In combination all those Scandinavian countries is a good market for us.

Russia is a market that we're aggressively pursuing a distributor relationship there.

Potentially a very strong market.

People have been wearing sheepskin product in Russia for a long time.

So given the fact we have the most evolved footwear collection in the world of sheepskin product; that bodes well.

Canada, if you come back to North America, is a very important market and we're actually seeing some great growth in Canada with a great distributor there for the UGG brand and the Teva brand.

And then there's Asia, which Asia is -- the key driver in Asia is China.

And the energy that I think is starting to develop with our brands in China -- all of them, as I described in my comments, will have retail presence.

They'll have stores dedicated to the brands.

And there's an affinity for these kind of brands in the China market.

And so that all bodes very well.

All right.

Last one from me is regarding Simple.

If you could just talk about some of the distribution wins for the brand, with the ecoSNEAKS line?

And then the penetration of the stores, the chains that you mentioned in your prepared remarks.

Could you just give us an update there?

Thanks.

Well I don't have specific door counts.

But we have had just great success with Dillard's, for example.

We're seeing great sell-through at Nordstrom.

Urban Outfitters, we've had great response.

We continue to do well with ecoSNEAKS and also with Green Toe in Whole Foods.

It's an interesting scenario because this is a difficult market for a lot of retailers.

But one of the things that retailers have not abandoned is the need to give their customers something new, something fresh, something contemporary and timely.

And the product is good.

The price points are good.

So from the independents out there to the department stores, we have had a lot of interest in Simple this Spring.

It's suddenly as if people woke up and discovered Simple.

And in addition to that is all of the PR and the amount of media energy that's going around sustainability.

So the brand is very, very well positioned.

It's become like the first place someone goes when they think okay; I need a sustainable category in my store.

I don't have it in footwear.

Which are the brands that I'm going to go at?

Well Simple is top of the list.

So we're getting a lot of opportunity.

I think you'll see over the next six months a very important broadening of the distribution platform for Simple.

Thank you, guys.

Congrats and good luck.

Thank you.

Next we'll go to Todd Slater with Lazard Capital.

Great job, everybody.

And welcome, Tom.

Tom is not on the call.

He's listening.

Okay.

Well anyway, best of luck.

I just want to start with Teva.

And I'm just wondering Angel, for the scorecard you can give yourself on the turnaround so far, sort of beyond the external issues which we all know about out there, but what has really worked and what do you think, if anything, needs to be reworked?

Well let's go back to the mix.

You know when we started the mix of products that we were selling was heavily slated toward flip flops.

I mean, we were driving a top line based on flip flops.

And I have always pointed out the fact that back then if you looked at our revenue top line was $80 million or thereabouts.

Most of that was comprised of flip flops at about $20 retail.

So in the mix you really saw the primary driver of our growth in units was that kind of product.

We had to change that.

We went to an $80 price point product in the performance sandals and almost reversed the mix.

That's a difficult thing to do.

It involved a lot of product development and repositioning of the brand.

We're still in that process.

We also had to create a year-round line.

And we didn't have anything to offer for the Fall season.

And when you look at the response we've had to Fall '08 -- included in that is again every caveat is the macro environment.

We've had an incredible response and I normally don't use words like that.

But it's been a fantastic response to this Fall line.

People seeing it as very fresh, very sellable, very commercial product.

So I believe that the other thing to note is that the brand has sustained this environment very, very well.

We're holding our own at retail and performing better than most.

And that's indicative of the strength of the brand.

You know brands are very important and consumers always go back to brands they know and they trust.

And now for a long time there a few years before I came, we were not developing enough new product.

And I think that really caused the brand to stagnate.

I think retailers now know Teva is a brand that's on the move.

And we're gaining back market share that we lost in those years.

So I give us pretty high marks for all the things that we've had to do to bring this brand back.

And on top of that, position it as a performance brand, which is an ongoing part of the process.

Okay.

And I think that's fair.

And then moving onto UGG.

I'm just wondering if you could give us a little bit of sort of the vision of the rest of the lifestyle extensions like the handbags and the apparel to talk about?

And also if you could just hit on some of the performance of the more fashion sandals like the Malta and the Cannes and if any of that stuff has gotten any traction yet?

Well we view UGG as a lifestyle brand and have from the beginning.

So yes, the handbags, the cold weather accessories, hats, gloves, scarves, and the outerwear are all a very important part of that mix.

When you see the Fall ads in Fall '08 you're going to see the brand showcased as a complete lifestyle statement.

And we were really not that satisfied with where we were going with our outerwear through licensing.

And we've decided this year that we're going to be doing that, we're tackling that ourselves, very limited, very selective.

But really focusing on quality.

And we like what we've got.

You'll see it in selected places.

You'll see it at our own stores.

You'll see it on our website.

And you will see it in selected retailers.

When it comes to the handbags, again there we felt that we really wanted to take better control of that entire process, speaking to quality.

I mean, that's really what the brand -- it's a premium brand.

And so we will continue to develop those kind of products that make sense to the brand.

And as we evolve these retail showcases around the world, you must have more than just shoes to look at, to try on, to aspire to.

So the retail showcase will be a great laboratory and experiment for these kind of ancillary type of products.

They're going to give us a great read of what consumers are looking for around the world.

And we'll come up with new things, based on exposure to retail direct to the consumer.

Great.

And then just lastly and a follow up international question.

I understand the goal is 30% there and just wondered if you could remind us what the mix is likely to be by the end of this year?

And how that compared to '07?

Is that growing faster than the domestic?

The international is going to grow faster this year vis a vis the domestic.

I would say that it will grow in the neighborhood of about over 40%.

Okay.

So maybe gain a couple of points in the mix, kind of thing?

Yes.

Okay.

Great.

That's terrific.

Thanks so much and best of luck.

Next we'll go to Robert Samuels with JP Morgan.

Hi.

Good afternoon, guys.

Just one quick question and congrats on the quarter.

You've got a boatload of cash on the balance sheet.

You've spoken in the past about adding another brand.

Could you just update us on this and what sort of opportunities Angel that you're currently seeing out there?

Well I am seeing opportunities out there.

And just as I had hoped, this difficult environment I think is bringing valuations down to a more palatable place.

We're looking for lifestyle brands or brands that have that potential.

We're looking for brands with quality distribution.

Ideally we'd like a brand with a management team because we don't have a lot of bodies to spare.

But generally speaking, the things I'm looking at are brands that are right in our power alley.

Right in the strength of our company to leverage production sourcing, development, distribution and increasingly the world-wide distribution.

And my preference and I have to be straight with it, I love to build brands.

It would probably be a brand that we can take that initial ride up to the couple hundred million dollar level.

That would be my goal, as optimal.

It's not to say we would reject out of hand the brand that's bigger than that.

But generally speaking that's the fun for me and we remain very entrepreneurial as a company in that respect.

So that's our mission really, to build brands into market leaders.

Sounds great.

And then Angel, I'm sorry; did you say that SG&A for Q2 should be up slightly on a dollar basis to Q1?

Did I hear that correct?

Yes.

Yes.

As we said, our SG&A is kind of spread.

Most of our SG&A is spread throughout the year.

So while we are looking for SG&A to be in the neighborhood of 20 to 30% sales for the full year -- but Q2 you will see a slight dollar increase from Q1.

Great.

And then gross margin you said flat to last year?

Yes.

Comparable to last year.

Okay, comparable.

Great.

Thanks so much.

Next we'll take Sam Poser with Sterne Agee.

Good afternoon and congratulations again.

Can you just walk through -- I know that your inventory in Teva is in very good shape.

But is most of that Spring goods or is that some of the closed-toe stuff that you're starting to set up for already?

Yes, we're going to be --you'll start seeing the Fall goods start to come in here in the next six weeks.

We've got a -- the inventory mix right now is the new stuff, the good stuff.

Weather of course is gong to be hopefully turning in our benefit here in the next few weeks.

So we anticipate an improvement in the fill-in business.

A lot of retailers have been, as you know, sitting on -- keeping their powder dry and not building up their own inventories and waiting for the weather to turn and then trying to fill in on an at-once basis.

So I think we'll see some of that, as well benefiting us here soon.

And most of my questions have been answered, but if you could just walk back through --two other questions.

One, if you could just walk back through the store openings in China for me?

And lastly, Zohar, now that you have a new CFO in place, what are your main objectives going to be going forward in your new role?

Okay.

I'll answer that first -- besides taking some time off.

I think what Angel indicated before when the question was asked about us focusing on improving our infrastructure is really spending the time on the supply chain, both on the sourcing side.

Also the China expansion, working on the JV, the European distributor -- stores.

Those are areas that I'm heading.

So I'll be spending a lot of my time both on the operation in the supply chain and also on the international expansion.

And as far as the stores in --.

And clearly when talking about the supply chain is the -- in our distribution center and the improvement that we are making there.

And as far as the stores go, we are planning two stand-alone stores in 2008 or 2009 for UGG, one in Beijing, one in Shanghai.

And three shop-in-shops in that same timeframe.

We are also planning with our Teva and Simple distributor to open two stand-alone Teva stores during the second quarter, this coming quarter, the first in Shanghai and that's next week, followed by Beijing in mid-May.

And they're planning to open more 10 more shop in shops later in the year.

And then we'll also be seeing more on the Simple front in China, which includes plans to open 10 to 15 shop-in-shops by year end.

So you're going to see the brand being born in China which is very exciting for us.

And what kind of growth do you foresee with that in 2009, just sort of looking ahead if all goes the way you're envisioning it and now that you have more people to put against that area and the total?

I think the most important thing right now is you know obviously you can open stores anywhere in the world and just drive volume.

That's not our goal.

We're building a brand in those markets so it's important to get location; the right locations surrounded by the appropriate other brands.

It's important to establish ourselves with a premium positioning in China so that the price points are comparable to what we would need them to be for making performance product in the case of Teva, for staying to our sustainable story with Simple, and obviously the premium luxury comfort story of UGG.

So the foundation phase is where we're at --brand positioning, good real estate choices, building the staff, building the infrastructure so we have great service in the stores, which is kind of new to China by the way, the full- service orientation.

And making sure that we have a sound infrastructure for growth.

At that point and it's probably a couple of years of development along those fronts, we would be able to start being even more aggressive in rolling out doors.

But my goal right now is not to see how many stores we can open and how much volume we can drive.

Thank you very much.

Congratulations and continued success.

(OPERATOR INSTRUCTIONS) And next we'll go to Jeff Mintz with Wedbush.

Thanks.

Let me add my congratulations, as well.

Zohar, could you talk a little bit about the potential implications of the new pick module for margins going forward?

And do you anticipate a margin impact in the second half of this year or do you expect that to start to really impact in '09?

We're planning to put it into production in June.

So you're not going to see any margin impact in the second quarter.

Probably the bulk of the impact you will see you will start to see more toward the latter part of the year in '09.

You're not going to see it in the gross profit margin.

You'll see it in the SG&A piece.

And what it will allow us to take the pick module right now through our manual picking we can pick up to 65,000 pairs per day.

The pick module will allow us to do up to 225,000 pairs per day.

So it will allow us to triple our capacity, our picking capacity on a daily basis.

And is that with fewer people?

Is that where the SG&A benefit comes in?

Correct.

Because it was a big investment.

As we said it was about $12 million.

So the payback we are getting is from the efficiency and fewer people.

Okay.

Great.

And then Angel, can you just talk a little bit about the UGG Spring products in particular?

I mean, I know you talked a little bit about the selling of slippers and boots in the Spring.

But I'm just trying to get a sense of kind of where the Spring product has matured to at this point?

And kind of where you see it going as we go into '09, as well.

Well primarily it's been women's.

It's been driven by the women's business.

We have some cute styles that are really spring-only styles.

The Cardy is a great example and that's been very successful.

It sort of built on the platform of a Classic boot but now we added a whole new fabrication, a whole new upper and whole new style.

This Fluffie flip flop has just been a bit of a phenomenon.

I mean, it's just kind of hard to find right now.

And that's kind of created another dimension of the brand.

It's fun.

It's very colorful.

You've probably seen that product.

There's just a lot of color in it.

We continue to do a good job with the core styles.

The core styles I would describe included would be moccasins, the Layback, which is a core sandal style.

So it's a diversification of the line.

What's different about each of these products is that they, compared to many of the competitors, they're very comfortable -- in addition to being a unique look.

We're not out there replicating what other people are doing.

These are unique looks to us and I think that that's just created a lot of buzz at retail.

Okay.

Thanks.

And then just finally not to beat a dead horse on Teva.

But I'm just trying to figure out where you're getting the confidence to look for 10% growth in Q2 given kind of the difficulties in Q1.

And obviously the weather hopefully will improve here.

But kind of the overall environment continues to be difficult and I'm just trying to get a sense of what you're hearing that's giving you that confidence.

Well we've had a lot of conversations with our retailers and we have them every day.

And I'm very impressed with the way that the brand has held its own.

I think a lot of retailers when they have discretionary dollars in terms of fill-in, they'll place them with brands that have held their own in difficult times and brands that people know.

So we are definitely getting commitments that come at the expense of other brands.

We're taking share back from people that had in the last few years taken it from us a little bit.

I think our products are priced right.

I think they perform really well.

We've got -- the Omnium for example is a closed-toe sandal at a better price point, better fit and better grip than anything else out there in the closed-toe category.

And so retailers are stepping up and reordering that product as the weather improves.

So look, our expectations for Teva were always conservative.

I mean, we knew we were in a turnaround situation and that continues.

We're not done yet.

So I'm seeing good response to the product line and it's coming off of a conservative expectation.

We don't have to set the world on fire for Teva to experience some significant increases.

And that's just not really including the opportunities that present themselves as we move into the back half of the year.

Because there we really see some nice growth potential in response to the Fall line.

So we're very optimistic I believe and realistic, as well with the Teva expectations.

Okay.

Thanks for the color and continued good luck.

And next we'll take our last question from Chris Svezia with Susquehanna Financial Group.

Thank you very much.

And fantastic job on the quarter, guys.

Well done.

I have a handful of questions quickly here on Teva, just for clarification.

I just want to get an idea.

Just give us an idea of the inventory levels at retail because it seems like when you're walking around and checking you're not seeing the promotional activity on the Teva brand.

It seems like it's working at full price.

And can you just explain why REI is doing so much better?

I know they're a big customer of yours versus other retailers like EMS or Dick's or L.L.

Bean, et cetera?

Well first of all it's product.

You know, product, product, product.

As I mentioned, there are some really good product at great price points in the Teva line this spring.

And if you go around and check as you have, you'll see it.

It's out there full price.

Now there is a lot of people who are not at full price.

So I think that just bodes well.

It's confidence by the retailer and belief in the brand.

They know that the minute we start seeing a pattern of warm weather, that they'll continue to sell these products all through the summer.

So we really are getting that firsthand from them and the brand is holding its own.

I think there was a really big question that was answered this spring with a tough environment as it is about Teva's ability to turn itself around.

And I think that we're seeing the answer to that.

It's a very positive one.

And it's expressed by the retailer's confidence and the fact that the brand has got good potential going forward as a year-round brand.

So in the end retailers make subjective decisions as well as objective decisions based on sell- through and turn, et cetera.

And we seem to be meeting the mark on both fronts.

Okay.

That's good to hear.

And I assume, Angel, the 10% increase you're looking for Q2, just for clarification, makes some assumptions for reorders for the second quarter, not just moving up the introduction for the Mountain stuff?

Yes.

We really look to improved weather, obviously we hope for that.

I can't predict it but we expect a much better reorder cycle in the second quarter than we've seen so far with the, really the delay of spring.

That's what it's been.

Nothing like last year though, so far and hopefully won't be.

But we think that we're at the top of the list with retailers when it comes to reorders.

So and again we've been conservative all along on this front.

We really are working very hard.

Now let me underscore that point too.

If you talk to any retailers, we've got great programs out there for them.

We're committed to the retailer and their success with our brand.

We're making it easy for them to buy our product.

I think we're fulfilling very well in our customer service group.

Our discount program is quite competitive.

We're doing some things with freight that they appreciate, trying to take some of the pressure off of them.

So we're working this at every angle.

We're being very aggressive, very hungry and we demonstrate that we want the business and I think that retailers are appreciating that.

Okay.

That's good to hear.

And then my last question I have is just on the UGG business.

When you talk about the growth and the penetration you're getting down in the south and southeastern markets for the UGG brand, some of those newer markets, are retailers being very receptive to looking at the entire product line and not just an emphasis on boots?

I just wondered if you could talk about that as the year unfolds?

Well the answer to that is yes.

Absolutely.

And one of the things you get to do when you have a powerful brand is that you get to showcase your entire assortment the way you want it showcased on a year-round basis.

So we select our retail partners very carefully.

We really want people who are committed to the brand on a year-round basis.

We don't have a lot of interest in one-sided relationships.

And we find ourselves in a position to be able to make that expectation known and to have it met.

So yes, is it somewhat a bit of leverage?

Yes it is.

But the product is selling and turning.

And I would never use the leverage if we didn't have the opportunity for retailers to make money and great margins.

So we've had no resistance and we continue to grow our business based on those kind of relationships.

That's great to hear.

And I wish you continued success.

Congratulations.

Thank you.

I show that there are no further questions at this time.

I will now turn the call over to Mr.

Angel Martinez for any additional comments or closing statements.

I just want to thank you all for believing in our company and continuing to support our efforts.

It's been a great quarter for us.

We're very excited about our results, but are very proud of our company and all of our employees worldwide.

We're adding to the team with some very high-end talent.

I think that bodes very well for the future, that we're using our success to invest in our future potential, here in the U.S.

and around the world.

And I hope you can see that from what we've discussed today.

So thank you very much and we'll speak to you next quarter.

That concludes today's conference.

Thank you for participating and have a wonderful day.