Deckers Outdoor Corp (DECK) 2008 Q3 法說會逐字稿

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

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

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.

(Operator Instructions).

I would like to remind everyone today's call is being recorded.

Before we begin, I would like to also 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, some of which may be beyond its control, can cause Deckers' actual results to differ materially from those described on this call.

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

Among these risks is the fact that the company's sales are highly sensitive to consumer performance, 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 these 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 the impact of future events.

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

Angel Martinez.

Please go ahead, sir.

Well, thanks very much, operator.

And welcome to all of you.

With me on the call today are Tom Hillebrandt, our CFO, and Zohar Ziv, our Chief Operating Officer who is calling in from a remote location.

As we previously reported two weeks ago, the third quarter represented another period of robust growth for our company.

Actual sales increased 52.5% to $197.3 million.

And diluted earnings per share rose 34% to $1.97.

This compares to our original guidance for sales and diluted EPS to increase 34% and 12% respectively.

Our results were particularly rewarding given the recent events that have impacted the global economy and placed additional strain on consumers and their disposable income.

I believe our performance year-to-date underscores the strength of our brands and the successful execution of our disciplined growth strategy.

Specific to the third quarter, UGG brand sales increased 57.1% to a record $178.7 million compared to a year ago.

Teva brand sales were $11.2 million, the same as last year.

And Simple brand sales were up 16.6% to $5.2 million compared to last year.

The main driver of performance was once again the UGG brand.

Domestically, we've continued to experience very high and favorable reaction to our expanded forward offering while benefitting from increased floor and shelf space within our existing account base.

As we mentioned on our second quarter call back in August, retailers scheduled fall shipments earlier than previous years as the UGG brand continues to evolve to a true year-round brand.

Throughout the third quarter, we witnessed strong sales throughout retail in all regions of the country and in many instances out of stock positions on key items much sooner into the season than we've historically seen.

I think this is a very good indicator that demand continues to outpace supply which bodes well as we head into the holidays.

With more than 140 styles, the fall line is our most diverse collection ever.

Not only does it include a greater selection of women's boots but a wider assortment of casuals and slipper for men and children as well.

While many of our best sellers continue to come from our Classic and Metropolitan collections, we're experiencing very nice traction from our expanded surf and cold weather collections.

We ended September with 35 of our shop 'n shops open at retail up from none in the third quarter and 10 in the fourth quarter of last year.

And the results from these locations are very strong.

At the same time, our national advertising campaign supporting a fall line debuted in August and can currently be found in the issues of "Vogue," Teen Vogue," "Glamour," "Vanity Fair," "Lucky," "O," and "GQ" through December, as well as on billboards in select metropolitan areas.

Using the resort town of Banff in the Canadian Rockies as a backdrop, the ads do a terrific job of showcasing the lifestyle nature of the UGG brand.

Overseas, we are seeing similar demand for the fall line with established markets like the UK and Benelux reporting strong year over year growth.

Meanwhile, newer territories, such as Scandinavia and Germany, are off to very solid starts with the brand.

Our Canadian business is also very strong.

With regard to our international business, it has been well documented that many of same issues impacting the domestic economy and retail environment have spread to Europe.

That said, like the US, we have not seen any slow down in our business and, in fact, sales outside the use are up 91.9% year-to-date and we are forecasting another robust holiday season in our foreign markets.

Of all our brands, Teva's market is by far the most competitive.

Given this and the difficult retail environment, we are pleased with out third quarter performance which was highlighted by the launch of the brand's first truly complete fall performance and lifestyle line of clothed-toe footwear.

The development of this collection is a key component of our strategy to target the broader outdoor performance category.

And we're confident that the strength and authenticity of the brand will allow us to develop a meaningful business for the fall season.

The inaugural line features approximately 24 new styles of clothed-toe footwear that is being sold through key accounts such as REI and Famous Footwear, as well as independent retails across the county.

We've been particularly pleased with the performance of several styles that sold in very well and more importantly, sold through nicely during the quarter.

This included the men's Tamur and the women's Cape and the mountains scuff for men, women, and children a slip-on casual that we believe has the ability to capture key market share in the years ahead.

We also introduced a fall line in select overseas markets, such as (indiscernible) Switzerland and Hong Kong.

And the results were comparable to the US.

Many of our retailers continue to be pleased with the new direction of Teva and have expressed confidence that the brand can be relevant on a year round basis.

Now to Simple which posted its fourth consecutive quarter of strong double-digit growth.

Simple's performance was driven by an increase in consumer brand awareness and strong sell through from the fall 2008 ecoSNEAKS collection.

Core styles, such as the women's Satire and Carat are experiencing solid and consistent weekly sell through rates at key accounts such as Nordstrom, Journey's, (indiscernible) stores and Dillard's.

It is worth noting that Nordstrom recently added the Carat to their auto replenishment programs which guaranties readers on a weekly-- which guaranties reorders on a weekly basis.

I think this really underscores the rapid acceptance and the early success we've seen we've seen with ecoSNEAKS since the launch just last year.

We also expanded the Simple franchise with the debut of Planet Walkers into our influential independent retail partners this past August.

The line is currently experiencing low double-digit weekly sell through rates in many of these accounts which is encouraging for a brand new collection of casual footwear retailing for over $120.00 in this difficult economic environment.

At the same time, our Simple.com internet business and other external eCommerce sites like Zappos.com and Endless.com remain very strong.

The success that Simple continues to experience within the internet channel of distribution further validates that the consumer is actively seeking out the brand.

This is also a good indication that Simple's products will benefit from increased points of distribution at retail which continues to be a top priority for the brand.

Like our wholesale business, sales from our direct operations once again outpace expectations.

Being with our eCommerce platform, revenues increased 36% to $10.6 million with increases coming from our UGG and Simple brand sites.

The investments we have made over the past several years enhancing the consumer experience and improving the overall functionality continue to translate into higher conversion rates.

Turning to retail, in the third quarter, increased 92.3% over the same period last year to $5.4 million and included approximately a month and a half of sales from our newest concept store that opened in San Francisco in mid-August.

We've continued to see traffic and transactions increase across our store base driving a store sales gain of 32.7% over the third quarter of last year for our stores open at least one year.

The fourth quarter will be our busiest period of expansion yet as we get set to open a second full price store in New York, two in London, one in Beijing, as well as an outlet location in New Jersey.

I will now turn the call over to Tom who will review the financials and then I'll return to discuss our outlook for the remainder of the year and beyond.

Tom?

Thanks, Angel.

For the third quarter, domestic sales which are included in the brand sales number that Angel mentioned earlier increase 40.9% to $162.3 million compared to $115.2 million in the third quarter of 2007.

While international sales increased 146.7% to $35 million compared to $14.2 million a year ago.

As a percentage of sales, international sales were 17.7% in Q3 2008, compared to 11% last year.

Our third quarter gross margin was 43.3%, compared to last year's third quarter of 45.4%.

As anticipated, the year-over-year decline in our gross margin was primarily attributable to material cost increases in 2008 and higher percentage of international sales for the UGG and Teva brands in Q3 2008 versus Q3 2007 all of which was partially offset by an increase in Simple brand gross margins.

For 2008, we still expect full year gross margin to be approximately 45% versus 46.2% in 2007.

Total SG&A expense for the third quarter was $42.3 million or 21.4% of net sales compared to $28.1 million or 21.7% of net sales a year ago.

The planned increase in SG&A in absolute dollars resulted primarily from the increase in personnel cost including additional stock compensation of $1.5 million related to our long-term incentive plan that we discussed last quarter, additional distribution center cost related to our expansion in December 2007, an increase in our bad debt reserve due to higher credit risk in the current economic environment, and higher sales and marketing variable costs related to the increase in sales and three new retail stores that were not open during the full third quarter of 2007.

Our levels of cash and short-term investments have been sufficient to self-finance the buildup of inventory required to meet increased sales.

However, the use of cash for inventory purchases and lower market interest rates resulted in a third quarter decrease in our interest income to approximately a half a million dollars as compared to last year's third quarter interest income of $.9 million.

Net income for the third quarter was $26 million or $1.97 per diluted share, compared to $19.3 million or $1.47 per diluted share in the third quarter of last year.

It is important to note that our tax rate for the third quarter was 40.1% versus 39.5% in the first and second quarters of this year.

The higher tax rate was primarily due to our decision to allocate a portion of Teva [IT] rights offshore which required a one time buying payment which increases the US based income as a ratio to worldwide income.

The higher tax rate equated to approximately $0.02 in diluted earnings per share in this year's third quarter when compared to the effective tax rate for the first and second quarters of the year.

Turning to the balance sheet.

At September 30, 2008, our overall inventories increased to $157.9 million versus $88.1 million a year ago.

By brand, UGG inventory increased $62 million to $134.4 million.

Teva inventory increased $3.9 million to $15.6 million.

And Simple inventory increased $1.9 million to $5.9 million.

The addition of the TSUBO brand in the third quarter added $2.2 million in inventory.

As we said before, the majority of the 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 full year to increase approximately 64%, up from our previous guidance of 53%.

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

In addition, at September 30, 2008, we had cash, cash equivalents, and short-term investments totaling $67.9 million, compared to $74.7 million at September 30, 2007 and accounts receivable of $113 million, compared to $74.4 million at September 30, 2007.

With regard to our outlook, based on better than expected third quarter results, as well as our increased expectation for the fourth quarter, we are raising our 2008 guidance.

We now expect full year revenues to increase approximately 52% over 2007 levels, up from our previous guidance of approximately 43% growth.

We also now expect diluted earnings per share, excluding the second quarter Teva impairment charge, to increase approximately 40% over 2007, up from our previous guidance of approximately 34% growth.

Again, this is based upon our better than expected third quarter results and improved viability based upon current pre-books.

This guidance also assumes our previously issued expectations for gross margin of approximately 45% in 2008 and SG&A as a percentage of sales of approximately 23% excluding impairment charges.

In addition, our fiscal 2008 guidance includes approximately $10.5 million of stock compensation expense which is an increase of approximately $3.9 million over 2007.

For the fourth quarter, we now expect revenues to increase approximately 52% over the same period last year, up from our previous guidance growth target of 45% and diluted earnings per share to increase approximately 44% over the same period last year, up from our previous growth target of 42%.

Our forecast is based on fourth quarter gross profit margin of approximately 47% and SG&A as a percentage of sales of approximately 18% both consistent with or pervious guidance.

For the full year, we now expect UGG brand sales to increase by approximately 64% with Teva brand sales expected to be flat and Simple sales to increase by approximately 31% 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, we're obviously very pleased with our third quarter and year-to-date results and excited that our positive momentum continues as we begin the fourth quarter.

As Tom just mentioned, we are raising our guidance for the fourth quarter based on a stronger than expected delivery schedule for UGG.

Despite commentary forecasting a difficult holiday season in general, we have not witnessed any slow down in our UGG business or any meaningful cancellations.

In fact, based on upcoming ship dates, order terms, and the importance of December to retailer's businesses, we continue-- we expect that we would have already received fourth quarter cancellations if we were going to get them.

Many of our retailers continue to tell us we are one of the best selling full priced brands with multiple SKUs in their list of top performing items.

And this is reflected in our heightened outlook for UGG in 2008.

In addition, both Teva and Simple are in good positions entering the fourth quarter.

For Teva, we are pleased with the responses we have received on the fall closed-toe footwear line.

As the line further develops, we expect it will help offset the developing trend of retailers placing more and more of their spring orders closer to the season.

With regard to Simple, we believe that ecoSNEAKS are poised for continued growth in the fourth quarter as we leverage the collection's recent performance into increased shelf space with both existing accounts, as well as new distribution opportunities.

Looking out into next year, we are certainly encouraged about the growth prospects for each of our brands given the favorable response from retailers to our spring collections.

Our UGG accounts have expressed enthusiasm about the continued evolution of the spring line.

Now in its forth year, we offer a diverse mix of boots, slippers, sandals and casuals which pre-booked very well across all doors.

Despite the economic climate, the positive reaction of Teva's new line for spring '09 gives us additional confidence that we remain headed in the right direction.

As I discussed earlier, retailers are placing more of their future orders for in season delivery.

As a result, we are now seeing a larger percentage of Teva sandal sales being booked for Q2 compared with Q1.

Historically, it has been the opposite.

Therefore, we now anticipate Q1 will be more fill in business with results dependent on the weather and the retail environment.

We are being sold this trend is industry wide and not specific of Teva.

And we continue to hear that Teva is one of the few brands in the space that continues to hold its own.

For Simple, spring '09 will not only include new and innovative collections of ecoSNEAKS, Planet Walkers and GREEN TOE, but a brand new brand message as well.

To help craft a message that is broader and more appealing to the consumer audience, we have recently hired JWT, formerly known as J.

Walter Thompson.

JWT has worked with some of the biggest brands out there, including Nestle, Ford, JetBlue, Dominoes, and Kellogg's.

We are very pleased and very excited to be collaborating with an agency of this caliber and we look forward of the debut of the new campaign early next year.

Now before we open up to questions I want to add that we are obviously very in-tune with what is currently going on at retail and mindful of the impact of the unprecedented events the world's financial markets could have the global economy going forward.

As we always have, we will continue to operate on a conservative manner, closely monitor our inventory levels and plan accordingly.

While no one can predict what the future demand for branded consumer products will be, we believe with our portfolio of leading niche brands and strong operating platform we are well positioned to capitalize on the many opportunities that still lie ahead both domestically and overseas.

This belief was underscored when we recently raised our long-term growth targets to a billion dollars in sales by 2012, up from $750 million.

This now includes $750 million dollars in UGG sales, $140 million from Teva, $75 million from Simple, and $35 million from TSUBO with 30% of total sales coming from international markets.

Operator, we are now ready to take questions.

Thank you.

(Operator Instructions).

Jeff Klinefelter, Piper Jaffray

Yes.

Congratulations, everyone, on a great performance in this environment.

Angel, just wanted to follow-up on one thing first in terms of your Q4 visibility.

You provided some great details.

I appreciate that.

Could you just give us a sense for to date what percent of your Q4 shipments would have gone out versus what would remain as replenishment at this point to put in perspective your visibility.

Well, I don't think I can give you an actual hard percentage.

I will tell you that the vast majority of our business is slated to ship.

We have very little time left for cancellations according to our order policy.

So the window for any cancellations is pretty much closed or is closing.

So the majority of our business is either waiting to be shipped or is right on the cusp.

Yes, Jeff.

We haven't broken down kind of the monthly flow of the revenues for each quarter.

Okay.

But the majority would have been shipped or is currently scheduled to ship?

Correct.

Okay.

Angel, also, on the UGG brand when you think about the size after growing 60+% two years in a row, you've obviously established a very large base of revenue and it would appear without many new doors being added or large customers channeled to distribution.

So given that you continue to just expand floor space, how do you think about the ultimate potential size that you would want the brand to reach domestically without any major product extensions into other licensed categories?

Well, well look at, obviously, the quality distribution that is out there for the brand.

I mean you can almost, if you take the number of retailers that we currently sell, we're really pretty close to penetrating the kind of retailers we like to be in.

There are still regions in the country which are growth opportunities, the Southeast, for example.

We still have growth in the Midwest.

We have growth in the men's line which is a very significant opportunity, as well as the kid's line.

And certainly our slipper business continues to evolve and constantly surprise us with its expansiveness and success in the market.

From an overall perspective, our goal is to be a premium brand in the market and not overstep the distribution perimeters that we have laid out for the brand.

We're never going to be a brand that you just bump into every time you turn around in a mall.

We want our retailers to really feel proud of the fact that they've got a great selection of UGG products for men, women, and kids and the assortment is offered for year-round selling.

So we're still very excited about what spring can offer as few as growth potential.

And the response to the spring line has been terrific.

And we expect that that will continue.

So it's really a matter of articulating from a distribution perspective how far we feel this brand can go.

And if you, for example, look at our Nordstrom displays and compare that to some of the other retailers in the country we've still got a long way to go on rolling out the broad spectrum of product that we now have available.

Okay.

That's helpful.

And in terms of you additional penetration in markets like the Midwest, Northeast, Southeast, are you thinking of additional doors of chains you are currently distributed in?

Or would this be more independents that you would find in those markets for distribution?

I think it's both.

We still have retailers who have expanded and want to expand UGG doors with a [spread and assortment].

So that's important.

And then, of course, we do have independent retailers who have perhaps they are a little late in some of the markets to come onboard with UGG because they hadn't seen the opportunity in spring in those warmer climates and now we are offering that.

Thanks.

Just one more quick thing.

The higher credit risk that you mentioned in the call, would this be in or modestly increasing that, I think, in numbers that you reported-- would this be in your smaller independent retailer that you're taking some reserves against some of those or can you quantify that?

Well, not to go into all the specific detail of how we establish our reserve.

If they're just from a credit risk standpoint clearly in the environment that we're in right now the risk has ratcheted up.

I would say from a percentage standpoint of our receivables it is higher than what we have historically been.

But total dollars I wouldn't say it's a really big number.

It's driven off of certainly they're smaller accounts and independents that are more credit risky, as well as, as we go in there are probably going to be a few larger accounts that as we get into next year that could be questionable.

Okay.

All right.

Thanks, guys.

Good luck.

Todd Slater, Lazard Capital.

Thanks very much and add my kudos.

Job very well done.

So inventory numbers always seem to be a source of consternation and I was wondering about if you could talk about when you will begin to annualize this shift to early deliveries which I believe has been a key issue in that retailers have been asking for product earlier than last year.

And until I think you fully cycle that unless that trend continues even earlier and earlier, it seems to me the numbers are a little bit distorted.

So I'm just wondering when we should expect that, those comparisons, to become a little bit more normalized.

And I'll start with that question.

Maybe you could just go over the inventories and make people feel a little more comfortable.

Sure.

Thanks, Todd.

You know as far as I know have a lot of people have always kind of looked at the growth of the inventory versus the growth in sales.

And I think you kind of looked at that one as well.

And if you look at that last year 2007 and you look at this year, it's kind of we've been in this where the in first half the sales growth is higher than the inventory growth.

And then in the second half the inventory growth is higher than the sales growth.

It's kind of been that same thing.

In the last two years, we've had such high growth from sales standpoint in managing that flow of inventory.

It hasn't gotten to the point certainly where we've totally, I think, caught up form year over year being the same timing of bringing the inventory in.

So I don't think we've-- to your question-- I don't think we've gotten to that full annualize standpoint.

And when we get there kind of depends upon the ongoing growth rate for the brand.

Okay.

Do you have a sense of when that will annualize or normalize?

Well, we haven't discussed any of the 2009.

And we've given the long-term sales growth goals.

So you can take a look at that.

Our 2012 goal of $750 million for UGG and a billion for total company, you can kind of look at some of the growth patterns there.

But to give you an exact quarter of when I thought the timing of the inventory was going to come in exactly the same would be difficult.

And it varies.

I mean there are shipments that can land on our doorstep on September 29 or October 2.

We don't gain that.

We schedule the inventory to meet our customer's needs and getting it through our distribution center.

So we're not trying to play games with the quarterly numbers.

We're running the business as we need to run it.

So it can just because of quarterly reporting it can vary one week to the next and kind of have impact somewhat on that numbers.

And so if you look at it more from a longer term horizon like I said we've been in this mode of first half sales growth exceeding inventory growth in second with the higher portion of sales for UGG in the second half and kind of building through the inventory seen in the sales growth.

And let me add something to that too.

You know the product line has evolved to the point, Todd, where we have products like the Cardi for example which is the woven knit boot.

That product seems to find much earlier delivery schedule than even conventional ultras and classics.

And it's clearly a product for early fall.

We're offering new products in the fall line next year which sort of extends that.

And I wouldn't be surprised to see retailers taking their fall program perhaps even a little earlier than they did this year.

We don't still quite have the product lien as mature as it needs to be.

So there are still evolutions of fabrications and different styles that lend themselves to an earlier delivery.

Then how do the international parts of the equation affect that?

Do they order differently than the domestic retailers?

Does that cause more bottlenecks or do they order more quickly?

How does international play into that?

International, they take the shipments directly, so we're not inventorying that as a distributer.

Currently, we sell internationally to distributers.

Now, starting the fourth quarter with our retail stores opening in the UK we'll start having some international inventory for our own stores.

But currently through our distributer sales we're not buying that inventory.

The distributer is.

Okay.

So that's a [net] sort of benefit to the equation.

One more point.

I think we do have to be cautious about the capacity of our distribution center.

If everyone wanted to go through fall in the same windows, we'd be very hard-pressed to ship that level of inventory in the weeks that they want it.

So expanding the delivery windows really helps our distribution center and gives the retailer, I think, more certainty of the product availability when they want it.

As well as, I guess would say if you looked at-- because we talked about this at the end of Q2.

If you looked at our growth at the end of Q2 and our sales for Q3, I think that inventory growth and the sales growth you know matched up pretty well.

And obviously with our increase in guidance for fourth quarter, I think you'd find the same parallel.

Right.

And your inventory turnover is still exceptionally high and stronger than the industry averages.

So it's coming in nicely, obviously, over the quarters.

I just want to go to international again and just look at and maybe you can help us understand how the international mix which is obviously up affecting the gross margins.

How big of an impact was that.

Well, if you looked at [we we're] at 17.7 this year in the quarter versus 11%.

So you've got a 6.7% difference.

And you can kind of calculate out the sales.

And we don't disclose the difference in the margin between our distributer sales and our domestic other sales.

But you could kind of extrapolate out the numbers to show you that it does, given that big of a difference in the sales-- it does have a fair impact on the gross margin.

Jeff Mintz, Wedbush.

Thanks very much.

Let me add my congratulations as well.

Angel, could you talk a little bit about the shop 'n shops for UGGs and what kind of improvement you see in those same doors from last year where you didn't have a shop 'n shop to having one this year?

Well, it's very significant.

It gives the consumer a full spread and assortment.

They see the full line.

We expect that we will continue to evolve and develop the shop and shop program across all channels of distribution.

We see in many cases very high double-digit growth year over year with shop and shop versus no shop and shop.

You can also look at the independents where we put in shop and shops.

Their performance has been quite strong.

David Z in New York, for example or Little's in Pittsburg.

Those are independent accounts that have really benefitted form a shop 'n shop this year.

And it's made them the headquarters for the UGG brand in their local markets.

So we're finding that retailers are embracing the idea and it's a real revenue generator for them, especially because they have a product line that they're not competing with everybody down the street for the same products.

So we will continue to evolve the concept and roll it out across all of our distributions.

Okay, great.

And then similar kind of question, I have noticed it seems that Nordstrom, the men's display has gotten much better year over year.

It just seems like a more complete display and perhaps better placement in the stores.

Can you just talk a little bit about what kind of sell-throughs you're seeing, not numbers, but men's versus women's with the better displays out of Nordstrom for example?

Yes, we're very happy with the lead that Nordstrom has taken on our men's line and it goes in the face of a very difficult men's market for footwear right now It's not a good time for men's across the board.

So our product line is offering something new and fresh.

I think the two insoles is a big plus.

The products are very commercial.

I've always joked that guys have the same five pairs of shoes in their closet from 15 different people.

I mean, how many pair of penny loafers do you have or driving mocs?

They're pretty much the same shoe.

So the line has to be very strong in a core assortment of products.

There's probably five patterns that the line requires.

Everything else is kind of fringe but important to create some instant energy and momentum.

Boots for example are very seasonable and very important in men's for that reason.

In proportion to the women's line, it's still a fraction.

It's still a small piece.

And we've still got a lot of room to grow in men's.

The advantage that we have is that once men discover the brand through slippers or UGG classic boots or some of our cold weather products, there's a large percentage that will come back to the brand for other offerings.

And that's what we're discovering when we make that kind of product, that sort of core product, available to them.

When we started with men's, as you may recall, the line was very limited.

We did very well with our driving mocs.

We've always done well with our boots.

But boots by definition are a smaller piece of the pie on a year-round basis.

So now we've got-- we're filling in all the blanks style wise.

And that bodes well.

I think that's a big opportunity for growth all over the world.

Okay, and then finally, you talked a little bit about costs or maybe Tom did about costs impacting gross margins.

Can you just talk a little bit about what you're hearing from your suppliers in terms of costs fro 2009?

I mean things seem to be shifting pretty quickly in the world economy, but what are you hearing in terms of potential cost increases for next year?

Well for 2009 we're kind of going through our pricing right now especially for the fall line.

And you're still hearing about cost increases I think as we go into 2009 and depending upon what the economy does in that, you might be able to see some more favorable freight and things like that But right now when you're talking about product costs, we're still seeing a pressure on costs for 2009.

Certainly where we can, we always try to push through price increases to offset some of that cost increase, but I would say just in general we're still seeing out there that there is some cost increases for 2009.

Tom, are your costs for the spring season set at this point?

For the most part, yes.

Great.

Thanks very much and good luck.

Okay, well if there are no other questions--

We do actually have several more questions.

We'll hear from Mitch Kummetz with Robert Baird.

Thank you.

I didn't mean to cut you off there, buddy.

I was a little afraid there for a second.

Let's see, first question.

Angel, you made a comment that with earlier fall deliveries you've now seen earlier out of stocks at retail.

Is there much of an opportunity to capitalize on that?

I mean are you guys trying to flow inventory in as quickly as possible to meet any at-once orders that are arising?

Or do retailers essentially, because they brought in fall deliveries earlier and you anticipated earlier out of stocks, do they essentially write back up orders earlier and that's already incorporated into your inventory plans?

Or how do you look at that?

Yes, pretty much retailers will write a back-up order and we do incorporate that into our inventory.

We anticipate a certain level of fill in but once we get to past our initial expectation based on previous year, we're pretty much done And so the last few years I think we've been pretty good at anticipating demand as have the retailers.

But inevitably, somebody runs 10% short and that's happened in quite a few retailers.

So they've learned to adjust for that as best they can and the brand continues to perform for them.

But we try to bake in as much of their anticipated need as we possible can without getting too speculative.

Okay.

And then on the gross margin, Tom, am I correct to assume that the international mix, change in international mix in the quarter, was the biggest factor in the lower gross margin from a year ago?

I think it's a combination of that and the product costs are the two biggies.

And would you expect those to also be a drag on Q4?

And I guess the reason I ask the question is, I know in the past there's always been an assumption of some normal level of closeouts in the fourth quarter and it would seem that with cancel, window for cancellations starting to close, that you're probably not going to see many if any closeouts in Q4.

And I'm guessing that guidance of a drop in gross margin is really attributable to those two factors again?

Yes, I mean certainly if you have the costs issue in Q3, you're going to have it in Q4 when you're comparing year over year.

So yes, for Q4 that is going to be part of it.

And would you expect to see as big of a change in mix on the international like you saw Q3 year over year?

For Q4, no, I wouldn't expect that because I wouldn't expect for the full year that the international would be as significantly up compared to the years where we're kind of running right now.

So I would expect that it would kind of balance a little more out in Q4.

Okay.

And then a question on spring '09.

Angel, you made some comments there across the brands.

I know that last year at this time you made the comment that backlogs or spring orders were running up double digits across the three brands.

I was hoping maybe you could just give us a little ore color and direction in terms of the orders there in addition to what you've already said.

Yes, we've had just excellent response to the spring '09 Teva line as we've had also excellent response to the ecoSNEAKS from Simple for spring '09.

Our spring pre-book with UGG continues to be extremely solid, very significant growth there, solid double digits.

And we have every fall customer for UGG has bought spring '09.

So we're continuing to drive that part of our assortment and getting great reception and excellent response.

Okay, and then maybe last question, just hoping to get a little more color on the international business.

It seems to be a growing part of the business and you expect it to be 30% at some point around $300 million in revenues.

Can you just maybe quickly just run through how it might break out Europe versus Asia versus other?

And then within Europe, which I think is the lion's share of the business.

I'm guessing the UK is the biggest price.

And how would you anticipate growth over the next five years or so to get to that target?

Where would you expect the growth to really come from?

Well we continue to see big growth opportunities in the UK.

The brand is very popular there and we've really just begun.

There are markets in Europe that we're just now beginning.

Germany, for example, we have excellent results from that distributor.

He's only just-- it's been less than a year that he's been on with UGG as a brand.

So we see opportunity in Germany as a very big market.

France we're not doing any business in for all intensive purposes, so we're starting to move into that market with a couple of selected retailers with Shop 'n Shop and that's going to be very important for anchoring the brand and the positioning for the brand.

There's Poland, Hungary, the Czech Republic, those are large markets with the type of customer that UGG appeals to.

Certainly markets that are comfortable with sheepskin as a fabrication for apparel.

And again, those markets we're not even in.

So I believe that-- oh, and then there's Scandinavia which is again a very young market for us We've just been in there about a year So those are all very large growth opportunities in just Europe.

We move outside of Europe to Asia, we've always been a little frustrated with Japan as a market because we know the customer-- you know, the number one-- one of our key, I don't want to disclose too much, but one of our key retailers, their number one store for UGG is in Honolulu because of Japanese tourists coming to Honolulu and buying UGG because it's not available in Tokyo.

And that's a big opportunity.

We really feel like we're honing in on the right distribution strategy for Japan, it's a very difficult market to get that right in.

And then of course there's China.

The stores that we're opening in China, Beijing and Shanghai, very important to anchor the brand presentation.

We've got a joint venture as you know with Stella and we're poised to open stores at the appropriate rate once we anchor the brand and the brand positioning and get some initial momentum.

The Chinese consumer is now very sophisticated.

They're shopping in Hong Kong.

They're shopping Tokyo.

They're traveling more around the world.

They see online the kind of brands that are exciting consumers elsewhere and there's a demand emerging for UGG.

So we intend to really drive that.

So those are I think some very large markets where we have a lot of opportunity and we'll continue with our strategy of premium positioning in luxury and comfort.

That's very helpful.

That's all I had.

Good-bye.

Sam Poser, Sterne Agee.

Good afternoon.

How is everything?

Listen, a couple of follow ups.

Number one, you mentioned, just mentioned there, Angel, that all customers were buying spring '09 that had bought fall.

What was the percentage last year or earlier this year that stepped up for spring use?

It's been growing.

I don't want to get into specifics, it's been growing as the line has evolved.

So I think a couple of years ago we were successful about 25% of the customers bought spring in and last year it was a bigger number.

And as we're moving into '09, it's-- we really are, I can't think of any customers not bringing in the spring line.

Now what happens as always when you have a new part of your collection, the retailer has to develop what are the core styles for them for that season?

And that, as you know, it just takes sell through.

So you build on the core styles from season to season and that's what we're starting to see now.

There's some styles that have worked for one season, two seasons, and those are being rebooked and up-- certainly we update those styles and they've been-- we anticipate good performance from those styles.

So it's just a matter of building confidence with the retailers.

But the idea that UGG can be a spring line-- as you may recall, a couple of years ago that was a bit of a stab in the dark.

People said, well I don't really know how UGG would be a spring line.

We've gotten way past that.

We now have a complete acceptance of UGG as a year round brand.

And that allows us now to do a little bit more on the product development front and keep driving new ideas, new looks for the customer.

Thank you.

I've got a few more questions.

Number one, do you have like an inventory target for the end of the year in total where you-- like an increase over last year or something where you're just sort of targeting your end of year inventories?

Well yes, I mean we forecast out the inventory.

And again, for the UGG brand, it's kind of driven off of our order and what we need.

Of course by the end of the year, you're starting to have some of the spring product come in, but yes, we have targets that we're trying to manage to.

Would you like to share any of those?

Well, that's a good question, Sam, but I think I'm not going to share it.

Okay.

The breadth of the line, Angel, how much broader is it this fall than it was last fall would you say?

140 styles for this fall, I think as compared to-- what were we last fall, 120?

For last fall, yes, it was about-- it's up about 14%.

Okay.

And then did the closeouts, did Teva closeouts affect the margin at all in Q3?

Spring goods?

No.

It wasn't really driven off of closeouts.

As far as Teva specifically, as I said, they did have a little bit higher international this year than last year, but there wasn't a lot of closeouts in third quarter compared to last year.

And one last thing.

Your percent international was 17.7% in Q3.

Should we look at that same number for Q4 or do you expect that to reduce?

I think you might have mentioned it, I might have missed it.

Yes, I said that I would expect it to come down because I wouldn't expect our full year nine months number to be as high as kind of where we're at right now.

Plus our distributors, many of them take the product a little earlier to make sure they can process it through to their customers to meet their demand.

So I wouldn't expect it to be any higher.

Yes.

I mean from a year to date standpoint international right now it's about 22.8%.

And from a full year's standpoint, we're not going to be that high.

Thank you very much.

Continued success.

Chris Svezia, Susquehanna Financial Group.

My congratulations as well.

Great job, guys.

I guess just shifting gears for a second, just on the Teva business, just so I understand this, looking at the current inventory position as you ended, it looks like it's up 33% if I'm not mistaken.

I guess maybe even just talk about how you're looking at that brand based upon sort of your thoughts about revenue guidance for the year and then sort of your thoughts about Q1 being more of a kind of fill in and reorder business.

And then really Q2 being the opportunity to drive the sandal business.

Kind of walk us through why the inventory is where it is and the opportunity you see to go into spring of next year in terms of how the product might flow.

Well from an inventory standpoint, I think we're-- we've got more inventory on the Teva side than I think that we would like.

Coming into the year, we had higher expectations for what we could do with the brand for the full year and now it looks like we're going to be flat year over year and so we haven't had the volume of sales that we've had.

It's not though that I think that we've got, we've piled up a bunch of bad inventory.

It's still product that's salable and we can work our way thorough.

But we're going to need to work our way through that and then probably look at doing some discounting as well as we're also pretty carefully scrubbing our inventory buys for next year, especially given the environment we're in.

And so kind of trying to address it on both ends.

And I guess how does that translate into when you go into your key selling season, what some of your key retailers, whether it's REI, EMS, in terms of the brand and new product, new product development?

Yes, as I mentioned, retailers are taking product closer to the market.

So they'll be more Q2 versus Q1 in this next coming year and that's-- I mentioned the trend across all brands in the industry.

The good news from Teva's perspective is that we've had a great response to the fall line which, as you know, we've been strategically moving toward an all around outdoor brand that includes closed footwear.

And I'm really kind of tired of having to look at the weather to sort of understand how well Teva is going to do.

We've been so weather dependent for so long, it's refreshing to now have a well received fall line.

To give you an example though, in this particular year in Europe, this is the second year of terrible summer weather.

A lot of rain which has impacted our European Teva business and that has created for them an inventory backlog as well.

So they're moving through that inventory.

Obviously their order base will be minimized as a result and it's just an ongoing struggle until we really evolve the complete year round assortment which we're really starting to get there and it's good to see the traction.

Thank you.

And then I guess the last question I have is just this year you had obviously investments in terms of staff, in terms of the distribution center, in terms of the pick module.

I'm just curious as you look out over the next-- I don't know how much visibility you can give here, but outside of store growth and basic support for revenue growth, are there any other things that you're looking at in terms of investments that you need to make to continue to drive the business better.

Sort of, not necessarily one time, but like investments in the pick module, investments in staffing, etc.

I'm just curious how you look at that over the next sort of 12 months at this point.

Well I think every CEO in the country is looking at his business, his or her business, a little differently than say four or five months ago.

And we are, like everyone else, being extremely cautious about adding new projects that don't generate revenue and don't produce top line results.

You want to be very close to the market with expectation from those investments.

We feel as if from an HR perspective, every hire now becomes a very carefully scrutinized situation.

And we have adopted that approach.

Obviously we need the people we need for the peak seasons in the warehouse and as demand at retail evolves we need to make sure the staff at the stores can service the customer.

But beyond that, we're locked down pretty tight going forward and for the foreseeable future until the economy starts to show signs of recovery.

I think it's the only prudent thing to do and that's really how we're approaching it.

That's good to hear.

Good balance and congratulations again.

Jim Duffy, Tom Weisel.

Mr.

Duffy your line is open.

Sorry about that, I had the mute on.

Thanks.

A couple quick questions.

In the fourth quarter, what percentage of the business is pre-booked?

We haven't broken out a percentage of how much is pre-book versus isn't pre-book and obviously in Q4 also keep in mind that's probably, not probably, it is our biggest retail quarter.

And obviously with the stores and eCommerce, the consumer direct business, that isn't a pre-book business, so that's certainly part of our business that's not pre-book.

Gotcha.

And with regard to the inventory, how do you go about earmarking the inventory for retail and the eCommerce?

Is that shared with other components of the business or is it possible to kind of split out what components of the inventory balance are related to those two businesses?

Well eCommerce and the wholesale business are serviced out of the same DC.

So we do have some flexibility in working with the inventory there.

It's not being serviced out of separate locations.

Okay.

But just to be clear, our eCommerce business places a buy for their inventory just as our retail business doest the same.

So they're held accountable for the precision with which they predict their inventory requirements.

We don't just have a warehouse full of goods that we can flow wholesale into retail and into eCommerce.

We try to create firewalls between the areas just to assure validity in our forecasting and our projections.

And on the eCommerce, we do have pretty good data collection on that to determine and help us forecast demand.

Okay.

And then so a component of what's in the inventory is the inventory for incremental retail stores.

Any chance you'd split that out?

What do you mean by split it out?

Well I mean give us a sense for how much of the inventory growth was related to inventory earmarked for retail stores that weren't in the business last year.

Yes, we haven't separated out the growth down to that level as far as how much is for wholesale or retail stores.

We haven't broken it down like that.

Okay.

And then Angel, you mentioned a couple of things on the cost side you're doing differently given recent changes in the environment.

What are some other ways you're looking at your business differently or through a different lens?

Well, I think as Tom mentioned, we're really being pretty conservative from a credit risk perspective.

I think it's a prudent thing to do as well.

We are postponing projects that are nice to have versus must have.

We're driving toward aggressive competition in the market.

I feel that if you weather this storm well, you'll come out of it so much stronger than your competitors.

And we have a great advantage right now with UGG performing at retail the way it is.

It's allowing us ongoing leverage in the future and the confidence of our retailers that even in a bad time, this company can perform for them in a true partnership way.

So it's just an across the board look at every dime.

I have to say.

I mean it's everybody acts as if it's their own personal money and that's the only way to approach this.

We're not, by any stretch of the imagination, doom and gloom.

We're in a great position with tremendous growth potential and a very high level of performance from all of our brands in this environment particularly.

But I have really spread the work that we need to-- we're going into unchartered territory here and we want to make sure that our customers are healthy and succeed with our products and that we're there to be able to provide them that for a long time.

I'm pretty happy with our approach.

But we've made some revision in our thinking and our strategy, appropriate to the marketplace.

Very good.

Well keep up the good work and best of luck in the holidays.

Mimi Barto, Telsey Advisory Group.

Hi, thanks for taking my question.

Just a quick one.

I now you touched on the other opportunity from a regional basis in the US, but could you just add any color regarding the current sales performance in terms of geography?

Specifically any areas that are slowing down or just touching on some of the warmer climates areas in the US?

Well we haven't really seen any area slowing down.

We continue to perform exceptionally well in the Northeast.

California continues to be our biggest market.

The warm climates, particularly as you move into the fall, I've always pointed out that this is our biggest market, California.

Southern California is one of our biggest markets.

Right now outside it's 80 degrees.

I still see a lot of people in UGG.

So the Southeast is just sort of coming online experience with the breadth and spread of assortment that we have in our new products going into fall '09.

So in other words, it's not all dependent on classic sheepskin.

There's other fabrications that perhaps we will find more appropriate for warmer climates.

So all of that said, we still see growth in a variety of regions of the country.

It's not anywhere close to seeing a saturation point by any stretch.

Okay, great.

Thank you.

Well, thank you very much for your time on this call.

I appreciate all your questions and we look forward to speaking to you again on the Q4 year end call.

Thank you.

And again, that does conclude today's conference call.

Thank you for your participation.

Have a wonderful day.