Deckers Outdoor Corp (DECK) 2008 Q2 法說會逐字稿

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

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

Following the presentation we will conduct a question-and-answer session.

Instructions will be provided at that time for questions.

(OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded.

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

Please note that some of the information provided in this call will be forward-looking statements within the meaning of the securities laws, these statements concerning Deckers plans statements and expectations for future operations.

The company cautions you that a number of risks and uncertainties, some of which may be beyond its control could cause Deckers actual results to differ materially from those described on this call.

Deckers has explained some of these risks and uncertainties and the risk factor 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 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 all of its forward-looking statements and this call would 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 impact of future events.

I would now like to turn the conference over to the President, Chairman and Chief Executive Officer, Angel Martinez.

Please go ahead.

Thank you.

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

With me on today's call is Zohar Ziv, our Chief Operating Officer, and Tom Hillebrandt, our Chief Financial Officer.

The second quarter was another period of exceptional growth for our company with net sales increasing nearly 73% to $91.1 million compared to $52.7 million last year.

As we stated in our earnings release, we recorded an noncash pretax charge in the second quarter of $14.9 million reflecting the right bound of intangible assets related to the Teva trademarks.

Excluding the impact from this write down, diluted earnings per share rose 129.4% to $0.39 in the quarter compared to $0.17 in the quarter a year ago.

Despite the ongoing challenges facing the US economy, and its impact on consumers and the retail environment, all our brands posted positive gains in the second quarter.

Sales of UGG products more than doubled increasing approximately 131% to $60.6 million compared to $26.3 million a year ago.

The UGG brands performance was highlighted by a significant increase in shipments to our international distributors.

Also contributing to the brands strong results were solid sell through of spring product on our website and in our company owned retail stores.

The second quarter has historically been our smallest in terms of sales volume.

However, it is growing in terms of importance, as UGG has become a true year-round brand as evidenced by sales of UGG products in the second quarter exceeding those in the first quarter.

Historically, we have shipped fall product overseas during the second quarter beginning in May and June.

We're now finding that there is more demand in the US for fall product in June, and our domestic customers are scheduling deliveries earlier as consumers are now purchasing UGG boots, slippers and casuals on a year-round basis.

Based on our pre-booked orders we're forecasting strong growth across the board for UGG.

With our twin face boots, casual boots including our metropolitan and surf collection as well as our Cardy boots and our slippers for men, women and children leading the way.

We have grown our business with other existing customers by expanding spread and assortment.

Our customers have embraced our expanded product offering that includes 140 styles in fall 2008, versus 125 styles in fall 2007.

We have also expand our cold weather collections which are show-cased beautifully in our national ad campaign shot on location in [Banf] and Lake Louise, Canada.

This fall will have over 40 shop and shops with key domestic retailers which is up from none in the second quarter of last year and only 10 shop and shops in the second half of last year.

We also will have 30 shop and shops overseas this fall compared to only seven last year.

These displays, which typically carry more than 80 different SKUs have similar look and feel to our UGG concept stores and show case the breadth and depth of the line.

We also have increased our marketing investment to support a broader print campaign that will run nationally in "Vogue," Teen Vogue," "Vanity Fair," "Glamour," "Lucky" and "O." The national ads begin this month in "Teen Vogue" and September "Glamour" which have hit the news stands already.

We have also expanded our outdoor advertising in key cities in the US, including New York, San Francisco, Chicago, Los Angeles, and San Diego.

As I mentioned earlier the second quarter has always been meaningful for the UGG brand internationally, as we ship fall deliveries to our distributors in Europe, Asia and Canada.

This quarter we witness a triple digit gain in international sales driven by demand for our entire fall assortment from markets such as Canada, the UK, Benelux and Germany.

The UGG brand recent performance abroad gives us a heightened degree of confidence that the global prospecting for the brand are significant.

Turning to Teva, second quarter sales increased 4.8% to $25.2 million versus sales of $24.1 million a year ago.

As everyone is aware the retail environment has been extremely challenging due to a number of economic factors.

Therefore, while Teva sales rose only modestly in Q2, we're pleased by its performance and encouraged by our ongoing efforts to reposition the brand and target a younger, more active consumer.

Importantly retailers are echoing our sentiments as they continue to tell us that Teva is holding its own versus the competition and one of a handful of footwear brands to watch in the outdoor space.

Sales in the second quarter were primarily driven by a fill in business as retailers across the board remain very cautious with future orders choosing to chase business as it materialized.

Many of the new styles that were standout in the first quarter continue to show strength as we entered into summer.

These include the West Water, Calienta, Fossil Canyon and Omni just to name a few.

Also [mushin and oahu, mandolin wedge and terafi] performed well as well.

There was a healthy mix of new and heritage styles.

Our business at REI is worth specific mention.

As you may recall Teva was chosen to be part of the brand campaign program, where it along with a handful of other premiere brands were highlighted throughout REI stores for a two week span in June.

The results were better than expected and we're currently are exploring similar opportunities to partner with other key retailers in a similar fashion.

Internationally our new distributer in China opened two Teva stand-alone stores in Beijing and Shanghai in the quarter with approximately 15 shop and shops for the remainder of 2008.

Early reports suggest that the stores are exceeding expectations.

Simple's second quarter sales rose 94% to $4.7 million compared to $2.4 million a year ago.

Simple has been gaining strong momentum over the past year as more and more consumers are discovering the brand and are making an emotional connection with its unique and compelling sustainable product offerings.

Sell through of ecoSNEAKS were strong across all distribution channels such as department store, specialty shops, the internet and independents.

The sale of the spring ecoSNEAKS for men and women is attributed to new styling and fresh colors and materials.

Green Toe which is the beacon of the entire Simple line also reported solid growth this past quarter with the introduction of new summer silhouettes for women.

We also experienced positive momentum with the introduction of our first infants collection.

We see opportunity in both the infants and the kids market where there is a void for sustainable footwear.

Late in the second quarter, we shipped the initial orders of Planet Walkers.

This new collection of sustainable comfort leather casuals for men and women is being introduced through an exclusive launch with a walking company in all 200 of their doors.

Planet Walkers is being supported through the Walking Company's six week 'think smart be planet friendly" promotion in partnership with the Sierra Club and Smart USA the maker of Smart cars.

Distribution of Planet Walkers will be opened up to select influential independent accounts later this month.

Also this quarter we opened the southeast division of Whole Foods and now sell the brand in approximately 85 of their locations.

In June we also launched a women's ecoSNEAKS program with REI in all 80 of their doors.

Simple's marketing efforts remain focused on communicating that we're the world leader in sustainable footwear and accessories.

This message is being delivered through an extensive print campaign in magazines such as "Lucky," "Teen Vogue," "Details" and "Wired," as well as through an aggression aggressive online advertising campaign which is resulting in enhanced brand awareness and an increase in internet sales.

Turning to our direct consumer business, eCommerce sales for the company increased more than 30% to $6.4 million for the quarter.

Unique visits to all our websites continues to increase as greater awareness for our brands is driving more and more consumers to seek out our products on the web.

Meanwhile, our retail sales for the second quarter of 2008 rose 143.2% to $3.1 million compared to $1.3 million last year.

For those stores that were open during the second quarter of last year, same store sales grew by 59.4%.

These results are especially rewarding given the current state of the retail environment.

We believe the performance of our UGG concept stores in New York and Chicago as well as our five outlets underscores the strength of the UGG brand and the growing demand for its diversified product line.

We move ahead excited about our expansion plan which includes the opening of an UGG concept store in San Francisco next week.

Another in the upper west side of -- in New York in late October.

And two stores in London.

We plan to open the first London store in late October, at the Westfield Mall and the second London location in late November in Covent Garden.

Over the past several months we have made a handful of important announcements that will strengthen our market position and enhance our global prospects.

First, we completed our acquisition and integration of the TSUBO brand including closing the US office in Carlsbad and transforming all the back office operation to our platform.

For those of you not familiar with the brand it is a high-end style comfort oriented brand, utilizing athletic components and high end materials that appeal that appeals to a metropolitan consumer base worldwide with price points between $70 and $200.

They are primarily sold through the same type of retailers as the UGG brand.

In addition it has a small but fast-growing internet business.

Our plan is to relaunch the brand with a new marketing campaign in fall 2009 and to build the brand to a meaningful business.

Secondly, we finalized our joint venture for the UGG brand in China with Stella International.

We're very excited about this initiative as we believe China represents a very compelling long-term opportunity for us.

Equally important we have been doing business with Stella for more than 12 years and they have been operating over 100 stores under their own brands.

As a result of their experience, combined with the unique proposition that the UGG brand offers to Chinese consumers, we feel confident that this is the right platform for launching the UGG brand in this market.

Our first UGG store is expected to open in Beijing this fall.

Lastly, since June, the new automated pick module has been operating in our Camarillo distribution center which will give us the ability to triple our daily output from that facility.

I will now turn the call over to Tom to review the financials.

Thanks, Angel.

I will start by mentioning the international sales that are included in the brands sales number has the Angel took you through.

International sales for all of our brands increased 131.8% to $34 million compared to $14.7 million in the second quarter of last year.

And domestic sales increased 50% to $57.1 million compared to $38 million in 2007.

As a percentage of sales, international sales were 37.3% in Q2 of 2008, compared to 27.8% last year.

Our gross margin for the current quarter was 39.9%, compared to 41.1% in the second quarter of last year.

The year-over-year decline in our gross margin was primarily attributable to the increase in international sales during the second quarter.

As a reminder, sales to our international distributors carry a lower gross margin than our domestic sales.

In our previously issued expectations for full-year gross margin remain at 45%.

The total SG&A expense for the quarter was $28.4 million, excluding the impairment charge which I will discuss later, or 31.2% of net sales, compared to $18.8 million, or 35.7% of net sales a year ago.

The planned increase in SG&A expense for the second quarter was due primarily to higher sales and marketing variable costs related to the increase in sales.

And two new retail stores that were not open in the second quarter 2007, higher share-based compensation costs, and additional distribution center costs related to our expansion in December 2007.

On a gross dollar basis, we expect SG&A will increase in the second half with an increase in sales, additional international costs related to our expansion, and additional executive hires that we previously discussed.

Interest income was approximately $.6 million in the second quarter compared to last year's second quarter interest income of $1.5 million.

The decrease was the result of lower interest rates versus a year ago, as well as a shift in the mix to savor lower yielding investments.

As stated in our earnings release for accounting purposes we recently conducted an impairment evaluation for Teva intangible assets on our balance sheet.

The current challenging economic environment that the Teva brand faces has negatively impacted our ability to attain the revenue projections we had previously established for the Teva brand.

We still believe there is growth potential for the brand but the economy as it is today has forced us to move out growth rates by a few years.

We had previously stated that we believed that the Teva brand could generate $175 million of annual sales by 2012.

We're revising that guidance, and now expect Teva brand annual sales of $140 million by 2012.

Our projected inability to reach our 2008 sales target along with a reduced long-term forecast for sales growth were indicators that the intangibles were possibly impaired, which led us to perform a detailed nationals of the intangibles.

The accounting valuation showed that the goodwill was not impaired but the fair value of the trademark was significantly below the carrying value of the intangibles on our balance sheet, and therefore, we recorded a noncash pre-tax charge in the second quarter of $14.9 million, reflecting the write down of the Teva trademarks.

On an after tax basis the impairment charge was $9 million, or $0.68 per diluted share.

Excluding the impact of the impairment charge, net income for the second quarter was $5.2 million or $0.39 per diluted share compared with $2.3 million or $0.17 per diluted share in the second quarter of last year.

Turning to the balance sheet.

At June 30, 2008, our overall inventories increased $112.8 million versus $66.3 million a year ago.

By brand, UGG increased $38.6 million to $90.6 million, Teva increased $2.9 million, to $14 million, and Simple increased $3.7 million to $6.9 million.

The addition of the TSUBO brand in the second quarter added $1.1 million in inventory.

As we said before, the majority of UGG brand's business is pre-booked and an increase in UGG inventory is necessary to fulfill the volume of orders currently on the books.

We now expect UGG brand sales for the year to increase approximately 53%, up from our previous guidance of 37%.

Another way to look at this is through a simplified example.

Our full year total company forecasted gross margin is 45%.

That means that for every $1 of sales, the cost of sales is $0.55.

Looking at it the other way around, every $1 of cost of sales translates to about $1.80 of sales.

If you apply that general relationship of $1.80 in sales for every $1 of cost of sales, to the $38.6 million increase in UGG inventory, the resulting amount would represent less than 60% of the expected increase in UGG brand sales for the second half of the year.

Given our current visibility, we feel very comfortable with our overall inventory levels.

In addition, at June 30, 2008, we had cash, cash equivalents and short term investments totaling $124.8 million compared to $96.6 million at June 30, 2007, and accounts receivable were $54.7 million compared to $30.2 million at June 30, 2007.

Moving onto the outlook.

Based on better than expected second quarter results, coupled with our heightened outlook for the UGG brand, we're raising our 2008 guidance.

To reiterate we're increasing our fiscal '08 guidance by the amount we exceeded Q2 plus our increased expectations for the back-half of the year.

Let me go through the specifics.

We now expect revenues to increase approximately 43% over 2007 levels, up from our previous guidance of approximately 31% growth.

We also now expect diluted earnings per share excluding the impairment charge discussed earlier, to increase approximately 34% over 2007, up from our previous guidance of approximately 27% growth.

Again, this is based on our better than expected second quarter results and improved visibility based on the current pre-book.

This guidance also assumes our previously issued expectation for gross margin of approximately 45% in 2008, and SG&A as a percentage of sales of approximately 23%, excluding the impairment charge discussed earlier.

In addition, our fiscal 2008 guidance includes approximately $10.6 million of share based compensation expense, which is an increase of approximately $4 million over 2007, and $1.8 million higher than our previous guidance.

We're currently working on our 2009 plan, and updating our five-year long-range plan.

For guidance purposes we are assuming that at the conclusion of this planning process, we will have a long-range plan that shows we will achieve our long-term incentive plan level II targets that were established back in May of 2007.

Therefore, we would have to record additional share-based compensation expense, beginning in the third quarter.

Our guidance assumes an additional share-based compensation expense of $1.7 million in Q3, and $.3 million in Q4.

We have not previously provided specific guidance with regard to the third and fourth quarters so we will do that now.

For the third quarter, we currently expect revenues to increase approximately 34%, and diluted earnings per share to increase approximately 12% over the third quarter of fiscal 2007.

Our forecast is based on a gross profit margin of approximately 44%, and SG&A as a percentage of sales of approximately 23%.

The increase in Q3 SG&A on a year over year comparison is based on the same reasons as the increase for the second quarter of 2008, which were additional distribution costs, higher share-based compensation that I just mentioned and costs for new retail stores that were not open in the third quarter of 2007.

For the fourth quarter, we currently expect revenues to increase approximately 45% and diluted earnings per share to increase approximately 42% over the fourth quarter of fiscal 2007.

Our forecast is based on a gross profit margin of approximately 47% and SG&A as a percentage of sales of approximately 18%.

For the full-year, as I mentioned earlier, we now expect UGG brand sales to increase by approximately 53%, while Teva brand sales are now expected to be flat to slightly up, and Simple brand sales to increase by approximately 37% over 2007.

TSUBO brand sales for 2008 are expected to be less than $5 million.

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

Angel?

Thanks Tom.

Well, as we head to the back-half of the year we remain fully cognizant of the challenges in the environment.

We also remain confident about our prospects.

As previously mentioned, we're raising our outlook for the year due in part to a better than expected first half of 2008.

And more importantly due to our heightened outlook for the UGG brand for the second half of the year.

During a period when our industry is dealing with a slowdown in consumer spending, and retailers are managing their businesses tighter, we're experiencing an increase in future orders as buyers are dedicating more and more of their open to buy dollars to UGG brand products.

At the same time we continue to carefully manage supply to make sure retailers remain profitable selling UGG brand products.

Most importantly the UGG brand is still a relatively small brand on a worldwide basis which we believe has significant growth potential, while the Teva and Simple brands are both making important progress toward achieving their strategic objectives.

I want to thank our entire team for their ongoing hard work and dedication, their passion for the business is at the heart of our success, and we move forward energized focused and committed to driving long-term growth and increasing shareholder value.

Operator, we would now like to open it up for questions.

Thank you.

The question-and-answer session will be conducted electronically.(OPERATOR INSTRUCTIONS) And we will pause a moment to let everybody have a chance to signal.

And we will go first to Mitch Kummetz with Robert Baird.

Yes.

Thanks and congratulations.

Couple of questions and then just a couple of housekeeping items.

First off looking at the sales guidance for the back half you're obviously expecting stronger sales growth in Q4 than Q3, is that mainly a function of retailers taking UGG deliveries this year so you had some business flow out of Q3 into Q2?

Yes, exactly.

We have pretty much across the board retailers wanting UGG product, at least a month earlier than prior years.

And that's really indicates the brand's success at diversifying its product assortment and becoming a year-round brand.

And then on the gross margin outlook, obviously your modeling gross margins down over 100 basis points in the back half.

I know in the past that you have always been very conservative with your kind of gross margin assumption based on you can see not knowing what closeouts might look like in the back half.

Could you just talk -- is that still the assumption for the drop in gross margin or there some other factors that are coming into play here and could you talk a little bit about now that you have your orders for the back half basically you kind of know what your sales are going to be, you have orders for those sales.

I mean what might happen to where we would -- you would end up with some closeouts?

Seems like close outs at this point would be unlikely since you have orders for that inventory.

Mitch, this is Tom.

I will take that.

And -- the answer is you kind of touched on it in the beginning of your question, yes, we continue to be conservative on estimate of expectation for possibility for closeout and some discounting in the second half, and we're being consistent with our expected full-year gross margin.

We have been saying 45% all along and continue to stick to that.

But there is an -- I guess I am still trying to get a better understanding as to how might you end up with closeouts at this point.

In the year, when basically the inventory you have I assume you have orders for all of that inventory.

Is it just being conservative that you might get some cancellations or --

Well, given this economy you just don't know what you're going to get, so yes there is a possibility of cancellation if things tank even further.

And we also have inventory we set aside for fill-in business where we do try to chase a little bit in key styles.

So, you assume that if you have healthy sell throughs you will be able to move through all of that inventory so, we really do try to err on the conservative side on that front.

Okay that's helpful.

And then again just a few housekeeping items.

Could you international business, Angel, you mentioned international was up triple digits in the quarter.

Could you -- give us a number for international or percentage of sales in the quarter.

It was for the quarter, international sales -- for the quarter were 30 -- yes, 37% for the quarter.

Okay 37% --

37%.

All right, okay.

And then --

Long-term we have been striving toward our international business represent can 30% of our revenues so, we continue to strive toward that.

Okay.

And then on the interest income line, could you maybe speak to what you think that comes in for the year, and then also lastly in -- on your share count, you guys in your press release your diluted share count was the same as your basic, but obviously you had a positive pro forma earnings.

So what kind of share should we be using to get to that $0.39 for the quarter?

There should have been a reconciliation --

Okay.

I will look for that.

-- table at the end of the earnings release.

There is a reconciliation of nonGAAP measures.

Okay.

And that table kind of basically kind of walks you through from the GAAP number to the nonGAAP number and it has the shared accounts in there.

Okay.

And the interest income you expect that to be, down from a year ago in the back half just based on what you said?

Yes.

I would anticipate that our yields again would be down.

I mean that's happened in the second quarter here.

As well as we kind of mixed the -- moved the mix a little more conservative portfolio.

Which again had lower yields.

And so yes, I would anticipate it would be down a little bit from last year.

Okay that's all I had.

Thanks and good luck.

Thank you, Mitch.

And we will go next to Jeff Klinefelter with Piper Jaffray.

Yes.

Congratulations, everyone, on a great quarter quarter.

Just a couple of questions.

One on Teva first.

Could you just talk a little bit more on a long-term basis, Angel, about the brand.

You have reduced your long-term outlook for it.

Yet you're still having some successes at retail.

Could you just talk a little bit about why you have decided to lower that bar?

And where you're maybe falling short of what might have been a bigger brand in the future?

I think if we look at what is impacting Teva more than any other factor is the economy.

And the fact that retailers are pulling in their horns and focusing on those brands that in the last several years have generated the revenue and created, the bulk of the sell through and plus the open to buy dollars.

So people are a bit risk averse.

Teva's product right now is a lot of new product which is performing quite well.

The good indicator through all of this, is that the new product is selling through and many stores we're selling through at double the sell-through rate of our competition.

So we're more than holding our own.

And in many stores our product -- new products are in the top 10 sellers of the footwear the outdoor footwear, so we remain quiet bullish on the long-term prospects for Teva.

One of the things I really don't want to do is keep the bar so high that in order to make up the gap that this year sort of creates we have to make some distribution decisions that we wouldn't want to make just to chase a number.

I think that the -- while Teva is a strong authentic outdoor brand, with, I believe, great growth potential as performance product, we now look at it and realize what the growth of UGG, it now represents 14% of our total business, which obviously, has less of an impact than it would have had several years ago.

So my goal is really to kind of take that pressure off the team so we can continue to grow the brand, with new product and quality marketing and good distribution.

Okay.

And then on UGG, you -- there is some concerns that, you're going to hit a saturation point here shortly, that you haven't really been adding new doors.

You don't typically talk about specific door counts but, in -- your growth has come I think largely from additional SKUs in existing distribution, and then higher productivity or higher sell through rates.

Can you talk about with this level success this year how you keep building on that?

Meaning, where does the average price point good go versus the number of units per existing door or, will you look at some new distribution in 2009 to help continue the growth rate?

I mean fundamentally, you have to look at our order book and understand that most customers -- well, I would almost tell you all customers are not getting anywhere near the amount of UGG that they would like to receive.

There is still much more demand for the product than we are capable of fulfilling.

So that's part one.

Part two is, eventually, there will come a point where we feel that the US market will be mature, and our growth overseas is going to be a driver for the brand.

We have been lining up that opportunity now for several years.

We anticipate through the success we have had in key markets like the UK, and Canada, and Benelux and we hope to see a similar type of success in Germany and China, that the growth for this brand has some pretty long-term, long legs on it.

You have hard time finding the brand in most of Europe and Asia.

Demand for the product in this to grow in the United States.

We get a lot of consumers from Europe and Asia in the US buying product and bringing it back for their friends and family and for themselves so -- it -- we're long ways from tapping this brand out to that place.

I mean you have to look at brands -- I remember a conversation once when I was with Reebok, we were at about $1 billion and eventually we got to $3.5 billion.

Nike is at what, $14 billion and the similar conversation is at about $1 billion dollars -- people said, aren't you saturated haven't people had all the running shoes they need or aerobic shoes they need.

I think there is a bigger market for a comfortable type of product than even for aerobic fitness and running shoes.

My feeling is if you understand the brand and what it does for people, we have got a very big long-term potential here.

Okay.

And then last thing on sourcing, lots of concerns about the pressure coming out of China, not only for raw materials but also for logistics.

Can you address that at all?

This year sound like largely locked in but going into '09, what is the dynamic right now with your sourcing?

We managed that process pretty well.

As you know, we have made an investment in talent and people in our China office.

We plan and work very closely with our factory partners.

We have customers in the US wanting their product earlier.

That's good because it allows us to do a better job of scheduling our production.

If everything came in here at the same time, if A it were to happen and B the factories couldn't accommodate it, so we're now getting to the point where we have to, through our growth of new styles, growth of a year-round approach to the brand we're able to really flow product and flow production on a 12-month basis much better than what we were doing.

That's taking a lot of pressure off the factories, allowing us to really manage our costs in a more effective way and I think that that's really been a key.

In addition to that we're doing a better job with information systems and scheduling production etc., and Zohar and his team have been working very hard on that.

So, this is the business we're in.

We have to manage this.

This is true of everybody in a similar kind of business.

I think we do it quite well.

And we're getting better at it all the time.

So -- but more specifically on inflation I mean a lot of people at the trade shows and other companies talk about mid-to-high single digit inflation just across the board coming through and most trying to push through it with price point increases.

But are you dealing with the similar industry dynamic?

Everybody is in the same boat.

Okay.

And we have been anticipating this for awhile.

So we have been very selective about price increases.

We haven't done anything across the way.

We have been selective in products that we felt, we would be able to accommodate a price increase.

And other products that we felt were really stressed we tried to forestall that, so this is not a surprise to us the.

We have been managing through it and anticipating it.

And I think again, I think we have done a pretty good job of that.

Okay.

But everyone is in the same boat.

I mean there is no way out of it.

Yes, thank you, appreciate it.

And we will go next to Jeff Mintz with Wedbush.

Thanks very much and my congratulations as well.

Angel, can you talk a little bit about the plans for the second half in UGG's outside of the boot business, or outside of the footwear I guess and kind of what we should be looking for in terms of other categories for this fall?

Well, I think for this fall, again, we have been developing nonclassic and alternative product, cold weather product which is I think had a great reception.

Our slipper business has done well.

If you step outside of footwear, we have already launched our bag collection and that's continuing.

We're doing that I think better than we have in the past, outerwear down the road is going to be another area for us, for this brand to develop itself.

It is important, though, that we're still driven by the footwear.

That's what we do.

Over the next few years, as we continue to evolve and develop these other opportunities, the cold weather accessories by the way have done well every single season and continue to do well.

It is a bit of a head-to-toe statement.

And those markets where consumers have a full breadth and assortment of the brand these things are important to round out the presentation.

So we will continue to develop those.

Okay.

Great.

And then it sounds like, you said that retailers want UGGs a month earlier and I know that your slipper business is kind of becoming a year-round business.

How do you kind of see that playing out in 2009 and beyond?

I mean, should we start to expect to see less seasonality in your product and perhaps more, even more product being sold in the spring as opposed to the fall?

We will continue to develop our first-half business our spring business.

We think that that's just, the response to it has been so great.

We will continue to -- we have exciting new stuff coming for spring '09 that you have probably seen.

It -- the seasonality will we sell more in the fall than in the front half, yes we will.

We will always do that.

I would anticipate we would probably remain at somewhere around 70/30.

Could we eventually get to 60/40, fall to spring?

Yes, maybe.

That's not a driver for us, however.

I think we're -- if retailers want the product earlier it is because they are able to sell it and it is performing.

And it is not that we are in some way trying to overmanage the mix.

We have good demand for our spring product now and slippers as you mentioned are year-round business for us, which is a huge accomplish from where we were a couple years ago, so stability in the mix is important.

A lot of creativity in the styles and the materials, etc., is what creates that type of stability and will continue to do that.

Okay.

Great.

And then turning to inventory, back to inventory I guess for a second, obviously a lot of that inventory is committed to orders.

Can you just give us a sense of where your uncommitted inventory is this year versus last year?

I mean, are you taking a more aggressive inventory position in UGGs than you were last year at this time.

No.

No, it is consistent.

Okay great.

And then just one quick housekeeping issue to maybe Tom, you have this.

Do you have the number of pairs and the average selling price in the quarter?

I don't have that, but the 10Q will get filed on Monday.

So, you should be able to get in there.

Okay, great, thanks very much.

And we will go next to Todd Slater with Lazard.

Thanks very much, guys.

A few questions.

I want to start just on the pricing front for a moment if we may.

We noticed obviously some price increases in some of the UGG line.

I am wondering what how much over all are prices up in your -- on your wholesales for the quarter and what do you see for the back-half?

Yes, I would probably -- I mean, probably around 5% I would say in an aggregate.

I think that's the way to look at it.

As I mentioned it is not an across the board and you have probably seen some prices, we're very selective as to where we feel that the price increase is appropriate.

But we have no choice on some of these things.

These are costs going up as was mentioned earlier, largely driven by the price of fuel.

These factories have to operate, it's much more expensive to keep the lights on and all that stuff.

Not to mention the HR costs involved in these large facilities.

So yes, it is about 5%.

Have you seen any change in velocity in terms of sell-through of those items?

No, no we haven't.

Okay that's good to hear.

And I want to just go back to a comment earlier you made about retailers, still even with the inventory that you have you still said retailers are on allegation or not getting the full boat.

I am just wondering if you feel your still undersupplying the market demand this year, even given where your inventories are?

And based on your current sell-throughs do you think you will have any need at all to chase any products in the second half?

Well, the under supply is -- it is always a question of there is a fine balance as to where you need to be.

With the amount of product in the market you can cross the line and it is like going to a restaurant and eating too much.

Like I ate, like last night, I didn't -- I wasn't feeling very good.

And I think it is really important that we always work with our retailers to understand what is an appropriate level of growth for the brand in their stores to assure that they for the long-term have a profitable UGG business and they are not in a battle with everybody else in the mall who is overinventoried.

So, we managed that very, very closely.

It is part of I think why we have been successful in the last few years.

And we will continue to do that and it is also effectively necessary because of the factory capacities, etc., we don't want to lose quality.

So factories can only ramp up at a certain rate and we have been consistently working with them to meet that middle ground.

I have always said that we could sell a lot of UGGs than we do.

Could I do that, Tom could do that, by picking up the phone.

And -- but that's not in the long-term health of the brand or of this company in total.

So, we have a long way to go with this brand and just ask anyone who owns the products.

They are pretty excited about what's coming for fall.

Sure well, your inventory turnover has been much higher than the industry average.

So clearly you have been very successful conservative management.

I am just wondering if this year what you think your inventory -- based on what you have now, what sort of inventory turnover are you expecting this year.

We don't expect it to deviate much from last year.

Okay.

Because it was pretty high last year.

We still -- we have had excellent early selling on our products, with a variety of retailers who have got fall in and had, a lot of great indicators out there, plus we know we have demand on our website and all that stuff, so we really feel like we're in pretty good shape.

This is a good segway to international because did I hear correctly at the quarter, you had 37% of the sales in the second quarter were international.

Yes, that's correct.

That seems like a very unusually high number.

I know it is skewed to Teva.

Teva is a little more mature internationally but what does that tell you about the international business in the second half?

What type of mixing do you see there, are you gaining more traction there than you thought overall?

We're definitely gaining traction.

And a lot of the momentum that is driving that is UGG.

UGG business products that we had for spring and anticipation of the new fall line.

We're just getting based on last year's performance in the Ukraine and Benelux Switzerland, various other markets.

We had excellent sell through.

People ran out of product.

And there is a lot of excitement over the new product.

The men's product the kids' product.

Keep in mind we still have a very underdeveloped men's business and a very underdeveloped slipper business for example in Europe.

They are just starting to get this whole idea of house shoes.

We don't want to call them slippers.

They are house shoes over there, so there is a lot of potential in that component in that piece of it, for ongoing growth.

In the second quarter, particularly as we move down the next couple of years.

Well, just kudos again on the way you have been growing this business in a very, very rational way.

Thank you.

Thanks, Todd.

And we will go next to Christopher Svezia with Susquehanna Financial.

Good afternoon, everyone.

And again congratulations, great job.

Thank you.

I guess I -- Angel, maybe you could just clarify a point here.

On the Teva business as you guys look at your inventories being up 26% and you kind of infer from your guidance about what you're looking at on annualized basis it looks like growth could be roughly 5% to 7% or so, somewhere in that range in the back-half.

How should we look at the inventories being up 26% relative to the growth?

Is it just more at once or how should we be looking that inventory position and what's the risk there?

Well, we -- fundamentally we have too much Teva inventory right now.

We will be aggressively moving through that inventory.

The reason that inventory exists is, unlike the UGG business, Teva's business isn't as heavily prebooked.

So, we're anticipating fill-in business, like we had last year and I think that that's kind of fallen short, given the economy.

Also keep in mind as we said last time this has been a horrible weather year for -- we haven't had sustained warm weather, particularly in the northeast.

It has been pretty tough.

So, all those things have conspired to give us a bit of an inventory issue with Teva, but we will move through that.

I think we're in pretty good shape there.

We don't -- again it is a brand with a very healthy in terms of its product mix, the product is all fresh and new and and it is not consumer driven issue, it is creating a little bit of a back up there, so --

Could you separate by any chance between I guess the spring and summer product with I guess sitting in the inventory and the reception to sort of the fall product and what your shipping?

I am just trying to get an idea.

It is almost all spring summer product.

The fall product we just started shipping that and we have had good response to that.

We anticipate it will be the best fall that we have ever had, but it is not a big number in the fall season for Teva.

So, but most of what is there is spring, summer product.

Okay.

And I -- Tom, a question for you, maybe, if you -- as you look at the difference in the third and fourth quarter, you talked about the UGG business growing roughly 53% or 54% for the year.

And obviously a reference to an earlier question about a possible shift in terms of product, maybe falling to the second quarter, in terms of early shipments.

Is it -- can you give us a little help in terms of how should we look at the UGG business in the second half in terms of growth between a third and fourth quarter, obviously fourth quarter being bigger but maybe could you just help us out a little bit in how we should look at that.

Yes, and we haven't given quarterly splits for each of the brand on the growth.

But, clearly from a total growth standpoint, fourth quarter is higher growth rate than third quarter.

Okay.

And then just on the SKU count if possible, for UGG.

I know Angel you mentioned the SKU increase for fall '08 versus '07.

Any color at all for spring '09 year-over-year in terms of the SKU increase for the UGG business?

I think it is pretty consistent with what it was last year.

We're not up much.

We have done a great job of managing the SKU assortment, so I think there is going to be -- what we do, just so you understand, with our brands -- and let's take UGG for example, we build around a core assortment.

So when we add a SKU it is based on the success of what came before it.

We tend to be pretty lean with new product when we come out with it and when we have success, for example the Cardy for example, that is one we may add a few colors because we know we have a success on our hands, so spring line will be that kind of thing.

We have got some very nice sandals and warm weather shoes that are built on the success of last year's product.

Okay.

All right.

Thank you very much gentlemen I appreciate it.

Thank you.

And we will go next to Howard Tubin of RBC Capital Markets.

Hey, guys, really super quarter.

Just a couple of questions.

One on marketing.

Angel maybe just some more detail on how your marketing plans differ this fall season and what you did last fall.

What has increased?

What has decreased?

Well, if you -- as I mentioned, the number of shop and shops that we're doing has increased pretty dramatically.

That was in the strategy.

And we -- our opportunity is that we can get more spread and assortment in front of consumers, make a better brand presentation, and then augment that presentation at retail with visibility in key publications, key magazines.

The other thing we have done is the outdoor program has gained momentum.

We have some great billboards in key locations around the country, Garden Grove for example here in Los Angeles.

There is a great UGG billboard as you drive into the parking facility and that's pretty much a permanent UGG billboard.

So those things work and we continue to do what works.

We're really not frivolous in our marketing spend.

We're pretty basic.

I am a big believer in retail presence for a brand like UGG.

I think that's the key driver is that interaction you have with the brand at retail and retailers love that, too.

That is where we're putting our money to enhance their facility, to enhance their store.

And that's working and working well so it is not brain surgery.

It is pretty cut and dry on the marketing front.

Got it, thanks.

And any -- how many retail stores do you plan opening up next year in 2009?

Do you have that number yet?

No, we haven't put out a number for that yet, Howard.

Okay.

And then the final question is just in terms of all that cash you have sitting on your balance sheet any -- are you still kind of out there looking for acquisitions or are you okay now with what you have done, or any chance you -- I guess you can't buy stock back or may not want to buy stock back, but would you consider a dividend or anything like that?

Well, we're still out there looking.

I mean I think that there -- given this economy, given the situation, unfortunately as people find themselves, there could be some pretty good things coming down the pike.

I think we're in a good position to take advantage of that if something should emerge.

I have said for quite a while now -- we will keep our powder dry until the right lifestyle brand opportunity comes by.

TSUBO, very small brand with great potential.

I think we were able to bring that brand on board pretty successfully.

It is almost a dry run for something.

If we were to do something else it could be something bigger.

We have now had the team successfully integrate a brand into the mix and I think we have done a great job with that, so we're open minded and we're keeping our eyes open out there.

So I haven't seen anything yet, though.

We're not chomping at the bit about it.

I think the situation could be beneficial to us as the next few months roll by.

There should be some good brands out there.

Okay.

Great.

Thanks.

And we will go next to Ken [Stumphouser] with Sterne Agee.

Hi, it is Sam Poser.

Nice quarter.

I have a follow-up on the inventory.

With the $90 million of inventory that you currently carry in the UGG business, and looking back historically it looks like you have more than the next three months' supply based on the guidance.

And I am just wondering, what was the thought process of bringing that much in so early?

Well, I -- one of the reasons we are bringing in inventory earlier this year is just with the growth in the demand and the sales with factories and their ability to produce things, we have had to bring some things in earlier than what we have in the past to meet the demand.

But that seems to be on a relative basis based on the percent increase.

Not totally reflected in the guidance of the UGG business for the balance of the year.

I am not understanding why you --

I mean the inventory was up, significantly, up a higher percentage than your guidance for the back half says your UGG business will be up.

Right.

The dollars were up just under $40 million.

They were up $38.6 million.

And as a percentage that is much higher than the back-half guidance for UGGs.

So I am wondering, we have heard the demand as you said is quite good and that apparently extremely successful Nordstrom sale, as well as other retailers that we spoke with at the recent shoe show at -- commented how well the product was moving.

And how much of that is built in?

Is that really as much -- as long as a supply as it appears to be, or how conservative is this guidance?

But if you looked at that increase it still wouldn't be enough to hit the second half sales.

No, but it would get you comfortably through the next three months, the first -- the whole quarter.

Right but we have got the fourth quarter as well coming up, too.

And I am -- sorry, Sam I am not following you.

Well, no, I just -- I mean last year, I'm sorry to drag this out, but last year -- your -- you have done a great job of managing your inventory and sales, and sort of -- from a -- looking backwards basis the inventory has been a very good predictor of what the sales have been and the inventory on the simplistic basis has been around 90% -- has been about -- on about 93% of sales for the following quarter.

And right now it is significantly higher than that.

And so, especially going to out of Q2 where Q3 actually revenue was significantly higher than the inventory reflected preceding that quarter.

Right, but we have got a 53% increase in the sales this year which from a dollar standpoint is much larger increase than in the past.

That 53% increase equates to about $171 million correct, $173 million?

Over last year?

Yes.

Yes, that's -- it is about that.

And so if you just take the cost of goods related to -- against that, the inventory -- even there, your inventory appears to be high.

Now if the demand is there, so I am wondering how the -- what the outlook really is as far as, Angel, you had mentioned, the state of the economy and so on, but I say the state of the economy is terrible and you can't buy a Prius and I look at the way the UGG boots are selling it is a Prius.

It is hard to get a hold of.

Right.

But you're not going to run the inventories down to zero and then you still -- as you get into the fourth quarter then you have got the spring product coming in for shipping in the first quarter, so there is some base level of inventory to take it to that extreme of exactly what is on the balance sheet, the $91 million right now would be all, specifically just third and fourth quarter.

It is kind of oversimplifying it.

But let me ask -- I'm sorry.

Sam, we have I think we have demonstrated over the last couple of years that we can manage inventory pretty well.

We have got a lot of pretty high powered people who live and breathe this every single day.

And on top of that we're conservative.

So, it is one of those things.

We can sit here all day and talk about the various merits of one approach versus another and understanding our inventory situation.

I am very comfortable that we have the appropriate level of inventory to grow our -- to meet our business objectives and grow our company.

I am not a risk-taker when it comes to inventory.

I have been in this business too long and I know that the one thing that will kill you in this business is inventory.

We have the orders against the inventory.

And that is a real driver for decision-make being how much we really need around here.

So if I were uncomfortable, we just wouldn't buy the shoes.

And that's really how we really all operate.

This is a very complicated and process that we manage very effectively, and we do it quarter in and quarter out, and we have got a lot of good track record with the UGG brand over the last few years in doing that.

And we will go next to Robert [Gouch] with Net Capital.

Hi, good afternoon.

On the preorders or the prebookings, is there any policy regarding either cancellations or mark-down monies or returns or things of that nature?

Well, there the pre-book orders, they are not 100% guaranteed.

So there is potential for full disclosure, there is potential for cancellation, but we haven't noticed any increase in cancellations.

All right.

On the international sales, just with regards to what is going on in the UK, perhaps you can maybe discuss year-over-year performance in different regions?

Yes, we haven't -- on the international sales, like I said is 37% for this year, but we haven't split it down specifically between country.

when you look at -- for the increase, Europe and UK were a big part of that increase in the second quarter.

All right.

And could you discuss anything regional in the US?

The --

Well, we continue to see growth and in the northeast, the midwest.

We're starting to see because of the spring product assortment, growth in the southeast and the warmer climate states.

When you look at our business historically, and you see California as being the driving market of our business, people often ask me, how well do you think UGG could sell in a warmer climate?

And I just point to southern California, where there has been historically a huge number of UGG products sold and it is pretty warm climate here.

So I think for us it has been garnering the belief by retailers that we have a year-round brand with UGG, and that's been proven now by performance at retail and through the sell-throughs, and that has now given retailers confidence that they can expand to their southern tier doors, or we have retailers in southern tier states that are bringing UGG in and starting to perform with it.

Thank you very much.

Thank you.

This will be the last question.

This does conclude today's question and answer session.

I would now like to turn the call back over to our speakers for any additional or closing comments.

Thank you very much.

Well, we really appreciate your time today.

I know all of you have multiple calls to be on.

We continue to drive toward our goals.

As you can see we're not letting up for a moment.

We struggle through the economic realities like everybody else.

And I think that we have some wonderful brands and some wonderful people here who are yielding great results for our shareholders.

So, thank you.

This does conclude today's conference.

We appreciate your participation and you may now disconnect.